Commission File No. 1-4212
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 20-F
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2003
-------------------------
AMERICAN ISRAELI PAPER MILLS LTD.
(Exact name of Registrant as specified in its charter and translation of
Registrant's name into English)
---------------------------------
Israel
(Jurisdiction of incorporation or organization)
P.O. Box 142, Hadera 38101, Israel
(Address of principal executive offices)
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Securities registered or to be registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
Ordinary Shares, par value NIS .01 per share American Stock Exchange
Securities registered or to be registered
pursuant to Section 12(g) of the Act:
None
(Title of Class) Securities for which there is a reporting obligation
pursuant to Section 15(d) of the Act:
None
(Title of Class)
-----------------------------------------------
Indicate the number of outstanding shares of each of the issuer's classes of
capital or common stock as of the close of the period covered by the annual
report:
3,968,295 Ordinary Shares, par value NIS .01 per share
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days: Yes |X| No |_|.
Indicate by check mark which financial statement item the registrant has elected
to follow: Item 17 |_| Item 18 |X|
PART I
ITEM 1 - IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
Not applicable to Annual Reports
ITEM 2 - OFFER STATISTICS AND EXPECTED TIMETABLE
Not applicable to Annual Reports
ITEM 3 - KEY INFORMATION
A. Selected Financial Data
The Company prepares its financial statements in accordance with
Israeli GAAP. Israeli GAAP and U.S. GAAP vary in certain respects, as described
in ITEM 18 below.
The following selected financial data is derived from the audited
consolidated financial statements of American Israeli Paper Mills Ltd. ("AIPM"
or the "Company"). The consolidated financial statements since 2000 were
influenced significantly by the following transactions:
(a) The finalization of the joint venture with Neusiedler AG (NAG), an
Austrian corporation, under which Neusiedler Hadera Paper (NHP), a company
engaged in the manufacture of printing and writing paper was formed, effective
January 1, 2000, and in which NAG holds 50.1% and AIPM holds 49.9% of the
shares. Consequently, as of that date, the results of NHP's operations are no
longer consolidated with the results of the Company. Since January 1, 2000,
AIPM's share in NHP's results is included in the Company's statement of income
under the item "Company's share in profits of associated companies." In the
balance sheets, AIPM's share in the shareholders' equity of NHP is included in
"Investments in associated companies."
(b) On March 31, 2000, Kimberly-Clark Corporation (KC) exercised the
option that was granted to it in January 2000 and acquired from AIPM 0.2% of the
shares in Hogla-Kimberly Ltd. in return for $5 million, thereby increasing its
holdings in Hogla-Kimberly to 50.1%. Consequently, as of the second quarter of
2000, the results of Hogla-Kimberly are no longer consolidated with AIPM's
consolidated results and AIPM's share in the results of operations of
Hogla-Kimberly (49.9%) is included in the item "Company's share in the profits
of associated companies." AIPM's share in the shareholders' equity of
Hogla-Kimberly is included in the balance sheets under "Investments in
associated companies."
2
The following table sets forth certain selected financial data with
respect to the Company presented in New Israeli Shekel (NIS):
Five Fiscal Year Financial Summary/1/
According to Israeli GAAP
(In Thousands of Adjusted NIS Except Per Share Amounts) Year Ended December 31
Income Statement data: ---------------------------------------------------------
2003 2002 2001 /2/2000 /2/1999
--------- --------- --------- --------- ---------
Net Sales 465,092 455,775 469,709 745,946 1,665,690
Operating Income 46,584 36,454 20,526 63,212 156,839
Share in profits of associated
companies, net 35,549 16,727 15,011 36,034 2,763
Net Income
60,047 37,460 34,447 /3/84,445 70,122
Selected balance sheet data:
Total Assets 1,253,274 1,052,123 1,052,141 1,058,901 1,628,249
Working Capital 229,411 86,931 77,963 74,433 265,550
Investment in Marketable Securities and
Fixed Term Bank Deposits 78,822
Property, Plant & Equipment (net) 325,641 325,837 311,168 311,872 539,631
Long-term Debt 268,052 70,257 79,611 93,510 141,067
Share Capital & Capital Surplus 215,317 215,316 215,316 215,316 215,860
Shareholders' Equity 614,230 650,950 634,472 603,200 572,929
Per Share Data:
Shares Outstanding at End of Year 3,968,295 3,918,710 3,918,710 3,890,561 3,854,571
Net Income per NIS 1 Par value:
Primary 1,494 947 873 2,137 1,794
Fully Diluted 1,494 947 873 2,137 1,794
Dividend per share /4/25.12 /4/5.30 /4/- 13.79 69.49
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/1/ The financial statements of the Company are presented in New Israeli
Shekels adjusted to reflect the changes in the purchasing power of
Israeli currency (i.e., adjusted shekels). These adjustments were
determined on the basis of the changes in the U.S. Dollar/Israel Shekel
exchange rate (see page 5 and see Note 1 to Consolidated Financial
Statements).
/2/ See above explanation of changes in the consolidated statements,
resulting in the de-consolidation of NHP (as of January 1, 2000) and of
Hogla-Kimberly (as of March 31, 2000).
/3/ The net income includes a material non-reoccurring gain in the year
2000, in the sum of NIS 20,087 thousands, originated from the changes
in holdings described above.
/4/ Dividend for 2001, in the sum of NIS 5.30 per share ($1.21 per share)
was declared in March 2002 and paid in April 2002.
Dividend for 2002, in the sum of NIS 6.31 per share ($1.44 per share)
was declared in March 2003 and paid in April 2003.
Dividend paid in 2003 includes a special dividend for 2003 in the sum
of NIS 18.81 per share ($4.29 per share ).
3
According to U.S. GAAP
(In Thousands of re-measured NIS except per share amounts)
Year ended December 31
---------------------------------------------------------
Income Statement and balance sheet data: 2003 2002 2001 *2000 *1999
--------------------------------------- --------- --------- --------- --------- ---------
Sales 481,491 492,990 451,152 705,884 1,567,871
Operating Income 53,688 53,751 25,723 61,189 150,374
Share in profits of associated companies, net 20,972 27,464 22,993 37,967 4,040
Net Income /1/38,469 54,624 49,876 /1/79,853 61,750
Total Assets 1,189,215 1,026,083 966,747 926,362 1,419,187
Working Capital 225,788 85,803 78,111 65,272 232,546
Investment in Marketable Securities and Fixed
Term Bank Deposits 72,738
Property, Plant & Equipment (net) 283,831 279,077 245,949 243,656 418,051
Long-term Debt 268,052 76,001 80,284 86,292 133,787
Shareholders' Equity 550,354 602,675 569,920 512,988 478,731
Per Share Data: (re-measured NIS)
Shares Outstanding at End of Year 3,968,295 3,918,710 3,918,710 3,890,561 3,854,571
Net Income Per Share
Basic 9.77 13.94 12.75 20.52 16.02
Diluted 9.69 13.81 12.66 20.16 15.63
Dividend per share /2/25.55 /2/5.77 /2/- 12.84 64.82
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For further information about the effect of application of U.S. GAAP, see Item
18.
* See above explanation of changes in the consolidated statements,
resulting in the de-consolidation of NHP (as of January 1, 2000) and of
Hogla-Kimberly (as of March 31, 2000) and their becoming associated
companies.
/1/ The net income includes a material non-reoccurring loss in the year
2003, in the sum of NIS 16,986 thousands, representing other than
temporary impairment of an investment in an associated company. A
material non-reoccurring gain was included in the year 2000, in the sum
of NIS 18,500 thousands, originated from the changes in holdings
described above.
/2/ Dividend for 2001, in the sum of NIS 5.77 per share ($1.21 per share)
was declared in March 2002 and paid in April 2002.
Dividend for 2002, in the sum of NIS 6.61 per share ($1.44 per share)
was declared in March 2003 and paid in April 2003.
Dividend paid in 2003 includes a special dividend for 2003 in the sum
of NIS 19.04 per share ($4.29 per share).
4
Exchange Rates
The exchange rate between the NIS and U.S. dollar published by the Bank
of Israel was NIS 4.555 to the dollar on May 31, 2004. The high and low exchange
rates between the NIS and the U.S. dollar during the six months of December 2003
through May 2004, as published by the Bank of Israel, were as follows:
Month High Low
----- ---- ---
1 U.S. dollar = 1 U.S. dollar =
December 2003 4.352 NIS 4.441 NIS
January 2004 4.371 NIS 4.483 NIS
February 2004 4.437 NIS 4.493 NIS
March 2004 4.483 NIS 4.535 NIS
April 2004 4.599 NIS 4.515 NIS
May 2004 4.634 NIS 4.555 NIS
The average exchange rate between the NIS and U.S. dollar, using the
average of the exchange rates on the last day of each month during the period,
for each of the five most recent fiscal years was as follows:
Period Exchange Rate
------ -------------
January 1, 1999 - December 31, 1999 4.154 NIS/$1
January 1, 2000 - December 31, 2000 4.067 NIS/$1
January 1, 2001 - December 31, 2001 4.219 NIS/$1
January 1, 2002 - December 31, 2002 4.736 NIS/$1
January 1, 2003 - December 31, 2003 4.512 NIS/$1
Forward Looking Statements
This Annual Report on Form 20-F contains "forward-looking" statements,
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended (the "1934 Act")
(collectively, the "Safe Harbor Provisions"). These are statements that are not
historical facts and include statements about our beliefs and expectations.
These statements contain potential risks and uncertainties and actual results
may differ significantly. Forward-looking statements are typically identified by
the words "believe", "expect", "intend", "estimate" and similar
5
expressions. Such statements appear in this Annual Report and include statements
regarding the intent, belief or current expectation of the Company or its
directors or officers. Actual results may differ materially from those
projected, expressed or implied in the forward-looking statements as a result of
various factors including, without limitation, the factors set forth below under
the caption "Risk Factors" (we refer to these factors as "Cautionary
Statements"). Any forward-looking statements contained in this Annual Report
speak only as of the date hereof, and we caution potential investors not to
place undue reliance on such statements. We undertake no obligation to update or
revise any forward-looking statements. All subsequent written or oral
forward-looking statements attributable to us or persons acting on our behalf
are expressly qualified in their entirety by the Cautionary Statements.
B. Capitalization and indebtedness
Not applicable.
C. Reason for the offer and use of proceeds
Not applicable.
D. Risk factors
Risks relating to the Company's Operations in Israel
Security, economic and political conditions in Israel may affect the results of
the Company's operations.
The Company is incorporated under Israeli law and our principal offices
are located in Israel. Political, economic and security conditions in Israel
directly affect our operations. Since the establishment of the State of Israel
in 1948, various armed conflicts have taken place between Israel and its Arab
neighbors and a state of hostility, varying in degree and intensity, has led to
security and economic problems for Israel. Israel signed a peace treaty with
Egypt in 1979 and a peace treaty with Jordan in 1994. As of the date of this
annual report, Israel has not entered into any peace agreement with Syria or
Lebanon. Since 1993 several agreements have been signed between Israel and the
Palestinians, but a final agreement has not been achieved. Since October 2000,
there has been a marked increase in hostilities between Israel and the
Palestinians, which have adversely affected the peace process, placed the
Israeli economy under significant stress, and have negatively influenced
Israel's relationship with several Arab countries.
Competition
Most of the Group's products are exposed to competition with local and
imported products. The said competition might have influence over the selling
prices and the Group's market share in its different fields of operations,
especially in times of recession.
Raw materials prices
The Group is exposed to changes in raw materials prices, especially
from imports (mainly pulp and fluff). Because of the small size of the Israeli
market and the influence of the competing imports over selling prices, an
increase in raw materials prices might erode the Group's gross margin and by
that to decrease the Group's profitability.
Dependency on energy prices
6
The Group's operations are highly dependent on energy consumption and
thereby are highly effected by fuel prices. The Group's profit may be adversely
effected in case of high increase in fuel prices.
Inflation
A high inflation rate can, in the long run affect the Group's wage
expenses, since these expenses might be influenced by the changes in the
Inflation rate.
An income tax reform in Israel may affect the Company's shareholders and the
Company
Effective as of January 2003, the Israeli Parliament has enacted a wide
ranging reform of the Israeli income tax system. These tax reforms have resulted
in significant changes to the Israeli tax system. (See Note 7e to the financial
statements attached- Reform of the Israeli tax system).
Risks relating to our operations in Turkey
The company is subject to various risks related to the operations in
Turkey, where Hogla-Kimberly operates through its subsidiary, Ovisan, resulting
from the economic instability in Turkey, and the high inflation rates. This
economic instability may effect the purchasing power in Turkey and together with
the volatility of the Turkish currency that may continue, might have a material
adverse effect on the operations of Ovisan.
For further information, see "Item 11 - Quantitative and Qualitative
Disclosure about Market Risk".
ITEM 4 - INFORMATION ON THE COMPANY
A. History and Development of the Company
The Company was incorporated in 1951 under the laws of the State of
Israel, and, together with its subsidiaries and associated companies (which
together with the Company are referred to as the "Group") is Israel's major
manufacturer of paper and paper products.
The Company's principal executive offices are located at 1 Meizer St.,
Industrial Zone, P.O. Box 142, Hadera, Israel, Tel: (972-4) 634-9349, fax:
(972-4) 633-9740.
The need to meet future challenges caused the Company to reorganize its
operations into separate business units. Effective as of December 31, 1995, the
Company's machines used in the manufacture of packaging and printing and writing
paper were transferred to a wholly-owned subsidiary of the Company, and the
Company's machines used in the manufacturing of printing and writing papers were
sold in 2000 to NHP. The Company's machines used in the manufacture of household
papers were sold to Hogla-Kimberly.
The organizational structure of the Company and certain subsidiaries
thereof was changed as of January 1, 1999. This change was intended to result in
an operational separation between various activities, especially in the paper
and board divisions, to allow for better business focus, greater operating
efficiency and the formulation of business strategies that facilitate the
establishment of additional international strategic alliances.
Within the framework of the organizational changes, different fields of
operations were defined and separated, including printing and writing paper and
packaging paper. For each of them a separate
7
management was assigned.
Over the last few years, the Group has created several new joint
ventures as follows:
1. In July 1992, the Group purchased 25% of the shares of Carmel
Container Systems Ltd. ("Carmel"), a leading Israeli designer, manufacturer and
marketer of containers, packaging materials and related products. As of May 31,
2004, the Group held 26.5% of the shares of Carmel. Other major shareholders in
this company are Rand Whitney Inc. (35.46%) and Ampal Ltd. (21.75%).
2. In 1996, KC acquired, 49.9% of the shares of Hogla, a wholly-owned
subsidiary of the Company and a leading Israeli consumer products company, which
was then renamed Hogla-Kimberly Ltd. The partnership was intended to expand the
local production base in Israel, in order to serve both local and regional
demand, and to offer Hogla-Kimberly access to international markets. In 1999,
Hogla-Kimberly purchased Ovisan, a Turkish manufacturer and marketer of diapers
and paper products.
In January 2000, AIPM and KC entered into an agreement pursuant to
which AIPM granted KC an option to acquire from AIPM an additional 0.2% of the
Hogla-Kimberly equity. On March 31, 2000, KC exercised the option thereby
increasing its holdings in Hogla-Kimberly to 50.1%.
3. In February 2000, effective January 1, 2000, AIPM entered into a
joint venture agreement with NAG, pursuant to which NAG acquired 50.1% of AIPM's
printing and writing paper operations. The printing and writing paper operation
was separated from AIPM upon the completion of this transaction and was sold to
NHP, a subsidiary that was established for this purpose. In return for the
acquisition of 50.1% of the shares of the new company, NAG paid to NHP $10
million in cash and lent to NHP $10 million.
NAG is a member of Mondi Europe, a group of companies with many years
of experience in the paper industry, wide global deployment and annual
production capacity in excess of 5 million tons of various grades of paper and
pulp. The establishment of the joint venture is expected to result in a doubling
of the paper production capacity in Israel within the coming years, while
relying on the NAG marketing network for the export of 50,000 to 80,000 tons of
printing and writing paper annually.
4. Amnir Recycling Industries Ltd. (a wholly owned subsidiary of AIPM)
acquired in 1997 and 1998 20% and 10%, respectively, of Cycle-Tec Recycling
Technologies Ltd. (Cycle-Tec), a research and development company which develops
a process for manufacturing of a high strength / low cost composite material,
based on recycled post consumer plastic and paper treated with special chemical
additives, for a total of $150,000. In 1999, Amnir acquired additional shares of
Cycle-Tec for $80,000. In March 2000 and in July 2001, Amnir acquired additional
shares of Cycle-Tec for $93,243 and $100,000, respectively. As of May 31, 2004,
Amnir owned 30.18% of Cycle-Tec.
5. In July 1998, the Company signed an agreement with a strategic
partner, Compagnie Generale d'Entreprises Automobiles (CGEA), for the sale of
51% of the operations of Amnir Industries and Environmental Services Ltd. (Amnir
Environment) in the field of solid waste management (waste disposal and
management of transfer stations and landfills) for a purchase price of $7.8
million. . CGEA is an international French company which is part of the Veolia
group and one of the world's leading companies in the field of environmental
services. The agreement does not apply to Amnir's operations in collecting and
recycling paper and plastic.
6. In March 2000, AIPM and CGEA, on the one hand, and Tamam Integrated
Recycling Industries Ltd. (T.M.M) and its controlling shareholders, on the other
hand, entered into an agreement
8
pursuant to which AIPM and CGEA acquired through a joint company from T.M.M.'s
controlling shareholders 62.5% of the share capital of T.M.M., a leading Israeli
company in the solid waste management field, for $15.85 million. Simultaneously
therewith, 100% of Amnir Environment's shares were transferred to T.M.M. in
return for an allocation of 35.3% of the shares of T.M.M to the shareholders of
Amnir Environment. Following such transaction, AIPM and CGEA owned together,
75.74% of the shares of T.M.M. In August and September 2000, T.M.M. acquired
approximately 3% of its own share capital. In December 2001, and in August 2003
AIPM and CGEA acquired additional shares of T.M.M.'s share capital through a
joint company (Barthelemi Holdings Ltd.), resulting in an increase in the
ownership of shares of T.M.M. by AIPM and CGEA to 88.02% as of May 31, 2004.
9
Capital Expenditures and Divestitures
2003:
The investments in fixed assets of the Company totaled about NIS 29.2
million in 2003 (about $6.7 million). These investments included:
- Investments of approximately NIS 2.6 million ($0.6 million) in
environmental issues, mainly in the process of purification of waste
from water.
- An investment of approximately NIS 2.6 million ($0.6 million) in the
expansion of the output of the packaging paper machine.
- Investments totaling NIS 24 million ($5.5 million) in buildings,
equipment, transportation and IT.
2002:
The investments in fixed assets totaled about NIS 46.8 million (about
$10.7 million). These investments included:
- The payment of approximately NIS 26.8 million ($6.1 million) in
connection with the extension of the lease for the Shafir Compound,
from the Tel Aviv Municipality, for an additional period ending during
2059.
- The completion of the investment in the anaerobic installation in
Hadera, Israel as part of the Group's environmental operations. The
additional investment in 2002 totaled NIS 3.5 million ($0.8 million).
- Investments totaling NIS 16.6 million ($3.8 million) in the renovation
of manufacturing and transport equipment. 2001:
2001:
The investments in fixed assets in 2001 totaled about NIS 30.0 million
(about $6.9 million). These investments included:
- An initial investment of NIS 4.0 million ($0.9 million) in an anaerobic
plant in Hadera, Israel as part of the Group's environmental
operations.
- Investments totaling NIS 26.1 million ($6.0 million) in the renovation
of equipment and transportation.
B. Business Overview
I. The Group's Operations and Principal Activities
The Group, through its subsidiaries and main affiliated companies,
produces and markets a wide variety of paper types such as coated and uncoated
printing and writing paper, packaging and wrapping paper, tissue paper for
personal care and household use and various grades of board.
The Group is also engaged in the conversion of household paper products
into consumer products such as bathroom tissue and paper towels, napkins and
facial tissue; the production and marketing of disposable baby diapers, adult
incontinence, absorbent products and feminine hygiene products; the production
and marketing of paperboard for the packaging industry; the production and
marketing of corrugated boxes; and the marketing of office supplies.
10
The collection and recycling of a variety of waste materials is also a
major Group activity, with waste paper used in the production of paper and
board. In addition, the Group is engaged in plastics and solid waste recycling
for industrial and agricultural applications.
In 1989, the Company was declared a monopoly in the field of paper
production and marketing in reels and sheets by Israel's Authority for
Restricted Trade Practices, but this declaration was partially revoked in 1998
with respect to printing and writing paper. Until January 2001, some of the
Group's products, such as printing and writing paper (in reels and sheets) were
under price control. In January 2001, these restrictions were cancelled.
The principal products produced and/or marketed by the Company and its
subsidiaries and associated companies are as follows:
o Grades of Paper and Board
Printing and writing paper, publication papers in reels, coated paper,
carbonless paper, recycled paper, cut-size paper for copy laser and inkjet,
copy-book paper, paper for continuous forms, paper for envelopes and direct
mailing and various grades of packaging paper and board.
o Packaging Products
Folding cartons, Corrugated containers and pallets and Solid board
containers.
o Household Products
Bathroom tissue, kitchen towels, facial tissue, , napkins, tablecloths,
sanitary towels, panty shields, tampons, disposable baby diapers, training
pants, baby wipes, disposable adult diapers, incontinence pads, cups and plates.
o Industrial, Hospital and Food Service Products
Toilet paper, towel rolls, C-fold towels, napkins, place mats,
coasters, bed sheets, wadding, paper toilet seat covers, disposable bed-pans and
urinals, sterilizing paper, bathroom tissue and paper towel dispensers,
dispensers for liquid hand soaps and room deodorizing dispensers for washrooms
and cleaners, detergents and cleaning complimentary products.
o Other Products
Aluminum food wraps, cling-film wraps, garbage bags, air purifiers for
lavatories, oven baking and cooking trays, office supplies, recycled ground and
palletized plastics used by the plastic products industry, compost for soil
conditioning and fertilizers for agriculture and landscape planting.
Sales and Marketing
The Group's paper grades are sold to publishers, major printers,
converters, and wholesalers some of which are part of the Group, and independent
and other direct customers.
The Group's household products are marketed mainly through retail
marketing chains, stores and the institutional market.
The Group's main marketing strategy has the following objectives:
11
(a) Maintaining its existing dominant share in the Israeli market of
paper grades and paper products produced by the Group and imported by it through
short delivery time and prompt service, while constantly improving the quality
of its products.
(b) Increasing cut-size paper exports of NHP significantly, through the
marketing network of NAG in Europe and worldwide.
(c) Meeting the growing and changing requirements of the market by
adding new paper grades and improving the quality of existing grades to meet the
technological changes required by new printing equipment.
(d) Exploring new business opportunities and increasing the range of
its products.
The following table sets forth the consolidated sales in adjusted NIS
millions(**) by categories of the consolidated segments of operations:
** The financial statements of the Company are presented in NIS adjusted
to reflect the changes in the purchasing power of Israeli currency
(i.e., adjusted NIS). These adjustments were determined on the basis of
the changes in the U.S. Dollar/NIS exchange rate (see Item 3 - "Key
Information - Selected Financial Data" and Note 1 to the Company's
Consolidated Financial Statements).
Paper
Manufacturing Marketing Office Total
and recycling /1/ Supplies /2/
---------------------------------- -------------------------------- -----------------------------
2003 2002 2001 2003 2002 2001 2003 2002 2001
---- ---- ---- ---- ---- ---- ---- ---- ----
332.1 314.6 316.4 133.0 141.1 153.3 465.1 455.8 469.7
===== ===== ===== ===== ===== ===== ===== ===== =====
The above mentioned segments include the following activities:
1. Paper manufacturing and recycling - collecting and recycling of paper
waste; manufacturing and marketing paper, mainly packaging paper, which
rely mainly on paper waste as raw materials.
2. Marketing office supplies - Marketing of office supplies and paper,
mainly to institutions.
Raw Materials
The raw materials required for paper and board production are different
wood pulps, secondary fibers (i.e., waste paper) and various chemicals and
fillers. Pulp is imported primarily from major suppliers in Scandinavia, the
United States, Portugal, Austria, Germany, Brazil and South Africa on a regular
basis. The bulk of the pulp tonnage purchased is secured by revolving long-term
agreements renewed on a yearly basis. Most of the waste paper and the fillers
are acquired from Israeli sources.
About 65% of the fibers required in paper production of the Group
(including printing and writing paper and household products) come from waste
paper, which in some paper grades, is used in lieu of relatively more expensive
pulp.
Since 1996, the Company has been using precipitated calcium carbonate
(PCC), a special pigment used for filling and coating paper in order to improve
quality. The PCC is manufactured in a plant constructed and operated by
Specialty Minerals Israel Ltd. (SMI), which is a wholly owned subsidiary of
Minerals Technologies Inc., a U.S. company.
12
The cost of paper production is affected by fluctuating raw material
prices and the cost of water and energy.
Competition
Most of the Group's products that are sold on the local market are
exposed to competition with local and imported products. The imported products
arrive in Israel exempt from import tariffs, especially from the EEC, EFTA and
the USA. The tariffs on imports of paper from other countries are in the range
of 0% -12%.
The said competition has influence over the selling prices that the Group can
charge.
The main competitors of the Group in the different fields of operation
are Israeli companies which sells mainly imported products, except for sales of
baby diapers and hygienic products in which the Group's main competitor is
Proctor & Gamble.
C. Organizational Structure
Clal Industries and Investment Ltd. (Clal) owns 32.54% of the Company.
Discount Investment Corporation Ltd. (DIC) owns 18.39% of the Company. Clal and
DIC agreed to coordinate and pool their voting power in the Company. IDB
Development Corporation Ltd. owns 64.7% of DIC and 63.6% of Clal.
Significant subsidiaries and associated companies
Name of the Company Ownership and Country of
------------------- Voting Incorporation
------ -------------
Subsidiaries
Amnir Recycling Industries Ltd. 100.00% Israel
Graffiti Office Supplies & Paper Marketing Ltd. 100.00% Israel
Attar Marketing Office Supplies Ltd. 100.00% Israel
American Israeli Paper Mills Paper Industry (1995) Ltd. 100.00% Israel
Associated Companies
Hogla-Kimberly Ltd. 49.90% Israel
Hogla-Kimberly Marketing Ltd. 49.90% Israel
Shikma Ltd. 49.90% Israel
Ovisan Sihhi Bez Sanai Ve Ticavet A.S 49.90% Turkey
Hogla-Kimberly Holdings A.S 49.90% Turkey
Neusiedler Hadera Paper Ltd. 49.90% Israel
Neusiedler Hadera Paper Marketing (1999) Ltd. 49.90% Israel
Grafinir Paper Marketing Ltd. 49.90% Israel
13
Name of the Company Ownership and Country of
------------------- Voting Incorporation
------ -------------
Mitrani Paper Marketing 2000 (1998) Ltd. 49.90% Israel
Yavnir (1999) Ltd. 49.90% Israel
Barthelemi Holdings Ltd. 33.91% Israel
T.M.M. Integrated Recycling Industries Ltd. (direct and indirect) 41.60% Israel
Carmel Containers Systems Ltd. 26.25% Israel
C.D. Packaging Systems Limited (direct and indirect) 63.20%* Israel
D. Property, Plants and Equipment
The Group's principal executive offices and manufacturing and warehouse
facilities are located on approximately 69 acres of land in Hadera, Israel,
which is 31 miles south of Haifa, a major seaport, and 28 miles north of Tel
Aviv. The Company owns 51 acres, and 18 acres are leased from the Israel Land
Administration, an agency of the State of Israel, under several leases. The
lease periods terminate during future years until 2050.
The Group's facilities in Hadera are housed in two-story plants and
several adjoining buildings. Approximately 1,200,000 square feet are utilized
for manufacturing, storage and sales and administrative offices. An additional
plant is located in renovated modern buildings on a 10 acre plot in Afula, a
city in northern Israel. The Molett plant is located in Nahariya, in northern
Israel, on approximately 6 acres. In September 2002, the Group signed an
agreement with the Tel Aviv Municipality for the extension of the lease period
of the real estate lease for a plant in Tel Aviv, that was shut down at the end
of 2002, until the year 2059, in return for the payment of $6.2 million by the
Group. The Group is investigating several options for using the land.
The Group also owns a warehouse containing 50,000 square feet situated
on three acres in the Tel Aviv area, and a two acre parcel in the industrial
zone of Bnei Brak, near Tel-Aviv, which is used for waste paper collection.
Hogla-Kimberly headquarters and logistic center which are rented under a long
term lease agreement are located in a new modern site in Zrifin, near Tel-Aviv,
covering an area of 430,550 square feet., with 188,370 square feet of buildings.
The Group sold at the end of 2002 the land and buildings it owned in
the city of Ashdod, in southern Israel, and at the beginning of 2003 the Group
sold 8 of 10 apartments it owned in Hadera.
The Group rents plant and office facilities in Migdal Haemek and
Caesarea and additional warehouses and waste paper collection sites throughout
Israel.
The machinery, equipment and assets of the Company are free of any
mortgage, lien, pledge or
----------
* The holding in voting shares is 63.05%
14
other charge or security interest.
The Group owns six paper machines that are used in the manufacture of
various grades of paper and board. Most of the paper production facilities of
the Company and its subsidiaries are located in Hadera where it operates five
machines with a combined production capacity of over 310,000 tons per year. The
Group owns another machine in Nahariya which produces tissue paper with
production capacity of 20,000 tons per year.
The Group also operates converting lines for personal care and
household paper products in Hadera and Nahariya.
The Group maintains facilities for collecting, sorting and baling waste
paper and board in various locations in Israel and a plant for the recycling of
urban waste in Afula. It also has a plant in Afula for the production of
disposable baby diapers, incontinence absorbent products and feminine hygiene
products, a plant in Migdal Haemek for the production of paperboard consumer
packages and a plant in Hadera for recycling plastic waste. The Group also
operates, through an associated company, a second plant for handling and
recycling urban waste in Petah Tikva, near Tel-Aviv and several landfills.
The Company established in 2000 a new co-generation power plant, based
on high-pressure steam available from steam drying employed in paper production,
for a total investment of $14 million. The operation of the power plant,
situated in Hadera, concluded two years of work, and the Group now enjoys an
independent power generation capacity of 18MW, with generation costs
considerably lower than the cost of electricity purchased from the Israel
Electricity Company. As part of this project, the infrastructure of the main
electricity supply system was renovated and improved, utilizing modern
technological innovations.
Environmental Regulation Matters
Certain of the Group's manufacturing operations are subject to
environmental and pollution control laws in Israel. In order to comply with
these laws, the Group planned and acquired, during 2001, a new modern facility
for the treatment of effluent using an anaerobic treatment process. This process
was installed in the Group's site in Hadera as a pre-treatment phase in the
existing system based on aerobic treatment, in order to improve the treated
effluent quality in compliance with environmental regulations.
In 2003 the Group recorded a significant improvement in sewage waste
quality, following the conclusion of the running-in and the optimization of its
anaerobic process facility and a significant reduce in sewage quantity.
The Company is investing money and efforts in environmental projects,
while placing emphasis on separating industrial effluent streams by type and
curtailing their volume. This effort includes educating the employees on
environmental matters.
The Group's achievements in the environmental protection during the
last few years were acknowledged at the end of 2002, when the paper mills at the
Hadera site won the Shield for Environmental Excellence in Industry Award
granted by the Israeli Ministry of the Environment. In 2003 all plants at the
main Hadera site passed successfully various environmental inspections.
ITEM 5 - OPERATING AND FINANCIAL REVIEW AND PROSPECTS
Critical Accounting Policies and Estimates
15
The Company's discussion and analysis of the financial condition and
operations are based upon the Company's consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in Israel (for information as to the reconciliation between U.S. and Israeli
GAAP, see Item 18). The preparation of these financial statements requires the
Company to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses, and related disclosure of contingent
assets and liabilities.
The Company identified the most critical accounting principles upon
which its financial status depends. The Company determined the critical
principles by considering accounting policies that involve subjective decisions
or assessments.
The Company states its accounting policies in the notes to the
consolidated financial statements and at relevant sections in this discussion
and analysis.
This discussion and analysis should be read in conjunction with the
Company's consolidated financial statements and related notes included elsewhere
in this report.
The Company identified the following to be the most critical accounting
policies:
Inventories
The inventory is valued at the lower of cost or market, where cost is
determined on the moving average basis. The Company writes down its inventory
for estimated obsolescence or unmarketable inventory based on analysis of
inventory aging, assumptions about future demand and market conditions. If
actual demand and/or market conditions are less favorable than those projected
by management, additional inventory write-downs may be required.
Allowance for doubtful accounts
The Company maintains allowances for doubtful accounts for estimated
losses resulting from the inability of its customers to make required payments.
The Company provides an allowance for doubtful accounts as a percentage of all
specific debts doubtful of collection. The allowances are based on the
likelihood of recoverability of accounts receivable considering the aging of the
balances, our historical write-off experience, net of recoveries, change in
credit worthiness of the customers, and taking into account current collection
trends that are expected to continue. These estimated allowances are
periodically reviewed, analyzing the customers' payment history. Actual customer
collections could differ from the Company's estimates.
Contingencies and risks involving the business
The Company is subject, from time to time, to various claims arising in
the ordinary course of operations. In determining whether liabilities should be
recorded for pending litigation claims, the Company assesses, based on advice of
its outside legal counsel, the allegations made and the likelihood that it will
successfully defend itself.
When the Company believes that it is probable that it will not prevail
in a particular matter, it then estimates the amount of the liability. The
evaluation of the probability of success of such claims and the determination of
whether there is a necessity to include provisions in respect thereof require
judgment by the Company's legal counsel and management.
16
Deferred income taxes
Deferred taxes are determined utilizing the asset and liability method,
based on the differences between the amounts presented in the financial
statements and those taken into account for tax purposes, in accordance with the
related tax laws. Valuation allowances are included in respect of deferred tax
assets when it is more likely than not that such assets will not adibe realized.
The Company has considered future taxable income and tax planning strategies in
assessing the need for the valuation allowance. Management evaluates the
realizability of the deferred tax assets on a current basis. If it were
determined that the Company would be able to realize the deferred tax assets in
excess of its net recorded amount, an adjustment to deferred tax assets would
increase income.
Impairment in value of Long-Lived Assets (including fixed assets and investments
in associated companies)
In February 2003, Accounting Standard No. 15 of the Israeli Accounting
Standard Board (hereafter - IASB) - "Impairment of Assets", became effective.
According to this standard the company performs a periodic review to evaluate
the need for a provision for the impairment its non-monetary assets - mainly
fixed assets as well as investments in associated companies.
Accordingly, at each balance sheet date, the company assesses whether
any events have occurred or changes in circumstances have taken place, which
might indicate that there has been an impairment of one or more of the above
assets. When such indicators of impairment are present, the Company evaluates
whether the carrying value of the asset in the Company's accounts can be
recovered from the cash flows anticipated from that asset.
The recoverable value of an asset is determined according to the higher
of the net selling price of the asset or its value in use to the Company. The
value in use is determined according to the present value of anticipated cash
flows from the continued use of the asset, including those expected at the time
of its future retirement and disposal. When it is not possible to assess whether
an impairment provision is required for a particular asset on its own, the need
for such a provision is assessed in relation to the recoverable value of the
cash generating unit to which that asset belongs.
Through December 31, 2002, the Company applied the provisions for
assessing and recording impairment of assets, prescribed by the U.S. standard,
FAS 121.
Recently issued pronouncement - "Discontinuance of Adjusting Financial
Statements for Inflation"
In October 2001, the IASB issued Israel Accounting Standard No. 12 -
"Discontinuance of Adjusting Financial Statements for Inflation", which provided
for the discontinuance of adjusting financial statements for the effects of
inflation, as of January 1, 2003. In December 2002, Accounting Standard No. 17
was issued that postponed the date from which Accounting Standard No. 12 is to
be applied until January 1, 2004.
Since the Company's financial statements are drawn up in NIS adjusted
for the changes in the dollar (as allowed by section 29(b) of Opinion 36 of the
Israeli Institute), and based on the provisions in paragraph 4 to Israeli
Accounting Standard No. 13, with effect from January 1, 2004, the Company will
no longer be able to measure its operations in dollars, and will have to resume
measuring its operations in NIS. The inflation-adjusted NIS amounts as of
December 31, 2003, as presented in these financial statements, will be the base
for the nominal-historical financial reporting following January 1, 2004.
17
The implementation of Standard No. 12 will mainly affect the financial
income and expenses items.
A. Operating Results
The following is a summary of the period-to-period changes in the
principal items included in the Consolidated Statements of Income:
Amount and Percentage Increase (Decrease)
New Israeli Shekels (in thousands)/1/
Year ended 12/31/03 Year ended 12/31/02
v. v.
year ended 12/31/02 year ended 12/31/01
---------------------- -------------------------
Changes % Changes %
NIS NIS
------- ------- ------- -------
Net sales 9,317 2.0 (13,934) (3.0)
Cost of sales (1,586) (0.4) (20,053) (5.2)
------- ------- ------- -------
Gross profit 10,903 11.9 6,119 7.1
Selling, administrative and general expenses 774 1.4 (9,809) (15.0)
------- ------- ------- -------
Income from ordinary operations 10,129 27.8 15,928 77.6
Financial income (expenses) - net (13,001) 435.3 (8,090) (158.5)
Other income (loss) 4,551 (4,037)
------- -------
Income before taxes on income 1,679 5.5 3,801 14.2
Taxes on income 2,086 21.3 (2,504) (34.4)
------- ------- ------- -------
Income from operation of the Company and the
consolidated subsidiaries 3,765 18.2 1,297 6.7
Share in profits of associated companies 18,822 112.5 1,716 11.4
------- ------- ------- -------
Net income 22,587 60.3 3,013 8.0
======= ======= ======= =======
The statements of income for the years ended December 31, 2003, 2002
and 2001 are presented in adjusted New Israeli Shekels as explained in Note 1 to
the Consolidated Financial Statements. The changes in purchasing power of New
Israeli Shekels were determined on the basis of changes in the U.S. dollar/New
Israeli Shekel exchange rate. All figures in the adjusted statements of income
are expressed in terms of December 31, 2003 shekels (1 U.S. $= NIS 4.379).
The number of New Israeli Shekels which were exchangeable for 1 U.S.
dollar increased (decreased) over the prior year by 9.3%, 7.3% and (7.6%) in
2001, 2002 and 2003, respectively.
----------
/1/ The financial statements of the Company are presented in New Israeli
Shekels adjusted to reflect the changes in the purchasing power of
Israeli currency (i.e., adjusted shekels). These adjustments were
determined on the basis of the changes in the U.S. Dollar/Israel Shekel
exchange rate (see page 5 and see Note 1 to Consolidated Financial
Statements).
18
The adjusted NIS figures have been translated into U.S. dollars using
the representative exchange rate of the U.S. dollar on December 31, 2003 ($1 =
NIS 4.379).
The translated U.S. dollar figures should not be construed as a
representation that the Israeli currency amounts actually represent, or could be
converted into U.S. dollars.
See Note 1 to the financial statements attached and Item 18 for
anticipated effect of adoption of accounting pronouncements that have been
issued but are not yet required to be adopted.
2003 compared to 2002
I. Overview of Results of Operations
1. Consolidated Data
Sales in 2003 totaled NIS 465.1 million, as compared with NIS 455.8
million in 2002 ($106.2 million as compared with $104.1 million).
The operating profit in 2003 amounted to NIS 46.6 million, as compared
with NIS 36.5 million in 2002 ($10.6 million, as compared with $8.3 million).
The financial expenses in 2003 amounted to NIS 16.0 million, as
compared with NIS 3.0 million in 2002 ($3.7 million, as compared with $0.7
million). The increased financial expenses are primarily attributed to the
impact of the revaluation on the net monetary balances (see analysis below -
Chapter III, Section 5).
2. Net Income and Earnings Per Share
Net profit in 2003 amounted to NIS 60.0 million, as compared with NIS
37.5 million in 2002 ($13.7 million, as compared with $8.6 million).
Net profit in 2003 includes NIS 1.0 million ($0.2 million) in net
capital gains, resulting from the sale of apartments that were owned by the
Company and that served Company employees in the past, coupled with a NIS 1.6
million ($0.4 million) tax benefit, on account of the exercise of employee
option warrants. The net profit in 2002 included approximately NIS 0.4 million
($0.1 million) in non-recurring income, net, from the realization of assets and
from taxes on account of preceding years.
The Earnings Per Share in 2003 amounted to NIS 1,494 per NIS 1 par
value ($3.41 per share), as compared with NIS 947 per NIS 1 par value ($2.16 per
share) in 2002.
The return on shareholders' equity amounted to 9.2% in 2003, as
compared with 5.9% in 2002.
II. The Business Environment
The severe recession that has been plaguing the Israeli economy over
the past several years, as part of the global economic crisis, has been
accompanied by security events and terrorist attacks and has resulted in
negative growth of the Israeli economy during this period, along with a
considerable rise in unemployment, lower domestic demand (due to the lower
purchasing power of the public and due to the significant decrease in incoming
tourism), coupled with a significant escalation in competition in all sectors.
19
The said global economic crisis - especially in Europe - has also
affected the paper industry and resulted in a supply surplus and consequently in
continuing the importing of low-priced paper into Israel. These imports have led
to increased competition, especially in fine paper, accompanied by a decrease in
selling prices. As a result of the rise in pulp prices during the same period,
the margin between selling prices and pulp prices has decreased as well.
Pulp prices rose by an average of approximately 10% in 2003, as
compared with 2002. These prices are estimated to continue to rise moderately in
the first half of 2004.
Despite the difficult business environment, the Group has managed to
maintain its operations at full capacity throughout this period, while expanding
its operations in overseas markets.
Signs of a recovery in the Israeli economy began appearing toward the
end of 2003, as reflected by low, albeit positive growth (although no growth was
recorded in 2003 in per capita terms), coupled with a certain positive change in
the business atmosphere in the economy.
The exchange rate of the NIS compared to the U.S. dollar was revaluated
by 7.6% in 2003, as compared with a devaluation of 7.3% in 2002.
Inflation was negative in 2003, at -1.9%, as compared with an inflation
rate of 6.5% in 2002.
The negative inflation enabled the Bank of Israel to significantly
lower the interest rates, by approximately 3.7% in 2003. This has led to a
lowering of the Prime rate at the commercial banks in 2003, from 10.4% to 6.7%.
III. Analysis of Operations and Profitability
The analysis set forth below is based on the consolidated data.
1. Sales
The consolidated sales totaled NIS 465.1 million in 2003, as compared
with NIS 455.8 million in 2002 ($106.2 million as compared with $104.1 million).
The 2002 consolidated sales included a sum of NIS 7.9 million ($1.8
million) of sales derived from the Shafir operation that was discontinued as of
September 2002.
The NIS 17.2 million ($3.9 million) increase in sales - net of Shafir's
sales in 2002 - originated primarily from a quantitative increase of
approximately 6% in packaging paper.
2. Cost of Sales
The cost of sales amounted to NIS 362.2 million in 2003 -77.9% of sales
- as compared with NIS 363.8 million -79.8% of sales - in 2002 ($82.7 million,
as compared with $83.1 million).
The gross margin as a percentage of sales reached 22.1% in 2003, as
compared with 20.2% in 2002.
The improved gross margin in 2003 compared to 2002, was achieved due to
the Company's ongoing improvements and increased efficiency. The said efficiency
was expressed by the increased output of the machines, by less work hours per
ton and a decrease in the consumption of energy per ton produced, coupled with
the continued reduction of various manufacturing costs.
20
The improved gross margin was achieved despite a sharp increase in
energy prices, following an average increase of approximately 21% in fuel oil
prices compared to 2002 (energy expenses grew by NIS 4.8 million ($1.1 million),
also on account of the transition to low-sulfur fuel oil, due to the demands of
the Ministry of the Environment). Furthermore a 23% increase was recorded in
water prices.
Labor Wages
The labor wages recorded in the cost of sales, in the selling expenses
and in the general and administrative expenses, totaled NIS 137.0 million in
2003, as compared with NIS 125.5 million in 2002 ($31.3 million as compared with
$28.7 million).
The increase in labor expenses originated primarily from an increase in
wages in dollar terms, due to the change in the average exchange rate between
the two periods, coupled with the updating of wages, to prevent a decrease in
real wages as a result of the rise in the CPI in 2002 (as mentioned above, the
CPI rose by 6.5% in 2002).
The said increase in wages was partially offset by the decrease in
personnel (as a result of efficiency measures and the shutting down of Shafir).
3. Selling, General and Administrative Expenses
The selling, general and administrative expenses (including wages)
amounted to NIS 56.3 million in 2003 (12.1% of sales), as compared with NIS 55.5
million (12.2% of sales) in 2002 ($12.9 million as compared with $12.7 million).
The increase in selling, general and administrative expenses originated
primarily from an increase in NIS-denominated expenses (including wages), in
dollar terms (due to the low dollar exchange rate, as compared with 2002).
4. Operating Profit
The operating profit amounted to NIS 46.6 million - 10.0% of sales - in
2003, as compared with NIS 36.5 million - 8% of sales - in 2002 ($10.6 million,
as compared with $8.3 million).
5. Financial Expenses
The financial expenses totaled NIS 16.0 million in 2003, as compared
with NIS 3.0 million in 2002 ($3.7 million as compared with $0.7 million).
The Company possesses a surplus of NIS-denominated financial
liabilities over financial assets (consisting primarily of notes and short-term
bank credit, denominated in NIS). Consequently, whereas a devaluation serves to
lower the financial expenses, a revaluation leads to an increase in the
financial expenses.
Elevated financial expenses were recorded by the Company in 2003,
originating primarily from the dollar revaluation, whereas in 2002, the
devaluation led to lower financial expenses (a difference of 15% between the
current year and in 2002).
It should nevertheless be stated that the cash-flow-related financial
expenses in 2003 (interest expenses net of revenues) amounted to NIS 8.8 million
($2.0 million), similar to the amount paid in 2002.
21
6. Taxes on Income
The expenditure for taxes on income totaled NIS 7.7 million in 2003, as
compared with NIS 9.8 million in 2002 ($1.8 million as compared with $2.2
million).
The principal factor behind the decrease in tax expenses in 2003, as
compared with 2002, is the difference between the real-term revaluation in 2003
and the real term devaluation in 2002. This devaluation served to decrease the
protection on shareholders' equity (measured for tax purposes according to the
changes in the Consumer Price Index) and increased the expenditure on taxes in
2002. A high real-term revaluation was recorded in 2003, that contributed to
lowering the tax expenditure.
7. Profit After Taxes and Before the Company's Share in the
Earnings of Associated Companies
The profit after taxes and before the Company's share in the earnings of
associated companies amounted to NIS 24.5 million in 2003, as compared with NIS
20.7 million in 2002 ($5.6 million, as compared with $4.7 million).
8. Company's Share in Earnings of Associated Companies
The companies whose earnings are reported under this item (according to
AIPM's holdings therein), include primarily: NHP, Hogla-Kimberly, Carmel and
TMM.
The Company's share in the earnings of associated companies amounted to
NIS 35.5 million in 2003, as compared with NIS 16.7 million in 2002 ($8.1
million, as compared with $3.8 million).
The following principal changes were recorded in the Company's share in
the earnings of associated companies, in relation to the preceding year:
- The Company's share in the net profit of NHP grew by NIS 1.2 million ($0.3
million) as a result of the continuing improvement in operating
profitability, that was attained primarily due to efficiency measures and
the reorganization of operations and marketing at the division. The
improved profitability was impaired by a certain decrease in operating
profit in the second half of 2003, as compared with the preceding quarters
of 2003 (due to the lower margins and the competition against imports),
coupled with the increase in financial expenses, primarily on account of
the repayment of some of the loans that were received from the shareholders
when the Company was founded.
- The Company's share in the net earnings of Hogla-Kimberly grew by NIS 19.0
million ($4.3 million), as a result of the improved operating profit at
Hogla-Kimberly as compared with 2002. This is primarily attributed to the
improved efficiency in logistics following the relocation to the central
warehouse in Tzrifin and the gradual transition toward the manufacturing of
HUGGIES diapers in Afula. Efficiency measures were also initiated at Ovisan
(the subsidiary in Turkey) and were expressed by a significant improvement
in the operating profit. The net profit also grew compared with 2002 on
account of financial revenues that were recorded at Hogla-Kimberly and at
Ovisan in 2003, due to the effects of the revaluation (in the NIS and in
the Turkish lira, as compared with the U.S. dollar).
- The Company's share in the net profit of the Carmel Group grew by NIS 2.5
million ($0.6 million) due to the transition from an operating loss in the
preceding quarters, to an operating profit starting with the third quarter
of 2003. This improvement is attributed to the comprehensive efficiency
measures that are being initiated by Carmel.
22
- The Company's share in the net profit of TMM decreased by NIS 2.3 million
($0.5 million), as a result of higher financial expenses in 2003, as
compared with 2002. This is attributed to an increase in bank credit (as a
result of an increase in customer debts primarily local municipalities
coupled by strategic investments in the development of the Company that
were financed using bank credit) and to the real-term interest in CPI
terms, that was higher in 2003 than it was in 2002.
IV. Liquidity and Investments
1. Cash Flows
The cash flows from operating activities amounted to NIS 52.7 million
in 2003, as compared with NIS 77.2 million in 2002 ($12.0 million, as compared
with $17.6 million). The decrease in the cash flows from operating activities in
2003, despite the improvement in the net profit, originated primarily from the
increase in operating working capital in 2003, that is non-recurring for the
most part. This increase stemmed primarily from the increase in customer debts,
on the one hand, and from the decrease in the supplier debt, on the other hand
(originated primarily from a change in the days of payables credit, as part of
price update agreements).
2. Investments in Fixed Assets
The investments in fixed assets amounted to NIS 29.2 million in 2003,
as compared with NIS 46.8 million in 2002 ($6.7 million, as compared with $10.7
million). The investments in 2003 included investments in environmental issues
(approximately $0.6 million), an investment in expanding the output of the
packaging paper machine (approximately $0.6 million), as well as investments in
equipment, transportation and IT.
3. Financial Liabilities
The long-term liabilities (including current maturities) amounted to
NIS 275.0 million at December 31, 2003, as compared with NIS 77.2 million at
December 31, 2002 ($62.8 million as compared with $17.6 million).
Most of the increase in the long-term liabilities is attributed to
loans raised through notes (Series 2) from institutional entities, in the amount
of NIS 200 million ($45.6 million), at December 21, 2003.
Some of the proceeds from the notes were used for the repayment of
short-term credit.
The short-term credit balance totaled NIS 144.6 million at December 31,
2003, as compared with NIS 104.0 million at December 31, 2002 ($33.0 million, as
compared with $23.8 million).
The increase in 2003 in the credit balances (which reached at the
maximum point about NIS 200 million) originates primarily from the dividends
paid to the shareholders (totaling NIS 100 million, or $22.6 million), as well
as from the repayment of long-term debts. The increase in the credit balances
was partially offset by dividends and by the repayment of a loan from associated
companies, coupled with part of the proceeds from the notes, as stated above.
Most of the credit for financing the Company's operations is
denominated in NIS. Due to the said increase in liabilities, the surplus of net
financial liabilities denominated in NIS grew from NIS 104.9 million at December
31, 2002 to NIS 159.8 million at December 31, 2003 (from $24.0 million to $36.5
million).
23
2002 compared to 2001
I. Overview of Results of Operations
The following are principal figures regarding the Company's operations.
For a detailed analysis, see paragraph III - "Analysis of Operations
and Profitability" below.
1. Consolidated Data - The Company and its subsidiaries
The consolidated sales amounted to NIS 455.8 million in 2002, as
compared with NIS 469.7 million in 2001 ($104.1 million, as compared with $107.3
million).
The operating income in 2002 amounted to NIS 36.5 million in 2002, as
compared with NIS 20.5 million in 2001 ($8.3 million, as compared with $4.7
million).
The earnings before taxes and before other incomeamounted to NIS 33.5
million in 2002, as compared with NIS 25.6 million in 2001 ($7.6 million, as
compared with $5.9 million).
2. Net Income and Earnings Per Share
Net income (before non-recurring income) totaled NIS 37.1 million in
2002, as compared with NIS 30.6 million in 2001 ($8.5 million, as compared with
$7.0 million).
Net income in 2002 included non-recurring income of NIS 0.4 million
($0.1 million), net, generated by the discontinuation of operations at Shafir
and Molett, from the sale of real estate in Ashdod, Israel (after deduction of
the applicable taxes) and from non-recurring tax revenues (see III.9, below).
Net income in 2002, including non-recurring income, totaled to NIS
37.5, as compared with NIS 34.4 million in 2001 ($8.6 million, as compared with
$7.9 million).
Earnings Per Share for 2002 totaled NIS 947 per NIS 1 par value ($2.16
per share), as compared with NIS 873 per NIS 1 par value ($1.99 per share) for
2001.
The return on shareholders' equity, before non-recurring income,
amounted to 5.8% in 2002, as compared with 5.1% in 2001.
II. The Business Environment and the influence of External Factors
The slowdown in Israel's economy grew more severe in 2002. The slowdown
in operations, effected by the global economic situation and by the
security-related events in Israel, was characterized by a decrease in domestic
demand, negative GDP growth and increased unemployment.
The accelerated devaluation of the NIS against the US dollar continued
with fluctuation throughout the year. At its peak, the US dollar exchange rate
reached a record of NIS 5 per dollar (13% devaluation since the end of 2001),
and its ascent was only curbed by the raising of interest rates by the Governor
of the Bank of Israel.
The accelerated devaluation during 2002 resulted in an increase in the
prices of imported inputs, but due to the economic situation in Israel, the
reduced demand and the increased competition, it was impossible to adjust the
selling prices as warranted by such devaluation. The sales turnover in dollar
24
terms was consequently eroded, despite the quantitative growth in sales in most
of the Group's operations, and the profitability was impaired.
In response to the foregoing economic situation, the Group initiated
efficiency measures that were intended to deal with the difficult economic
environment, while preserving AIPM's market shares and profitability of its
various operations, despite the said erosion and while focusing on its cost
base. These efficiency measures, which encompass all of the Group's different
operations, included personnel cutbacks, on both management and operational
levels, increased productivity and the creation of a lower cost base, resulting
in a greater ability to adjust to market conditions.
2002 was a year marked by stability in global pulp prices, following a
year with a sharp decline in prices. Pulp prices appeared to be rising in the
first quarter of 2003 (by approximately 10%) and this trend is expected to
continue in the second quarter of 2003 as well.
The inflation rate in 2002 amounted to 6.5%, as compared with an
inflation rate of 1.4% in 2001.
The NIS declined by 7.3% against the dollar in 2002, compared with a
decline of 9.3% in 2001.
III. Analysis of Operations and Profitability
The analysis below is based on the consolidated data.
1. Sales
The consolidated sales amounted to NIS 455.8 million in 2002, as
compared with NIS 469.7 million in 2001 (-3%); ($104.1 million, as compared with
$107.3 million).
The decrease in the sales turnover is primarily attributed to the
termination of some operations in 2002 (See III.9, below). The termination of
these operations resulted in a NIS 26.3 million (approximately $6 million)
decrease in the consolidated sales turnover.
An increase was recorded in 2002 in the volume sales of packaging paper
(fluting) in the domestic market, as compared to 2001. The growth in sales as a
result of such volume growth was partially offset by the decrease in local
selling prices, resulting from the severe crisis impacting the packaging sector
(corrugators).
With the intention of running at full capacity, while preserving
manufacturing efficiency, lowering the cost base, the Packaging Papers and
Recycling Division expanded its production and sales in 2002, thereby lowering
the average total cost per ton.
The turnover of the office supplies sector declined due to lower demand
stemming from the economic situation and the erosion of prices in dollar terms.
2. Cost of Sales
The cost of sales amounted to NIS 363.8 million - or 79.8% of sales -
in 2002, as compared with NIS 383.8 million - or 81.7% of sales - in 2001 ($83.1
million, as compared with $87.7 million).
The gross profit amounted to NIS 92.0 million - or 20.2% of sales - in
2002, as compared with NIS 85.9 million - or 18.3% of sales - in 2001 ($21.0
million, as compared with $19.6 million).
25
The increase in the gross margin was due to the Group's continuing
efficiency measures and the acceleration of these measures due to the economic
situation in Israel.
The improved efficiency was achieved, among other things, by:
- Lower wage costs, primarily as a result of personnel cutbacks
and the impact of the devaluation (see below).
- Increased output of the packaging paper machine, thereby
lowering the cost per ton.
- Lower raw material utilization costs.
- Reduction of various operating expenses.
- Increased proportion of self-generated electricity (as opposed
to purchased electricity), following improvements in the
operation of the new power plant at the Hadera plant.
Some of the above savings were offset as a result of a 12.3% increase
in fuel oil prices, originating from the increase in fuel oil prices in 2002,
coupled with the transition to the use of low-sulfur fuel oil, in accordance
with the demands of the Israeli Ministry of the Environment.
The increase in fuel oil prices increased the cost of self-generated
electricity by approximately $1 million, compared with 2001 (not including the
increase in quantity, resulting from the increase in production).
Labor Wages
The labor wages reflected in the cost of sales, the selling expenses
and the general and administrative expenses, amounted to NIS 125.5 million in
2002, as compared with NIS 148.4 million in 2001, representing a decrease of
15.4% ($28.7 million as compared with $33.9 million).
The lower labor expenses originated both from the reduction in the
number of personnel as a result of the Group's efficiency measures (savings of
6.2%, excluding the shutting down of Shafir), as well as the erosion of the
wages in dollar terms, due to the sharp devaluation of the NIS during 2002.
3. Selling, General and Administrative Expenses
The selling, general and administrative expenses (including wages)
amounted to NIS 55.5 million in 2002 (12.2% of sales), as compared with NIS 65.4
million (13.9% of sales) in 2001 ($12.7 million, as compared with $14.9
million).
This decrease is primarily attributed to the lower labor expenses and
to the efficiency measures implemented by AIPM, as detailed above.
4. Operating Income
The operating income amounted to NIS 36.5 million in 2002 (8.0% of
sales), as compared with NIS 20.5 million in 2001 (4.4% of sales) ($8.3 million,
as compared with $4.7 million).
5. Financial Revenues (Expenses)
26
Financial expenses of NIS 3.0 million were recorded in 2002, as
compared with financial revenues of NIS 5.1 million in 2001 ($0.7 million in
expenses, as compared with revenues of $1.2 million).
Most of AIPM's interest-bearing liabilities are denominated in NIS,
while some are linked to the CPI .
Due to the increased devaluation in 2001 (which was considerably
greater than the increase in the CPI), the CPI-linked and NIS liabilities
eroded, thereby creating financial revenues for 2001. In 2002, the devaluation
was lower and only slightly surpassed the increase in the CPI, resulting in
financial expenses.
Furthermore, despite the fact that the average balance of short-term
credit in 2002 was similar to that in 2001, the average interest rate on the
credit was higher this year, due to the interest rate increases by the Bank of
Israel.
6. Profits Before Taxes
The profits before taxes and before other income/expenses amounted to
NIS 33.5 million in 2002, as compared with NIS 25.6 million in 2001 ($7.6
million, as compared with $5.9 million).
7. Taxes on Income
The taxes on income expenses, on account of the current operations,
totaled NIS 13.1 million in 2002, as compared with NIS 11.2 million in 2001
($3.0 million, as compared with $2.6 million).
The tax expenses grew in 2002 compared to 2001, primarily due to the
NIS 7.9 million increase in income before taxes ($1.8 million). The said
increase was partially offset by the larger real-term devaluation last year,
which resulted in the erosion of the hedging of shareholders' equity for tax
purposes in 2001, calculated according to changes in the Consumer Price Index,
resulting in increased tax expenses in the financial statements for 2001.
8. Company's Share in Earnings of Associated Companies
The companies whose earnings are reported under this item (according to
AIPM's share therein), include primarily: Hogla-Kimberly, NHP, Carmel and T.M.M.
(including Amnir Environmental Services).
AIPM's share in the earnings of associated companies amounted to NIS
16.7 million in 2002, as compared with NIS 15.0 million in 2001 ($3.8 million,
as compared with $3.4 million, respectively).
The following are the detailed changes in the earnings of associated
companies in 2002 as compared to 2001:
- The Company's share in NHP's earnings grew by approximately NIS 11.8
million ($2.7 million) in 2002, as compared with 2001. This growth was
rendered possible by the comprehensive efficiency program implemented by
NHP, which included the restructuring of operations and marketing,
including a significant growth in export sales. The manufacturing
efficiency and machine output at NHP grew considerably in 2002 as a result
of the said measures and assisted NHP in returning to profitability,
despite the adverse market conditions.
- The decrease in the Company's share in Hogla-Kimberly's earnings amounted
to NIS 8.8 million ($2.0 million). This decrease was attributed to an
increase in competition in the non-food household
27
sector (in which Hogla-Kimberly operates) during 2002, both from
international brands - primarily Procter & Gamble in the baby diapers
sector - as well as from private labels of the retail marketing chains. In
response to the competition, Hogla-Kimberly is implementing various
marketing measures that are intended to enable it to preserve its sales
volumes, although while incurring certain erosion in selling prices and
operating profitability.
- The decrease in the Company's share in Carmel's earnings amounted to NIS
1.3 million ($0.3 million). This decrease was attributed to the continuing
crisis, expressed by lower demand for packaging, due to the declining
volumes of operation in industry and agriculture, which resulted in a
volume decrease in demand for packaging and in lower prices. The decrease
in sales adversely affected the profitability of Carmel, despite the
efficiency efforts and the lower raw material costs. Carmel is continuing
to implement additional efficiency measures, which are expected to result
in an increased level of profitability.
- The T.M.M.-Amnir operations continued to expand in 2002, while recording a
constant improvement in operational efficiency and in profitability.
IV. Liquidity and Investments
1. Cash Flows
Cash flows from operating activities amounted to NIS 55.3 million in
2002 (excluding dividend received from an associated company), as compared with
cash flows of NIS 19.3 million in 2001 ($12.6 million, as compared with $4.4
million). The improved cash flows were attributed primarily to annual
differences in operating working capital. The operating working capital grew by
NIS 29.4 million ($6.7 million) in 2001, as compared with a NIS 5.5 million
($1.2 million) decrease in operating working capital in 2002, originating
primarily from a decrease in inventories in 2002. The cash flows from operating
activities, including the said dividend, amounted to $17.6 million in 2002.
2. Investments in Fixed Assets
The investments in fixed assets totaled NIS 46.8 million in 2002, as
compared with NIS 30.0 million in 2001 ($10.7 million, as compared with $6.9
million).
The investments in 2002 included the payment of approximately NIS 26.8
million ($6.1 million) on account of the extension of the lease on the Shafir
Compound from the Tel Aviv Municipality, for an additional period, until 2059.
The investments also included the completion of the investment in the
anaerobic installation in Hadera, as part of the Group's environmental
operations, coupled with ongoing investments in the renovation of manufacturing
and transport equipment.
B. Liquidity and capital resources
The Company anticipates that its existing credit lines are sufficient
for financing its working capital needs. The Company uses its cash flow from
operating activities to finance its investments and for repayment of loans and
dividend distributions to its shareholders.
Based on the Company's balance sheet, the Company believes that it is
unlikely that there will be any difficulties to obtain credit, whether short
term debts or long-term debts, to finance anticipated investments.
28
At December 21, 2003, the Company issued notes - through tender by
private placement - in the amount of NIS 200 million, to institutional
investors. These notes carry an interest rate of 5.65% per annum (a margin of
1.45% above government notes with a comparable average maturity). The principal
will be repaid in seven equal annual installments between the years 2007-2013
(average maturity of 6 years), with both the principal and the interest being
linked to the CPI. The notes are not convertible into the Company's ordinary
shares and shall not be registered for trade on a public exchange.
The Company uses loans from local financial institutions, mostly banks,
to finance its activities. As of December 31, 2003, these loans consisted of the
following:
1. Short-term credit from banks - see Note 10d to the financial
statements attached.
2. Long-term loans from banks and other liabilities - see Note 4a
and 4c to the financial statements attached.
3. Notes - see Note 4b to the financial statements attached.
For information regarding financial instruments used for hedging
purposes and market risks - see Item 11, "Quantitative and Qualitative
Disclosure about Market Risk".
The Group may incur additional tax liabilities in the event of
inter-company dividend distributions, derived from "approved enterprises"
profits. The said dividend distribution from investee companies is in the amount
of up to approximately NIS 95 million (of which the Company's share of the
additional tax is NIS 16 million, if this dividend is distributed). No account
was taken of the additional tax, since AIPM has the ability and the intention
that such earnings are to be reinvested and that no dividend would be declared
which would involve additional tax liability to the Group in the foreseeable
future.
C. Research and development, patents and licenses, etc.
There are no significant investments in research and development
activities.
D. Trend information
For trend information see "The Business Environment and the Influence
of External Factors" above.
ITEM 6 - DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
The following table sets forth certain information with respect to the
directors and executive officers of the Company:
NAME DIRECTOR Year of
Directors: SINCE Birth POSITION
---------- ----- ----- --------
Michael Dorsman 1999 1965 Director
Nochi Dankner 2003 1954 Director
29
NAME DIRECTOR Year of
Directors: SINCE Birth POSITION
---------- ----- ----- --------
Avi Fischer 2004 1956 Director
Aviezer (Gezi) Kaplan 2001 1948 Director
Jacob Laskow 1999 1954 Director until June 8, 2003.
Miri Lent-Sharir 2000 1956 Director
Oren Lieder 2003 1948 Director
Zvi Livnat 2003 1953 Director
Isaac Manor 2003 1941 Director
Amos Mar-Haim 1984 1938 Director
Leon Recanati 1988 1948 Director
Shmuel Rotem 1979 1926 Vice Chairman until November 1, 2003.
Meir Shannie 2001 1945 Director until February 23, 2004.
Avi Yehezkel 2003 1958 Director
Yaacov Yerushalmi 1998 1942 Chairman of the Board since January 1999, CEO of
the Company since June 1990 until April 2003.
The business experience of each of the directors is as follows:
Mr. Michael Dorsman is a businessman, Chairman of the Board and CEO of
D.B.P.L. Public Investments Ltd. and Papaya Investments Ltd. Mr. Dorsman holds
11.4% of the Company's shares directly.
Mr. Nochi Dankner is Chairman and Chief Executive Officer of IDB
Holdings Corporation Ltd., Chairman of IDB Development Ltd., Discount
Investments Ltd. and of Clal Industries and Investments Ltd. Serves or served as
Chairman and Director in public and private companies of Ganden Group, IDB Group
and Bank Hapoalim.
Mr. Avi Fischer is Co-CEO of Clal Industries and Investments Ltd. and
Deputy CEO of IDB Holdings Corporation Ltd., director of IDB Development Ltd,
Discount Investment Ltd. and several public and private companies of Ganden
Group and IDB Group. Senior partner of Fischer, Behar, Chen & Co. Law Office.
Mr. Aviezer (Gezi) Kaplan is the CEO and a director of Tivall (1993)
Ltd., Deputy Managing Director of Osem Group, Chairman of the Boards of Sabra
Salad Food Industries (1985) Ltd., Ostiv Ltd., and Of Tov Products (2001) Ltd.,
and a director of Beit-Hashita Assis Food Industries Limited Partnership. He
serves as an external director of the Company.
Ms. Miri Lent-Sharir is a businesswoman and an external director of the
Company. Until November 2000, she was Assistant to the General Manager for
Special Projects of Housing and Construction Holding Ltd. Until August 1998, she
was the Deputy General Manager of Ampal American Israel Corporation and a
director of companies in the Ampal Group.
30
Mr. Oren Liedr is Executive Vice President and Chief Financial Officer
of Discount Investments Ltd. Serves as director at various companies, including
publicly-traded companies. Formerly served as Chief Financial Officer of Bezeq,
the Israeli Telecom Company Ltd.
Mr. Zvi Livnat is Co-CEO of Clal Industries and Investments Ltd. and
Deputy CEO of IDB Holdings Corporation, Vice President of Taavura Holdings Ltd.,
Director in IDB Development Ltd., Discount Investments Ltd., Clal Industries and
Investments Ltd. and other public and private companies.
Mr. Isaac Manor is a director at various publicly-traded and
privately-held companies within the IDB Group, IDB Holdings Ltd., IDB
Development Ltd., Discount Investment Ltd. and Clal Industries and Investments
Ltd ,Israel Union Bank Ltd. and others; Chairman of companies in the David
Lubinsky Group Ltd.,.
Mr. Amos Mar-Haim is Chairman of the Board of Atara Investments
Company Ltd., Migdal Underwriting and Investment Banking Ltd., director of
Al-Rov (Israel) Ltd., the Jerusalem Development Authority, Metrix Ltd., Moria
Ltd., Keter Ltd., and Yissum Research and Development Co. Ltd., and Chairman of
the Association of Public Companies until 2001. Until May 1999 he was Vice
Chairman of Israel Company, Chairman of Zim Israel Navigation Co., Vice Chairman
of Israel Chemicals Ltd., and Vice Chairman of Oil Refineries Ltd.
Mr. Leon Recanati is CEO and Chairman of Glenrock Israel Ltd., Ligum
Ltd. and Gorli Ltd. Until May 2003 he was Chairman of the Board of Clal
Industries and Investments Ltd., Chairman of the Board of Discount Investments
Corporation Ltd., CEO (until February 2003) and Chairman of IDB Holding
Corporation Ltd., and Chairman of IDB Development Ltd. Until the middle of 2000,
he also acted as the Chairman of Clal (Israel) Ltd.
Mr. Avi Yehezkel is an external director at Bank Yahav. He served as a
Knesset member between 1992-2003, during these years alternately, he served as
Deputy Minister of transportation, Chairman of the Economics Committee, Chairman
of the Defense Budget Committee, Chairman of the Capital Market Sub-Committee,
Chairman of the Banking Sub-Committee and member of the Finance Committee.
Mr. Yaacov Yerushalmi is Chairman of the Board and was the CEO of the
Company until April 2003. In addition, he is the Chairman or Vice-Chairman of
subsidiaries and associated companies of the Group.
Senior Management (as of May 31, 2004)
Name Year of Birth Position and Business Experience for past five years
---- ------------- ----------------------------------------------------
Yaacov Yerushalmi 1942 Chief Executive Officer from June 1990 until April 2003; Chairman of the
Board since January 1999.
Avi Patir 1948 Chief Executive Officer until February, 2004.
31
Name Year of Birth Position and Business Experience for past five years
---- ------------- ----------------------------------------------------
Israel Eldar 1945 Corporate Controller and responsible for risks and business interruption
management. A director of subsidiaries and affiliated companies of the
Company.
Ofra Gorni 1953 Business Development Manager and a director of subsidiaries and
affiliated companies of the Company.
Lea Katz 1950 Legal counsel and Corporate Secretary since August 2000.
Gabi Kenan 1944 Deputy General Manager. A director of subsidiaries and affiliated
companies of the Company.
Pinhas Rimon 1940 General manager of Packaging Paper and Recycling Division. A director of
subsidiaries and affiliated companies of the Company.
Gideon Liberman 1950 General Manager of Development and Infrastructure Division
Senior Management in Subsidiaries and Affiliated Companies (as of May 31, 2004)
Name Position in the Company
---- -----------------------
Avi Brener General Manager, Hogla-Kimberly Ltd.
Avner Solel General Manager, Neusiedler Hadera Paper Ltd.
Doron Katzir General Manager, Graffiti Office Supplies & Paper Marketing Ltd.
Rafi Alon General Manager, T.M.M. Integrated Recycling Industries Ltd.
Doron Kempler General Manager, Carmel Container Systems Ltd.
B. Compensation
The aggregate amount of remuneration paid to all directors and the
above senior officers of the Company as a group for services provided by them to
the Company during 2003 was approximately NIS
32
10,071,000 (approximately `$2,218,000). The aggregate amount set aside for
pension, retirement or similar benefits for directors and officers as a group
for services provided by them to the Company during 2003 was approximately NIS
896,000 (approximately $197,000).
Remuneration paid by the Company in 2003 to Mr. Yerushalmi, the
Company's CEO and Chairman of the Board, for services provided by him to the
Company during 2003, was NIS 2,178,000 (approximately $479,000).
Agreement with Mr. Yerushalmi
The general shareholders meeting which took place in 2003 approved the
foregoing addition to the Chairman's employment agreement. :
The agreement regarding the employment of the Chairman will end on
March 1, 2007 ("retirement date"). Each of the Company and the Chairman will
have the right to terminate the employment agreement prior to the foregoing date
by giving the other party a 180-day prior notice, provided that the Chairman may
not give notice of termination of the employment agreement prior to March 1,
2005. If the Chairman's employment is terminated by the Company or if he
resigns, the Chairman will have the right to receive (i) all rights relating to
a managers' insurance policy maintained for him by the Company and (ii) all
severance monies and other amounts paid for him by the Company to various funds.
If the Chairman's employment is terminated by the Company or if he resigns as a
result of a demotion in his responsibilities without his consent, the Chairman
will have the right to continue receiving all payments and other benefits
payable to him under the employment agreement until his retirement date.
In addition, upon the termination of employment of the Chairman he will
have the right to receive a payment in an aggregate amount equal to one-month's
salary for each year in which he was employed by the Company and an additional
$300,000, as a bonus in respect of the establishment by him of strategic
partnerships. All other terms of the Chairman's employment agreement as
currently in effect shall remain unchanged.
On May 7, 2001, the Company's Board of Directors adopted an incentive
plan, which was subsequently approved by the Company's shareholders, to
remunerate the Company's Chairman of the Board of Directors. According to the
plan, such remuneration will be equal to the increase in the value of 50,000
ordinary shares of the Company in the period from May 7, 2001 (share price - NIS
194.37) to May 7, 2008. The remuneration will be spread over the period
commencing two years from the resolution of the Board of Directors, until the
seventh anniversary of such resolution. As of December 31, 2003 one quarter of
the remuneration is exercisable.
Remuneration of Directors
The remuneration of the directors (including the external directors)
for 2003 was approved at the 2003 general meeting of shareholders. Pursuant to
regulations under the Israeli Companies Law, each external director of the
Company must receive the same annual compensation, which must be between NIS
28,022 and NIS 45,531, plus an additional fee for each meeting attended which
must be between NIS 986 and NIS 1,751. The Board approved in 2000 that the
remuneration of each director, including the external directors, be fixed at NIS
39,000 plus an additional NIS 1,500 for each meeting attended. The same amounts
were approved by the Board in 2001. In 2002, the Board of Directors resolved
that the remuneration of each director will be NIS 35,000 plus NIS 1,350 for
each meeting attended (a decrease of 10% compared to 2001), subject to the
approval of the Company's shareholders. In 2003 the Board of Directors resolved
that the remuneration of each director will be the same as in the years 2000 and
2001,
33
namely, NIS 39,000 plus an additional NIS 1,500 for each meeting attended.
The remuneration was also approved by the General Meeting of Shareholders.
C. Board practices
The directors of the Company, except for the external directors, retire
from office at the Annual General Meeting of Shareholders and are eligible for
re-appointment at such Annual General Meeting.
Notwithstanding the aforesaid, if no directors were appointed at any
Annual General Meeting, the directors appointed at the previous Annual General
Meeting shall continue in office. Directors, except for the external directors,
may be removed from office earlier by a resolution at an Annual General Meeting
of Shareholders.
The Articles of Association of the Company provide that any director
may, by written notice, appoint any person who is approved by the directors to
be an alternate director and to act in his place and to vote at any meeting at
which he is not personally present. The alternate director is entitled to notice
of Board meetings and he will be remunerated out of the remuneration of the
director appointing him. The alternate director shall vacate his office if and
when the director appointing him vacates his office as director, or removes him
from office by written notice.
There are no services contracts which give the current directors of the
Company any benefits upon termination of appointment, except for Mr. Yaacov
Yerushalmi, whose terms of employment were submitted for approval at the Annual
General Meeting of Shareholders according to Israeli law.
External Directors
Under the Israeli Companies Law, which became effective on February 1,
2000, the Company (as a public company) is required to have at least two
external directors as members of its Board of Directors. An external director
may not have any financial or other substantial connection with the Company and
must be appointed at the Annual General Meeting of Shareholders. The external
directors are elected for a three-year term of office that may be extended for
another three years. External directors who were elected before February 1, 2000
may serve five years.
Audit Committee
Under the Israeli Companies Law, members of the Audit Committee are to
be elected from members of the Board of the Company by the Board. The Audit
Committee will be comprised of at least three directors, including all of the
external directors, but excluding: (i) the chairman of the board of directors;
(ii) any director employed by the Company or who provides services to the
Company on a regular basis; or (iii) a controlling shareholder of the Company or
his relative.
The role of the Audit Committee under the Israeli law is: (i) to
examine flaws in the business management of the Company in consultation with its
auditors and to suggest appropriate courses of action and (ii) to decide whether
to approve actions or transactions which under the Israeli Companies Law require
the approval of the Audit Committee (transaction with a related party, etc.) The
Company does not currently have a Nominating Committee nor a Compensation
Committee.
Our Audit Committee complies with the applicable provisions of the
Sarbanes-Oxley Act of 2002 and the rules promulgated thereunder."
34
The Company's Audit Committee members are: Amos Mar-Haim, Chairman,
Miri Lent-Sharir, and Aviezer (Gezi) Kaplan.
D. Employees
As of April 30, 2004, the Company and its subsidiaries had 724
employees and the Group (including associated companies) had 3,133 employees, of
whom 884 were engaged in the household paper activities, 291 were engaged in the
printing and writing paper activities, 871 were engaged in the recycling
activities, 571 were engaged in the corrugated board containers activities, 165
were engaged in the office supplies activities, 286 worked at the paper mills in
Hadera and Tel Aviv and for other related subsidiaries and 65 were management
and clerical personnel at the Company's headquarters in Hadera.
Some of the employees are subject to the terms of employment of
collective bargaining agreements. The parties to such collective bargaining
agreement are the Company and the employees, through the union.
E. Share ownership
In January 1998, the Company's Board of Directors approved a stock
option plan, pursuant to which options for ordinary shares were allocated to
senior officers of the Company and its subsidiaries, including 32,000 options to
the CEO, in three annual installments. The plan was approved at the Company's
Annual General Meeting of Shareholders in February 1998.
In 1998, 52,833 options were granted to senior officers under this
plan. In 1999, 51,335 options were granted under this plan and in 2000 51,335
options were granted. For further information regarding the 1998 plan, see Note
6 of the Notes to the Consolidated Financial Statements.
A total of 35,990 shares were issued in March 2000, as a result of the
exercise of 51,335 options from the first installment, which were allocated to
employees within the framework of the 1998 stock option plan. In March 2001,
28,149 shares were issued as a result of the exercise of 46,002 stock options
which were allocated to them within the framework of the 1998 stock option plan.
In 2003, an additional 28,693 shares were issued as a result of the exercise of
56,663 stock options which were allocated to employees within the framework of
the 1998 stock option plan. The unexercised balance of 1,498 options granted
expired in 2003.
In April 2001, the Board of Directors of the Company adopted a new
stock option plan under which options to purchase a total of 194,300 shares may
be granted to senior officers of the Company and certain other companies in the
Group. All of the options were granted in July 2001. Each option is exercisable
to purchase one ordinary share of NIS 0.01 par value of the Company. The options
vest in four yearly installments. The vesting period of the first installment is
two years, commencing on the date of grant, and the next three installments vest
on the third, fourth and fifth anniversary of the grant date. Each installment
is exercisable for two years from the vesting date of such installment. For
further information regarding the 2001 plan, see Note 6 of the Notes to the
Consolidated Financial Statements.
In 2003,1,550 options were exercised under the 2001 plan. 227 shares
were issued following the exercise.
In August 2001, the Company's Board of Directors approved a stock
option plan for employees of the Company and its subsidiaries. Under this plan,
up to 125,000 options may be granted without consideration. Each option is
exercisable to purchase one ordinary share of NIS 0.01 par value of the Company.
In November 2001, 81,455 options were granted under the 2001 employee plan. For
further
35
information regarding the 2001 employee plan, see Note 6 of the Notes to the
Consolidated Financial Statements.
In 2003, 57,962 options were exercised under the 2001 employee plan.
20,665 shares were issued following the exercise.
ITEM 7 - MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
A. Major shareholders
The following table sets forth, as of June 15, 2004, the number of
Ordinary Shares of the Company owned beneficially by (i) all those persons who,
to the Company's knowledge, were the beneficial owners of more than 5% of such
outstanding shares, and (ii) all officers and directors of the Company as a
group:
------------------------------------------------------------------- ---------------------------- --------------------
Name and Address: Amount Beneficially Owned Percent of Class
Principal Shareholders: Directly or Indirectly/1/ Outstanding
---------------------- ------------- -----------
Clal Industries and Investments Ltd. ("Clal"), 3 Azrieli Center, 1,292,769/2/ 32.54
the Triangle Building, Tel Aviv, Israel
Discount Investment Corporation Ltd. ("DIC"), 3 Azrieli Center, 730,565/2/ 18.39
the Triangle Building, Tel Aviv, Israel
Michael Dorsman, 20 Shlonski St., Tel Aviv, Israel 455,150 11.5
Bank Hapoalim Ltd. 62 Yehuda Halevi st. Tel Aviv, Israel (Through 213,489 5.37
trust and provident funds)
------------------------------------------------------------------- ---------------------------- --------------------
All officers and directors as a group /3/
------------------------------------------------------------------- ---------------------------- --------------------
/1/ Beneficial ownership is based on shared voting and dispositive power
over the securities listed in the table.
/2/ IDB Holding Corporation Ltd. ("IDBH") is the parent of IDB Development
Corporation Ltd. ("IDBD"), which, in turn, is the parent of DIC and
Clal. IDBH, IDBD, Clal and DIC are public companies traded on the Tel
Aviv Stock Exchange.
On May 19, 2003, private companies controlled by Oudi Recanati, Leon Y.
Recanati, Judith Yovel Recanati and Elaine Recanati completed a sale of
all of the shares of IDBH held by them, constituting approximately
51.7% of the outstanding share capital of IDBH, to a group comprised
of: (i) Ganden Investments I.D.B. Ltd. ("Ganden"), a private Israeli
company controlled by Nochi Dankner and his sister, Shelly Bergman,
which, following this transaction, holds 31.02% of the equity of and
voting power in IDBH; (ii) Manor Investments-IDB Ltd. ("Manor"), a
private Israeli company controlled by Ruth Manor, which, following this
transaction, holds 10.34% of the equity of and voting power in IDBH;
and (iii) Avraham Livnat Investments (2002) Ltd. ("Livnat"), a private
Israeli company controlled by Avraham Livnat, which, following this
transaction, holds 10.34% of the equity of and voting power in IDBH. In
addition, Shely Bergman owns approximately 4.75% of the equity and
voting power of IDBH.
Ganden, Manor and Livnat, owning in the aggregate approximately 51.7%
of the equity of and voting power in IDBH, entered into a Shareholders
Agreement relating, among other things, to their joint control of IDBH,
the term of which is until May 19, 2023.
Nochi Dankner is Chairman of IDBH, IDBD, Clal and DIC. Shelly Bergman,
Isaac Manor (the husband of Ruth Manor), and Zvi Livnat (the son of
Avraham Livnat) are directors of each of IDBH, IDBD, Clal and DIC.
/3/ The officers and directors of the Company own, in the aggregate, less
than 1% of the Company's outstanding Ordinary Shares, excluding the
shares beneficially owned by Michael Dorsman, Nochi Dankner, Isaac
Manor and Zvi Livnat whose ownerships are described above.
36
On February 5, 1980, Clal entered into a Voting Agreement with DIC,
pursuant to which Clal and DIC agreed to coordinate and pool their voting power
in the Company in order to appoint an equal number of On February 5, 1980, Clal
entered into a Voting Agreement wit DIC., pursuant to which Clal and DIC agreed
to coordinate and pool their voting power in the Company in order to appoint
equal of each party's nominees to the Board of Directors of the Company and in
order to elect designees on their behalf to the main board committees of the
Company. The parties have also agreed to vote en bloc at general meetings of the
Company on the subject of dividend distributions. Finally, in the event that any
party to the agreement decides to dispose of its Ordinary Shares, the agreement
grants the other parties thereto a first refusal option with respect to such
shares. The term of the agreement is for ten years, subject to extensions for
additional ten year periods. This agreement has been extended through the year
2010.
Based on the foregoing and on the shareholdings and other relationships
set forth in the preceding table and the footnotes thereto, Clal, DIC, IDBD,
IDBH and Nochi Dankner, Shelly-Bergman, Isaac, Ruth and Dori Manor, and Avraham
and Zvi Livnat may be deemed to constitute a group in control of the Company.
The Company estimates that as of April 30, 2004, 9.21% of its
outstanding ordinary shares were held in the United States by 2,396 record
holders.
All ordinary shares of the Company have equal voting rights.
B. Related Party Transactions
The information is included in the Company's attached Consolidated
Financial Statements: For loans to associated companies, see Note 2 to the
attached financial statements. For a capital note to an associated company, see
Note 4c to the attached financial statements. For transactions and balances with
related parties, see Note 12 to the attached financial statements.
For further information see also Note 9e to the financial statements
attached.
C. Interests of Experts and Counsel
Not applicable to annual reports.
ITEM 8 - FINANCIAL INFORMATION
37
A. Consolidated Statements and Other Financial Information
See the financial statements included in Item 18.
B. Significant Changes
None.
ITEM 9 - THE OFFER AND LISTING
A. Offer and Listing Details
The Company's ordinary shares are listed on the American Stock
Exchange. The trading symbol for the ordinary shares is AIP. The ordinary shares
are also listed on the Tel Aviv Stock Exchange.
The following table sets forth the high and low sale prices of the
Company's ordinary shares on the American Stock Exchange and the Tel Aviv Stock
Exchange for the periods indicated:
Last full five fiscal years
American Stock Exchange Tel Aviv Stock Exchange
------------------------------ ----------------------------- ---------------------------------------------------
High Low High Low High Low
------------------------------ ------------- --------------- ------------ ------------- ----------- ------------
$ NIS $/1/
------------------------------ ----------------------------- -------------------------- ------------------------
Calendar Year
----------------------------------------------------------------------------------------------------------------
2003 54.66 29.22 239.00 143.60 54.58 30.01
----------------------------------------------------------------------------------------------------------------
2002 40.50 25.10 178.00 116.10 40.10 24.90
----------------------------------------------------------------------------------------------------------------
2001 64.25 30.00 267.50 130.30 64.80 29.82
----------------------------------------------------------------------------------------------------------------
2000 83.5 55.31 347.00 224.90 86.10 54.96
----------------------------------------------------------------------------------------------------------------
1999 65.5 31.13 282.00 139.70 66.71 34.37
----------------------------------------------------------------------------------------------------------------
Quarters during last two full fiscal years and first quarter of 2004:
American Stock Exchange Tel Aviv Stock Exchange
------------------------------ ----------------------------- ---------------------------------------------------
High Low High Low High Low
------------------------------ ------------- --------------- ------------ ------------- ----------- ------------
$ NIS $/1/
------------------------------ ----------------------------- -------------------------- ------------------------
2004 Quarter Ended
------------------------------ --------------- ------------- -------------- ----------- ----------- -------------
March 31 60.73 53.01 267.10 234.90 60.33 52.10
------------------------------ --------------- ------------- -------------- ----------- ----------- -------------
2003 Quarter Ended High Low High Low High Low
------------------------------ ----------------------------- -------------------------- -------------------------
$ NIS $/1/
------------------------------ ----------------------------- -------------------------- -------------------------
March 31 35.50 29.22 165.20 143.60 35.25 30.01
------------------------------ --------------- ------------- -------------- ----------- ----------- -------------
June 30 46.12 35.65 200.00 163.30 46.38 35.66
------------------------------ --------------- ------------- -------------- ----------- ----------- -------------
September 30 47.20 41.10 205.70 178.60 46.19 40.31
------------------------------ --------------- ------------- -------------- ----------- ----------- -------------
December 31 54.66 45.00 239.00 197.50 54.58 44.56
------------------------------ --------------- ------------- -------------- ----------- ----------- -------------
2002 Quarters Ended High Low High Low High Low
------------------------------ --------------- ------------- -------------- ----------- ----------- -------------
$ NIS $/1/
------------------------------ ----------------------------- -------------------------- -------------------------
March 31 40.50 32.00 178.00 149.30 40.10 32.00
------------------------------ --------------- ------------- -------------- ----------- ----------- -------------
June 30 32.10 26.30 149.20 125.20 31.30 25.60
------------------------------ --------------- ------------- -------------- ----------- ----------- -------------
September 30 28.60 25.10 133.60 116.10 28.60 24.90
------------------------------ --------------- ------------- -------------- ----------- ----------- -------------
December 31 33.30 26.50 155.20 125.30 33.50 26.30
38
----------
/1/ Share prices have been translated from New Israeli Shekels (NIS) to
U.S. Dollars at the representative rate of exchange, as reported by the
Bank of Israel, on the dates when such high or low prices in NIS were
recorded.
39
Last full six months prior to filing of this report:
------------------------------ ----------------------------- ----------------------------------------------------
American Stock Exchange Tel Aviv Stock Exchange
----------------------------- ------------- --------------- -------------- ----------- ----------- -------------
High Low High Low High Low
----------------------------- ----------------------------- -------------------------- -------------------------
$ NIS $/1/
------------------------------ ----------------------------- -------------------------- -------------------------
May 2004 53.88 51.30 245.70 235.70 53.94 51.01
------------------------------ ------------- --------------- -------------- ----------- ----------- -------------
April 2004 57.25 53.25 257.30 239.30 56.80 52.88
------------------------------ ------------- --------------- -------------- ----------- ----------- -------------
March 2004 56.20 53.01 249.00 234.90 55.53 52.10
------------------------------ ------------- --------------- -------------- ----------- ----------- -------------
February 2004 55.65 54.50 255.00 242.00 57.18 54.23
------------------------------ ------------- --------------- -------------- ----------- ----------- -------------
January 2004 60.73 53.13 267.10 242.70 60.33 54.50
------------------------------ ------------- --------------- -------------- ----------- ----------- -------------
December 2003 54.66 49.01 239.00 222.40 54.58 50.17
------------------------------ ------------- --------------- -------------- ----------- ----------- -------------
ITEM 10 - ADDITIONAL INFORMATION
A. Share Capital
Not applicable to Annual Reports.
B. Memorandum and Articles of Association
The Company was registered under Israeli law on February 10, 1951 and
its registration number with the Israeli registrar of companies is 52-001838-3.
On June 20, 2001, the Company's shareholders approved a new version of
the Articles of Association ("Articles").
Objects of the Company
As indicated in Article 5 of the Company's Articles, the Company may,
at any time, engage in any branch or kind of business in which it is, expressly
or by implication, authorized to engage in accordance with the Articles. The
Company may also cease to engage in such businesses, whether or not it has
commenced to engage in such branch or kind of business.
----------
/1/ Share prices have been translated from New Israeli Shekels (NIS) to
U.S. Dollars at the representative rate of exchange, as reported by the
Bank of Israel, on the dates when such high or low prices in NIS were
recorded.
40
Director's Personal Interest
The Israeli Companies Law requires that a director and an officer of a
company disclose to the company any personal interest that he may have and all
related material information, in connection with any existing or proposed
transaction by the company. The disclosure is required to be made promptly and
in any event no later than the date of meeting of the board of directors in
which the transaction is first discussed.
If the transaction is an extraordinary transaction, the procedure of
approval is as described below. Under Israeli law, an extraordinary transaction
is a transaction other than in the ordinary course of business, otherwise than
on market terms or that is likely to have a material impact on the company's
profitability, assets or liabilities.
Subject to the restrictions of the Israeli Companies Law, a director is
entitled to participate in the deliberations and vote with regard to the
approval of transactions in which he has a personal interest. A director is not
entitled to participate and vote with regard to the approval of an extraordinary
transaction in which he has a personal interest, the approval of indemnity,
exemption or insurance of the directors or the approval of the directors'
compensation. If a majority of the directors have a personal interest in a
certain decision, they may participate and vote but the issue must be approved
also by the audit committee and by the shareholders. If the controlling
shareholder has a personal interest in an extraordinary transaction, the issue
must be approved also by the audit committee and the shareholders.
Any power of the Company which has not been conferred by law or by the
Articles to any other body, may be exercised by the Board. The management of the
Company is guided by the Board.
The Board shall formulate the policies of the Company and shall
supervise the performance of the office and actions of the General Manager,
including inter alia examination of the financial position of the Company and
determination of the credit framework which the Company may receive. Without
derogating from any power vested in the Board in accordance with the Articles,
the Board may, from time to time, at its discretion, decide upon the issuance of
a series of debentures, including capital notes or undertakings, including
debentures, capital notes or undertakings which can be converted into shares,
and also the terms thereof, and mortgage of the property of the Company, in
whole or in part, at present or in future, by floating or fixed charge.
Debentures, capital notes, undertakings or other securities, as aforesaid, may
be issued either at a discount or at a premium or in any other manner, whether
with deferred rights or special rights and/or preferred rights and/or other
rights, all the aforesaid as the Board may, at its discretion, determine.
Except for special cases as detailed in the Articles and subject to the
provisions of the Israeli Companies Law, the Board may delegate its powers to
the General Manager, to an officer of the Company or to any other person or to
the Board committees. Delegation of the powers of the Board may be with regard
to a specific matter or for a particular period, at the discretion of the Board.
There are no limitation requirements regarding age affecting directors'
ability to serve as directors of the Company. The directors need not be
shareholders of the Company in order to qualify as directors.
The Shares -Rights and Restrictions
All of the Company's shares are ordinary shares. Every ordinary share
in the capital of the Company is of equal rights, for all intents and purposes,
to every other ordinary share, including the right
41
to dividends, to bonus shares and to participation in the surplus assets of the
Company upon liquidation, proportionately to the par value of each share,
without taking into consideration any premium paid in respect thereof, all the
aforesaid subject to the provisions of the Articles.
Each of the ordinary shares entitles the holder thereof to participate
at and to one vote at Annual General Meetings of the Company. As described in
Item 6.C, all directors, except external directors, stand for election each year
at the Annual General Meeting.
Subject to the provisions of the Israeli Companies Law, the Board may
resolve upon the distribution of a dividend. When deciding on the distribution
of a dividend, the Board may decide that the dividend shall be paid, in whole or
in part, in cash or by way of the distribution of assets in specie, including
securities or bonus shares, or in any other manner at the discretion of the
Board.
Dividends on the Company's ordinary shares may be paid only out of
retained earnings, as defined in the Israeli Companies Law, as of the end of the
most recent fiscal year or profits accrued over a period of two years, whichever
is higher.
The Company may, by resolution adopted at an Annual General Meeting by
an ordinary majority, decrease the capital of the Company and of any reserve
fund from redemption of capital. For the execution of any resolution as
aforesaid, the Board may, at its discretion, resolve any issues, which may arise
in connection therewith.
In case of winding up of the Company, the liquidator may determine the
proper value of the assets available for distribution and determine how the
distribution among the shareholders will be carried out.
The liability of the shareholders is limited to the payment of par
value of their ordinary shares.
Under the Israeli Companies Law, each and every shareholder has a duty
to act in good faith in exercising his rights and fulfilling his obligations
toward the Company and other shareholders and to refrain from abusing his power
in the Company, such as in voting at the General Meeting of shareholders on the
following matters: any amendment to the Articles; an increase of authorized
share capital; a merger; or an approval of certain actions and transactions
which require shareholder approval.
In addition, each and every shareholder has the general duty to refrain
from depriving other shareholders of their rights.
Furthermore, any controlling shareholder, any shareholder who knows
that it possesses the power to determine the outcome of a shareholder vote and
any shareholder that, pursuant to the provisions of the Articles, has the power
to appoint or to prevent the appointment of an officer in the Company or any
other power toward he Company is under a duty to act in fairness toward the
Company. The Israeli Companies Law does not describe the substance of this duty
of fairness. These various shareholder duties may restrict the ability of a
shareholder to act in what the shareholder perceives to be its own best
interests.
Modification of Rights of Shares
If the share capital is divided into different classes, the Company may
by resolution adopted at a General Meeting by a special majority (except if the
terms of the issuance of the shares of such class otherwise provide) annul,
convert, expand, supplement, restrict, amend or otherwise modify the rights of a
class of shares of the Company, provided that the consent, in writing, of all
the shareholders of such
42
class thereto shall be received or that the resolution shall have been approved
by a General Meeting of the shareholders of such class by special majority, or
in the event that it was otherwise provided in the terms of the issuance of a
particular class of the shares of the Company, as may have been provided in the
terms of issuance of such class, provided that the quorum at the class meeting
shall be the presence, in person or by proxy, at the opening of the meeting of
at least two shareholders who own at least twenty five percent (25%) of the
number of the issued shares of such class.
The rights conferred upon the shareholders or owners of a class of
shares, whether issued with ordinary rights or with preference rights or with
other special rights, shall not be deemed to have been converted, restricted,
prejudiced or altered in any other manner by the creation or issuance of
additional shares of any class, whether of the same degree or in a degree
different or preferable to them, nor shall they be deemed to have been
converted, restricted, prejudiced or altered in any other manner by a change of
the rights linked to any other class of shares, all the aforesaid unless
otherwise expressly provided in the terms of the issuance of such shares.
Shareholders Meeting
The Company shall hold an Annual General Meeting each year not later
than fifteen months after the previous Annual Meeting, at such time and place as
may be determined by the Board. Any other General Meeting is referred to as a
"Special Meeting".
A notice of a General Meeting shall be published in at least two widely
distributed daily newspapers published in Hebrew. The notice shall be published
at least fourteen days prior to the convocation of the meeting. In addition the
Company provides a notice of the meeting and related proxy statement in English
to the holders of its Ordinary Shares listed on the records of the Company's
registrar and stock transfer agent in the United States.
Apart from the notices as to the General Meeting as above, according to
its articles and the Israeli Companies Law the Company is not required to give
any notice as to the General Meeting, either to the registered shareholders or
to shareholders who are not registered, subject to provisions of the Companies
Law and/or any other applicable law. The notice as to a General Meeting is
required to detail the place, the day and the hour at which the meeting will be
held and to include the agenda as well as a summary of the proposed resolutions
and any other details required by law.
The board of directors of the Company shall convene a Special Meeting
as may be decided by the Board, and shall also convene a special meeting at the
demand of any two directors or one quarter of the directors in office or one or
more shareholders who hold at least five percent of the issued capital and one
percent of the voting rights, or one or more shareholders who hold at least five
percent of the voting rights.
If the Board receives a demand for the convocation of a Special Meeting
as aforesaid, the Board shall within twenty one days of receipt of the demand
convene the meeting for a date fixed in the notice as to the Special Meeting,
provided that the date for convocation shall not be later than thirty five days
from the date of publication of the notice, all the aforesaid subject to the
provisions of the Companies Law.
In the resolution of the Board to convene a meeting, the Board may, at
its discretion and subject to the provisions of the law, fix the manner in which
the items on the agenda will be determined and notice given to the shareholders
entitled to participate at the meeting.
43
No business shall be transacted at any General Meeting unless a quorum
is present at the time the meeting proceeds to business. A quorum shall be
constituted when two shareholders, holding collectively at least twenty five
percent of the voting rights, are present in person or by proxy within half an
hour from the time appointed for commencement of the meeting, unless otherwise
determined in the Articles.
If a quorum is not present within half an hour, the meeting shall stand
adjourned for seven days, to the same day of the week at the same time and
place, without need for notification to the shareholders, or to such other day,
time and place as the Board may by notice to the shareholders appoint.
If a quorum is not present as aforesaid at the adjourned meeting, the
meeting shall be postponed.
Voting and Adopting Resolutions at General Meetings
A shareholder who wishes to vote at a General Meeting shall prove to
the Company his ownership of his shares. The Board may issue directives and
procedures relating to the proof of ownership of shares of the Company.
A shareholder is entitled to vote at a General Meeting or class
meeting, in person or by proxy. A voting proxy need not be a shareholder of the
Company.
The above shall also apply to any person entitled to shares, provided
that at least forty eight hours before the time for the meeting or the adjourned
meeting, as the case may be, at which he proposes to vote, he shall satisfy the
Board of his right to vote such shares unless the Company shall have previously
recognized his right to vote the shares at such meeting.
The instrument appointing a proxy (hereinafter "Proxy Appointment")
shall be in writing signed by the principal, or if the principal is a
corporation the proxy appointment shall be in writing and signed by authorized
signatories of the corporation The Board is entitled to demand that prior to the
holding of the meeting, there shall be produced to the Company a confirmation in
writing of the authority of signatories to bind the corporation to the
satisfaction of the Board. The Board may also issue provisions and procedures
relating to such matters.
The Proxy Appointment or an office copy to the satisfaction of the
Board shall be deposited at the registered office or at such other place or
places, in or outside of Israel, as may from time to time be determined by the
Board, either generally or in respect of a specific meeting, at least forty
eight hours prior to the commencement of the meeting or the adjourned meeting,
as the case may be, at which the proxy proposes to vote on the strength of such
Proxy Appointment.
A voting proxy is entitled to participate in the proceedings at the
General Meeting and to be elected as chairman of the meeting in the same manner
as the appointing shareholder, unless the Proxy Appointment otherwise provides.
The Proxy Appointment shall be in form usual in Israel or any other form which
may be approved by the Board.
Each ordinary share entitles the holder thereof to participate at a
General Meeting of the Company and to one vote at a poll.
44
Right of Non-Israeli Shareholders to Vote
There is no limitation on the right of non-resident or foreign owners
of any class of the Company's securities to hold or to vote according to the
rights vested in such securities.
Change of Control
Under the Articles, the approval of merger as provided in the Israeli
Companies Law, is subject to a simple majority at the General Meeting or class
meeting, as the case may be, all the aforesaid subject to the applicable
provisions of any law. It is also subject to the approval of the boards of the
merging companies.
For purposes of shareholders' approval, unless a court rules otherwise,
the merger will not be deemed approved if a majority of the shares held by
shareholders, other than the shareholders who are also shareholders in the other
merging company whose shares are held by the other merging company, or by any
person who holds 25% or more of the shares or the right to appoint 25% or more
of the directors in the other merging company, vote against the merger. Upon the
request of a creditor of either party to the proposed merger, a court may delay
or prevent the merger if it concludes that there exists a reasonable concern
that as a result of the merger, the surviving company will be unable to satisfy
the obligations of any of the parties to the merger. In addition, a merger may
not be completed unless at least 70 days have passed from the time that a
proposal of the merger has been filed with the Israeli Registrar of Companies.
The Israeli Companies Law also provides that an acquisition of shares
of a public company must be made by means of a tender offer if as a result of
the acquisition the purchaser would become a 25% shareholder of the company and
there is no existing 25% or more shareholder in the company. If there is no
existing 50% or greater shareholder in the company, the Companies Law provides
that an acquisition of shares of a public company must be made by means of a
tender offer if as a result of the acquisition the purchaser would become a 45%
shareholder of the company.
If following any acquisition of shares, the acquirer will hold 90% or
more of the company's shares, the acquisition may not be made other than through
a tender offer to acquire all of the shares of such class. If more than 95% of
the outstanding shares are tendered in the tender offer, all the shares that the
acquirer offered to purchase will be sold to it. However, the remaining minority
shareholders may seek to alter the consideration by court order.
Under the Israeli Securities Act 5728-1968, any major shareholder who
is the beneficial owner of more then 5% of the Company's equity capital or
voting securities is required to report this fact to the Israeli Securities
Authority.
C. Material Contracts
During the two years preceding the date of this annual report, the
Company did not enter into any material contract.
D. Exchange Controls
Foreign Exchange Regulations
There are no Israeli governmental laws, decrees or regulations that
restrict or that affect the export or import of capital, including but not
limited to, foreign exchange controls on remittance of
45
dividends on the ordinary shares or on the conduct of the Group's operations,
except as otherwise set forth in the paragraph below regarding taxation.
E. Taxation
Investors are advised to consult their tax advisors with respect to the
tax consequences of their purchases, ownership and sales of Ordinary Shares,
including the consequences under applicable state and local law and federal
estate and gift tax law, and the application of foreign laws or the effect of
nonresident status on United States taxation. This tax summary does not address
all of the tax consequences to the investors of purchasing, owning or disposing
of the Ordinary Shares.
Income Taxes on Dividends Distributed by the Company to Non-Israeli Residents
Subject to the provisions of applicable tax treaties, dividend
distributions from regular profits by the Company to a non-resident shareholder
are subject to withholding tax of 25%. The portion of dividends paid out of
profits earned by an Approved Enterprise of the Company is subject to
withholding tax at the rate of 15%.
The same rates generally apply under the Israeli-U.S. Tax Treaty.
However, when a U.S. tax resident corporation is the recipient of the dividend,
the rate on a dividend out of regular (non-Approved Enterprise) profits may be
reduced to 12.5% under the treaty, where the following conditions are met:
(a) the recipient corporation owns at least 10% of the outstanding voting
rights of the Company for all of the period preceding the dividend
during the Company's current and prior taxable year; and
(b) generally not more than 25% of the gross income of the paying
corporation for its prior tax year consists of certain interest and
dividend income.
Otherwise, the usual rates apply.
United States individual citizens and residents and U.S. corporations
generally will be required to include in their gross income the full amount of
dividends received from the Company with respect to the Ordinary Shares owned by
them, including the amount withheld as Israeli income tax. Subject to the
limitations and conditions provided in the Internal Revenue Code of 1986, as
amended (the "Code"), such persons may be eligible to claim a credit for such
withheld amounts against their United States federal income tax liability. As an
alternative, the persons enumerated above (provided such persons, in the case of
individual taxpayers, itemize their deductions) may elect to deduct such
withheld tax from their gross income in determining taxable income (subject to
applicable limitations on the deductions claimed by individuals). However, such
a credit or deduction may be limited for U.S. alternative minimum tax purposes,
depending on the taxpayer's specific circumstances.
Dividend payments on the Ordinary Shares will not be eligible for a
dividends received deduction generally allowed to United States corporations
under the Code.
Income Taxes and Capital Gains Applicable in Israel and to Non-Israeli
Shareholders
The basic tax rate applicable to corporations is currently 36%. The
maximum tax rate for individuals is 49%. These rates are subject to the
provisions of any applicable bilateral double taxation treaty. Israeli law
generally imposes a capital gains tax on the sale of securities and any other
capital assets.
Effective January 1, 2003, the capital gains tax rate imposed, on both
individuals and corporations upon sale of capital assets and non-traded
securities, acquired after that date has been reduced to 25%; capital gains
accrued from assets acquired before that date are subject to a blended tax rate
based on the relative Periods of time before and after that date that the asset
was held.
46
Effective January 1, 2003, capital gains from the sale of ordinary
shares on the Tel Aviv Stock Exchange (or listed on a designated foreign stock
market or traded in a foreign stock exchange), accrued by individuals (and
certain corporations) whose income in this regard is not classified as business
income, derived from January 1, 2003 and thereafter, will in general be liable
to capital gains tax of up to 15%. To the extent that the holder of the ordinary
shares claims a deduction of financing expenses, the gain will be subject to tax
at a rate of 25%.
In addition, if the ordinary shares are traded on the Tel Aviv Stock
Exchange (or listed on a designated foreign stock market), gains on the sale of
ordinary shares held by non-Israeli tax resident investors will generally be
exempt from Israeli capital gains tax.
Notwithstanding the foregoing, dealers (both individuals and
corporation) in securities in Israel are taxed at regular tax rates applicable
to business income.
The U.S. Israeli Tax Treaty exempts U.S. residents who hold an interest
of less than 10% an Israeli company, and who held an interest of less than 10%
during the 12 months prior to a sale of their shares, from Israeli capital gains
tax in connection with such sale. Certain other tax treaties to which Israel is
a party also grant exemptions from Israeli capital gains taxes.
F. Dividends and Paying Agents
Not applicable to Annual Reports.
G. Statement by Expert
Not applicable to Annual Reports.
H. Documents on display
A copy of each document (or a translation thereof to the extent not in
English) concerning the Company that is referred to in this Annual Report on
Form 20-F, is available for public view at our principal executive offices at
American Israeli Paper Mills Ltd., 1 Meizer Street Industrial Zone, Hadera
38100, Israel. Copies of this Annual Report and the exhibits hereto may be
inspected and copied at the SEC's Public Reference Room at 450 Fifth Street, NW,
Washington, D.C. 20549 and at the SEC's regional office at 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661. Copies of the materials may be
obtained from the Public Reference Room of the SEC at 450 Fifth Street, NW,
Washington, D.C. 20549 at prescribed rates. The public may obtain information on
the operation of the SEC's Public Reference Room by calling the SEC in the
United States at 1-800-SEC-0330.
ITEM 11 - QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Due to its operations, the Company is exposed to market risks, consisting
primarily of changes in interest rates - on both short and long-term loans -
changes in exchange rates (primarily NIS/$) and changes in raw material and
energy prices, which are denominated primarily in foreign currency. These
changes influence the Company's results.
The Company's Board of Directors determines the policy according to which
financial instruments are employed and defines the objectives to be attained,
taking into account the Group's linkage balance sheet and the impact of various
changes in currencies and in the Consumer Price Index on the Company's balance
sheets and on its financial statements.
AIPM conducts calculations of the Company's exposure every month and
examines the compliance with the policy determined by the Board of Directors.
47
Furthermore, limited use is made of derivative financial instruments,
which the Company employs for hedging the cash flows in dollars, originating
from the existing assets and liabilities.
Such transactions are conducted primarily through currency options and
forward transactions opposite Israeli banking institutions. The Company
therefore believes that the inherent credit risk of these transactions is
slight.
The Company possesses CPI-linked long-term loans (notes and loans) in the
total sum of NIS 240 million ($54.8 million), with the interest thereupon being
no higher than the market interest rate. In the event that the inflation rate
increases and is considerably high, this could lead to an additional financial
expenses being recorded in the Company's financial statements as a result of a
surplus of CPI-linked liabilities. At December 31, 2003, the Company was not
involved in any forward transactions. In January 2004, the Company entered into
a forward transaction, with a term of one year, to hedge a sum of NIS 200
million against a rise in the CPI, in order to hedge the said exposure.
The Company has only limited involvement with derivative financial
instruments. The Company uses these instruments as hedges. The Company utilizes
derivatives, mainly forward exchange contracts and currency options, to protect
its dollar cash flows in respect of existing assets and liabilities or
commitments that are to be affected by changes in exchange rates or in the
Israeli CPI. As the counter-parties to these derivatives are Israeli banks, the
Company considers the inherent credit risks remote.
Credit Risks
Most of the Group's sales are made in Israel to a large number of
customers and the exposure to customer-related credit risks is consequently
generally limited. The Group regularly analyzes - through credit committees that
operate within the various companies - the quality of the customers, their
credit limits and the relevant collateral required, as the case may be.
The financial statements include provisions for doubtful debts, based on
the existing risks on the date of the statements.
The cash, cash equivalents and fixed-term deposits are by and large
deposited with large Israeli banking institutions or foreign banks controlled by
the said institutions.
Fair Value of Financial Instruments
The fair value of financial instruments included in working capital of
the Group is usually identical or close to their carrying value. The fair value
of long-term bank loans and other liabilities also approximates the carrying
value, since they bear interest at rates close to the prevailing market rates
except for as follows:
The fair value of long-term loans and capital notes, included under
investments in associated companies, aggregating adjusted NIS 44,637,000 and of
a capital note to an associated company in the amount of adjusted NIS
32,770,000. Their value cannot be reliably determined prior to determining their
repayment dates.
48
Quantitative Information Regarding Market Risk
The following are the balance-sheet components by linkage bases at
December 31, 2003:
In NIS Million Unlinked CPI-linked In foreign Non-monetary Total
currency, or items
linked thereto
(primarily $)
----------------------------------------------- ------------ ----------- -------------------- --------------- ----------
Assets
Cash and cash equivalents 150.1 8.6 158.7
Short-term deposit 20.0 20.0
Other accounts receivable 210.6 0.2 48.5 9.9 269.2
Inventories 90.7 90.7
Investments in associated companies 12.2 10.6 21.9 339.2 383.9
Deferred taxes on income 3.9 3.9
Fixed assets, net 325.6 325.6
Deferred expenses, net of accrued
amortization 1.3 1.3
----------------------------------------------- ------------ ----------- -------------------- --------------- ----------
Total assets 392.9 10.8 79.0 770.6 1,253.3
----------------------------------------------- ------------ ----------- -------------------- --------------- ----------
Liabilities
Credit from banks 144.6 144.6
Loans from banks 0.4 0.4
Accounts payable 146.1 11.6 157.7
Deferred taxes on income 61.8 61.8
Notes 239.6 239.6
Other liabilities 32.8 2.2 35.0
Shareholders' equity, 614.2 614.2
----------------------------------------------- ------------ ----------- -------------------- --------------- ----------
Total liabilities and equity 323.5 240.0 13.8 676.0 1,253.3
----------------------------------------------- ------------ ----------- -------------------- --------------- ----------
Excess of monetary assets (liabilities) at
December 31, 2003 69.4 (229.2) 65.2 94.6 -
----------------------------------------------- ------------ ----------- -------------------- --------------- ----------
ITEM 12 - DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
Not applicable to Annual Reports
ITEM 13 - DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
None.
ITEM 14 - MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF
PROCEEDS
None.
49
ITEM 15 - CONTROLS AND PROCEDURES
The Company maintains disclosure controls and procedures that are
designed to ensure that information required to be disclosed in the Company's
periodic filings with the SEC is recorded, processed, summarized and reported
within the time periods specified in the SEC's rules and forms, and that such
information is accumulated and communicated to the Company's management,
including the Company's Chief Executive Officer (CEO - the Company's senior
executive officer) and Chief Financial Officer (CFO - the Company's senior
financial officer), as appropriate, to allow timely decisions regarding required
disclosure. In designing and evaluating the disclosure controls and procedures,
management recognized that any controls and procedures, no matter how well
designed and operated, can provide only reasonable assurance of achieving the
desired control objectives. Furthermore, management necessarily was required to
use its judgment in evaluating the cost to benefit relationship of possible
disclosure controls and procedures. Within 90 days prior to the date of this
report, the Company performed an evaluation of the effectiveness of the design
and operation of the Company's disclosure controls and procedures. The
evaluation was performed with the participation of senior management of each
business segment and key corporate functions, and under the supervision of the
CEO and CFO. Based on the evaluation, the Company's management, including the
CEO and CFO, concluded that the Company's disclosure controls and procedures
were effective. There have been no significant changes in the Company's internal
controls or in other factors that could significantly affect internal controls
after the date the Company completed the evaluation.
ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT
Amos Mar-Haim, a member of the Registrant's Audit Committee, is an Audit
Committee Financial Expert under the applicable rules and regulations of the
SEC. Amos Mar-Haim is "independent", as that term is defined in the American
Stock Exchange listing standards.
ITEM 16B. CODE OF ETHICS
The Company has adopted a code of ethics which is applicable to all
directors, officers and employees of the Company, including its principal
executive, financial and accounting officers and persons performing similar
functions (the "Code of Ethics"). The Code of Ethics covers areas of
professional and business conduct, and is intended to promote honest and ethical
behavior, including fair dealing and the ethical handling of conflicts of
interest; support full, fair, accurate, timely and understandable disclosure in
reports and documents the Company files with, or submits to, the SEC and other
governmental authorities, and in its other public communications; deter
wrongdoing; encourage compliance with applicable laws and governmental rules and
regulations; and ensure the protection of the Company's legitimate business
interests. The Company encourages all of its directors, officers and employees
promptly to report any violations of the Code of Ethics, and has provided
mechanisms by which they may do so. The Company will provide a copy of the Code
of Ethics to any person, without charge, upon written request addressed to the
Corporate Secretary of the Company at the Company's corporate headquarters in
Hadera, Israel.
ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The Audit Committee maintains a policy of approving and recommending only
those services to be performed by the Company's external auditors which are
permitted under the Sarbanes-Oxley Act and the applicable rules of the SEC
relating to auditor's independence, and which are otherwise consistent with and
will encourage, and are remunerated at levels that accord with, the basic
principles of auditor independence. The practice of the Audit Committee is to
receive from the Company's management, a list of all services, including audit,
audit-related, tax and other services, proposed to be provided during the
50
current fiscal year to the Company and its subsidiaries by Kesselman &
Kesselman, an affiliate of PricewaterhouseCoopers. After reviewing and
considering the services proposed to be provided during the current fiscal year
and, where appropriate in order better to understand their nature, discussing
them with management, the Audit Committee pre-approves such of the proposed
services, with a specific pre-approved budget, as it considers appropriate in
accordance with the above principles. Additional services from Kesselman &
Kesselman and any increase in budgeted amounts will similarly be pre-approved
during the year by the Audit Committee on a case-by-case basis.
All audit-related and non-audit-related services performed by Kesselman
& Kesselman during 2003 were reported to, and the services proposed to be
provided by them during 2004 pre-approved by, the Audit Committee in May 10,
2004, in accordance with the procedures outlined above.
The total fees paid by the Company to Kesselman & Kesselman for all
services, described above, including audit services, for the years ended
December 31, 2003 and 2002 were $125 in thousands and $160 in thousands,
respectively.
Item 16D. Exemptions from the Listing Standards for Audit Committees
Not applicable to Registrant.
Item 16E. Purchases of Equity Securities by the Issuer and Affiliated
Purchasers
Neither the Company nor any affiliated purchaser purchased any of the
Company's equity securities during 2003.
PART III
ITEM 18 - FINANCIAL STATEMENTS
Report of Independent Auditors on Reconciliation
of Israeli GAAP to U.S. GAAP
To the Shareholders of
American Israeli Paper Mills Ltd.
In connection with our audits of the consolidated balance sheets of American
Israeli Paper Mills Ltd. ("the Company") as of December 31, 2003 and 2002, and
the related consolidated statements of income, changes in shareholders' equity
and cash flows for each of the three years in the period ended December 31, 2003
(the "Financial Statements"), which are incorporated in this Form 20-F, we have
also audited the information included in the Reconciliation of Israeli GAAP to
U.S. GAAP listed under Item 18 herein. Those financial statements and the
Reconciliation are the responsibility of the Company's Board of directors and
management. Our responsibility is to express an opinion on the financial
statements and the Reconciliation based on our audit.
We did not audit the U.S.GAAP financial data of certain associated companies in
which the Company's share in excess of profits over losses of which is a net
amount of remeasured NIS 24.7 million in 2003 and re-measured NIS 26.7 million
in 2002. The financial data of those companies were audited by other independent
auditors whose reports have been furnished to us, and our opinion, insofar as it
relates to amounts included for those companies, is based solely on the reports
of the other independent auditors.
We conducted our audit in accordance with auditing standards generally accepted
in Israel, and the standards of the Public Company Accounting Oversight Board
(United States), which include examining, on a test basis, evidence supporting
the amounts and disclosures in the attached report, in order to obtain
reasonable assurance that there is no material misstatement, and to provide us
with a reasonable basis for our opinion.
In our opinion, based on our audits and the reports of the other independent
auditors, the information set forth under Item 18 present fairly, in all
material respects, in relation to the Financial Statements taken as a whole the
financial position and the operating results of the Company in conformity with
accounting principles generally accepted in the United States.
/s/ Kesselman & Kesselman
Tel-Aviv, Israel Kesselman & Kesselman
March 10, 2004 Certified Public Accountants (Isr.)
The Company prepares its financial statements in accordance with
Israeli GAAP. Israeli GAAP and U.S. GAAP vary in certain significant respects,
as described below:
a. The functional currency of the Company
Through December 31, 1993, the financial statements of the Company,
presented in NIS values adjusted for the changes in the general purchasing power
of the Israeli currency based on the changes in the exchange rate of the dollar
(see note 1b to the financial statements attached), were also used for the
purposes of reporting in conformity with U.S. GAAP applicable to entities
operating in hyper-inflationary economic environments, as prescribed by
Statement No. 52 of the Financial Accounting Standards Board of the United
States (FASB). Since the inflation rate in Israel has decreased considerably,
the Company decided that, commencing in 1994, it would implement the rules
relating to economies no longer considered hyper-inflationary, for reporting
purposes, in accordance with U.S. GAAP.
Under those rules:
1) The functional currency of the Company (the currency in which
most income is derived and most expenses are incurred) is the
New Israeli Shekel (NIS);
51
2) The opening balances for 1994 are the balances presented in
the Company's balance sheet at December 31, 1993;
3) Transactions performed from January 1, 1994 are presented on
the basis of their original amounts in Israeli currency.
The term "Re-measured NIS" signifies the currency used for FASB 52
purposes, as described above.
As to the effect of application of these rules - see (i) below.
See also note 1q to the financial statements attached regarding new
Israeli pronouncement that requires the discontinuance of adjustments
for inflation as from January 1, 2004.
b. Deferred income taxes
Under Israeli GAAP, no deferred taxes are provided for in respect of
certain long-lived (more than 20 years) assets, such as buildings and land.
Under U.S. GAAP, in accordance with the provisions of FAS 109, income taxes are
to be provided for any assets that have a different basis for financial
reporting and income tax purposes.
In addition, for U.S. GAAP purposes deferred taxes are to be provided
for with respect to un-remitted earnings of investee companies. Under Israeli
GAAP due to the Company's policy to hold its investments in investee companies,
and not to realize them, these temporary differences are considered differences
permanent in duration for which deferred taxes are not provided for.
Through 1999, as long as the main investments of the Company were
subsidiaries which were controlled by the Company, the Company did not provide
for deferred taxes also for U.S. GAAP reporting purposes, since those
differences were deemed to be not taxable due to the tax free inter-company
dividend distribution law in Israel and tax planning on its behalf, accordingly.
As from 2000, due to changes in certain of the Company's investments
from subsidiaries to investee companies, deferred taxes were provided for any
portion that arose from investee companies sources other than pre-1993
undistributed earnings (taking into account the Company's tax strategy).
As to the effect of application of this treatment, see (i) below.
c. Employee stock option plans
Under Israeli GAAP, no compensation expenses are recorded in respect of
employee stock options.
Under U.S. GAAP, the Company accounts for employee stock based
compensation using the intrinsic value-based model of accounting prescribed by
Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to
Employees" ("APB 25") and related interpretations. In accordance with FAS 123 -
"Accounting for Stock-Based Compensation" ("FAS 123"), the Company discloses pro
forma data assuming the Company had accounted for employee stock option grants
using the fair value-based method defined in FAS 123.
All of the Company's awards are considered to be variable awards; thus
the difference between the price of the shares at each balance sheet date and
the exercise price of such options is charged to income over the vesting period
and is adjusted in subsequent periods up to the measurement date (exercise or
expiration date). The amount of the difference is correspondingly presented as
capital surplus.
52
Pro-forma disclosure
Had compensation cost for the employee stock options plans, been
determined based on the fair value at the grant date, consistent with the method
of FAS 123, the Company's net income and earnings per share would have been
changed to the pro - forma amounts indicated below:
Year ended December 31
--------------------------------------------
2003 2002 2001
------ ------ ------
In thousands, except for per share data
Net income, as reported under U.S. GAAP 38,469 54,624 49,876
Add (deduct):
stock based employee compensation
expense (income), included in reported net
income, net of related tax effect 8,132 (1,066) (3,792)
Deduct:
stock based employee compensation
expense determined under fair value
method for all awards, net of related tax
effects (4,055) (4,801) (1,522)
------ ------
Pro forma net income 42,546 48,757 44,562
------ ------
Earnings per share - under U.S. GAAP:
Basic - as reported 9.77 13.94 12.75
Basic - pro forma 10.80 12.44 11.39
Diluted - as reported 9.69 13.89 12.66
Diluted - pro forma 10.72 12.40 11.31
A summary of the status of the Company's plans as of December 31, 2003,
2002, and 2001 , and changes during the years ended on those dates, is presented
below:
2003 2002 2001
-------------------------- ------------------------- -------------------------
Weighted Weighted Weighted
average average average
exercise exercise exercise
Price Price Price
Number NIS Number NIS Number NIS
---------- ---------- ---------- ---------- ---------- ----------
Options outstanding at
beginning of year 333,916 147.27 333,916 184.52 104,163 85.02
Changes during the year:
Granted - below market value 275,755 200.46
Exercised (116,175) 116.37 (46,002) 87.82
Expired (1,498) 98.62
---------- ---------- ---------- ---------- ---------- ----------
Options outstanding at 216,243 159.15 333,916 147.27 333,916 184.52
end of year ========== ========== ==========
Options exercisable at
year-end *70,518 179.53 58,161 99.67 58,161 92.91
========== ========== ========== ==========
Weighted average fair value of
options granted during the year
NIS **59.38
=========
53
The quoted price of the Company's ordinary shares on December 31, 2003 was NIS
234.3 ($53.5).
* Based upon the Company's share market value as of December 31, 2003,
this reflects potentially 17,547 shares regarding the options
exercisable at year-end.
** The fair value of the options granted is computed by the Black-scholes
formula using the following assumptions: dividend yield of 0%; expected
volatility of 30.5%; risk-free interest rate (linked to the Israeli
CPI) of 4.5% and expected average life of 5-5.5 years.
The following table summarizes information about options outstanding at December
31, 2003.
Options outstanding
------------------------------------------------------------------- Number of
Number options
Range of outstanding at Average exercisable at
Exercise December 31, remaining December 31,
Prices 2003 contractual life 2003
------ ---- ---------------- ----
NIS Years
93.07 48,575 2.5
137.09 23,493 2.8 23,493
148.97 48,575 3.5
200.73 47,025 1.5 47,025
200.73* 48,575* 4.5
216,243 3.0 70,518
======= === ======
* The exercise price of this batch will be ultimately determined in July
2004, (see Note 6b(2) to the financial statements attached). If the
exercise price of this batch was determined in December 31, 2003, it
would have been NIS 200.73.
54
d. Earnings per share ("EPS")
Israeli GAAP relating to computation of EPS is described in note 1P to the
financial statements attached.
The EPS computation according to U.S. GAAP presented below is in
accordance with FAS 128.
As applicable to the Company, the main difference between the two methods
of EPS computation is that shares to be issued upon exercise of employee stock
options (under SAR plans) are taken into account in the computation of basic EPS
in Israel, whereas in the United States, in computing basic EPS, only the
weighted average number of company shares actually outstanding in the reported
period is taken into account, and shares to be issued upon exercise of options
are included in the computation of diluted EPS. Another difference is the U.S.
requirement for separate presentation - in the income statements - of basic and
diluted EPS as long as they are not identical, while, in Israel, such separate
presentation is only required if the difference between basic and diluted EPS is
in excess of 5%.
As to the effect of application of U.S. GAAP, see (i) below.
Following are data relating to the weighted average number of shares
for the purpose of computing basic and diluted earnings per share under U.S.
GAAP:
2003 2002 2001
--------- --------- ---------
Weighted average number of shares used in the
computation of basic earnings per share 3,938,035 3,918,710 3,911,673
Net additional shares from the assumed exercise of
employee stock options 31,673 14,570 28,713
--------- --------- ---------
Weighted average number of shares used in the
computation of diluted earnings per share 3,969,708 3,933,280 3,940,385
========= ========= =========
e. Investment in marketable equity securities accounted for by the equity
method (associated company) - Carmel Container Systems (Carmel)
Under Israeli GAAP, an investment in an associated company is tested
for impairment under the provisions of Israeli Standard No. 15 of the Israeli
Accountant Standard Board - "Impairment of Assets" (see note 1g to the financial
statements). Based on the provisions of this Standard, and as explained in note
2e to the financial statements, the Company determined that the recoverable
value of this investment exceeds its carrying value (based, among other, on its
Discounted Cash Flows), and accordingly, the investment was not written down.
Under U.S. GAAP (APB 18 - "The Equity Method of Accounting for
Investments in Common Stock") and SEC Staff Accounting Bulletin (SAB) No. 59
("Accounting for Noncurrent Marketable Equity Securities"), a decline in value
of investment in an associated company which is other than temporary is
recognized as a realized loss, establishing a new carrying value for the
investment. Factors considered in determining that a decline is other than
temporary include, among other, the length of time and the extent to which the
market value has been less than the carrying value of the investment. The
relevant market value for determining the impairment loss is the market value at
balance sheet date (it should be noted that the share price of Carmel rose by
about 90% since December 31, 2003).
55
Therefore, although according to the Israeli GAAP the recoverable value of
this investment exceeds its carrying value (see above) under U.S. GAAP and SEC
rules described above, the decline in the market value of Carmel shares is the
significant factor in determining other than temporary decline. Accordingly, for
U.S.GAAP reporting, since the decline in the market value of Carmel is long and
extensive, the Company reduced the carrying value of this investment to its
market value as of December 31, 2003 and recorded an impairment loss amounting
NIS 16,986,000 (see also share in profits of associated companies under U.S.
GAAP in Item 3 above).
f. Statements of income presentation
Under Israeli GAAP, the Company included, in the statements of income
for the year ended December 31, 2002 and 2003, under "other income (expenses)",
in 2002 - loss from closure of facilities and disposal of assets and closing
inventories and in 2003 - gain from sale of apartments.
Under U.S. GAAP, the loss from inventories should be classified as part
of cost of sales and loss from closure of facilities, disposal of assets and
sale of apartments should be classified as part of operating income.
These adjustments were included in the reconciliation to the U.S. GAAP
(see operating income under U.S. GAAP in Item 3 above).
g. Accounting for guarantees
The Group's applies for U.S. GAAP purposes the provisions of FASB
interpretation No. 45 "Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others " ("FIN
45").
All of the guarantees granted by the Company and its subsidiaries (see
note 9 to the financial statements) were issued prior to December 31, 2002.
h. Supplemental disclosure on employee rights upon retirement
The Company and its subsidiaries expects to contribute in 2004 NIS
8,500 thousands to the provident funds and to the insurance companies in respect
of its severance pay obligations.
i. The effect of applying U.S. GAAP on the consolidated financial statements is
as follows:
1) Consolidated statement of income figures:
Year ended December 31
-------------------------------------
2003 2002 2001
------ ------ ------
In thousands
(except per share data)
Net income, as reported according to Israeli GAAP 60,047 37,460 34,447
Effect of treatment of the following items in accordance with U.S. GAAP:
Functional currency* 8,243 33,254 4,851
56
Year ended December 31
-------------------------------------
2003 2002 2001
------ ------ ------
In thousands
(except per share data)
Deferred income taxes - net (4,703) (17,156) 6,786
Other then temporary impairment of an investment in an associated company (16,986)
Applying APB 25 in respect of employee stock options:
Gross amount (12,705) 1,667 5,925
Deferred taxes 4,573 (601) (2,133)
------ ------ ------
Net income under U.S. GAAP 38,469 54,624 49,876
====== ====== ======
Earnings per share:
Under Israeli GAAP - net income per NIS 1 of par value of shares - Primary** 1,494 947 873
====== ====== ======
Under U.S. GAAP - per share:
Basic 9.77 13.94 12.75
====== ====== ======
Diluted 9.69 13.89 12.66
====== ====== ======
* In 2002 and 2001 including exchange rate differences from the end of
each of those years, to December 31, 2003.
** Each NIS 1 par value is composed of 100 ordinary shares of NIS 0.01 par
value.
2) Shareholders' equity:
December 31
--------------------------
2003 2002
--------- ---------
In thousands
Shareholders' equity according to Israeli GAAP (614,230) (704,168)
Effect of treatment of the following items in accordance with US GAAP:
Functional currency 57,224 112,029
Other then temporary impairment of an investment in an associated company 16,986
Deferred income taxes (10,334) (10,464)
--------- ---------
Shareholders' equity under US GAAP (550,354) (602,675)
========= =========
57
3) Consolidated balance sheet figures:
December 31
---------------------------------------------------------------------------
2003 2002
----------------------------------- ---------------------------------
Adjusted NIS Re-measured NIS Adjusted NIS Re-measured NIS
------------ --------------- ------------ ---------------
In thousands
---------------------------------------------------------------------------
As Reported Under As Reported Under
Israeli GAAP Under U.S. GAAP Israeli GAAP Under U.S. GAAP
------------ --------------- ------------ ---------------
Inventories 90,654 75,308 90,495 76,817
======== ======== ======== ======
Investment in associated companies 383,879 366,376 366,156 373,878
======== ======== ======== =======
Fixed assets - net 325,641 283,831 325,837 279,080
======== ======== ======== =======
Deferred taxes - net (50,789) (41,024) (47,318) (37,526)
======== ======== ======== =========
Shareholders' equity ** (614,230) (550,354) (650,950) (602,675)
======== ======== ======== =========
----------
** In 2003 the Company distributed dividends in the amount of NIS
100,989,000.
j. Statement of cash flows
The Company presents its cash flow information, under Israeli GAAP net
of the effects of inflation.
The information to be included under US GAAP for the years ended
December 31, 2001, 2002 and 2003 is presented below:
2003 2002 2001
------- ------- -------
Adjusted NIS
-------------------------------------
(In thousands)
-------------------------------------
Net cash provided by operating activities 53,895 81,587 16,279
Net cash used in investing activities (32,261) (43,682) (32,667)
Net cash provided by (used in) financing activities 125,517 (47,901) (1,756)
Effect of inflation on cash and cash equivalent 5,649 12,056 17,394
------- ------- -------
Increase (decrease) in cash and cash
equivalents 152,800 2,060 (750)
Balance of cash and cash equivalents
at beginning of year 5,906 3,846 4,596
------- ------- -------
Balance of cash and cash equivalents
at end of year 158,706 5,906 3,846
======= ===== =====
k. Reporting comprehensive Income
In addition to net income, comprehensive income includes translation of
foreign currency financial statements of an investee company, as
follows:
58
Year Ended December 31
----------------------
2003 2002
------ ------
Re-measured NIS
in thousands
----------------------
Net income under U.S. GAAP 38,469 54,624
Differences from translation of foreign
currency financial statements of an
investee company (2,506) 2,424
------ ------
Comprehensive income 35,963 57,048
====== ======
As of December 31, 2003 the accumulated other comprehensive income
aggregates (82) re-measured NIS, in thousands.
l. Recently issued accounting pronouncement in the United States:
5) FIN 46
In January 2003, the FASB issued FASB Interpretation No. 46
"Consolidation of Variable Interest Entities" (FIN 46). Under this FIN entities
are separated into two populations: (1) those for which voting interests are
used to determine consolidation (this is the most common situation) and (2)
those for which variable interests are used to determine consolidation. The FIN
explains how to identify Variable Interest Entities (VIE) and how to determine
when a business enterprise should include the assets, liabilities, no
controlling interests, and results of activities of a VIE in its consolidated
financial statements.
In December 2003, the FASB revised FIN 46 ("FIN 46-R") by amending some
of its provision and providing for new effective dates.
The adoption of FIN 46 did not have a material effect on Company's
consolidated financial statements. The Company believes that the expected
adoption of FIN 46-R will not have a material effect on its consolidated
financial statements.
FAS 132 (revised 2003)
In December 2003, the FASB issued SFAS No. 132 (revised 2003),
"Employers' Disclosures about Pensions and Other Postretirement Benefits, an
amendment of FASB Statements No. 87, 88 and 106, and a revision of FASB
Statement No. 132 ("FAS 132 (revised 2003)") ". This Statement revises
employers' disclosures about pension plans and other postretirement benefit
plans. It does not change the measurement or recognition of those plans. The new
rules require additional disclosures about the assets, obligations, cash flows,
and net periodic benefit cost of defined benefit pension plans and other
postretirement benefit plans.
Part of the new disclosures provisions are effective for 2003 calendar
year-end financial statements, and accordingly have been applied by the company
in these financial statements. The rest of the provisions of this Statement,
which have a later effective date, are currently being evaluated by the company.
59
Schedule - Valuation and Qualifying Accounts
Three Years Ended December 31, 2003
(Adjusted NIS in thousands)
Column A Column B Column C Column D Column E
Balance at beginning Additions Balance at
of period (reductions) Deductions end of period
charged to
expenses
----------------------- ---------------- --------------- -------------------
Allowance for doubtful accounts:
Year ended December 31, 2003 12,752 944 -- 13,696
======================= ================ =============== ===================
Year ended December 31, 2002 11,538 1,230 (16) 12,752
======================= ================ =============== ===================
Year ended December 31, 2001 12,962 92 (1,516) 11,538
======================= ================ =============== ===================
Report of Independent Accountants on
Financial Statement Schedule
To the Board of Directors of
American Israeli Paper Mills Limited.
Our audits of the consolidated financial statements referred to in our report
dated March 10, 2004, appearing in the 2003 annual report to the shareholders of
American Israeli Paper Mills Limited also included an audit of Financial
Statement Schedule - Valuation and Qualifying Accounts - listed in Item 18 on
this Form 20-F. In our opinion, the Schedule presents fairly, in all material
respects, the information set forth therein when read in conjunction with
related consolidated financial statements.
/s/ Kesselman & Kesselman
Tel-Aviv, Israel Kesselman & Kesselman
March 10, 2004 Certified Public Accountants (Isr.)
60
ITEM 19 - EXHIBITS
(a) The following financial statements and supporting documents are filed with
this report:
(i) Consolidated Audited Financial Statements of the Company for the
year ended December 31, 2003 (including reports of independent auditors of Kost,
Forer, Gabbay and Kasierer, a member of Ernst & Young Global, for TMM Integrated
Recycling Industries Ltd. and Barthelemi Holdings Ltd., of Bar-Lev, merrari,
Geva & co. for EFFEH lanfill Ltd., of Mualem Glezer Inbar Junio & co. an
affiliate of DFK International for M.M.M. Unaited Landfill Industries (1998)
Ltd. and of Kost, Forer, Gabbay and Kasierer, a member of Ernst & Young Global,
for Carmel Container Systems Ltd.).
(ii) Financial statements of Neusiedler Hadera Paper Ltd. for the year
ended December 31, 2003.
(iii) Financial statements of Hogla-Kimberly Ltd. for the year ended
December 31, 2003.
(iv) Report of independent accountants on Schedule on Valuation and
Qualifying Accounts and Schedule.
(v) Report of Independent auditors on reconciliation to U.S. GAAP.
(b) Exhibits:
1.1* Memorandum of Association
1.2** Articles of Association
3.1*** Voting Agreement dated February 5, 1980 by and among Clal Industries
Ltd., PEC Israel Economic Corporation and Discount Bank Investment
Corporation Ltd.
8.1 List of subsidiaries
31.1 Certification of Active Chief Executive Officer pursuant to 17 CFR
240.13a-14(a), as adopted pursuant to ss. 302 of the Sarbanes-Oxley
Act.
31.2 Certification of Chief Financial Officer pursuant to 17 CFR
240.13a-14(a), as adopted pursuant toss.302 of the Sarbanes-Oxley Act.
32.1 Certification of Active Chief Executive Officer pursuant to 18
U.S.C.ss.1350, as adopted pursuant toss. 906 of the Sarbanes-Oxley Act.
32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C.ss.1350,
as adopted pursuant toss.906 of the Sarbanes-Oxley Act.
* Previously filed as an exhibit to the Company's Annual Report on Form
20-F for the year ended December 31, 1987, file No. 1-4212, and
incorporated by reference herein.
** Previously filed as an exhibit to the Company's Annual Report on Form
20-F for the year ended December 31, 2000, file No. 1-4212, filed with
the SEC in June 2001 and incorporated by reference herein.
*** Incorporated by reference to the exhibit number 3.1 in the Company's
form 20-F for the year ended December 31, 1987.
61
SIGNATURES
Pursuant to the requirement of Section 12 of the Securities Exchange
Act of] 1934, the registrant certifies that it meets all of the requirements for
filing on Form 20-F and has duly caused this annual report to be signed on its
behalf by the undersigned, thereunto duly authorized.
AMERICAN ISRAELI PAPER MILLS LIMITED
By: /s/ Lea Katz
-----------------------------
Name: Lea Katz
Title: Corporate Secretary
Dated: June 24, 2004
62
EXHIBIT INDEX
1.1* Memorandum of Association
1.2** Articles of Association
3.1*** Voting Agreement dated February 5, 1980 by and among Clal Industries
Ltd., PEC Israel Economic Corporation and Discount Bank Investment
Corporation Ltd.
8.1 List of subsidiaries
31.1 Certification of Active Chief Executive Officer pursuant to 17 CFR
240.13a-14(a), as adopted pursuant to ss. 302 of the Sarbanes-Oxley
Act.
31.2 Certification of Chief Financial Officer pursuant to 17 CFR
240.13a-14(a), as adopted pursuant toss.302 of the Sarbanes-Oxley Act.
32.1 Certification of Active Chief Executive Officer pursuant to 18
U.S.C.ss.1350, as adopted pursuant toss. 906 of the Sarbanes-Oxley Act.
32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C.ss.1350,
as adopted pursuant toss.906 of the Sarbanes-Oxley Act.
* Previously filed as an exhibit to the Company's Annual Report on Form
20-F for the year ended December 31, 1987, file No. 1-4212, and
incorporated by reference herein.
** Previously filed as an exhibit to the Company's Annual Report on Form
20-F for the year ended December 31, 2000, file No. 1-4212, filed with
the SEC in June 2001 and incorporated by reference herein.
*** Incorporated by reference to the exhibit number 3.1 in the Company's
form 20-F for the year ended
AMERICAN ISRAELI PAPER MILLS LIMITED
2003 CONSOLIDATED FINANCIAL STATEMENTS
AMERICAN ISRAELI PAPER MILLS LIMITED
2003 CONSOLIDATED FINANCIAL STATEMENTS
TABLE OF CONTENTS
Page
REPORT OF INDEPENDENT AUDITORS 2
CONSOLIDATED FINANCIAL STATEMENTS -
IN ADJUSTED NEW ISRAELI SHEKELS (NIS):
Balance sheets 3-4
Statements of income 5
Statements of changes in shareholders' equity 6
Statements of cash flows 7-8
Notes to financial statements 9-39
SCHEDULE - DETAILS OF SUBSIDIARIES AND
ASSOCIATED COMPANIES 40
---------------
-------------------------------
---------------
PricewaterhouseCoopers Kesselman & Kesselman
Certified Public Accountants (Isr.)
Trade Tower, 25 Hamered Street
Tel Aviv 68125 Israel
P.O Box 452 Tel Aviv 61003
Telephone +972-3-7954555
Facsimile +972-3-7954556
REPORT OF INDEPENDENT AUDITORS
To the shareholders of
AMERICAN ISRAELI PAPER MILLS LIMITED
We have audited the consolidated balance sheets of American Israeli Paper Mills
Limited (hereafter - the Company) and its subsidiaries as of December 31, 2003
and 2002 and the related consolidated statements of income, changes in
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 2003. These financial statements are the responsibility of
the Company's board of directors and management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We did not audit the financial statements of certain associated companies, the
Company's interest in which as reflected in the balance sheets as of December
31, 2003 and 2002 is adjusted NIS 299.3 million and adjusted NIS 285.2 million,
respectively, and the Company's share in excess of profits over losses of which
is a net amount of adjusted NIS 28.2 million, adjusted NIS 10.2 million and
adjusted NIS 19.0 million for the years ended December 31, 2003, 2002 and 2001,
respectively. The financial statements of those companies were audited by other
independent auditors whose reports have been furnished to us, and our opinion,
insofar as it relates to amounts included for those companies, is based solely
on the reports of the other independent auditors.
We conducted our audits in accordance with auditing standards generally accepted
in Israel, including those prescribed by the Israeli Auditors (Mode of
Performance) Regulations, 1973 and the auditing standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by the Company's board of directors and management,
as well as evaluating the overall financial statement presentation. We believe
that our audits and the reports of the other independent auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audits and the reports of the other independent
auditors, the financial statements referred to above present fairly, in all
material respects, the consolidated financial position of the Company and its
subsidiaries as of December 31, 2003 and 2002 and the consolidated results of
operations, changes in shareholders' equity and cash flows for each of the three
years in the period ended December 31, 2003, in conformity with accounting
principles generally accepted ("GAAP") in Israel. Furthermore, in our opinion,
the financial statements referred to above have been prepared in accordance with
the Israeli Securities (Preparation of Annual Financial Statements) Regulations,
1993.
As explained in note 1b, the financial statements referred to above are
presented in values adjusted based on the changes in the exchange rate of the
U.S. dollar, in accordance with the pronouncements of the Institute of Certified
Public Accountants in Israel.
Tel-Aviv, Israel
March 10, 2004
/s/ Kesselman & Kesselman
2
AMERICAN ISRAELI PAPER MILLS LIMITED
CONSOLIDATED BALANCE SHEETS
IN ADJUSTED NEW ISRAELI SHEKELS
December 31
--------------------------
Note 2003 2002
---- ---- ----
In thousands
----------------------------
A s s e t s 9
CURRENT ASSETS: 8
Cash and cash equivalents 1o 158,706 5,460
Short-term deposit 10a 20,000
Accounts receivable: 10b
Trade 140,996 131,736
Other 128,246 131,890
Inventories 10c 90,654 90,495
--------- ---------
T o t a l current assets 538,602 359,581
--------- ---------
INVESTMENT AND LOAN TERM RECEIVALES:
Investments in associated companies 2;8 383,879 366,156
Deferred income taxes 7g 3,885
--------- ---------
387,764 366,156
--------- ---------
FIXED ASSETS: 3
Cost 953,656 930,563
L e s s - accumulated depreciation 628,015 604,726
--------- ---------
325,641 325,837
--------- ---------
DEFERRED CHARGES,
net of accumulated amortization 1h 1,267 549
--------- ---------
T o t a l assets 1,253,274 1,052,123
========= =========
) Chairman of the
------------------------------------------- ) Board of Directors
Yaki Yerushalmi
)
------------------------------------------- ) Director
Zvika Livnat
)
------------------------------------------- ) Controller
Israel Eldar
Date of approval of the financial statements: March 10, 2004.
3
December 31
-------------------
Note 2003 2002
---- -------------------
In thousands
-------------------
Liabilities and shareholders' equity
CURRENT LIABILITIES: 8
Credit from banks 10d 144,989 104,711
Current maturities of long-term notes 4b 6,590 6,214
Accounts payable and accruals:
Trade 84,602 99,255
Other 10e 73,010 62,470
--------- ---------
T o t a l current liabilities 309,191 272,650
--------- ---------
LONG-TERM LIABILITIES:
Deferred income taxes 7g 61,801 58,266
Loans and other liabilities
(net of current maturities): 4;8
Loans from banks 355
Notes 233,039 37,366
Other liabilities 35,013 32,536
--------- ---------
T o t a l long-term liabilities 329,853 128,523
--------- ---------
COMMITMENTS 9
T o t a l liabilities 639,044 401,173
--------- ---------
SHAREHOLDERS' EQUITY: 6
Share capital (ordinary shares of NIS 0.01 par value: 125,257 125,256
authorized - 20,000,000 shares; issued and paid:
December 31, 2003 and 2002 - 3,968,295 and
3,918,710 shares, respectively)
Capital surplus 90,060 90,060
Currency adjustments in respect of financial statements
of associated companies (1,122) (3,482)
Retained earnings 400,035 439,116
--------- ---------
614,230 650,950
--------- ---------
T o t a l liabilities and shareholders' equity 1,253,274 1,052,123
========= =========
The accompanying notes are an integral part of the financial statements.
4
AMERICAN ISRAELI PAPER MILLS LIMITED
CONSOLIDATED STATEMENTS OF INCOME
IN ADJUSTED NEW ISRAELI SHEKELS
Note 2003 2002 2001
---- ---- ---- ----
In thousands
----------------------------------
SALES - net 10f;14 465,092 455,775 469,709
COST OF SALES 10g 362,185 363,771 383,824
------- ------- -------
GROSS PROFIT 102,907 92,004 85,885
------- ------- -------
SELLING, MARKETING, ADMINISTRATIVE
AND GENERAL EXPENSES: 10h
Selling and marketing 31,324 29,167 31,918
Administrative and general 24,999 26,382 33,441
------- ------- -------
56,323 55,549 65,359
------- ------- -------
INCOME FROM ORDINARY OPERATIONS 46,584 36,455 20,526
FINANCIAL INCOME (EXPENSES) - net 10j (15,989) (2,988) 5,102
OTHER INCOME (EXPENSES) 10i 1,609 (2,942) 1,095
------- ------- -------
INCOME BEFORE TAXES ON INCOME 32,204 30,525 26,723
TAXES ON INCOME 7 7,706 9,792 7,287
------- ------- -------
INCOME FROM OPERATIONS OF THE
COMPANY AND ITS SUBSIDIARIES 24,498 20,733 19,436
SHARE IN PROFITS OF ASSOCIATED
COMPANIES - net 2 35,549 16,727 15,011
------- ------- -------
NET INCOME FOR THE YEAR 60,047 37,460 34,447
======= ======= =======
Adjusted NIS
----------------------------------
NET INCOME PER NIS 1 OF PAR VALUE
OF SHARES 1p;11 1,494 947 873
======= ======= =======
The accompanying notes are an integral part of the financial statements.
5
AMERICAN ISRAELI PAPER MILLS LIMITED
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
IN ADJUSTED NEW ISRAELI SHEKELS
Currency
adjustments in
respect of financial
Share Capital statements of Retained
capital surplus associated companies earnings Total
------- ------- -------------------- -------- -----
In thousands
-------------------------------------------------------------------------
BALANCE AT JANUARY 1, 2001 125,256 90,060 387,885 603,201
CHANGES IN 2001:
Net income 34,447 34,447
Exercise of employee options into shares * *
Currency adjustments in respect of financial
statements of associated companies (3,175) (3,175)
------- ------ ------ ------- -------
BALANCE AT DECEMBER 31, 2001 125,256 90,060 (3,175) 422,332 634,473
CHANGES IN 2002:
Net income 37,460 37,460
Dividend paid (20,676) (20,676)
Currency adjustments in respect of financial
statements of associated companies (307) (307)
------- ------ ------ ------- -------
BALANCE AT DECEMBER 31, 2002 125,256 90,060 (3,482) 439,116 650,950
CHANGES IN 2003:
Net income 60,047 60,047
Dividend paid (99,128) (99,128)
Exercise of employee options into shares 1 1
Currency adjustments in respect of financial
statements of associated companies 2,360 2,360
------- ------ ------ ------- -------
BALANCE AT DECEMBER 31, 2003 125,257 90,060 (1,122) 400,035 614,230
======= ====== ====== ======= =======
* Represents an amount less than adjusted NIS 1,000.
The accompanying notes are an integral part of the financial statements.
6
(Continued) - 1
AMERICAN ISRAELI PAPER MILLS LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS
IN ADJUSTED NEW ISRAELI SHEKELS
2003 2002 2001
---- ---- ----
In thousands
--------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income for the year 60,047 37,460 34,447
Adjustments to reconcile net income to
net cash provided by operating activities (*) (7,396) 39,718 (15,133)
------- ------- ------
Net cash provided by operating activities 52,651 77,178 19,314
------- ------- ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of fixed assets (29,247) (46,807) (30,031)
Short-term deposit (20,000)
Associated companies:
Granting of loans (8,241) (3,302) (4,067)
Collection of loans 21,895 2,464
Proceeds from sale of fixed assets 3,332 9,792 1,436
------- ------- ------
Net cash used in investing activities (32,261) (40,380) (30,198)
------- ------- ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Notes issuance, net of issuance expenses of NIS 800,000 198,909
Consideration in respect of the exercise of options by employees 1
Repayment of long-term loans from banks and others (762) (1,038) (1,069)
Redemption of notes (6,770) (5,960) (6,696)
Dividend paid (99,128) (20,676)
Short-term credit from banks - net 40,606 (7,219) 17,955
------- ------- ------
Net cash provided by (used in) financing activities 132,856 (34,893) 10,190
------- ------- ------
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 153,246 1,905 (694)
BALANCE OF CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR 5,460 3,555 4,249
------- ------- ------
BALANCE OF CASH AND CASH EQUIVALENTS AT
END OF YEAR 158,706 5,460 3,555
======= ======= ======
7
(Concluded) - 2
AMERICAN ISRAELI PAPER MILLS LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS
IN ADJUSTED NEW ISRAELI SHEKELS
2003 2002 2001
---- ---- ----
In thousands
--------------------------------
(*) Adjustments to reconcile net income to net cash provided by operating
activities:
Income and expenses not involving cash flows:
Share in profits of associated companies - net (35,549) (16,727) (15,011)
Dividend received from associated company 16,391 21,852
Depreciation and amortization 28,247 26,809 29,363
Deferred income taxes - net 3,471 3,703 7,287
Capital losses (gains) on:
Sale of fixed assets (2,054) (137) 22
Termination of activities and disposal of assets - net 1,345
Gain on issuance of shares in an associated company to a
third party - net (1,095)
Linkage and exchange differences on (erosion of) principal of
long-term loans from banks - net 79 (17) (175)
Linkage differences on (erosion of) principal of Notes 3,110 (524) (3,899)
Erosion of (linkage differences on) principal of
long-term loans to associated companies (1,101) 153 755
Appreciation (erosion) of a long-term capital note granted to
an associated company 2,477 (2,202) (3,015)
------- ------- -------
15,071 34,255 14,232
------- ------- -------
Changes in operating asset and liability items:
Decrease (increase) in trade receivables (9,260) (15,064) 24,101
Decrease (increase) in other receivables (8,935) 3,394 (120)
Decrease (increase) in inventories (159) 22,060 (4,308)
Increase (decrease) in trade payables (14,653) 11,180 (31,637)
Increase (decrease) in other payables and accruals 10,540 (16,107) (17,401)
------- ------- -------
(22,467) 5,463 (29,365)
------- ------- -------
(7,396) 39,718 (15,133)
======= ======= =======
Supplementary cash flow information = cash paid during the year for:
Taxes on income 11,553 26,711 8,801
======= ======= =======
Interest 11,335 9,839 10,519
======= ======= =======
The accompanying notes are an integral part of the financial statements.
8
AMERICAN ISRAELI PAPER MILLS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
The significant accounting policies, applied on a consistent basis,
are as follows. As to the adoption for the first time in 2003 of the
accounting for impairment of assets, see g. below:
a. General:
1) Activities of the Group
American Israeli Paper Mills Limited (hereafter - the
Company) and its subsidiaries and associated companies
(hereafter - the Group) are engaged in the production and
sale of paper and paper products, including paper recycling
activities and handling solid waste. Certain companies are
engaged in the marketing of office supplies and in the sale
of products produced by others (some of which are not paper
or paper products). Most of the Group's sales are made to
the local market (Israel). As to information by operating
segments, see note 14.
2) Use of estimates in the preparation of financial statements
The preparation of financial statements in conformity with
generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported
amounts of assets and liabilities, the disclosure of
contingent assets and liabilities at the dates of the
financial statements and the reported amounts of revenues
and expenses during the reporting years. Actual results
could differ from those estimates.
3) Definitions:
Subsidiaries - companies over which the Company has control
and over 50% of the ownership, the financial statements of
which have been consolidated with the financial statements
of the Company.
Associated companies - investee companies, which are not
subsidiaries, over whose financial and operational policy
the Company exerts material influence, the investment in
which is presented by the equity method. Material influence
is deemed to exist when the percentage of holding in said
company is 20% or more, unless there are circumstances that
contradict this assumption.
Interested parties - as defined in the Israeli Securities
(Preparation of Annual Financial Statements) Regulations,
1993.
b. Adjusted financial statements:
1) The Company and its subsidiaries maintain their accounts in
nominal new Israeli shekels ("NIS") and in U.S. dollars
(hereafter - dollar). All the figures in the financial
statements are presented in values adjusted for the changes
in the exchange rate of the dollar (rather than the changes
in the Israeli consumer price index; hereafter - Israeli
CPI), as permitted by Opinion 36 of the Institute of
Certified Public Accountants in Israel (hereafter - the
Israeli Institute), for companies whose securities are
traded on a foreign stock exchange; the Company's shares are
traded on the American Stock Exchange ("AMEX"). As to the
discontinuance of adjusting financial statements for the
effects of inflation, with effect from January 1, 2004, see
q. below.
9
AMERICAN ISRAELI PAPER MILLS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (continued):
The adjusted NIS data are the product of the data in dollar terms
multiplied by the representative exchange rate of the dollar at
December 31, 2003 - $1 = NIS 4.379 (see also note 8b).
2) Non-monetary balance sheet items (mainly fixed assets,
inventories and deferred charges, and shareholders' equity
items originating in cash flow from shareholders) have been
adjusted on the basis of the changes in the exchange rate of
the dollar since the related transactions were carried out.
The income statement components relating to these
non-monetary balance sheet items have been adjusted on the
same basis as the related balance sheet items.
Investments in some of the associated companies (the
activities of which are an integral part of the Company's
activities) and the Company's share in their operating
results have been determined based on their financial
statements, which are adjusted on the basis of changes in
the exchange rate of the dollar. As to associated companies
the financial statements of which are adjusted on the basis
of the changes in the Israeli CPI, see (4) below.
The components of the statements of income (except
financing) relating to transactions carried out in the
reported year - sales, purchases, labor costs, etc. - have
been adjusted on the basis of the exchange rates in effect
on transaction dates.
Financial income and expenses represent such income and
expenses in real terms and the erosion of balances of
monetary items during the year.
3) The amounts of non-monetary items do not necessarily
represent realizable value or any other economic value, but
only their original historical values adjusted on basis of
the changes in the exchange rate of the dollar. In these
financial statements, the term "cost" signifies cost in
adjusted NIS.
4) Associated companies whose financial statements are adjusted
on the basis of the changes in the Israeli CPI
For purposes of inclusion on the equity basis, the amounts
included in the financial statements of the above associated
companies operating independently were treated as follows:
Balance sheet items at the end of the year and the results
of operations for the year reflect the amounts presented in
the financial statements of such companies. Balance sheet
items at the beginning of the year and changes in
shareholders' equity items during the year were adjusted on
the basis of the changes in the exchange rate of the dollar
at the beginning of the year or at the date of each change,
respectively, through the end of the year. Any differences
resulting from the treatment described above were carried to
the adjusted shareholders' equity under a separate item
("currency adjustments in respect of financial statements of
associated companies").
AMERICAN ISRAELI PAPER MILLS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (continued):
c. Principles of consolidation:
1) The consolidated financial statements include the accounts
of the Company and its subsidiaries. A list of the main
subsidiaries is presented in a schedule to the financial
statements.
2) Intercompany transactions and balances, as well as
intercompany profits on sales which have not yet been
realized outside the Group, have been eliminated.
d. Inventories
Raw materials and supplies, finished goods, purchased products
and maintenance and sundry stores are valued at the lower of cost
or market (net of processing costs and after deduction of a
provision for obsolescence, where appropriate); cost is
determined on the moving average basis.
e. Investments in associated companies:
1) The investments in these companies are accounted for by the
equity method.
2) Profits on intercompany sales, not yet realized outside the
Group, have been eliminated according to the percentage of
the Company's holding in such companies.
3) With effect from the interim financial statements for the
3-month period ended March 31, 2003, the Company reviews
whether any events have occurred or changes in circumstances
have taken place, which might indicate that there has been
an impairment of its investments in associated companies -
see g. below.
4) The excess of cost of the investment in associated companies
over the equity in net assets at time of acquisition
("excess of cost of investment") or the excess of equity in
net assets of associated companies at time of acquisition
over the cost of their acquisition ("negative excess of cost
of investment") represent the amounts attributed to specific
assets upon acquisition, at fair value. The excess of cost
of investment and the negative excess of cost of investment
are presented at their net amount and are amortized over the
remaining useful life of the assets. The average rate of
amortization is 10%.
f. Fixed assets:
1) Fixed assets are stated at cost, net of related investment
grants.
2) Fixed assets of own manufacture are stated at cost, based on
the direct costs with the addition of an appropriate portion
of related production costs.
3) Borrowing costs in respect of credit applied to finance the
construction of the fixed assets - during the period until
construction is completed - are charged to cost of such
assets.
10
AMERICAN ISRAELI PAPER MILLS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (continued):
4) The assets are depreciated by the straight-line method on
basis of their estimated useful life, as follows:
Years
-----------------------
Buildings 10-50 (mainly 33)
Machinery and equipment 7-20 (mainly 10 and 20)
Vehicles 5-7 (mainly 7)
Office furniture and equipment
(including computers) 3-17 (mainly 4)
g. Impairment in value of Long-Lived Assets
In February 2003, Accounting Standard No. 15 of the Israeli
Accounting Standard Board (hereafter - IASB) - "Impairment of
Assets", became effective. This standard requires a periodic
review to evaluate the need for a provision for the impairment of
the company's non-monetary assets - mainly fixed assets as well
as investments in associated companies.
Accordingly, commencing with the interim financial statements for
the 3-month period ended March 31, 2003, the Company assesses -
at each balance sheet date - whether any events have occurred or
changes in circumstances have taken place, which might indicate
that there has been an impairment of one or more of the above
assets. When such indicators of impairment are present, the
Company evaluates whether the carrying value of the asset .
The recoverable value of an asset is determined according to the
higher of the net selling price of the asset or its value in use
to the Company. The value in use is determined according to the
present value of anticipated cash flows from the continued use of
the asset, including those expected at the time of its future
retirement and disposal. When it is not possible to assess
whether an impairment provision is required for a particular
asset on its own, the need for such a provision is assessed in
relation to the recoverable value of the cash generating unit to
which that asset belongs.
Through December 31, 2002, the Company and its subsidiaries
applied the provisions for assessing and recording impairment of
assets, prescribed by the U.S. standard, FAS 121. The adoption of
Standard 15 for the first time has not had any effect on the
Company and its subsidiaries.
AMERICAN ISRAELI PAPER MILLS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (continued):
h. Deferred charges
The item represents notes issuance costs, which are amortized
over the period of the notes (see note 4b).
i. Deferred income taxes:
1) Deferred taxes are computed in respect of differences
between the amounts presented in these statements and those
taken into account for tax purposes. As to the main factors
in respect of which deferred taxes have been included - see
note 7g. Deferred tax balances are computed at the tax rate
expected to be in effect at time of release to income from
the deferred tax accounts. The amount of deferred taxes
presented in the income statements reflects changes in the
above balances during the reporting years.
2) Taxes which would apply in the event of disposal of
investments in subsidiaries and associated companies have
not been taken into account in computing the deferred taxes,
as the Company intends to hold these investments, not to
realize them.
3) The Group may incur an additional tax liability in the event
of intercompany dividend distribution derived from "approved
enterprises" profits - see note 7a. No account was taken of
this additional tax, since it is the Group's policy not to
cause distribution of dividend which would involve an
additional tax liability to the Group in the foreseeable
future.
j. Revenue recognition
Revenue from sale of products to the local market, net of
discounts granted, is recognized upon shipment to the customer
(which represents the point at which the title transfers).
Revenue from sale of products for export, net of discounts, is
recognized as the products are delivered to the customer in the
target country.
k. Shipping and handling fees costs
Shipping and handling costs are classified as component of
selling and marketing expenses.
l. Advertising expenses
Advertising expenses are charged to income as incurred (as to the
amount of the expenses, see note 10h).
m. Allowance for doubtful accounts
The allowance is determined mainly in respect of specific debts
doubtful of collection (see note 13b).
11
AMERICAN ISRAELI PAPER MILLS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (continued):
n. Derivative financial instruments
Gains or losses on and cash flows from derivatives that are
hedging existing assets or liabilities are recognized in income
and cash flows statements and cash flows statements commensurate
with the results from those assets or liabilities.
o. Cash equivalents
The Group considers all highly liquid investments, which include
short-term bank deposits that are not restricted as to withdrawal
or use, the period to maturity of which did not exceed three
months at time of deposit, to be cash equivalents.
p. Net income per NIS 1 of par value of shares
Net income per NIS 1 of par value of shares is computed in
accordance with Opinion 55 of the Israeli Institute; as to the
data used in the per share computation - see note 11.
q. Recently issued pronouncement
In October 2001, the IASB issued Israel Accounting Standard No.
12 - "Discontinuance of Adjusting Financial Statements for
Inflation", which provided for the discontinuance of adjusting
financial statements for the effects of inflation, as of January
1, 2003. In December 2002, Accounting Standard No. 17 was issued
that postponed the date from which Accounting Standard No. 12 is
to be applied until January 1, 2004.
Since the Company's financial statements are drawn up in NIS
adjusted for the changes in the dollar (as allowed by section
29(b) of Opinion 36 of the Israeli Institute), and based on the
provisions in paragraph 4 to Israeli Accounting Standard No. 13,
with effect from January 1, 2004, the Company will no longer be
able to measure its operations in dollars, and will have to
resume measuring its operations in NIS. The inflation-adjusted
NIS amounts as of December 31, 2003, as presented in these
financial statements, will be the base for the nominal-historical
financial reporting as of January 1, 2004.
The implementation of Standard No. 12 will mainly affect the
financial income and expenses items.
NOTE 2 - INVESTMENTS IN ASSOCIATED COMPANIES:
a. The Company has a number of investments in associated companies,
which are held either directly or through associated companies.
The financial statements of significant associated companies
(Neusiedler Hadera Paper Ltd. and Hogla-Kimberly Ltd.) are
attached to these financial statements.
12
AMERICAN ISRAELI PAPER MILLS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 2 - INVESTMENTS IN ASSOCIATED COMPANIES (continued):
b. Composed as follows:
December 31
------------------
2003 2002
---- ----
Adjusted NIS
in thousands
------------------
Cost:
Shares 54,241 54,241
Excess of cost of investment - net 2,086 2,086
L e s s - accumulated amortization (3,068) (3,375)
Gain on issuance of shares of an associated
company to a third party 40,241 40,241
Currency adjustments (1,122) (3,482)
Share in profits accumulated since acquisition - net 246,864 228,013
------- -------
339,242 317,724
Long-term loans and capital notes
(December 31, 2002 - net of current maturities)* 44,637 48,432
------- -------
383,879 366,156
======= =======
* Classified by linkage terms, the total amounts of the loans
and capital notes are as follows:
December 31
---------------------
2003 2002
---- ----
Adjusted NIS
in thousands
---------------------
Linked to the dollar 21,897 43,790
Linked to the Israeli CPI 10,553 8,790
Unlinked capital note 12,187 4,610
------ ------
44,637 57,190
L e s s - current maturities 8,758
------ ------
44,637 48,432
====== ======
These loans and capital notes do not bear interest.
As of December 31, 2003, the repayment dates of the balance of
the loans and capital notes have not yet been determined.
13
AMERICAN ISRAELI PAPER MILLS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 2 - INVESTMENTS IN ASSOCIATED COMPANIES (continued):
c. The changes in the investments during 2003 are as follows:
Adjusted NIS
in thousands
------------
Balance at beginning of year 366,156
Changes during the year:
Share in profits of associated companies - net 35,549
Dividend received from an associated company (16,391)
Currency adjustments 2,360
Decrease in balance of long-term loans and capital notes - net (3,795)
-------
Balance at end of year 383,879
=======
d. Neusiedler Hadera Paper Ltd. (hereafter - N.H.P.)
N.H.P. is held to the extent of 49.9% by the Company and also by
Neusiedler AG (hereafter - Neusiedler), under an agreement dated
November 21, 1999. According to said agreement, N.H.P. purchased
the Group's activities in the field of printing and writing
paper, and issued to Neusiedler 50.1% of its shares. As part of
the said agreement, Neusiedler was granted an option (commencing
3 years from the signing of the agreement) to sell to the Company
its holdings in N.H.P., at a price which is 20% lower than the
value (as defined in the agreement). The understanding between
the parties is that the option would only be exercised under
continued extraordinary circumstances that preclude the operation
of N.H.P. in Israel. The Company believes that the likelihood of
such circumstances is very remote.
e. Investment in Carmel Container Systems Limited (hereafter -
Carmel)
The investment in shares includes, as of December 31, 2003 and
2002, an investment of adjusted NIS 29,475,000 and adjusted NIS
28,717,000, respectively, investment in Carmel, which is held to
the extent of 26.25%. Carmel's shares are traded in the United
States on the "AMEX" Stock Exchange. The market value of the
Company's holding in these shares as of December 31, 2003 and
2002 is adjusted NIS 9,656,000.
The financial statements of Carmel are drawn up on the basis of
historical cost, adjusted for the changes in the general
purchasing power of Israeli currency measured on the basis of the
Israeli CPI. For purposes of inclusion in these financial
statements, Carmel's financial statements were adjusted on the
basis of the changes in the exchange rate of the dollar.
14
AMERICAN ISRAELI PAPER MILLS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 2 - INVESTMENTS IN ASSOCIATED COMPANIES (continued):
The Company's management believes that the low market value of these
shares is not representative of the economic value, as the trade in
Carmel's shares is very weak. At the beginning of 2003, the Company
used the services of an outside appraiser in determining the value in
use to the Company.
The Company's management believes, based on the abovementioned and
current developments in 2003, that the investment should not be
written down.
f. Investment in T.M.M Integrated Recycling Industries Ltd.
(hereafter - T.M.M.)
In 2000, the Company and Compagnie Generale D'Entreprises
Automobiles (hereafter - CGEA), an international French group in
the field of environmental services - through a jointly held
company (Barthelemi Holdings Ltd., in which the Company holds
33.9% interest; hereafter - Barthelemi) - acquired shares of
T.M.M. from its controlling shareholders.
In addition, T.M.M was merged with Amnir Industries and
Environmental Services Ltd. (in which the Company and CGEA held
49% and 51%, respectively; hereafter - Amnir Environment) in such
a manner that Amnir Environment became a wholly-owned subsidiary
of T.M.M.
In August 2003, Barthelemi acquired approximately 7% of the share
capital of T.M.M off the stock exchange.
As of December 31, 2003, the Company's share in T.M.M. (directly
and through Barthelemi) aggregates 41.6%.
The excess of equity in net assets of T.M.M. shares, over the
cost of investment therein - adjusted NIS 1,581,000 is amortized
over a period of ten years.
The amount invested in shares includes adjusted NIS 15,759,000
(December 31, 2002 - adjusted NIS 15,567,000), which was directly
invested in T.M.M. (17.8%), the shares of which are traded on the
Tel Aviv Stock Exchange; the market value of these shares
aggregates adjusted NIS 13,713,000 as of December 31, 2003
(December 31, 2002 - adjusted NIS 7,300,000).
The Company's management examined the value of its investment in
T.M.M. for impairment which is not temporary in nature. At the
beginning of 2003, the Company used the services of an outside
appraiser in determining the value in use to the Company.
The Company's management believes, based on the abovementioned
and current developments in 2003, that the investment should not
be written down.
15
AMERICAN ISRAELI PAPER MILLS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 3 - FIXED ASSETS:
a. Composition of assets, grouped by major classifications, and
changes therein during 2003, are as follows:
Cost
--------------------------------------------------------
Balance at Additions Retirements Balance at
beginning during during end of
of year the year the year year
---------- --------- ----------- ----------
Adjusted NIS in thousands
--------------------------------------------------------
Land and buildings on the land 182,205 3,534 64 185,675
Machinery and equipment 643,549 11,619 1,962 653,206
Vehicles 33,102 2,886 4,128 31,860
Office furniture and equipment
(including computers) 64,185 1,384 65,569
Payments on account of
machinery and equipment 7,522 9,824 17,346
------- ------ ----- -------
930,563 29,247 6,154 953,656
======= ====== ===== =======
Accumulated depreciation
-------------------------------------------------------- Depreciated balance
Balance at Additions Retirements Balance at -------------------
beginning during during end of December 31
of year the year the year year 2003 2002
---------- --------- ----------- ---------- ---- ----
Adjusted NIS
Adjusted NIS in thousands in thousands
-------------------------------------------------------- -------------------
Land and buildings on the land 100,760 3,477 104,237 81,438 81,445
Machinery and equipment 432,181 18,873 1,528 449,526 203,680 211,368
Vehicles 23,003 2,702 3,348 22,357 9,503 10,099
Office furniture and equipment
(including computers) 48,782 3,113 51,895 13,674 15,403
Payments on account of
machinery and equipment 17,346 7,522
------- ------ ----- ------- ------- -------
604,726 28,165 4,876 628,015 325,641 325,837
======= ====== ===== ======= ======= =======
16
AMERICAN ISRAELI PAPER MILLS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 3 - FIXED ASSETS (continued):
b.
December 31
---------------------
2003 2002
---- ----
Adjusted NIS
in thousands
---------------------
The item is net of investment grants in respect
of investments in "approved enterprises"
(see notes 7a and 9a):
Cost 490 490
Accumulated depreciation 459 458
c. The Group's real estate is partly owned and partly leased - to
the extent of adjusted NIS 44.5 million, in respect of which
lease fees of approximately adjusted NIS 25.8 million have been
capitalized. The leasehold rights are for 49-year periods ending
in the years 2008 to 2059, with options to extend for an
additional 49 years.
d. As of December 31, 2003 and 2002, the cost of fixed assets
includes borrowing costs of adjusted NIS 1,007,000 capitalized to
the cost of machinery and equipment.
e. Depreciation expenses amounted to adjusted NIS 28,165,000,
adjusted NIS 26,726,000 and adjusted NIS 29,278,000, for the
years ended December 31, 2003, 2002 and 2001, respectively.
f. As to pledges on assets - see note 9a.
NOTE 4 - LONG-TERM LOANS AND OTHER LONG-TERM LIABILITIES:
a. Loans from banks:
Composed as follows:
December 31
----------------------
2003 2002
---- ----
Adjusted NIS
in thousands
----------------------
Linked to the Israeli CPI* 372 1,056
L e s s - current maturities 372 701
--- -----
-,- 355
=== =====
* The weighted average annual interest rate as of December 31,
2003 is 4.9%.
17
AMERICAN ISRAELI PAPER MILLS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 4 - LONG-TERM LOANS AND OTHER LONG-TERM LIABILITIES (continued):
b. Notes
The item represents two series of notes issued to institutional
investors as follows:
December 31
----------------------------
2003 2002
------------------ ------
Adjusted NIS in thousands
----------------------------
Series II Series I
----------- ----------------
Balance 200,000 39,629 43,580
L e s s - current maturities 6,590 6,214
------- ------ ------
200,000 33,039 37,366
======= ====== ======
(1) Series I - May 1992
The balance of the notes as of December 31, 2003 is
redeemable in six installments, due in June of each of the
years 2004-2009, each installment amounting to 6.66% of the
original par value of the notes, which is adjusted NIS
98,925,000; the unpaid balance of the notes bears annual
interest of 3.8%, payable each June. The notes - principal
and interest - are linked to the Israeli CPI of February
1992.
(2) Series II - December 2003
In December 2003, the Company made a private issuance to
institutional investors of notes with a par value of NIS 200
million. The notes are redeemable in seven equal annual
installments, due in December of each of the years
2007-2013. The unpaid balance of the notes bears annual
interest of 5.65%, payable in annual installments at
December of each year. The notes - principal and interest -
are linked to the Israeli CPI of November 2003.
c. Other liabilities:
December 31
-------------------------
2003 2002
---- ----
Adjusted NIS in thousands
-------------------------
Capital note to an associated company (1) 32,770 30,293
Other liability (2) 2,243 2,243
------ ------
35,013 32,536
====== ======
(1) The capital note is unlinked and interest free. No repayment
date has been fixed, but the associated company does not
intend to demand the repayment of the capital note before
January 1, 2005.
(2) The loan was received from a supplier in 2000, to finance
acquisition of machinery and equipment in the amount of
adjusted NIS 2,409,000. The loan is linked to the dollar. No
repayment date has yet been fixed. The Company believes that
the repayment is not probable before January 1, 2005.
18
AMERICAN ISRAELI PAPER MILLS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 5 - EMPLOYEE RIGHTS UPON RETIREMENT:
a. Israeli labor laws and agreements require the company and its
subsidiaries to pay severance pay to employees dismissed or
leaving their employ under certain circumstances, computed on the
basis of the number of years of service and, generally, the
latest pay rate (one month's pay for each year of service) or a
pension upon retirement.
To cover the liability for employee rights upon retirement,
pursuant to labor agreements in force and based on salary
components which, in management's opinion, create entitlement to
severance pay, deposits are made by the Company and its
subsidiaries with various provident funds (including pension
funds) or insurance policies for the benefit of employees.
The severance pay and pension liability and the amounts funded as
above are not reflected in the financial statements, as the
pension and severance pay risks have been irrevocably transferred
to the pension funds and the insurance companies, as allowed by
the Severance Pay Law.
b. The expenses relating to employee rights upon retirement, which
reflect the amounts that were deposited during the reported years
with provident funds, pension funds and various insurance
policies, are adjusted NIS 8,515,000, adjusted NIS 5,786,000 and
adjusted NIS 6,315,000 in 2003, 2002, and 2001, respectively.
NOTE 6 - SHAREHOLDERS' EQUITY:
a. Share capital
Composed of ordinary registered shares of NIS 0.01 par value, as
follows:
December 31
------------------------
2003 2002
---- ----
Authorized Issued and paid
---------- ---------------
Number of shares 20,000,000 3,968,295 3,918,710
========== ========= =========
Amount in NIS 200,000 39,683 39,187
========== ========= =========
The shares are traded on stock exchanges in Tel-Aviv and in the
U.S. The quoted prices per share, as of December 31, 2003 are NIS
239 and $ 53.5 (NIS 234.3), respectively.
b. Employee stock option plans:
1) The 1998 plan for senior officers in the Group
On January 11, 1998, the board of directors approved a stock
option plan for senior officers in the Group ("the 1998 plan
for senior officers").
19
AMERICAN ISRAELI PAPER MILLS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 6 - SHAREHOLDERS' EQUITY (continued):
In 2000, 1999 and 1998, 51,330, 51,335 and 52,833 options,
respectively, were granted under the 1998 plan for senior
officers (including 10,667 options in 2000 and 1999 and
10,666 options in 1998, to an employee who is an interested
party). All together, 155,498 options were granted.
The exercise price of the options granted as above, was
fixed at NIS 134.38. The exercise price is linked to the
dollar and is subject to adjustments in respect of the
distribution of dividends by the Company.
Each batch can be exercised within three years after two
years from the date of grant.
Notwithstanding the above, the number of shares resulted
from exercise of the options and the actual exercise price
were fixed as follows: Upon the receipt of an exercise
request from an option holder, a computation was made of the
difference between the quoted price of the Company's shares
at the beginning of that trading day and the exercise price;
that difference was then multiplied by the number of
exercisable options (hereafter - the benefit). The number of
shares that the Company actually issued to the option holder
was the number of shares the market value of which was equal
to the amount of the benefit computed as above. In
consideration for the shares, the option holder paid their
par value only.
The ordinary shares issued upon exercise of the options
conferred upon their holders the same rights as all other
ordinary shares, upon issuance.
In 2003, 2001 and 2000, 56,663, 46,002 and 51,335 options,
respectively, were exercised under the 1998 plan for senior
officers. 28,693, 28,149 and 35,990 shares of NIS 0.01 were
issued following the exercise, respectively. The unexercised
balance of 1,498 options granted expired in 2003.
The above plan was carried out according to the principles
set out in Section 102 of the Income Tax Ordinance, which
stipulates, inter-alia, the terms for recognition of the
expense to the Company and for determining the employees'
tax liability in respect of the profits attributed thereto
as benefits arising from the above plan.
The aforementioned expense is recognized in the tax year
that the benefit is credited to the employee.
20
AMERICAN ISRAELI PAPER MILLS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 6 - SHAREHOLDERS' EQUITY (continued):
b. Employee stock option plans (continued):
2) The 2001 plan for senior officers in the Group
On April 2, 2001, the Company's board of directors approved
a stock option plan for senior officers in the Group
(hereafter - the 2001 plan for senior officers). Under this
plan, 194,300 options were allotted on July 5, 2001 without
consideration. Each option is exercisable in purchase of one
ordinary share of NIS 0.01 par value of the Company. The
options will be exercisable in four equal annual batches.
The blocking period of the first batch is two years,
commencing on the date of grant; the blocking period of the
second batch is three years from the date of grant, and so
forth. Each batch is exercisable within two years from the
end of the blocking period.
The exercise price of the options granted as above was set
at NIS 217.00, linked to the CPI, on the basis of the CPI as
of April 2, 2001. The exercise price for each batch is
determined as the lesser of the aforementioned exercise
price or the average price of the Company's shares as quoted
on the Tel-Aviv Stock Exchange (hereafter - the Stock
Exchange) during thirty trading days preceding to the
effective date of each batch, less 10%. As stipulated by the
2001 plan for senior officers, the exercise price is to be
adjusted, following dividend distributions. Accordingly, the
exercise price as of December 31, 2003 is adjusted NIS
200.73 for the first batch, adjusted NIS 93.07 for the
second batch and adjusted NIS 148.97 for the third batch and
adjusted NIS 200.73 for the fourth batch.
The quoted price of the Company's shares on the Tel Aviv
Stock Exchange close to the time of the board of directors'
resolution to grant the options, was NIS 204.00. Prior to
the granting of the options, the price was NIS 185.8.
The fair value of each option - computed on the basis of the
Black-Scholes option-pricing model - as prescribed by the
regulations of the Tel-Aviv Stock Exchange - was
approximately adjusted NIS 56.69 on the date of grant.
Notwithstanding the above, the number of shares resulting
from exercise of the options and the actual exercise price
will be determined as follows: when an exercise request is
received from an option holder, a computation will be made
of the difference between the quoted price of the Company's
shares at the beginning of that trading day and the exercise
price; that difference is to be multiplied by the number of
exercisable options, as of the date of the exercise
(hereafter - the benefit). The number of shares that the
Company will actually issue to the option holder will be the
number of shares the market value of which is equal to the
amount of the benefit computed as above. In consideration
for the shares, the option holder will pay their par value
only.
The ordinary shares issued upon exercise of the options will
confer upon their holders the same rights as all other
ordinary shares, upon issuance.
In 2003, 1,550 options were exercised under the 2001 plan
for senior officers. 227 shares of NIS 0.01 were issued
following the exercise. The unexercised balance of the
options granted is 192,750.
21
AMERICAN ISRAELI PAPER MILLS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 6 - SHAREHOLDERS' EQUITY (continued):
The above plan is carried out according to the principles
set out in Section 102 of the Income Tax Ordinance, which
stipulates, inter-alia, the terms for recognition of the
expense to the Company and for determining the employees'
tax liability in respect of the profits attributed thereto
as benefits arising from the above plan.
The aforementioned expense will be recognized in the tax
year that the benefit is credited to the employee.
3) The 2001 employee plan
On August 29, 2001, the Company's board of directors
approved a stock option plan for employees in the Group,
according to a specification (hereafter - the 2001 employee
plan). Under this plan, up to 125,000 options will be
allotted without consideration. Each option is exercisable
in purchase of one ordinary share of NIS 0.01 par value of
the Company. The blocking period of the options is two years
from the date of grant. Each option is exercisable within
three years from the end of the blocking period.
On November 4, 2001, 81,455 options were granted under the
2001 employee plan.
The exercise price of all the options granted as above was
set at NIS 160.99, linked to the CPI, on the basis of the
CPI as of August 29, 2001. This price represents the average
price of the Company's shares as quoted on the Tel-Aviv
Stock Exchange during thirty trading days prior to the date
of the board of directors' approval, less 10%. As stipulated
by the 2001 employee plan, the exercise price has been
adjusted, following a dividend distribution and is adjusted
NIS 137.09 as of December 31, 2003.
The quoted price of the Company's shares on the Tel Aviv
Stock Exchange close to the time of the board of directors'
resolution to grant the options, was NIS 171.20. Prior to
the granting of the options, the price was NIS 138.80.
The fair value of each option - computed on the basis of the
Black-Scholes option-pricing model - as prescribed by the
regulations of the Tel-Aviv Stock Exchange - was
approximately adjusted NIS 64.11 on the date of grant.
Notwithstanding the above, the number of shares resulting
from exercise of the options and the actual exercise price
will be fixed as follows: when an exercise request is
received from an option holder, a computation will be made
of the difference between the quoted price of the Company's
shares at the beginning of that trading day and the exercise
price; that difference is to be multiplied by the number of
exercisable options, as of the date of the exercise
(hereafter - the benefit). The number of shares the that
Company will actually issue to the option holder will be the
number of shares the market value of which is equal to the
amount of the benefit computed as above. In consideration
for the shares, the option holder will pay their par value
only.
The ordinary shares issued upon exercise of the options will
confer upon their holders the same rights as all other
ordinary shares, upon issuance.
22
AMERICAN ISRAELI PAPER MILLS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 6 - SHAREHOLDERS' EQUITY (continued):
In 2003, 57,962 options were exercised under the 2001
employee plan. 20,665 shares of NIS 0.01 were issued
following the exercise. The unexercised balance of the
options granted is 23,493.
The above plan is carried out according to the principles
set out in Section 102 of the Income Tax Ordinance, which
stipulates, inter-alia, the terms for recognition of the
expense to the Company and for determining the employees'
tax liability in respect of the profits attributed thereto
as benefits arising from the above plan.
The aforementioned expense will be recognized in the tax
year that the benefit is credited to the employee.
NOTE 7 - TAXES ON INCOME:
a. Tax benefits under the Law for the Encouragement of Capital
Investments, 1959 (hereafter - the law)
Under the law, by virtue of the "approved enterprise" status
granted to certain of their production facilities, certain
subsidiaries are entitled to various tax benefits (mainly reduced
tax rates).
During the period of benefits - mainly 7 years commencing in the
first year in which the companies earn taxable income from the
approved enterprises, provided the maximum period to which it is
restricted by law has not elapsed - reduced tax rates or
exemption from tax apply, as follows:
1) Corporate tax rate of 25%, instead of the regular tax rate
(see d. below).
2) Tax exemption on income from certain approved enterprises in
respect of which the companies have elected the "alternative
benefits" (involving waiver of government guaranteed loans);
the length of the exemption period is 4 years, after which
the income from these enterprises is taxable at the rate of
25% for 3 years.
The part of the taxable income which is entitled to the tax
benefits is determined on the basis of the ratio of the turnover
attributed to the "approved enterprise" to the total turnover of
these companies, taking into account the ratio of the "approved
enterprise" assets to total assets of these companies. The
turnover that is attributed to the "approved enterprise" is
generally computed on the basis of the ratio of the increase in
turnover to the "basic" turnover stipulated in the instrument of
approval.
The period of benefits in respect of the "approved enterprises"
of these companies expired at the end of 2003.
The entitlement to the above benefits is conditional upon the
companies' fulfilling the conditions stipulated by the law,
regulations published thereunder and the instruments of approval
for the specific investments in "approved enterprises". In the
event of failure to comply with these conditions, the benefits
may be cancelled and the companies may be required to refund the
amount of the benefits, in whole or in part, with the addition of
linkage differences to the CPI and interest.
23
AMERICAN ISRAELI PAPER MILLS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 7 - TAXES ON INCOME (continued):
b. Measurement of results for tax purposes under the Income Tax
(Inflationary Adjustments) Law, 1985 (hereafter - the
inflationary adjustments law)
Under the inflationary adjustments law, results for tax purposes
are measured in real terms, having regard to the changes in the
Israeli CPI. The Israeli companies in the Group are taxed under
this law.
As stated in note 1b, the financial statements are drawn up in
NIS adjusted on the basis of the changes in the exchange rate of
the dollar. The difference between the change in the Israeli CPI
and the change in the exchange rate of the dollar - on an annual
and cumulative basis - creates differences between the taxable
income and the income reflected in the financial statements.
c. The Law for the Encouragement of Industry (Taxation), 1969
The Company and certain subsidiaries are "industrial companies"
as defined by this law. These companies claimed, depreciation at
accelerated rates on equipment used in industrial activity as
stipulated by regulations published under the inflationary
adjustments law.
The Company files consolidated tax returns with certain
subsidiaries.
d. Tax rates applicable to income not derived from "approved
enterprises"
Income not eligible for the approved enterprise benefits
mentioned in a. above is taxed at the regular rate - 36%.
e. Reform of the Israeli tax system
In 2003, the provisions of the Amendment to the Income Tax
Ordinance (No. 132), 2002 (hereafter - the tax reform law) came
into effect. The tax reform law comprehensively reforms certain
parts of the Israeli tax system. Certain provisions of the tax
reform law and anticipated supplementary provisions will only be
applied from later dates.
In accordance with the provisions of the tax reform law, as from
January 1, 2003, capital gains will be taxed at a reduced rate of
25%, instead of the regular rate of 36% at which they were taxed
until the aforementioned date; with regard to the sale of assets
acquired prior to January 1, 2003, the reduced tax rate will be
applicable only for the gain allocated to capital gains earned
after the implementation of that law, which will be calculated as
prescribed by the tax reform law. Furthermore, the tax reform law
stipulates that carryforward capital losses may be utilized
against capital gains without any time restriction (the time
limitation for the utilization has been removed in respect of
capital losses which arose in the tax year 1996 and thereafter).
f. Carryforward tax losses
Carryforward tax losses of certain subsidiaries are adjusted NIS
14,002,000 and adjusted NIS 12,198,000 as of December 31, 2003
and 2002, respectively. Under the inflationary adjustments law,
carryforward losses are linked to the Israeli CPI, and may be
utilized indefinitely.
24
AMERICAN ISRAELI PAPER MILLS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 7 - TAXES ON INCOME (continued):
g. Deferred income taxes
The composition of the deferred taxes, and the changes therein
during 2003 and 2002, are as follows:
Among Among As a
current non-current non-current
assets (1) assets (2) liability (3) Total
---------- ---------- ------------- -----
Adjusted NIS in thousands
--------------------------------------------------------
Balance at January 1, 2002 (9,261) 52,876 43,615
Changes in 2002 -
amounts carried to income (1,687) 5,390 3,703
------ ------ ------ ------
Balance at December 31, 2002 (10,948) 58,266 47,318
Changes in 2003:
Reclassification 3,885 (3,885)
Amounts carried to income (64) 3,535 3,471
------ ------ ------ ------
Balance at December 31, 2003 (7,127) (3,885) 61,801 50,789
====== ====== ====== ======
(1) In respect of inventories and provisions for doubtful
accounts, vacation and recreation pay and carryforward tax
losses.
(2) In respect of carryforward tax losses.
(3) Mainly in respect of depreciable fixed assets.
The deferred taxes are computed at the rate of 36%.
h. Taxes on income included in the income statements:
1) As follows*:
2003 2002 2001
---- ---- ----
Adjusted NIS in thousands
For the reported year:
Current 4,235 4,702
Deferred, see g. above 3,471 3,703 7,287
----- ----- -----
7,706 8,405 7,287
For prior years - current 1,387
----- ----- -----
7,706 9,792 7,287
* The tax expenses, for all reported years, originate in
Israel.
25
AMERICAN ISRAELI PAPER MILLS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 7 - TAXES ON INCOME (continued):
2) Following is a reconciliation of the "theoretical" tax
expense, assuming all income is taxed at the regular rate,
as stated in d. above, and the actual tax expense:
2003 2002 2001
------------------- -------------------- -------------------
Adjusted Adjusted Adjusted
NIS in NIS in NIS in
% thousands % thousands % thousands
--- --------- --- --------- --- ---------
Income before taxes on income, as reported
in the statements of income 100.0 32,204 100.0 30,525 100.0 26,723
===== ====== ===== ====== ===== ======
Theoretical tax on the above amount 36.0 11,593 36.0 10,989 36.0 9,620
Tax benefits arising from reduced tax rate
for approved enterprises (1.5) (487) (1.0) (305) (1.2) (327)
----- ------ ----- ------ ----- ------
34.5 11,106 35.0 10,684 34.8 9,293
Increase in taxes resulting from computation
of deferred taxes at a rate which is
different from the theoretical rate 0.9 230
Tax deduction in respect of options
exercised by employees according to
section 102 of the Israeli
Income Tax Ordinance (5.0) (1,607) (6.2) (1,883) (14.5) (3,884)
Other - net (5.6) (1,793) (1.3) (396) 6.1 1,648
----- ------ ----- ------ ----- ------
Taxes on income for the reported year 23.9 7,706 27.5 8,405 27.3 7,287
----- ------ ----- ------ ----- ------
i. Tax assessments
The Company and most of its subsidiaries have received final tax
assessments through the year ended December 31, 2000.
26
AMERICAN ISRAELI PAPER MILLS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 8 - LINKAGE TERMS OF MONETARY BALANCES:
a. As follows:
December 31, 2003 December 31, 2002
---------------------------- ----------------------------
In, or linked Linked In, or linked Linked
to, foreign to the to, foreign to the
currency Israeli currency Israeli
(mainly dollar) CPI Unlinked (mainly dollar) CPI Unlinked
------ ------- ------- ------ ------ -------
Adjusted NIS in thousands Adjusted NIS in thousands
---------------------------- ----------------------------
Assets:
Current assets:
Cash and cash equivalents 8,561 150,145 2,833 2,627
Short-term deposit 20,000
Receivables 48,457 215 210,560 48,865 191,629
Investments in associated companies - long-term
loans (2002 - including current maturities) 21,897 10,553 12,187 43,790 8,790 4,610
------ ------- ------- ------ ------ -------
78,915 10,768 392,892 95,488 8,790 198,866
====== ======= ======= ====== ====== =======
Liabilities:
Current liabilities:
Short-term credit from banks 144,617 24,872 79,138
Accounts payables and accruals 11,579 146,033 3,184 158,541
Long-term liabilities (including current maturities):
Loans from banks 372 1,056
Notes 239,629 43,580
Other liabilities 2,243 32,770 2,243 30,293
------ ------- ------- ------ ------ -------
13,822 240,001 323,420 30,299 44,636 267,972
====== ======= ======= ====== ====== =======
As to exposures relating to fluctuations in foreign currency exchange rates and
the use of derivatives for hedging purposes - see note 13a.
27
AMERICAN ISRAELI PAPER MILLS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 8 - LINKAGE TERMS OF MONETARY BALANCES (continued):
b. Data regarding the exchange rate and the Israeli CPI:
Exchange rate of
one dollar CPI*
---------- ----
NIS Points
At end of year:
2003 4.379 178.6
2002 4.737 182.0
2001 4.416 170.9
2000 4.041 168.5
Change in the year:
2003 (7.6%) (1.9%)
2002 7.3% 6.5%
2001 9.3% 1.4%
* Based on the index for the month ending on each balance sheet
date, on the basis of 1993 average = 100.
NOTE 9 - COMMITMENTS AND LIABILITIES SECURED BY PLEDGES:
a. In respect of investment grants
Under the Law for the Encouragement of Capital Investments, 1959,
certain subsidiaries and an associated company have received
investment grants from the State of Israel. In the event of
failure to comply with the terms attached to the receipt of the
grants, the companies may be required to refund the amount of the
grants, in whole or in part, with linkage differences and
interest from the date of receipt.
The abovementioned subsidiaries have registered floating charges
on all their assets in favor of the State of Israel as security
for compliance with the terms of the investment grants received.
In respect of the grant received by the associated company, the
Company has provided a guarantee, with another associated
company, for the repayment of the grant. As of December 31, 2003,
the guarantee amounts to adjusted NIS 491,000.
b. In 1996, an associated company received a grant amounting to
adjusted NIS 2,067,000 from the Fund for Preparation for Exposure
of the Ministry of Industry and Trade. With respect to this
grant, the Company has provided a bank guarantee of adjusted NIS
2,018,000 in favor of the State of Israel.
c. The Company has provided guarantees of adjusted NIS 2,189,000 in
favor of an associated company, in connection with the latter's
participation in a tender. If the associated company does not win
the tender, the guarantee will become null and void.
d. A subsidiary has provided a guarantee of adjusted NIS 1,291,000
to a bank in respect of a loan extended to an associated company.
28
AMERICAN ISRAELI PAPER MILLS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 9 - COMMITMENTS AND LIABILITIES SECURED BY PLEDGES (continued):
e. On May 7, 2001, the Company's board of directors resolved to
carry out a plan, which was approved by the shareholders'
meeting, to remunerate the Company's chairman of the board of
directors. According to the plan, a remuneration will be granted,
equal to the increase in the value of 50,000 shares of the
Company in the period from May 7, 2001 (share price - NIS 194.37,
linked to the terms of the plan) to May 7, 2008. The remuneration
will be spread over the period commencing two years from the
resolution of the board of directors, until the end of seven
years from said resolution. As of December 31, 2003 one quarter
of the remuneration is exercisable. A liability was included in
the financial statements in respect of the above plan, under
current liabilities.
NOTE 10 - SUPPLEMENTARY FINANCIAL STATEMENT INFORMATION:
Balance sheets:
a. Short-term deposit
The deposit is for a period of one year, unlinked, and bears
annual interest (payable monthly) at the rate of 5.5%.
December 31
------------------
2003 2002
------- -------
Adjusted NIS
in thousands
------------------
b. Receivables:
1) Trade:
Open accounts 128,021 119,927
Checks collectible 12,975 11,809
------- -------
140,996 131,736
The item is:
Net of allowance for doubtful accounts 13,696 12,752
Includes associated companies 26,594 19,863
2) Other:
Employees and employee institutions 3,060 2,336
Associated companies ( 2002 - including current
maturities) 89,691 96,047
Prepaid expenses 2,883 3,427
Advances to suppliers 9,365 7,214
Deferred income taxes, see note 7g 7,127 10,948
Income tax authority 12,005 6,235
Interest receivable 257 19
Sundry 3,858 5,664
------- -------
128,246 131,890
======= =======
c. Inventories:
For industrial activities:
Finished goods 14,819 13,168
Raw materials and supplies 10,426 10,387
------- -------
25,245 23,555
For commercial activities - purchased products 18,817 20,810
------- -------
44,062 44,365
Maintenance and sundry stores 46,592 46,130
------- -------
90,654 90,495
======= =======
29
AMERICAN ISRAELI PAPER MILLS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 10 - SUPPLEMENTARY FINANCIAL STATEMENT INFORMATION (continued):
d. Credit from banks:
1) As follows:
December 31
------------------
2003 2002
------- -------
Adjusted NIS
in thousands
------------------
Short-term credit 144,617 104,010
Current maturities of long-term loans, see note 4a 372 701
------- -------
144,989 104,711
======= =======
2) Classified by currency of repayment, linkage terms and
interest rates, the amounts of short-term credit from banks
are as follows:
Weighted average
interest rate
at December 31
December 31, ------------------
2003 2003 2002
------- ------- -------
% Adjusted NIS
- in thousands
------- -------
Unlinked 6.0 144,617 79,138
In dollars 24,872
------- -------
144,617 104,010
======= =======
e. Accounts payable and accruals - other:
December 31
----------------
2003 2002
------ ------
Adjusted NIS
in thousands
----------------
Payroll and related expenses 37,324 30,628
Institutions in respect of employees 12,944 11,320
Customs and value added tax authorities 728 1,262
Associated company 521 469
Accrued interest 2,127 953
Accrued expenses 7,825 5,728
Sundry 11,541 12,110
------ ------
73,010 62,470
====== ======
30
AMERICAN ISRAELI PAPER MILLS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 10 - SUPPLEMENTARY FINANCIAL STATEMENT INFORMATION (continued):
Statements of income:
2003 2002 2001
------- ------- -------
Adjusted NIS in thousands
--------------------------------
f. Sales - net (1):
Industrial activities (2) 326,825 310,628 312,751
Commercial activities 138,267 145,147 156,958
------- ------- -------
465,092 455,775 469,709
======= ======= =======
(1) Including sales to associated companies 115,505 104,864 114,345
======= ======= =======
(2) Including sales to export 44,175 40,645 26,044
======= ======= =======
g. Cost of sales:
Industrial activities:
Materials consumed 72,292 61,649 69,267
Payroll and related expenses 85,419 78,903 93,195
Depreciation 22,739 21,182 22,807
Other manufacturing costs 80,709 77,765 89,330
Decrease (increase) in inventory of
finished goods (1,651) 12,585 (7,019)
------- ------- -------
259,508 252,084 267,580
Commercial activities - cost of products sold 102,677 111,687 116,244
------- ------- -------
362,185 363,771 383,824
======= ======= =======
Including purchases from associated
companies 26,374 29,423 32,036
======= ======= =======
h. Selling, marketing, administrative and
general expenses:
Selling and marketing:
Payroll and related expenses 15,225 14,692 16,986
Packaging, transport and shipping 5,719 5,689 5,842
Advertising 872
Commissions 2,733 1,605 902
Depreciation 1,595 1,659 1,410
Other 6,052 5,522 5,906
------- ------- -------
31,324 29,167 31,918
======= ======= =======
Administrative and general:
Payroll and related expenses 36,360 31,927 38,166
Office supplies, rent and maintenance 1,938 1,750 2,526
Professional fees 486 1,010 1,174
Depreciation 2,814 3,884 4,865
Doubtful accounts and bad debts 944 1,791 766
Other 5,858 10,148 8,830
------- ------- -------
48,400 50,510 56,327
Less - rent and participation from
associated companies 23,401 24,128 22,886
------- ------- -------
24,999 26,382 33,441
======= ======= =======
31
AMERICAN ISRAELI PAPER MILLS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 10 - SUPPLEMENTARY FINANCIAL STATEMENT INFORMATION (continued):
2003 2002 2001
----- ------ -----
Adjusted NIS in thousands
--------------------------
i. Other income (expenses):
From the sale of apartments (1) 1,609
From termination of an activity and
disposal of assets(2) (2,942)
From the issuance of shares of an associated
company to a third party 1,095
----- ------ -----
1,609 (2,942) 1,095
===== ====== =====
1) In 2003, the Company sold apartments that it previously held
for the use of its employees.
2) In 2002, the Company terminated operations at some of its
sites, as follows:
a) At the Molett site in Nahariya, the operation of the
old household paper machine was terminated, following
the introduction of a new tissue machine by
Hogla-Kimberly Ltd., an associated company.
Subsequently, the old paper machine was sold to a third
party (overseas).
b) In order to comply with the requirements of the
Ministry of Environment, the operation of the old paper
machines at the Shafir site in Tel-Aviv were
terminated. The termination included dismissal of
employees, sale of maintenance stores, sale of the
machines to a third party (overseas) and other related
costs (including closing inventories).
c) The Company sold real estate that it owned in Ashdod.
The effects of the restructuring resulting from the
termination of the operations are as follows:
2002
-----
Adjusted NIS
in thousands
-----
Severance pay expenses (2,334)
Other expenses, net of sale proceeds (4,475)
Gain on sale of real estate in Ashdod 3,867
-----
(2,942)
======
32
AMERICAN ISRAELI PAPER MILLS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 10 - SUPPLEMENTARY FINANCIAL STATEMENT INFORMATION (continued):
2003 2002 2001
------- ------ -----
Adjusted NIS in thousands
-------------------------------
j. Financial income (expenses) - net*:
Expenses:
In respect of long-term loans - net 1,607
In respect of notes - including amortization
of deferred charges 5,031 1,291
Erosion of operating monetary balances,
net of related hedges 2,289 1,502
In respect of short-term balances - net
(2002 -net of borrowing costs capitalized to
the cost of fixed assets) 16,917 1,506
------- ------ -----
23,555 5,086 1,502
------- ------ -----
Income:
In respect of long-term loans - net 2,098 2,290
In respect of notes - including amortization
of deferred charges 1,892
In respect of increase in value of operating
monetary balances, net of related hedges 7,566
In respect of short-term balances - net 2,422
------- ------ -----
7,566 2,098 6,604
------- ------ -----
(15,989) (2,988) 5,102
======= ====== =====
* Including financial income (expenses) in respect
of loans to associated companies (1,376) 2,207 2,260
======= ====== =====
NOTE 11 - NET INCOME PER NIS 1 OF PAR VALUE OF SHARES:
a. The weighted average par value of shares used in computation of
per share data is as follows:
NIS
---
Year ended December 31:
2003 40,197
======
2002 39,557
======
2001 39,474
======
b. In the reported years, plans for granting stock options to
employees in the Group were taken into account in computing per
share data, having regard to the quoted price of the Company's
share at the end of each year.
33
AMERICAN ISRAELI PAPER MILLS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 12 - INTERESTED PARTIES - TRANSACTIONS AND BALANCES:
a. Transactions:
1) Income (expenses):
2003 2002 2001
------ ------ -------
Adjusted NIS in thousands
------------------------------
Sales 38,715 36,030 35,469
====== ====== =======
Costs and expenses (7,009) (6,038) (14,373)
====== ====== =======
The amounts presented above represent transactions that the
Company carried out in the ordinary course of business with
interested parties (companies which are held by the
Company's principal shareholder), at terms and prices
similar to those applicable to non-affiliated customers and
suppliers.
2) Benefits to interested parties:
2003 2002 2001
------ ----- -----
Payroll to interested parties employed
by the Company - adjusted NIS
in thousands *3,364 2,000 1,699
====== ===== =====
Number of people to whom
the benefits relate 2 1 1
====== ===== =====
Remuneration of directors who are not
employed by the Company -
adjusted NIS in thousands 444 324 477
====== ===== =====
Number of people to whom
the benefits relate 13 9 11
====== ===== =====
* In 2003, includes the Chief Executive Officer
(hereafter - CEO) payroll (who was appointed in
April 2003), in addition to the payroll of the
Chairman of the Board of Directors (who served
earlier as the CEO).
3) In 2003, 2001 and 2000, an interested party employed by the
Company exercised 15,999, 5,334 and 10,666 options,
respectively, granted to him under the 1998 plan for senior
officers, into 8,529, 3,263 and 7,476 shares, respectively,
of NIS 0.01 par value each, upon payment of their par value.
4) As to the plan for the remuneration of the Company's
Chairman of the Board of Directors - see note 9e.
34
AMERICAN ISRAELI PAPER MILLS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 12 - INTERESTED PARTIES - TRANSACTIONS AND BALANCES (continued):
b. Balances with interested parties:
December 31
----------------
2003 2002
------ -----
Adjusted NIS
in thousands
----------------
Accounts receivable - commercial activity* 10,440 8,942
====== =====
Accounts payables and accruals 2,430 88
====== =====
* There were no significant changes in the balance during the year.
NOTE 13 - FINANCIAL INSTRUMENTS AND RISK MANAGEMENT:
a. Derivative financial instruments
The Company has only limited involvement with derivative
financial instruments. The Company uses these instruments as
hedges. The Company utilizes derivatives, mainly forward exchange
contracts and currency options, to protect its dollar cash flows
in respect of existing assets and liabilities. As the
counter-parties to these derivatives are Israeli banks, the
Company considers the inherent credit risks remote. As at
December 31, 2003 and 2002, there are no balances in respect of
transactions in derivative financial instruments.
In January 2004, the Company entered into a forward transaction
for a period of one year, in order to hedge an amount of adjusted
NIS 200 million against increases in the Israeli CPI.
b. Credit risks
The Company and its subsidiaries' cash and cash equivalents and
the short-term deposit as of December 31, 2003 are deposited
mainly with major Israeli banks or with foreign banks controlled
by those Israeli banks. The Company and its subsidiaries
considers the credit risks in respect of these balances to be
remote.
Most of these companies sales are made in Israel, to a large
number of customers. The exposure to credit risks relating to
trade receivables is limited due to the relatively large number
of customers. The Group performs ongoing credit evaluations of
its customers to determine the required amount of allowance for
doubtful accounts. An appropriate allowance for doubtful accounts
is included in the financial statements.
35
AMERICAN ISRAELI PAPER MILLS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 13 - FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (continued):
c. Fair value of financial instruments
The fair value of the financial instruments included in working
capital of the Group is usually identical or close to their
carrying value. The fair value of loans and other liabilities
also approximates the carrying value, since they bear interest at
rates close to the prevailing market rates, except as described
below.
The Company does not disclose the fair value of long-term loans
and capital notes included under investments in associated
companies as of December 31, 2003, aggregating adjusted NIS
44,637,000 (see note 2b) and of a capital note to an associated
company in the amount of adjusted NIS 32,770,000 (see note
4c(1)), since their value cannot be reliably determined so long
as they have no repayment dates.
NOTE 14 - SEGMENT INFORMATION:
a. Activities of the Company and its subsidiaries:
1) Manufacturing and marketing of paper and paper products
(packaging and household paper), including collection and
recycling of paper waste. The manufacturing of paper relies
mainly on paper waste as raw material.
2) Marketing of office supplies and paper, mainly to
institutions.
Most of the Group's sales are to the local market (Israel)
and of its assets are located in Israel.
36
AMERICAN ISRAELI PAPER MILLS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 14 - SEGMENT INFORMATION (continued):
b. Business segment data:
Paper and recycling Marketing of office supplies
--------------------------------- --------------------------------
2003 2002 2001 2003 2002 2001
------- ------- ------- ------- ------- -------
Adjusted NIS in thousands
----------------------------------------------------------------------
Sales - net(1) 332,124 314,636 316,375 132,968 141,139 153,334
======= ======= ======= ======= ======= =======
Income (loss) from ordinary operations 46,282 37,488 21,646 302 (1,033) (1,120)
======= ======= ======= ======= ======= =======
Financial income (expenses), net
Other income (expenses)
Income before taxes on income
Segment assets (at end of year) 497,811 482,833 478,144 59,480 65,234 67,774
Unallocated assets (at end of year) (2)
Consolidated total assets (at end of year)
Segment liabilities (at end of year) 58,906 66,325 58,034 25,696 32,930 30,041
Unallocated liabilities (at end of year)
Consolidated total liabilities (at end of year)
Depreciation and amortization 25,523 24,422 27,068 2,724 2,387 2,295
======= ======= ======= ======= ======= =======
(1) Represents sales to external customers.
(2) Including investments in associated companies.
Total
---------------------------------
2003 2002 2001
--------- --------- -------
Adjusted NIS in thousands
--------- --------- -------
Sales - net(1) 465,092 455,775 469,709
========= ========= =======
Income (loss) from ordinary operations 46,584 36,455 20,526
Financial income (expenses), net (15,989) (2,988) 5,102
Other income (expenses) 1,609 (2,942) 1,095
--------- --------- ---------
Income before taxes on income 32,204 30,525 26,723
========= ========= =========
Segment assets (at end of year) 557,291 548,067 545,918
Unallocated assets (at end of year) (2) 695,983 504,056 506,224
--------- --------- ---------
Consolidated total assets (at end of year) 1,253,274 1,052,123 1,052,142
========= ========= =========
Segment liabilities (at end of year) 84,602 99,255 88,075
Unallocated liabilities (at end of year) 554,442 301,918 329,594
--------- --------- ---------
Consolidated total liabilities (at end of year) 639,044 401,173 417,669
========= ========= =========
Depreciation and amortization 28,247 26,809 29,363
========= ========= =========
(1) Represents sales to external customers.
(2) Including investments in associated companies.
---------------
-------------------------------
---------------
37
Schedule
AMERICAN ISRAELI PAPER MILLS LIMITED
Details of Subsidiaries and Associated Companies
At December 31, 2003
Percentage of direct and
indirect holding in shares
conferring equity and
voting rights
--------------------------
%
-----
Main subsidiaries:
Amnir Recycling Industries Limited 100.00
Graffiti Office Supplies and Paper Marketing Ltd. 100.00
Attar Marketing Office Supplies Ltd. 100.00
American Israeli Paper Mills Paper Industry (1995) Ltd. 100.00
Main associated companies:
Hogla-Kimberly Ltd. 49.90
Subsidiaries of Hogla-Kimberly Ltd.:
Hogla-Kimberly Marketing Limited 49.90
Molett Marketing Limited 49.90
Shikma Ltd. 49.90
Ovisan Sihhi Bez Sanai Ve Ticavet A.S 49.90
Hogla-Kimberly Holdings A.S 49.90
H-K Overseas (Holland) B.V 49.90
Neusiedler Hadera Paper Ltd. 49.90
Subsidiaries of Neusiedler Hadera Paper Ltd.:
Grafinir Paper Marketing Ltd. 49.90
Yavnir (1999) Ltd. 49.90
Neusiedler Hadera Paper Marketing (1999) Ltd. 49.90
Mitrani Paper Marketing 2000 (1998) Ltd. 49.90
Carmel Container Systems Limited 26.25
C.D. Packaging Systems Limited* 63.20
Barthelemi Holdings Ltd. 33.91
T.M.M. Integrated Recycling Industries Ltd.** 41.60
* C.D. Packaging Systems Limited is partly held through Carmel Container
Systems Limited (an associated company); the holding in voting shares of
C.D. Packaging Systems Limited is 63.05%.
** T.M.M Integrated Recycling Industries Ltd. is partly held directly and
partly through Barthelemi Holdings Ltd.
38
[AIPM LOGO] Meizer street
Industrial Zone, P.O. Box 142
Hadera 38101, Israel
Tel: 972-4-6349402
Fax: 972-4-6339740
E-Mail: chq@aipm.co.il
Enclosed please find the financial reports of the following associated
companies:
- Neusiedler Hadera Paper Ltd.
- Hogla-Kimberly Ltd.
The financial report of the following associated companies are not included:
- Carmel Containers Systems Ltd., according to section 44(c) of
the Securities (Periodic and Immediate Reports) Regulations.
- TMM Integrated Recycling Industries Ltd., a reporting
corporation.
[LOGO][LOGO]
NEUSIEDLER HADERA PAPER LTD.
(An Israeli Corporation)
2003 ANNUAL REPORT
NEUSIEDLER HADERA PAPER LTD.
(An Israeli Corporation)
2003 ANNUAL REPORT
TABLE OF CONTENTS
PAGE
REPORT OF INDEPENDENT AUDITORS 2
FINANCIAL STATEMENTS - OF THE COMPANY AND
CONSOLIDATED - IN ADJUSTED NEW ISRAELI SHEKELS (NIS):
Balance sheets 3-4
Statements of income (loss) 5
Statements of changes in shareholders' equity 6
Statements of cash flows 7-9
Notes to financial statements 10-35
APPENDIX - DETAILS OF INVESTEE COMPANIES 36
--------------------
-----------------------------
--------------------
PricewaterhouseCoopers Kesselman & Kesselman
Certified Public Accountants (Isr.)
Trade Tower, 25 Hamered Street
Tel Aviv 68125 Israel
P.O Box 452 Tel Aviv 61003
Telephone +972-3-7954555
Facsimile +972-3-7954556
REPORT OF INDEPENDENT AUDITORS
To the shareholders of NEUSIEDLER HADERA PAPER LTD.
We have audited the financial statements of Neusiedler Hadera Paper Ltd.
(hereafter - the Company) and the consolidated financial statements of the
Company and its subsidiaries: balance sheets as of December 31, 2003 and 2002
and the related statements of income (loss), changes in shareholders' equity and
cash flows for each of the three years in the period ended December 31, 2003.
These financial statements are the responsibility of the Company's board of
directors and management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in Israel, including those prescribed by the Israeli Auditors (Mode of
Performance) Regulations, 1973, and the auditing standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by the Company's board of directors and management,
as well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, based on our audits, the financial statements referred to above
present fairly, in all material respects, the financial position - of the
Company and consolidated - as of December 31, 2003 and 2002 and the results of
operations, the changes in shareholders' equity and the cash flows - of the
Company and consolidated - for each of the three years in the period ended
December 31, 2003, in conformity with accounting principles generally accepted
in Israel. Furthermore, in our opinion, the financial statements referred to
above are prepared in accordance with the Israeli Securities (Preparation of
Annual Financial Statements) Regulations, 1993.
As explained in note 1b, the financial statements referred to above are
presented in values adjusted for the changes in the exchange rate of the U.S.
dollar, in accordance with pronouncements of the Institute of Certified Public
Accountants in Israel.
Tel-Aviv, Israel
March 10, 2004
/s/ Kesselman & Kesselman
2
NEUSIEDLER HADERA PAPER LTD.
(An Israeli Corporation)
BALANCE SHEETS
IN ADJUSTED NEW ISRAELI SHEKELS
CONSOLIDATED THE COMPANY
-------------------- --------------------
DECEMBER 31 DECEMBER 31
-------------------- --------------------
NOTE 2003 2002 2003 2002
------ ------- ------- ------- -------
IN THOUSANDS
----------------------------------------------
ASSETS
CURRENT ASSETS: 8
Cash and cash equivalents 1l 31,678 49,089 20,034 45,629
Accounts receivable: 10a
Trade 147,748 154,995 2,811
American Israeli Paper Mills Limited
and its subsidiaries - net 1a(3) 134,659 70,559
Subsidiaries 8,815
Other 11,296 12,796 13,458 13,732
Inventories 10b 89,231 79,698 62,650 64,595
------- ------- ------- -------
Total current assets 279,953 296,578 230,801 206,141
------- ------- ------- -------
INVESTMENT IN INVESTEE
COMPANIES 2 6,932 7,505
------- -------
FIXED ASSETS: 3
Cost 132,692 124,815 127,617 118,802
Less - accumulated depreciation 25,381 17,993 22,701 15,611
------- ------- ------- -------
107,311 106,822 104,916 103,191
------- ------- ------- -------
GOODWILL, net of accumulated amortization 4,423 5,049
------- ------- ------- -------
Total assets 391,687 408,449 342,649 316,837
======= ======= ======= =======
Date of approval of the financial statements: March 10, 2004
/s/ GUNTHER HASSLER )
-------------------------------------------
GUNTHER HASSLER ) CHAIRMAN OF THE BOARD OF DIRECTORS
/s/ YAKI YERUSHALM )
-------------------------------------------
YAKI YERUSHALMI ) VICE CHAIRMAN OF THE BOARD OF DIRECTORS
/s/ ELIAZ AMAR )
-------------------------------------------
ELIAZ AMAR ) CHIEF FINANCIAL OFFICER
3
CONSOLIDATED THE COMPANY
----------------------- -----------------------
DECEMBER 31 DECEMBER 31
----------------------- -----------------------
NOTE 2003 2002 2003 2002
------ ------- ------- ------- ------
IN THOUSANDS
------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES: 8
Credit from banks 10c 15,108 14,670 15,108 14,652
Current maturities of long-term
capital note 5 17,516 17,516
Accounts payable and accruals: 10d
Trade - open accounts 104,097 76,650 53,397 44,771
American Israeli Paper Mills Limited
and its subsidiaries - net 1a(3) 52,968 54,685
Subsidiaries 52,671
Other 12,682 19,933 12,049 12,863
------- ------- ------- -------
Total current liabilities 184,855 183,454 133,225 89,802
------- ------- ------- -------
LONG-TERM LIABILITIES:
Loans from bank 4 51,725 71,837 51,725 71,837
Capital notes from shareholders (2002 - net
of current maturities) 5 43,790 70,064 43,790 70,064
Deferred income taxes 7e 29,247 19,557 29,247 19,574
Excess of losses of subsidiaries
over the investments therein 2 2,592 2,058
Liability for employee rights upon
retirement 6 145 131 145 96
------- ------- ------- -------
Total long-term liabilities 124,907 161,589 127,499 63,629
------- ------- ------- -------
COMMITMENTS 9
------- ------- ------- -------
Total liabilities 309,762 345,043 260,724 253,431
------- ------- ------- -------
SHAREHOLDERS' EQUITY:
Share capital (ordinary shares of NIS 1 par
value: authorized - 38,000 shares;
issued and paid - 1,000 shares) 1 1 1 1
Capital surplus 43,352 43,352 43,352 43,352
Retained earnings 38,572 20,053 38,572 20,053
------- ------- ------- ------
81,925 63,406 81,925 63,406
------- ------- ------- ------
Total liabilities and
shareholders' equity 391,687 408,449 342,649 316,837
======= ======= ======= =======
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
4
NEUSIEDLER HADERA PAPER LTD.
(An Israeli Corporation)
STATEMENTS OF INCOME (LOSS)
IN ADJUSTED NEW ISRAELI SHEKELS
CONSOLIDATED THE COMPANY
---------------------------------- --------------------------------
NOTE 2003 2002 2001 2003 2002 2001
------ ------ ------ ------ ------ ------ ------
IN THOUSANDS
-------------------------------------------------------------------------
SALES - net 10e 642,140 575,607 557,576 462,654 421,413 398,150
COST OF SALES 10f 556,890 *489,962 *505,476 391,492 *359,129 *369,944
------- --------- -------- ------- --------- --------
GROSS PROFIT 85,250 85,645 52,100 71,162 62,284 28,206
------- --------- -------- ------- --------- --------
SELLING, MARKETING,
ADMINISTRATIVE AND
GENERAL EXPENSES: 10g
Selling and marketing 42,892 *42,481 *40,418 32,330 *26,747 *25,189
Administrative and general 8,640 10,321 9,671 6,065 4,335 4,272
------- --------- -------- ------- --------- --------
51,532 52,802 50,089 38,395 31,082 29,461
------- --------- -------- ------- --------- --------
INCOME (LOSS) FROM
ORDINARY OPERATIONS 33,718 32,843 2,011 32,767 31,202 (1,255)
FINANCIAL EXPENSES - net 10h 4,681 5,232 13,115 2,713 4,387 11,615
------- --------- -------- ------- --------- --------
INCOME (LOSS) BEFORE
TAXES ON INCOME 29,037 27,611 (11,104) 30,054 26,815 (12,870)
TAXES ON INCOME (TAX
BENEFIT) 7 10,518 11,534 (3,272) 10,275 9,800 (3,299)
------- --------- -------- ------- --------- --------
INCOME (LOSS) AFTER
TAXES ON INCOME 18,519 16,077 (7,832) 19,779 17,015 (9,571)
SHARE IN PROFITS (LOSSES)
OF INVESTEE COMPANIES,
net 2 (369) (1,260) (938) 1,370
------- --------- -------- ------- --------- --------
NET INCOME (LOSS) FOR
THE YEAR 18,519 16,077 (8,201) 18,519 16,077 (8,201)
======= ========= ======== ======= ========= ========
ADJUSTED NIS
NET INCOME (LOSS) PER
NIS 1 OF PAR VALUE OF
SHARES 1m 18,519 16,077 (8,201) 18,519 16,077 (8,201)
======= ========= ======== ======= ========= ========
* Reclassified.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
5
NEUSIEDLER HADERA PAPER LTD.
(An Israeli Corporation)
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
IN ADJUSTED NEW ISRAELI SHEKELS
SHARE CAPITAL
------------------- CAPITAL RETAINED
NUMBER OF AMOUNT SURPLUS EARNINGS TOTAL
SHARES ------- ------- ------ -------
----- IN THOUSANDS
-----------------------------------------------------
BALANCE AT JANUARY 1, 2001 1,000 1 43,352 12,177 55,530
CHANGES DURING 2001 -
loss (8,201) (8,201)
----- ------ ------ ------ ------
BALANCE AT DECEMBER 31, 2001 1,000 1 43,352 3,976 47,329
CHANGES DURING 2002 -
net income 16,077 16,077
----- ------ ------ ------ ------
BALANCE AT DECEMBER 31, 2002 1,000 1 43,352 20,053 63,406
CHANGES DURING 2003 -
net income 18,519 18,519
----- ------ ------ ------ ------
BALANCE AT DECEMBER 31, 2003 1,000 1 43,352 38,572 81,925
===== ====== ====== ====== ======
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
6
(Continued) - 1
NEUSIEDLER HADERA PAPER LTD.
(An Israeli Corporation)
STATEMENTS OF CASH FLOWS
IN ADJUSTED NEW ISRAELI SHEKELS
CONSOLIDATED THE COMPANY
--------------------------------- --------------------------------
2003 2002 2001 2003 2002 2001
------ ------ ------ ------ ------ ------
IN THOUSANDS
-------------------------------------------------------------------------
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income (loss) for the year 18,519 16,077 (8,201) 18,519 16,077 (8,201)
Adjustments to reconcile net income
(loss) to net cash provided
by operating activities (a) 37,698 31,659 55,377 29,887 26,772 51,770
------ ------ ------ ------ ------ ------
Net cash provided by operating
activities 56,217 47,736 47,176 48,406 42,849 43,569
------ ------ ------ ------ ------ ------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Acquisition of a subsidiary consolidated
for the first time (b) (2,208) (2,208)
Purchase of fixed assets (9,339) (16,305) (12,746) (9,339) (16,086) (11,714)
Proceeds from sale of fixed assets 635 800 101 244 357 19
------ ------ ------ ------ ------ ------
Net cash used in investing activities (8,704) (15,505) (14,853) (9,095) (15,729) (13,903)
------ ------ ------ ------ ------ ------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Repayment of long-term loans (21,116) (7,266) (21,116) (7,266)
Repayment of long-term capital notes
from shareholders (43,790) (43,790)
Short-term credit from banks - net (18) (4,147) (5,257) (4,646)
------ ------ ------ ------ ------ ------
Net cash used in financing
activities (64,924) (11,413) (5,257) (64,906) (7,266) (4,646)
------ ------ ------ ------ ------ ------
INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS (17,411) 20,818 27,066 (25,595) 19,854 25,020
BALANCE OF CASH AND CASH
EQUIVALENTS AT THE
BEGINNING OF YEAR 49,089 28,271 1,205 45,629 25,775 755
------ ------ ------ ------ ------ ------
BALANCE OF CASH AND CASH
EQUIVALENTS AT END OF YEAR 31,678 49,089 28,271 20,034 45,629 25,775
====== ====== ====== ====== ====== ======
7
(Continued) - 2
NEUSIEDLER HADERA PAPER LTD.
(An Israeli Corporation)
STATEMENTS OF CASH FLOWS
IN ADJUSTED ISRAELI SHEKELS
CONSOLIDATED THE COMPANY
--------------------------------- ----------------------------------
2003 2002 2001 2003 2002 2001
------ ------ ------ ------ ------ ------
IN THOUSANDS (EXCEPT PER SHARE DATA)
---------------------------------------------------------------------------
(A) ADJUSTMENTS TO RECONCILE NET INCOME
(LOSS) TO NET CASH PROVIDED BY
OPERATING ACTIVITIES:
Income and expenses not
involving cash flows:
Share in losses (profits) of
investee companies - net 369 1,260 938 (1,370)
Depreciation and amortization 8,626 8,077 6,501 7,252 6,484 5,156
Deferred income taxes - net 10,438 11,483 (2,538) 10,275 9,893 (2,572)
Liability for employee
rights upon retirement 14 5 (6) 49 19 (5)
Capital losses (gains) on
sale of fixed assets - net 215 84 189 118 37 (8)
Linkage differences on (erosion of)
long-term bank loans 1,460 (134) (2,138) 1,460 (134) (2,138)
Erosion of (linkage differences
on) long-term loans to
investee company 112 (153) 14 180
------ ------ ------ ------ ------ ------
20,753 19,515 2,489 20,261 17,251 (757)
------ ------ ------ ------ ------ ------
Changes in operating assets and
liabilities:
Decrease (increase) in accounts
receivable:
Trade 7,247 (696) 22,674 2,811 (2,455) 165
American Israeli Paper Mills
Limited and its
subsidiaries - net (41,232) (29,326)
Subsidiaries 33,473 104,264
Other 752 9,025 (1,678) (328) 7,983 (2,213)
Decrease (increase) in inventories (9,533) 13,010 61,105 1,945 5,744 42,191
Increase (decrease) in accounts
payable and accruals:
Trade 27,447 6,043 (3,953) 8,626 1,716 6,106
American Israeli Paper Mills
Limited and its
subsidiaries - net (1,717) (18,799) (18,479) (64,100) (65,388)
Subsidiaries 61,486
Other (7,251) 3,561 (6,781) (814) 4,292 (3,272)
------ ------ ------ ------ ------ ------
16,945 12,144 52,888 9,626 9,521 52,527
------ ------ ------ ------ ------ ------
37,698 31,659 55,377 29,887 26,772 51,770
====== ====== ====== ====== ====== ======
8
(Concluded) - 3
NEUSIEDLER HADERA PAPER LTD.
(An Israeli Corporation)
STATEMENTS OF CASH FLOWS
IN ADJUSTED ISRAELI SHEKELS
CONSOLIDATED
AND THE COMPANY
---------------
2001
---------------
IN THOUSANDS
---------------
(b) ACQUISITION OF A SUBSIDIARY CONSOLIDATED FOR THE FIRST TIME: Fair
value of assets and liabilities acquired, at acquisition date:
Working capital deficiency (excluding cash and cash equivalents) - net 3,887
Fixed assets (1,228)
Liability for employee rights upon retirement 51
Deferred income taxes - net (2,142)
Investment in the associated company at acquisition date* 2,087
Goodwill arising on acquisition** (6,141)
------
(3,486)
Less - amount recorded against debit balance of the former shareholder,
see supplementary information (2) below 1,278
------
(2,208)
======
* See note 2a(2).
** Including goodwill balance at acquisition date.
CONSOLIDATED THE COMPANY
------------------------------ -------------------------------
2003 2002 2001 2003 2002 2001
----- ----- ----- ----- ----- -----
IN THOUSANDS
SUPPLEMENTARY CASH FLOW
INFORMATION:
Interest paid 3,757 3,582 4,664 3,757 3,582 4,664
===== ===== ===== ===== ===== =====
Income taxes paid - net (480) 164 666 513
===== ===== ===== =====
SUPPLEMENTARY INFORMATION ON INVESTING AND FINANCING ACTIVITIES NOT INVOLVING
CASH FLOWS:
1) In July 2001, the long-term shareholders' loans were converted into capital
notes. This conversion is not reflected among financing activities.
2) On April 1, 2001 the Company increased its holdings in the associated
company, from 33.3% to 100%. Part of the consideration - adjusted NIS
1,278,000 - which was recorded against debit balance of the former
shareholder (which is included among the current account of subsidiaries as
of December 31, 2001), is not reflected among investing activities.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
9
NEUSIEDLER HADERA PAPER LTD.
(An Israeli Corporation)
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES:
The significant accounting policies, applied on a consistent basis,
are as follows. As to the adoption for the first time in 2003 of the
accounting for impairment of assets, see k. below.
a. GENERAL:
1) Incorporation and operations
Neusiedler Hadera Paper Ltd. (hereafter - the Company) was
incorporated and commenced operations on January 1, 2000.
The Company and its subsidiaries (hereafter - the Group),
are engaged in the production and sale of paper and paper
products - mainly in Israel, see also note 13.
Effective as of January 1, 2003, as part of a change in the
organizational structure of the Group, all marketing and
selling activities were transferred to one subsidiary with
three logistics sites. In the past, the Group's operations
in marketing were executed by four subsidiaries.
Accordingly, those subsidiaries' employees are now employed
by the Company and its inventories were transferred to the
remaining subsidiary.
Those subsidiaries continued operating in 2003,mainly for
collecting old debts.
As to agreements with AIPM (see (3) below), see note 11a(2).
2) Use of estimates in the preparation of financial statements
The preparation of financial statements in conformity with
generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of
contingent assets and liabilities at balance sheet date and
the reported amounts of revenues and expenses during the
reported year. Actual results could differ from those
estimates.
3) Definitions:
The ultimate parent company - Anglo American Plc.
Subsidiaries - companies over which the Company has control
and over 50% of the ownership, the financial statements of
which have been consolidated with the financial statements
of the Company.
The associated company - Miterani Paper Marketing 2000
(1998) Ltd..
Investee companies - subsidiaries and the associated
company.
Shareholders - Neusiedler AG and American Israeli Paper
Mills Limited (hereafter - AIPM) which hold 50.1% and 49.9%
of the Company's share capital, respectively.
Interested parties - as defined in the Israeli Securities
(Preparation of Annual Financial Statements) Regulations,
1993.
10
NEUSIEDLER HADERA PAPER LTD.
(An Israeli Corporation)
NOTES TO FINANCIAL STATEMENTS (continued)
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (continued):
Affiliated company - companies in which AIPM exerts material
influence. Material influence is deemed to exist when the percentage
of holding in said company is 20% or more, unless there are
circumstances that contradict this assumption.
Goodwill - the difference between the cost of investment in an
investee company and the Company's share in the fair value of its net
underlying assets at time of acquisition, net of applicable taxes.
B. ADJUSTED FINANCIAL STATEMENTS:
1) The Company and its subsidiaries maintain their accounts in
nominal new Israeli shekels ("NIS") and in U.S. dollars
("dollars"). All figures in the financial statements are
presented in NIS adjusted for the changes in the exchange
rate of the dollar (rather than the changes in the Israeli
consumer price index; hereafter - Israeli CPI).
As for discontinuance of adjusting financial statements for
the effects of inflation, with effect from January 1, 2004,
see also o. hereafter.
The adjusted NIS data are the product of the data in dollar
terms, multiplied by the representative exchange rate of the
dollar at December 31, 2003 - $1 = NIS 4.379 (see also note
8b).
Condensed nominal Israeli currency data of the Company are
presented in note 14.
2) Non-monetary balance sheet items have been adjusted on the
basis of the changes in the exchange rate of the dollar
since the related transactions were carried out. The income
statement components relating to these non-monetary balance
sheet items have been adjusted on the same basis as the
related balance sheet items.
The investment in the associated company and the Company's
share in its operating results have been determined based on
its financial statements, adjusted on the basis of the
changes in the exchange rate of the dollar. Income statement
components (except financing) relating to transactions
carried out in the reported year - sales, purchases, labour
costs, etc. - have been adjusted on the basis of the
exchange rates in effect on transaction dates.
Financial income and expenses represent such income and
expenses in real terms and the erosion of balances of
monetary items during the year.
3) The amounts of non-monetary items do not necessarily
represent realization value or any other economic value, but
only their original historical values adjusted on the basis
of the changes in the exchange rate of the dollar. In these
financial statements, the term "cost" signifies cost in
adjusted NIS.
11
NEUSIEDLER HADERA PAPER LTD.
(An Israeli Corporation)
NOTES TO FINANCIAL STATEMENTS (continued)
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (continued):
c. PRINCIPLES OF CONSOLIDATION:
1) The consolidated financial statements include the accounts
of the Company and its subsidiaries. A list of the
subsidiaries is presented in the appendix to the financial
statements.
2) Intercompany transactions and balances, as well as
intercompany profits on sales which have not been realized
outside the Group, have been eliminated.
3) As to goodwill, see e(2) below.
d. INVENTORIES
Raw materials and supplies, finished goods and goods in process,
and purchased products are valued at the lower of cost or market
(net of processing costs, where appropriate and after deduction
of a provision for obsolescence), cost is determined on the
moving average basis.
e. INVESTMENTS IN INVESTEE COMPANIES:
1) The investments in these companies (in the financial
statements of the Company) are accounted for by the equity
method.
2) Goodwill is amortized in equal annual installments, over a
period of 10 years, commencing in the year of acquisition.
f. FIXED ASSETS:
1) Fixed assets are stated at cost.
2) The assets are depreciated by the straight-line method on
basis of their estimated useful life, as follows:
YEARS
-----
Machinery and equipment 7-20 (mainly 10 and 20)
Vehicles 5-7 (mainly 7)
Office furniture and equipment
(including computers) 3-5 (mainly 4)
Leasehold improvements are amortized by the straight-line method over
the expected term of the lease, which is shorter than the estimated
useful life of the improvements.
12
NEUSIEDLER HADERA PAPER LTD.
(An Israeli Corporation)
NOTES TO FINANCIAL STATEMENTS (continued)
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (continued):
g. DEFERRED INCOME TAXES:
1) Deferred taxes are computed in respect of differences
between the amounts presented in these statements and those
taken into account for tax purposes. As to the main factors
in respect of which deferred taxes have been included - see
note 7e. Deferred tax balances are computed at the tax rate
expected to be in effect at time of release to income from
the deferred tax accounts. The amount of deferred taxes
presented in the income statements reflects changes in the
above balances during the reported years.
2) Taxes which would apply in the event of disposal of
investments in the investee companies have not been taken
into account in computing the deferred taxes, as the Company
intends to hold these investments, not to realize them.
h. ALLOWANCE FOR DOUBTFUL ACCOUNTS
The allowance for doubtful accounts is determined mainly for
specific debts doubtful of collection (see note 12b).
i. REVENUE RECOGNITION
Revenue from sale of products, net of discounts granted, is
recognized upon shipment (date of transfer of title). Revenue
from sale of products for export, net of discounts granted, is
recognized upon shipment from port.
j. DERIVATIVES FINANCIAL INSTRUMENTS
Gains and losses on and cash flows from derivatives that are
hedging existing assets or liabilities are recognized in income
and cash flows statements commensurate with the results from
those assets and liabilities.
Gains and losses related to derivatives that are hedging firm
commitments are deferred, and ultimately recognized in income as
part of the measurement of the results of the underlying hedged
transactions.
k. IMPAIRMENT IN VALUE OF LONG-LIVED ASSETS
In February 2003, Accounting Standard No. 15 of the Israeli
Accounting Standards Board - (hereafter - IASB) "Impairment of
Assets", became effective. This standard requires a periodic
review to evaluate the need for a provision for the impairment of
the company's non-monetary assets - fixed assets and identifiable
intangibles, including goodwill, as well as investments in
associated companies.
Accordingly, commencing with the interim financial statements for
the 3-month period ended March 31, 2003, the company assesses -
at each balance sheet date - whether any events have occurred or
changes in circumstances have taken place, which might indicate
that there has been an impairment of one or more of the above
assets. When such indicators of impairment are present, the
company evaluates whether the carrying value of the asset in the
company's accounts can be recovered from the cash flows
anticipated from that asset.
13
NEUSIEDLER HADERA PAPER LTD.
(An Israeli Corporation)
NOTES TO FINANCIAL STATEMENTS (continued)
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (continued):
The recoverable value of an asset is determined according to the
higher of the net selling price of the asset or its value in use
to the Company. The value in use is determined according to the
present value of anticipated cash flows from the continued use of
the asset, including those expected at time of its future
retirement and disposal.
When it is not possible to assess whether an impairment provision
is required for a particular asset on its own, the need for such
a provision is assessed in relation to the recoverable value of
the cash generating unit to which that asset belongs.
Through December 31, 2002, the Group applied the provisions for
assessing and recording impairment of assets, prescribed by the
U.S. standard, FAS 121. The adoption of this standard has not had
any effect on the Group.
l. CASH EQUIVALENTS
The Group considers all highly liquid investments, which include
short-term bank deposits (up to three months from date of
deposit) that are not restricted as to withdrawal or use, to be
cash equivalents.
m. NET INCOME (LOSS) PER NIS 1 OF PAR VALUE OF SHARES
Net income (loss) per NIS 1 of par value of shares is computed in
accordance with Opinion 55 of the Israeli Institute.
The par value of shares used in computation of per share data is
NIS 1,000.
n. ADVERTISING EXPENSES
Advertising expenses are charged to income as incurred (as to the
amount of the expenses, see note 10g).
o. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS:
In October 2001, the IASB issued Israel Accounting Standard No.
12 - Discontinuance of Adjusting Financial Statements for
Inflation, which provided for the discontinuance of adjusting
financial statements, as of January 1, 2003. In December 2002,
Accounting Standard No. 17 was issued that postponed the date
from which Accounting Standard No. 12 is to be applied until
January 1, 2004. The inflation-adjusted amounts as of December
31, 2003, as presented in these financial statements, will be the
base for the financial reporting in the following periods.
The Company is currently assessing the effect, if any, of the
adoption of this standard, thus, it expects the implementation of
Standard No. 12 will mainly affect financing income and expenses
items.
14
NEUSIEDLER HADERA PAPER LTD.
(An Israeli Corporation)
NOTES TO FINANCIAL STATEMENTS (continued)
NOTE 2 - INVESTMENTS IN INVESTEE COMPANIES:
A. COMPOSED AS FOLLOWS:
THE COMPANY
----------------------
DECEMBER 31
----------------------
2003 2002
------ ------
ADJUSTED NIS
IN THOUSANDS
----------------------
Shares:
Cost 4,338 4,338
Share in accumulated losses (2,476) (1,216)
------ ------
1,862 3,122
Long-term loan (1) 2,478 2,325
------ ------
4,340 5,447
The investment is presented in the balance sheets as follows:
Among investments 6,932 7,505
Among long-term liabilities (2,592) (2,058)
------ ------
4,340 5,447
(1) The loan is linked to the Israeli CPI and is interest
free. Repayment date has not yet been fixed.
(2) On April 1, 2001, the Company increased its holdings
in the associated company and reached control and
ownership of 100%.
B. The changes in the investments during 2003 are as follows:
THE COMPANY
------------
ADJUSTED NIS
IN THOUSANDS
------------
Balance at beginning of year 5,447
Changes during the year:
Share in losses, net (1,260)
Erosion of long-term loans 153
------
Balance at end of year 4,340
15
NEUSIEDLER HADERA PAPER LTD.
(An Israeli Corporation)
NOTES TO FINANCIAL STATEMENTS (continued)
NOTE 3 - FIXED ASSETS
Composition of assets, grouped by major classifications, and changes
therein during 2003, are as follows:
COST
-----------------------------------------------
CHANGES DURING THE YEAR
-----------------------------------------------
BALANCE AT
BEGINNING BALANCE AT
OF END OF
YEAR ADDITIONS RETIREMENTS YEAR
------- ----- ----- -------
ADJUSTED NIS IN THOUSANDS
-----------------------------------------------
CONSOLIDATED:
Machinery and equipment 111,743 7,620 820 118,543
Vehicles 2,421 6 642 1,785
Office furniture and
equipment
(including computers) 2,426 367 2,793
Leasehold improvements 3,668 56 3,724
Payments on account of
machinery and equipment 4,557 1,290 5,847
------- ----- ----- -------
124,815 9,339 1,462 132,692
======= ===== ===== =======
THE COMPANY:
Machinery and equipment 110,130 7,620 508 117,242
Vehicles 81 6 16 71
Office furniture and equipment
(including computers) 1,462 367 1,829
Leasehold improvements 2,595 56 2,651
Payments on account of
machinery and equipment 4,534 1,290 5,824
------- ----- ----- -------
118,802 9,339 524 127,617
======= ===== ===== =======
ACCUMULATED DEPRECIATION
-------------------------------------------------------------
CHANGES DURING THE YEAR
------------------------------------------------------------
BALANCE AT BALANCE AT DEPRECIATED BALANCE
BEGINNING END OF DECEMBER 31
OF YEAR 2003 2002
YEAR ADDITIONS RETIREMENTS ---- ---- ----
------ ----- --- ADJUSTED NIS
ADJUSTED NIS IN THOUSANDS ADJUSTED NIS IN THOUSANDS IN THOUSANDS
----------------------------------- ------------------------- -----------------
CONSOLIDATED:
Machinery and equipment 15,058 6,883 238 21,703 96,840 96,685
Vehicles 1,214 375 374 1,215 570 1,207
Office furniture and
equipment
(including computers) 682 354 1,036 1,757 1,744
Leasehold improvements 1,039 388 1,427 2,297 2,629
Payments on account of
machinery and equipment 5,847 4,557
------ ----- --- ------ ------- -------
17,993 8,000 612 25,381 107,311 106,822
====== ===== === ====== ======= =======
THE COMPANY:
Machinery and equipment 14,463 6,721 151 21,033 96,209 95,667
Vehicles 38 11 11 38 33 43
Office furniture and equipment
(including computers) 333 257 590 1,239 1,129
Leasehold improvements 777 263 1,040 1,611 1,818
Payments on account of
machinery and equipment 5,824 4,534
------ ----- --- ------- ------- -------
15,611 7,252 162 22,701 104,916 103,191
====== ===== === ======= ======= =======
16
NEUSIEDLER HADERA PAPER LTD.
(An Israeli Corporation)
NOTES TO FINANCIAL STATEMENTS (continued)
NOTE 4 - LOANS FROM BANK:
WEIGHTED
AVERAGE CONSOLIDATED AND THE
INTEREST RATES COMPANY
-------------- --------------------
DECEMBER 31
--------------------
2003 2002
--------------------
ADJUSTED NIS
------------------- ---------------------
% IN THOUSANDS
------------------- ---------------------
a) Composed as follows:
Linked to the dollar 3.08 44,755 63,175
Linked to the Israeli CPI 6.55 22,078 23,314
---- ------ ------
66,833 86,489
Less - current maturities 15,108 14,652
------ ------
51,725 71,837
====== ======
b) The non-current portion of the loans matures as follows:
Second year 15,297 14,817
Third year 15,497 14,994
Fourth year 11,332 15,183
Fifth year 3,655 11,006
Sixth year and thereafter 5,944 15,837
------ ------
51,725 71,837
====== ======
c) The Company is required, inter alia, to fulfill certain
operational conditions and to maintain certain financial
ratios. If the Company defaults on the covenants, the banks
are entitled to demand early repayment of the loans - in
whole or in part. The Company believes that it is in
compliance with all covenants stipulated by the banks.
d) As to a "negative pledge agreement" signed by the Company,
see note 9c.
NOTE 5 - CAPITAL NOTES
The capital notes, from shareholders, are linked to the dollar and
bear no interest. Repayment date have not been fixed. In 2003, the
Company paid the shareholders an aggregate amount of NIS 43,790,000 in
respect of capital notes.
17
NEUSIEDLER HADERA PAPER LTD.
(An Israeli Corporation)
NOTES TO FINANCIAL STATEMENTS (continued)
NOTE 6 - EMPLOYEE RIGHTS UPON RETIREMENT:
a. Israeli labor laws and agreements require the Group to pay
severance pay to employees dismissed or leaving their employ
under certain circumstances, computed on the basis of the number
of years of service and, generally, the latest pay rate (one
month's pay for each year of service) or of a pension upon
retirement.
To cover the liability for employee rights upon retirement,
pursuant to labor agreements currently in force and based on
salary components which, in management's opinion, create
entitlement to severance pay, deposits are made with various
provident funds (including pension funds) or insurance policies
in the name of the employees.
The severance pay and pension liabilities and the amounts funded
as above are not reflected in the financial statements, as the
significant pension and severance pay risks have been irrevocably
transferred to the pension funds and the insurance companies, as
allowed by the Severance Pay Law.
The liability presented in the balance sheets represents the
severance pay liability in respect of temporary employees.
b. The expenses relating to employee rights upon retirement, which
reflect the amounts that were deposited during the reported years
with provident funds, pension funds and various insurance
policies in respect of permanent employees, and severance
payments made in respect of temporary employees, together amount
to adjusted NIS 3,827,000, adjusted NIS 2,356,000 and adjusted
NIS 2,497,000 in 2003, 2002 and 2001 respectively.
NOTE 7 - TAXES ON INCOME:
a. MEASUREMENT OF RESULTS FOR TAX PURPOSES UNDER THE INCOME TAX
(INFLATIONARY ADJUSTMENTS) LAW, 1985 (hereafter - the
inflationary adjustments law)
Under the inflationary adjustments law, results for tax purposes
are measured in real terms, having regard to the changes in the
Israeli CPI. The companies in the Group are taxed under this law.
As stated in note 1b, the financial statements are drawn up in
NIS adjusted on the basis of the changes in the exchange rate of
the dollar. The difference between the change in the Israeli CPI
and the change in the exchange rate of the dollar - on an annual
and cumulative basis - creates differences between the taxable
income and the income reflected in the financial statements.
b. THE LAW FOR THE ENCOURAGEMENT OF INDUSTRY (TAXATION), 1969
The Company is an "industrial company" as defined by this law. As
such, it is entitled to claim, and has in fact claimed,
depreciation at accelerated rates on equipment used in industrial
activity as stipulated by regulations published under the
inflationary adjustments law.
18
NEUSIEDLER HADERA PAPER LTD.
(An Israeli Corporation)
NOTES TO FINANCIAL STATEMENTS (continued)
NOTE 7 - TAXES ON INCOME (continued):
c. REFORM OF THE ISRAELI TAX SYSTEM
In 2003, the provisions of the Amendment to the Income Tax
Ordinance (No. 132), 2002 (hereafter - the tax reform law) came
into effect. The tax reform law comprehensively reforms certain
parts of the Israeli tax system. Certain provisions of the tax
reform law and anticipated supplementary provisions will only be
applied from later dates.
In accordance with the provisions of the tax reform law, as from
January 1, 2003, capital gains will be taxed at a reduced rate of
25%, instead of the regular rate of 36% at which they were taxed
until the aforementioned date; with regard to the sale of assets
acquired prior to January 1, 2003, the reduced tax rate will be
applicable only for the gain allocated to capital gains earned
after the implementation of that law, which will be calculated,
as prescribed by the tax reform law.
Furthermore, the tax reform law stipulates that carryforward
capital losses may be utilized against capital gains, without any
time restriction (the time limitation for the utilization has
been removed in respect of capital losses which arose in the tax
year 1996 and thereafter).
d. CARRYFORWARD TAX LOSSES
Carryforward tax losses of the Group and the Company are adjusted
NIS 14,997,000 and 14,528,000 at December 31, 2003, respectively.
(December 31, 2002 - adjusted NIS 39,037,000). Under the
inflationary adjustments law, the carryforward losses are linked
to the Israeli CPI.
19
NEUSIEDLER HADERA PAPER LTD.
(An Israeli Corporation)
NOTES TO FINANCIAL STATEMENTS (continued)
NOTE 7 - TAXES ON INCOME (continued):
e. Deferred income taxes:
1) Composition of the deferred taxes, and the changes therein
during 2003 and 2002, are as follows:
PROVISIONS FOR EMPLOYEE
RIGHTS
---------------------
VACATION ALLOWANCE
AND FOR IN RESPECT OF
DEPRECIABLE SEVERANCE RECREATION DOUBTFUL CARRYFORWARD
FIXED ASSETS INVENTORIES PAY PAY ACCOUNTS TAX LOSSES TOTAL
------------ ----------- --------- ---------- -------- ------------ -------
ADJUSTED NIS IN THOUSANDS
----------------------------------------------------------------------------------------
CONSOLIDATED:
Balance at January 1, 2002 (18,879) (1,379) 44 1,636 1,281 18,571 1,274
Changes in 2002 -
amounts carried to income (8,214) 1,274 4 (226) 197 (4,518) (11,483)
------- ------ -- ----- ----- ----- -------
Balance at December 31, 2002 (27,093) (105) 48 1,410 1,478 14,053 (10,209)
Changes in 2003 -
amounts carried to income (2,206) 649 4 108 (170) (8,823) (10,438)
------- ------ -- ----- ----- ----- -------
Balance at December 31, 2003 (29,299) 544 52 1,518 1,308 5,230 (20,647)
======= ====== == ===== ===== ===== =======
20
NEUSIEDLER HADERA PAPER LTD.
(An Israeli Corporation)
NOTES TO FINANCIAL STATEMENTS (continued)
NOTE 7 - TAXES ON INCOME (continued):
e. Deferred income taxes (continued):
PROVISIONS FOR EMPLOYEE
RIGHTS
---------------------
VACATION
AND IN RESPECT OF
DEPRECIABLE SEVERANCE RECREATION CARRYFORWARD
FIXED ASSETS INVENTORIES PAY PAY TAX LOSSES TOTAL
------------ ----------- --------- ---------- ------------ -------
ADJUSTED NIS IN THOUSANDS
--------------------------------------------------------------------------------
THE COMPANY:
Balance January 1, 2002 (18,879) (1,113) 27 1,354 16,644 (1,967)
Changes in 2002 -
amounts carried to income (8,214) 1,074 7 (169) (2,591) (9,893)
------- --- -- ----- ----- -------
Balance at December 31, 2002 (27,093) (39) 34 1,185 14,053 (11,860)
Changes in 2003 -
amounts carried to income (2,206) 403 18 333 (8,823) (10,275)
------- --- -- ----- ----- -------
Balance at December 31, 2003 (29,299) 364 52 1,518 5,230 (22,135)
======= === == ===== ===== =======
The deferred taxes are computed at the rate of 36%.
21
NEUSIEDLER HADERA PAPER LTD.
(An Israeli Corporation)
NOTES TO FINANCIAL STATEMENTS (continued)
NOTE 7 - TAXES ON INCOME (continued):
e. Deferred income taxes (continued):
2) Deferred taxes are presented in the balance sheets, as
follows:
CONSOLIDATED THE COMPANY
--------------------------------- ---------------------------------
AMONG AS A AMONG AS A
CURRENT NON-CURRENT CURRENT NON-CURRENT
ASSETS(1) LIABILITY(2) TOTAL ASSETS(1) LIABILITY (2) TOTAL
----- ------- ------- ----- ------- -------
ADJUSTED NIS IN THOUSANDS ADJUSTED NIS IN THOUSANDS
--------------------------------- ---------------------------------
Balance at January 1, 2002 1,533 (259) 1,274 241 (2,208) (1,967)
Changes in 2002 7,815 (19,298) (11,483) 7,473 (17,366) (9,893)
----- ------- ------- ----- ------- -------
Balance at December 31, 2002 9,348 (19,557) (10,209) 7,714 (19,574) (11,860)
Changes in 2003 (748) (9,690) (10,438) (602) (9,673) (10,275)
----- ------- ------- ----- ------- -------
Balance at December 31, 2003 8,600 (29,247) (20,647) 7,112 (29,247) (22,135)
===== ======= ======= ===== ======= =======
(1) In respect of inventories, allowance for doubtful accounts,
carryforward tax losses, vacation and recreation pay.
(2) In respect of depreciable fixed assets, severance pay and
carryforward tax losses.
(3) The deferred taxes are computed at the rate of 36%.
22
NEUSIEDLER HADERA PAPER LTD.
(An Israeli Corporation)
NOTES TO FINANCIAL STATEMENTS (continued)
NOTE 7 - TAXES ON INCOME (continued):
f. Taxes on income included in the statements of income (loss):
1) As follows:
CONSOLIDATED THE COMPANY
---------------------------------- ---------------------------------
2003 2002 2001 2003 2002 2001
------ ------ ------ ------ ----- ------
ADJUSTED NIS IN THOUSANDS
---------------------------------------------------------------------------
For the reported year:
Current 80 51 (93)
Deferred, see d
above 10,438 10,220 (1,761) 10,275 9,893 (1,792)
------ ------ ------ ------ ----- ------
10,518 10,271 (1,761) 10,275 9,800 (1,792)
------ ------ ------ ------ ----- ------
For previous years:
Current (733) (729)
Deferred 1,263 (778) (778)
------ ------ ------ ------ ----- ------
10,518 11,534 (3,272) 10,275 9,800 (3,299)
====== ====== ====== ====== ===== ======
NEUSIEDLER HADERA PAPER LTD.
(An Israeli Corporation)
NOTES TO FINANCIAL STATEMENTS (continued)
NOTE 7 - TAXES ON INCOME (continued):
f. Taxes on income included in the statements of income (loss)
(continued):
2) Following is a reconciliation of the theoretical tax amount,
assuming all income (loss) is taxed at the regular rate, and
the actual tax amount:
CONSOLIDATED
-------------------------------------------------------
2003 2002 2001
-------------- -------------- ----------------
ADJUSTED ADJUSTED ADJUSTED
NIS NIS NIS
IN IN IN
% THOUSANDS % THOUSANDS % THOUSANDS
----- ------ ----- ------ ------ -------
Income (loss) before taxes on income, as
reported in the statements of income (loss) 100.0 29,037 100.0 27,611 (100.0) (11,104)
===== ====== ===== ====== ====== =======
Theoretical tax (tax benefit) on the above amount 36.0 10,453 36.0 9,940 (36.0) (3,997)
Changes in taxes resulting from:
Differences between Israeli CPI
Adjusted tax returns and dollar-adjusted
financial statements - net (see a above) 0.2 65 0.7 186 20.0 2,212
Other - net 0.5 145 0.2 24
----- ------ ----- ------ ------ -------
Taxes on income (tax benefit) for the
reported year 36.2 10,518 37.2 10,271 (15.8) (1,761)
===== ====== ===== ====== ====== =======
THE COMPANY
-------------------------------------------------------
2003 2002 2001
-------------- -------------- ----------------
ADJUSTED ADJUSTED ADJUSTED
NIS NIS NIS
IN IN IN
% THOUSANDS % THOUSANDS % THOUSANDS
----- ------ ----- ------ ------ -------
Income (loss) before taxes on income, as
reported in the statements of income (loss) 100.0 30,054 100.0 26,815 (100.0) (12,870)
===== ====== ===== ====== ===== ======
Theoretical tax (tax benefit) on the above amount 36.0 10,819 36.0 9,653 (36.0) (4,633)
Changes in taxes resulting from:
Differences between Israeli CPI
Adjusted tax returns and dollar-adjusted
financial statements - net (see a above) 1.8 (544) 0.3 78 22.0 2,774
Other - net 0.3 69 0.1 67
----- ------ ----- ------ ------ ------
Taxes on income (tax benefit) for the
reported year 34.2 10,275 36.6 9,800 (14) (1,792)
===== ====== ===== ====== ====== ======
g. Tax assessments
The Company and its subsidiaries have not been assessed for
tax purposes since incorporation.
23
NEUSIEDLER HADERA PAPER LTD.
(An Israeli Corporation)
NOTES TO FINANCIAL STATEMENTS (continued)
NOTE 8 - LINKAGE TERMS OF MONETARY BALANCES:
a. As follows:
CONSOLIDATED
-------------------------------------------------
DECEMBER 31, 2003
-------------------------------------------------
IN, OR LINKED
TO, FOREIGN
CURRENCY (MAINLY LINKED TO THE
THE DOLLAR) ISRAELI CPI UNLINKED
----------- ----------- --------
ADJUSTED NIS IN THOUSANDS
-------------------------------------------------
Assets:
Current assets:
Cash and cash equivalents 24,492 7,186
Accounts receivable:
Trade 34,213 113,535
Other 970
------- ------ -------
Long-term loan to subsidiary
58,705 121,691
======= =======
Liabilities:
Current liabilities -
accounts payable and accruals:
Trade 85,386 18,711
AIPM and its subsidiaries - net 52,968
Other 2,881 9,543
Long-term liabilities:
Loans from bank (including current maturities) 44,755 22,078
Capital notes from shareholders (including
current maturities) 43,790
-------- ------ -------
176,812 22,078 81,222
======== ====== =======
THE COMPANY
-------------------------------------------------
DECEMBER 31, 2003
-------------------------------------------------
IN, OR LINKED
TO, FOREIGN
CURRENCY (MAINLY LINKED TO THE
THE DOLLAR) ISRAELI CPI UNLINKED
----------- ----------- --------
ADJUSTED NIS IN THOUSANDS
-------------------------------------------------
Assets:
Current assets:
Cash and cash equivalents 12,896 7,138
Accounts receivable:
AIPM and its subsidiaries - net 134,659
Other 5,448
Long-term loan to subsidiary 2,478
------- ----- --------
12,896 2,478 147,245
======= ===== ========
Liabilities:
Current liabilities -
accounts payable and accruals: 37,826 15,571
AIPM and its subsidiaries - net 52,671
Subsidiaries 2,881 9,168
Other
Long-term liabilities: 44,755 22,078
Loans from bank (including current maturities)
Capital notes from shareholders (including
current maturities) 43,790
------- ----- --------
129,252 22,078 77,410
======= ===== ========
24
NEUSIEDLER HADERA PAPER LTD.
(An Israeli Corporation)
NOTES TO FINANCIAL STATEMENTS (continued)
NOTE 8 - LINKAGE TERMS OF MONETARY BALANCES (continued):
b. Data regarding the exchange rate and the Israeli CPI:
EXCHANGE RATE OF
ONE DOLLAR CPI*
---------------- ------
NIS POINTS
--- ------
At end of year:
2003 NIS 4.379 178.6
2002 NIS 4.737 182.0
2001 NIS 4.416 170.9
2000 NIS 4.041 168.5
Increase (decrease) during the year:
2003 (7.6%) (1.9%)
2002 7.3% 6.5%
2001 9.3% 1.4%
* Based on the index for the month ending on each
balance sheet date, on the basis of the 1993 average
= 100.
NOTE 9 - COMMITMENTS AND LIABILITIES SECURED BY PLEDGES:
a. The subsidiaries entered into operating lease agreements for the
buildings they use. The agreements are for periods ending through
2008. The projected annual rental payments for the next four
years, based on rates in effect as of December 31, 2003,
approximate adjusted NIS 1,579,000.
b. As to a lease agreement relating to the Company, see note 11a(2).
c. To secure bank loans and credits (the balance of which at
December 31, 2003 is adjusted NIS 66,833,000), the Company signed
a "negative pledge agreement," under which it is committed not to
pledge its assets (of all kinds), excluding fixed pledges
relating to assets financed by others.
NOTE 10 - SUPPLEMENTARY FINANCIAL STATEMENT INFORMATION:
Balance sheets:
a. Accounts receivable:
CONSOLIDATED THE COMPANY
DECEMBER 31 DECEMBER 31
------------------ -------------------
2003 2002 2003 2002
------- ------- ------- -----
ADJUSTED NIS IN THOUSANDS
--------------------------------------------
1) Trade:
Composed as follows:
Open accounts 111,796 119,080 2,811
Cheques receivable 35,952 35,915
------- ------- -----
147,748 154,995 2,811
======= ======= =====
The item includes (is net of):
Neusiedler AG, see note 1a(3) 18,957 34,200
= == ======= =======
Affiliated company 2,811 2,811
======== =====
Allowance for doubtful accounts 3,630 4,106
======= =======
25
NEUSIEDLER HADERA PAPER LTD.
(An Israeli Corporation)
NOTES TO FINANCIAL STATEMENTS (continued)
NOTE 10 - SUPPLEMENTARY FINANCIAL STATEMENT INFORMATION (continued):
CONSOLIDATED THE COMPANY
--------------- ----------------
DECEMBER 31 DECEMBER 31
--------------- ----------------
2003 2002 2003 2002
----- ------ ------ ------
ADJUSTED NIS IN THOUSANDS
-----------------------------------
2) Other:
Institutions 201 716 363
Customs and value added tax
(VAT) authorities* 4,922 3,695
Prepaid expenses 990 504 329 250
Advances to suppliers 736 451 569 451
Amounts accrued in respect of
forward transactions, see
note 12c 505 505
Deferred income taxes, see note 7e 8,600 9,348 7,112 7,714
Sundry 769 1,272 526 754
------ ------ ------ ------
11,296 12,796 13,458 13,732
====== ====== ====== ======
* Consolidated VAT returns are filed by the Group
b. Inventories:
For industrial activities:
Finished goods and goods in process 32,584 38,317 31,262 36,561
Raw materials and supplies 31,389 28,034 31,388 28,034
------ ------ ------ ------
63,973 66,351 62,650 64,595
For commercial activities - purchased products 25,258 13,347
------ ------ ------ ------
89,231 79,698 62,650 64,595
====== ====== ====== ======
The item is net of provision for obsolescence 906 1,375 530 941
====== ====== ====== ======
c. Credit from banks:
Composed as follows:
Short-term credit 18
Current maturities of loans from bank, see note 4 15,108 14,652 15,108 14,652
------ ------ ------ ------
15,108 14,670 15,108 14,652
====== ====== ====== ======
Unutilized credit lines 87,580 87,765 87,580 87,580
====== ====== ====== ======
In 2003 and 2002, the Company and its subsidiaries entered into an
agreement for a bank credit facility, pursuant to which the Company and
its subsidiaries may, from time to time, borrow an aggregate principal
amount of up to adjusted NIS 87,580,000. Under the terms of the
agreement, the credit facility has no time limit.
26
NEUSIEDLER HADERA PAPER LTD.
(An Israeli Corporation)
NOTES TO FINANCIAL STATEMENTS (continued)
NOTE 10 - SUPPLEMENTARY FINANCIAL STATEMENT INFORMATION (continued):
d. Accounts payable and accruals:
1) Trade:
CONSOLIDATED THE COMPANY
------------ -----------
DECEMBER 31 DECEMBER 31
----------- -----------
2003 2002 2003 2002
---- ---- ---- ----
ADJUSTED NIS IN THOUSANDS
--------------------------------------------
The item includes:
Neusiedler AG 7,803 1,502 1,423 557
====== ====== ====== ======
Affiliated company 1,733 3,943 467
====== ====== ======
2) Other:
Payroll and related expenses 1,914 1,594 1,918 1,541
Provision for vacation and recreation pay 4,226 3,897 4,228 3,294
Customs and value added tax (VAT)
authorities* 368 1,008
Interest payable 2,882 3,416 2,882 3,416
Advances from customers 258 5,032
Neusiedler AG 552 1,901 552 1,901
Sundry 2,482 3,085 2,469 2,711
------ ------ ------ ------
12,682 19,933 12,049 12,863
====== ====== ====== ======
* Consolidated VAT returns are filed by the Group.
Statements of income (loss):
CONSOLIDATED THE COMPANY
------------ -----------
2003 2002 2001 2003 2002 2001
---- ---- ---- ---- ---- ----
ADJUSTED NIS IN THOUSANDS
-----------------------------------------------------------------
e. Sales - net (1):
Industrial activities (2) 455,927 424,195 406,035 462,654 421,413 398,150
Commercial activities 186,213 151,412 151,541
------- ------- ------- ------- ------- -------
642,140 575,607 557,576 462,654 421,413 398,150
======= ======= ======= ======= ======= =======
(1) Including sales to:
Investee companies 13,991 462,654 421,413 398,150
======= ======= ======= =======
Shareholders
and its subsidiaries 170,811 154,765 119,516
======= ======= =======
Affiliated company 320 832 1,278
======= ======= =======
(2) Including export, see
note 13 157,303 149,260 126,059
======= ======= =======
27
NEUSIEDLER HADERA PAPER LTD.
(An Israeli Corporation)
NOTES TO FINANCIAL STATEMENTS (continued)
NOTE 10 - SUPPLEMENTARY FINANCIAL STATEMENT INFORMATION (continued):
CONSOLIDATED THE COMPANY
---------------------------------- ---------------------------------
2003 2002 2001 2003 2002 2001
------- -------- -------- ------- -------- --------
ADJUSTED NIS IN THOUSANDS
-----------------------------------------------------------------------
f. Cost of sales:
Industrial activities:
Materials consumed 271,334 251,070 253,333 271,332 251,070 253,333
Payroll and related expenses 30,482 **25,608 **29,373 30,482 **25,608 **29,373
Energy costs 43,166 36,539 34,335 43,164 36,539 34,335
Depreciation 7,243 6,464 5,131 7,243 6,464 5,131
Other manufacturing
costs and
expenses (including rent) 34,758 **29,181 **33,580 33,972 **27,739 **32,040
Decrease (increase) in inventories
of finished goods
and goods in process
in process (7,269) 18,975 *30,719 5,299 11,709 *15,732
------- -------- -------- ------- -------- --------
379,714 367,837 386,471 391,492 359,129 369,944
Commercial activities - cost of
products sold 177,176 122,125 119,005
------- -------- -------- ------- -------- --------
556,890 489,962 505,476 391,492 359,129 369,944
======= ======== ======== ======= ======== ========
* After deduction of adjusted NIS 8,625,000 - amounts refunded from insurance companies.
** Reclassified.
28
NEUSIEDLER HADERA PAPER LTD.
(An Israeli Corporation)
NOTES TO FINANCIAL STATEMENTS (continued)
NOTE 10 - SUPPLEMENTARY FINANCIAL STATEMENT INFORMATION (continued):
CONSOLIDATED THE COMPANY
---------------------------------- ------------------------------------
2003 2002 2001 2003 2002 2001
---- ---- ---- ---- ---- ----
ADJUSTED NIS IN THOUSANDS
-----------------------------------------------------------------------------
g. Selling, marketing, administrative and general expenses:
Selling and marketing:
Payroll and related
expenses 16,913 *18,190 *18,922 16,913 *12,033 *11,139
Packaging and
shipping 17,460 14,740 11,709 9,714 9,419 9,822
Office and warehouse
rent and maintenance 4,144 *6,148 *6,094 4,139 *3,941 *3,210
Equipment and vehicle
maintenance 1,178 1,427 2,098 399 315 345
Advertising 180 153 245 180 116 145
Commissions 1,865 176 298 176 298
Subsistence and travel 337 311 153 337 311 153
Depreciation 670 880 789 44 20 25
Other 145 456 110 604 416 52
------ ------ ------ ------ ------ ------
42,892 42,481 40,418 32,330 26,747 25,189
====== ====== ====== ====== ====== ======
Administrative and general:
Payroll and related
expenses 3,821 3,310 3,841 3,821 2,090 2,124
Office supplies, rent
and maintenance 1,496 2,339 1,843 933 635 630
Professional fees and
and maintenance fee 1,594 2,227 2,189 1,152 1,549 1,509
Depreciation and
amortization 652 733 581
Doubtful accounts and
bad debts 679 1,475 955
Other 398 237 262 159 61 9
------ ------ ------ ------ ------ ------
8,640 10,321 9,671 6,065 4,335 4,272
====== ====== ====== ====== ====== ======
* Reclassified.
29
NEUSIEDLER HADERA PAPER LTD.
(An Israeli Corporation)
NOTES TO FINANCIAL STATEMENTS (continued)
NOTE 10 - SUPPLEMENTARY FINANCIAL STATEMENT INFORMATION (continued):
CONSOLIDATED THE COMPANY
-------------------------------- ----------------------------------
2003 2002 2001 2003 2002 2001
---- ---- ---- ---- ---- ----
ADJUSTED NIS IN THOUSANDS
-----------------------------------------------------------------------------
h. Financial income expenses) - net:
Expenses:
In respect of long-term
loans 3,254 4,208 5,771 3,254 4,206 5,771
Erosion of operating
monetary balances,
net of related hedges 634 4,946 1,608 1,423 7,110
In respect of interest
and exchange differences
on customer's balances - net 3,770 1,147 875
In respect of short-term
balances - net 1,253 753
Other 270 186
------ ------ ------- ------ ------ -------
(7,024) (5,989) (13,115) (4,862) (5,629) (13,820)
------ ------ ------- ------ ------ -------
Income:
In respect of increase
in value of cash
balances relating to
operating activity 2,205
Erosion of operating
monetary balances, net of 350
related hedges
In respect of
short-term balances - net 1,993 473 2,149 950
Other 284 292
------ ------ ------- ------ ------ -------
2,343 757 2,149 1,242 2,205
------ ------ ------- ------ ------ -------
(4,681) (5,232) (13,115) 2,713 (4,387) (11,615)
====== ====== ======= ====== ====== =======
30
NEUSIEDLER HADERA PAPER LTD.
(An Israeli Corporation)
NOTES TO FINANCIAL STATEMENTS (continued)
NOTE 11 - "INTERESTED PARTIES" - TRANSACTIONS AND BALANCES:
a. Transactions - expenses (income):
1) As follows:
CONSOLIDATED THE COMPANY
------------------------------- ---------------------------
2003 2002 2001 2003 2002 2001
---- ---- ---- ---- ---- ----
ADJUSTED NIS IN THOUSANDS
-----------------------------------------------------------------
Sales (171,131) (155,599) (120,795)
======= ======= =======
Costs and expenses 73,414 71,750 79,072 73,112 66,215 73,392
======= ======= ======= ====== ====== ======
Financial - net 13,759 (3,722) (3,681) 858 (298) 3,166
======= ======= ======= ====== ====== ======
2) The Company leases its premises from AIPM and uses services
(including electricity, water, maintenance and professional
services) rendered under agreements which are renewed every
year. The expenses in respect of the above agreements are
presented in (1) above.
3) The transactions as above represent transactions carried out
in the ordinary course of business, at terms and prices as
with non-affiliated customers and suppliers.
b. Balances with interested parties:
CONSOLIDATED THE COMPANY
------------------- ---------------------
DECEMBER 31 DECEMBER 31
------------------- ---------------------
2003 2002 2003 2002
---- ---- ---- ----
ADJUSTED NIS IN THOUSANDS
--------------------------------------------------
Current assets - accounts
receivable 18,957 37,011 134,659 73,370
====== ====== ======= ======
Current liabilities - accounts
payable and accruals 62,504 62,578 1,900 3,004
====== ====== ======= ======
Capital notes and current maturities
of long-term capital notes 43,790 87,580 43,790 87,580
====== ====== ======= ======
31
NEUSIEDLER HADERA PAPER LTD.
(An Israeli Corporation)
NOTES TO FINANCIAL STATEMENTS (continued)
NOTE 12 - FINANCIAL INSTRUMENTS AND RISK MANAGEMENT:
a. Derivative financial instruments
The Company has only limited involvement with derivative
financial instruments. The Company uses these instruments as
hedges. The Company utilizes derivatives, mainly forward exchange
contracts to protect its dollar cash flows in respect of existing
assets and liabilities. As the counter-parties of these
derivatives are Israeli banks, the Company considers the interest
credit risks remote. As of December 31, 2003 there are no
balances in respect of transactions in derivatives financial
instruments.
b. Credit risks
The Group's cash and cash equivalents are deposited mainly with
major Israeli banks.
Most of the Group's sales are made in Israel and Europe, to a
large number of customers. The exposure to credit risks relating
to trade receivables is limited due to the relatively large
number of customers. The Group performs ongoing credit
evaluations of its debtors and requires collaterals when
appropriate. An appropriate allowance for doubtful accounts is
included in the financial statements.
c. Fair value of financial instruments
The financial instruments of the Group consist mainly of
non-derivative assets and liabilities (which include working
capital items, long-term loans to investee companies, long-term
loans received and capital notes) and of some derivatives (see a.
above).
In view of their nature, the fair value of the financial
instruments included in working capital of the Group is usually
identical or close to their carrying value. The fair value of the
long-term loans also approximates the carrying value, since they
bear interest at rates close to the prevailing market rates.
The Company does not disclose the fair value of capital notes
from shareholders, included under current liabilities and
long-term liabilities aggregating adjusted NIS 43,790 in
thousands (see note 5), since their value cannot be reliably
determined prior to determining their repayment dates.
The fair value and the carrying value of derivatives at December
31, 2002, is approximately adjusted NIS 505,000, and generally
reflects the estimated amounts that the Group would receive or
pay to terminate the contracts at the reporting dates.
32
NOTE 13 - BUSINESS AND GEOGRAPHICAL SEGMENTS
Following are data regarding the distribution of the Group's
consolidated sales by geographical market, regardless of where the
goods were produced:
2003 2002 2001
---- ---- ----
ADJUSTED NIS IN THOUSANDS
--------------------------------------
Europe 139,791 129,416 110,005
Israel 484,837 426,347 431,516
Other 17,512 19,844 16,054
------- ------- -------
642,140 575,607 557,575
======= ======= =======
33
NEUSIEDLER HADERA PAPER LTD.
(An Israeli Corporation)
NOTES TO FINANCIAL STATEMENTS (continued)
NOTE 14 - NOMINAL DATA OF THE COMPANY:
a. Balance sheet data:
NOMINAL NIS
------------------------
IN THOUSANDS
DECEMBER 31
------------------------
2003 2002
------- -------
A S S E T S
Current assets:
Cash and cash equivalents 20,034 49,359
Accounts receivable:
Trade 3,041
American Israeli Paper Mills Limited and its
subsidiaries - net 134,659 76,327
Subsidiaries 9,536
Other 6,328 6,454
Inventories 63,651 69,751
------- -------
224,672 214,468
------- -------
Investments in investee companies 6,592 7,252
------- -------
Fixed assets:
Cost 123,564 114,341
L e s s - accumulated depreciation 21,749 14,853
------- -------
101,815 99,488
------- -------
333,079 321,208
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Credit from banks 15,108 15,850
Current maturities of long-term capital loans 18,948
Accounts payable and accruals:
Trade 53,397 48,432
Subsidiaries 52,671
Other 12,049 13,915
------- -------
133,225 97,145
Long-term liabilities:
Loans from bank 51,725 77,710
Capital notes from shareholders (net of
current maturities) 43,790 75,792
Excess of losses of subsidiaries over the
investments therein 3,738 4,325
Liability for employee rights upon retirement 145 104
------- -------
99,398 157,931
------- -------
T o t a l liabilities 232,623 255,076
------- -------
Shareholders' equity, see c. below:
Share capital 1 1
Capital surplus 41,125 41,125
Retained earnings 59,330 25,006
------- -------
100,456 66,132
------- -------
333,079 321,208
======= =======
34
NEUSIEDLER HADERA PAPER LTD.
(An Israeli Corporation)
NOTES TO FINANCIAL STATEMENTS (continued)
NOTE 14 - NOMINAL DATA OF THE COMPANY (continued):
b. Operating results data:
NOMINAL NIS IN THOUSANDS
--------------------------------------
2003 2002 2001
---- ---- ----
Sales - net 480,764 452,986 382,166
Cost of sales 406,930 *378,990 *351,317
------- ------- -------
Gross profit 73,834 73,996 30,849
------- ------- -------
Selling, marketing, administrative and
general expenses:
Selling and marketing 33,455 *28,769 *24,205
Administrative and general 9,173 4,639 4,120
------- ------- -------
42,628 33,408 28,325
------- ------- -------
Income from ordinary operations 31,206 40,588 2,524
Financial income (expenses) - net (3,152) 11,957 22,130
------- ------- -------
Income (loss) before taxes on income 34,358 28,631 (19,606)
Tax benefit, see d. below (669)
------- ------- -------
Income (loss) after taxes on income 34,358 28,631 (18,937)
Share in losses of investee companies, net 34 385 559
------- ------- -------
Net income (loss) for the year - nominal 34,324 28,246 (19,496)
======= ======= =======
* Reclassified.
c. Changes in shareholders' equity:
NOMINAL NIS IN THOUSANDS
-----------------------------------------------------
SHARE CAPITAL ACCUMULATED
CAPITAL SURPLUS DEFICIT TOTAL
------- ------- ------- -----
Balance at January 1, 2001 1 41,125 16,256 57,382
Changes during 2001 -
loss (19,496) (19,496)
------ ------ ------ -------
Balance at January 1, 2001 1 41,125 (3,240) 37,886
Changes during 2002 -
net income 28,246 28,246
------ ------ ------ -------
Balance at December 31, 2002 1 41,125 25,006 66,132
Changes during 2003 -
net income 34,324 34,324
------ ------ ------ -------
Balance at December 31, 2003 1 41,125 59,330 100,456
====== ====== ====== =======
d. For practical reasons, no deferred taxes are created in the
nominal accounts.
---------------
-------------------------------
---------------
35
APPENDIX
NEUSIEDLER HADERA PAPER LTD.
DETAILS OF INVESTEE COMPANIES
AT DECEMBER 31, 2003
PERCENTAGE OF
HOLDING
IN SHARES CONFERRING
PROFIT AND
VOTING RIGHTS
--------------------------
%
-------
SUBSIDIARIES:
Grafinir Paper Marketing Ltd. 100.00
Yavnir (1999) Ltd. 100.00
Neusiedler Hadera Paper Marketing (1999) Ltd. 100.00
Miterani Paper Marketing 2000 (1998) Ltd. 100.00
36
HOGLA-KIMBERLY LTD.
FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2003
TABLE OF CONTENTS
PAGE
----
INDEPENDENT AUDITORS' REPORT 1
FINANCIAL STATEMENTS:
Balance Sheets 2
Statements of Operations 3
Statements of Changes in Shareholders' Equity 4
Statements of Cash Flows 5-6
Notes to the Financial Statements 7-29
INDEPENDENT AUDITORS' REPORT
TO THE SHAREHOLDERS OF
HOGLA-KIMBERLY LTD.
We have audited the accompanying balance sheets of HOGLA-KIMBERLY LTD. ("the
Company") as of December 31, 2003 and 2002, and the consolidated balance sheets
as of those dates, and the related statements of operations, changes in
shareholders' equity and cash flows - of the Company and on a consolidated basis
- for each of the two years in the period ended December 31, 2003. These
financial statements are the responsibility of the Company's Board of Directors
and management. Our responsibility is to express an opinion on these financial
statements based on our audit.
The statements of operations, changes in shareholders' equity and cash flows -
of the Company and on a consolidated basis - for the year ended December 31,
2001 were audited by other auditors whose report, dated March 4, 2002, expressed
an unqualified opinion on those financial statements.
We conducted our audit in accordance with generally accepted auditing standards
in the United States and in Israel, including those prescribed by the Israeli
Auditors' Regulations (Mode of Performance), 1973. Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by the Board of Directors and
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position - of the Company and on a
consolidated basis - as of December 31, 2003 and 2002, and the results of
operations, changes in shareholders' equity and cash flows - of the Company and
on a consolidated basis - for each of the two years in the period then ended, in
accordance with generally accepted accounting principles in Israel. In addition,
in our opinion, the financial statements referred to above are prepared in
accordance with the Israeli Securities Regulations (Preparation of Annual
Financial Statements), 1993.
Accounting principles generally accepted in Israel vary in certain significant
respects from accounting principles generally accepted in the United States of
America. The application of the latter would have affected the determination of
the financial position and results of operations as of the dates and for the
years presented to the extent summarized in Note 25.
As explained in Note 2A, the financial statements have been prepared on the
basis of historical cost adjusted for changes in the exchange rate of the U.S.
dollar in relation to the NIS, in accordance with pronouncements of the
Institute of Certified Public Accountants in Israel.
/s/ Brightman Almagor & Co.
Brightman Almagor & Co.
Certified Public Accountants
A Member Firm of Deloitte Touche Tohmatsu
Tel Aviv, March 8, 2004
-1-
HOGLA-KIMBERLY LTD.
BALANCE SHEETS
(Adjusted for changes in the U.S. dollar vis-a-vis the NIS)
CONSOLIDATED COMPANY
---------------------- ----------------------
DECEMBER 31, DECEMBER 31,
---------------------- ----------------------
NOTE 2003 2002 2003 2002
---- ------- ------- ------- -------
NIS IN THOUSANDS NIS IN THOUSANDS
---------------------- ----------------------
CURRENT ASSETS
Cash and cash equivalents 3 37,340 21,330 31,645 10,832
Current maturities of long-term bank deposits 7 7,882 9,195 7,882 9,195
Trade receivables 4 229,979 182,568 74,668 41,176
Other receivables 5 14,222 10,574 7,879 6,719
Inventories 6 92,664 86,427 58,539 42,292
------- ------- ------- -------
382,087 310,094 180,613 110,214
======= ======= ======= =======
LONG-TERM INVESTMENTS
Long-term deposits 7 70,064 77,946 - 7,882
Capital note of shareholder 8 32,770 30,294 32,770 30,294
Investments in Subsidiaries 9 - - 196,037 158,619
------- ------- ------- -------
102,834 108,240 228,807 196,795
======= ======= ======= =======
FIXED ASSETS 10
Cost 479,744 464,144 380,774 368,011
Less - accumulated depreciation 210,176 193,428 164,163 151,639
------- ------- ------- -------
269,568 270,716 216,611 216,372
======= ======= ======= =======
OTHER ASSETS - GOODWILL 9B 29,073 31,841 - -
------- ------- ------- -------
783,562 720,891 626,031 523,381
======= ======= ======= =======
CURRENT LIABILITIES
Short-term bank credit 1,087 - 1,087 -
Current maturities of long-term bank loans 13 15,147 24,960 - -
Trade payables 11 139,555 127,629 174,580 95,570
Other payables and accrued expenses 12 37,632 32,502 10,645 21,648
------- ------- ------- -------
193,421 185,091 186,312 117,218
======= ======= ======= =======
LONG-TERM LIABILITIES
Long-term bank loans 13 96,338 82,326 - -
Deferred taxes 22 29,428 19,644 26,738 16,592
------- ------- ------- -------
125,766 101,970 26,738 16,592
======= ======= ======= =======
COMMITMENTS AND CONTINGENT LIABILITIES 15
MINORITY INTEREST 51,394 44,259 - -
======= ======= ======= =======
SHAREHOLDERS' EQUITY
Share capital 16 28,788 28,788 28,788 28,788
Capital reserves 156,799 156,799 156,799 156,799
Retained earnings 227,394 171,141 227,394 171,141
Dividend declared
after balance sheet date - 32,843 - 32,843
------- ------- ------- -------
412,981 389,571 412,981 389,571
------- ------- ------- -------
783,562 720,891 626,031 523,381
======= ======= ======= =======
-------------------- -------------------- -------------------- --------------------
T. DAVIS Y. YERUSHALMI A. MAGID A. BRENNER
Chairman of the Board of Vice-Chairman of the Board of Financial Manager Managing Director
Directors Directors
Approval date of the financial statements: March 8, 2004.
The accompanying notes are an integral part of the financial statements.
-2-
HOGLA-KIMBERLY LTD.
STATEMENTS OF OPERATIONS
(Adjusted for changes in the U.S. dollar vis-a-vis the NIS)
CONSOLIDATED COMPANY
------------------------------------ -------------------------------------
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
------------------------------------ -------------------------------------
NOTE 2003 2002 2001 2003 2002 2001
---- --------- ---------- ----------- --------- --------- ---------
NIS IN THOUSANDS NIS IN THOUSANDS
------------------------------------ -------------------------------------
Net sales 17 868,671 766,549 821,264 377,117 285,442 331,109
Cost of sales 18 621,014 554,763 559,173 322,558 233,096 243,591
--------- ---------- ----------- --------- --------- ---------
GROSS PROFIT 247,657 211,786 262,091 54,559 52,346 87,518
Selling expenses 19 130,670 (*)123,955 (*) 131,133 7,538 5,373 5,352
General and
administrative expenses 20 39,046 (*)29,941 (*) 33,379 4,381 5,368 6,172
--------- ---------- ----------- --------- --------- ---------
OPERATING PROFIT 77,941 57,890 97,579 42,640 41,605 75,994
Financing income
(expenses), net 21 5,517 (13,425) (17,420) (12,268) (4,622) 293
Other income (expenses), net 496 78 (550) 238 714 406
--------- ---------- ----------- --------- --------- ---------
INCOME BEFORE INCOME
TAXES 83,954 44,543 79,609 30,610 37,697 76,693
Income taxes 22 20,566 19,232 36,477 11,775 16,076 28,378
--------- ---------- ----------- --------- --------- ---------
INCOME AFTER INCOME TAXES 63,388 25,311 43,132 18,835 21,621 48,315
Equity in net earnings (losses)
of Subsidiaries - - - 37,418 1,091 (6,714)
Minority interest in
earnings of Subsidiary (7,135) (2,599) (1,531) - - -
--------- ---------- ----------- --------- --------- ---------
NET INCOME FOR THE YEAR 56,253 22,712 41,601 56,253 22,712 41,601
========= ========== =========== ========= ========= =========
EARNINGS PER SHARE (IN NIS) 6.81 2.75 5.03 6.81 2.75 5.03
========= ========== =========== ========= ========= =========
NUMBER OF SHARES USED IN
COMPUTATION 8,263,473 8,263,473 8,263,473 8,263,473 8,263,473 8,263,473
========= ========= ========= ========= ========= =========
(*) Reclassified.
The accompanying notes are an integral part of the financial statements.
-3-
HOGLA-KIMBERLY LTD.
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(Adjusted for changes in the U.S. dollar vis-a-vis the NIS)
DIVIDEND
DECLARED
AFTER
SHARE CAPITAL RETAINED BALANCE SHEET
CAPITAL RESERVES EARNINGS DATE TOTAL
-------------- -------------- ----------- ---------------- --------------
NIS IN THOUSANDS
BALANCE - JANUARY 1, 2001 28,788 156,799 183,461 - 369,048
CHANGES DURING 2001:
Dividend declared
after balance-sheet date (43,790) (43,790)
Net income for the year 41,601 41,601
-------------- -------------- ----------- ---------------- --------------
BALANCE - DECEMBER 31, 2001 28,788 156,799 181,272 - 366,859
CHANGES DURING 2002:
Dividend declared
after balance-sheet date (32,843) 32,843 -
Net income for the year 22,712 22,712
-------------- -------------- ----------- ---------------- --------------
BALANCE - DECEMBER 31, 2002 28,788 156,799 171,141 32,843 389,571
CHANGES DURING 2003:
Dividend paid (32,843) (32,843)
Net income for the year 56,253 56,253
-------------- -------------- ----------- ---------------- --------------
BALANCE - DECEMBER 31, 2003 28,788 156,799 227,394 - 412,981
The accopanying notes are an integral part of the financial statements.
-4-
HOGLA-KIMBERLY LTD.
STATEMENTS OF CASH FLOWS
(Adjusted for changes in the U.S. dollar vis-a-vis the NIS)
CONSOLIDATED COMPANY
--------------------------------- ----------------------------------
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
--------------------------------- ----------------------------------
2003 2002 2001 2003 2002 2001
------- ------- -------- ------- ------- -------
NIS IN THOUSANDS NIS IN THOUSANDS
--------------------------------- ----------------------------------
CASH FLOWS - OPERATING ACTIVITIES
Net income 56,253 22,712 41,601 56,253 22,712 41,601
Adjustments to reconcile net income
to net cash provided by operating
activities (Appendix A) 4,190 14,324 18,657 7,188 80,535 16,087
------- ------- -------- ------- ------- -------
NET CASH PROVIDED BY OPERATING
ACTIVITIES 60,443 37,036 60,258 63,441 103,247 57,688
======= ======= ========= ======= ======= =======
CASH FLOWS - INVESTING ACTIVITIES
Investment in short-term bank deposit - - (57,069) - - -
Withdrawal of short-term bank deposit - 57,069 - - - -
Investment in long-term bank deposits - - (13,575) - - (13,575)
Withdrawal of long-term bank deposits 9,195 8,759 - 9,195 8,759 -
Acquisition of fixed assets (26,953) (76,523) (47,729) (20,351) (66,375) (41,520)
Proceeds from sale of fixed assets 1,092 456 1,321 284 161 955
------- ------- -------- ------- ------- -------
NET CASH USED IN INVESTING ACTIVITIES (16,666) (10,239) (117,052) (10,872) (57,455) (54,140)
======= ======= ========= ======= ======= =======
CASH FLOWS - FINANCING ACTIVITIES
Dividend paid (32,843) (43,790) - (32,843) (43,790) -
Long-term loans received 28,949 11,386 13,575 - - -
Repayment of long-term loans (24,960) - - - - -
Short-term bank credit 1,087 - - 1,087 - -
------- ------- -------- ------- ------- -------
NET CASH PROVIDED BY
(USED IN) FINANCING ACTIVITIES (27,767) (32,404) 13,575 (31,756) (43,790) -
======= ======= ========= ======= ======= =======
INCREASE (DECREASE) IN
CASH AND CASH EQUIVALENTS 16,010 (5,607) (43,219) 20,813 2,002 3,548
CASH AND CASH EQUIVALENTS -
BEGINNING OF YEAR 21,330 26,937 70,156 10,832 8,830 5,282
------- ------- -------- ------- ------- -------
CASH AND CASH EQUIVALENTS
- END OF YEAR 37,340 21,330 26,937 31,645 10,832 8,830
======= ======= ========= ======= ======= =======
The accompanying notes are an integral part of the financial statements.
-5-
HOGLA-KIMBERLY LTD.
APPENDICES TO STATEMENTS OF CASH FLOWS
(Adjusted for changes in the U.S. dollar vis-a-vis the NIS)
CONSOLIDATED COMPANY
------------------------------- --------------------------------
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
------------------------------- --------------------------------
2003 2002 2001 2003 2002 2001
------ ------ ------ ------ ------ ------
NIS IN THOUSANDS NIS IN THOUSANDS
------------------------------- --------------------------------
A. ADJUSTMENTS TO RECONCILE NET INCOME
TO NET CASH PROVIDED BY OPERATING ACTIVITIES
INCOME AND EXPENSES ITEMS
NOT INVOLVING CASH FLOWS:
Minority interest in
earnings of Subsidiary 7,135 2,599 1,531 - - -
Equity in net losses
(earnings) of Subsidiaries - - - (37,418) (1,091) 6,714
Depreciation and amortization 25,213 22,086 21,262 14,789 12,093 11,153
Deferred taxes, net 8,251 1,072 3,028 10,417 1,046 2,508
Loss (gain) from sale of fixed assets (482) 81 (373) (208) (29) (385)
Effect of exchange rate
differences, net (2,266) 2,202 3,015 (2,476) 2,202 3,015
CHANGES IN ASSETS AND LIABILITIES:
Decrease (increase) in trade receivables (47,933) (14,411) (2,026) (4,930) (455) 446
Decrease (increase) in other receivables (2,115) 4,860 (7,055) (1,431) (1,395) (2,098)
Decrease (increase) in inventories (6,237) (16,362) 9,927 (16,247) (10,406) 13,558
Increase (decrease) in trade payables 27,544 18,343 (1,057) 13,628 15,495 (8,035)
Net change in balances with
related parties (10,050) 7,731 3,411 42,067 71,830 13,603
Increase (decrease) in other
payables and accrued expenses 5,130 (13,877) (13,006) (11,003) (8,755) (24,392)
------ ------ ------ ------ ------ ------
4,190 14,324 18,657 7,188 80,535 16,087
====== ====== ====== ====== ====== ======
B. NON-CASH ACTIVITIES
Dividend declared 43,790 43,790
====== ======
Acquisition of fixed assets on credit 8,661 13,707 2,382 8,460 13,707 2,382
====== ====== ====== ====== ====== ======
The accompanying notes are an integral part of the financial statements.
-6-
HOGLA-KIMBERLY LTD.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - GENERAL
A. DESCRIPTION
Hogla Kimberly Ltd. ("the Company") and its Subsidiaries are
engaged principally in the production and marketing of paper and
hygienic products. The Company's results of operations are
affected by transactions with shareholders and affiliated
companies (see Note 23).
The Company is presently owned by Kimberly Clark Corp. ("KC" or
the "Parent Company") (50.1%) and American-Israeli Paper Mills
Ltd. ("AIPM") (49.9%).
B. DEFINITIONS:
THE COMPANY - Hogla-Kimberly Ltd.
THE GROUP - the Company and its Subsidiaries, a
list of whom is provided in Note 9D.
SUBSIDIARIES - companies in which the Company
exercises over 50% ownership and
control, directly or indirectly, and
whose financial statements are fully
consolidated with those of the
Company.
RELATED PARTIES - as defined by Opinion No. 29 of the
Institute of Certified Public
Accountants in Israel.
INTERESTED PARTIES - as defined in the Israeli Securities
Regulations (Presentation of
Financial Statements), 1993.
CONTROLLING SHAREHOLDER - as defined in the Israeli Securities
Regulations (Presentation of
Transactions between a Corporation
and its Controlling Shareholder in
the Financial Statements), 1996.
NIS - New Israeli Shekel.
CPI - the Israeli consumer price index.
DOLLAR - the U.S. dollar.
C. USE OF ESTIMATES
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and
liabilities as of the date of the financial statements, and the
reported amounts of revenues and expenses during the reporting
periods. Actual results could differ from those estimates.
-7-
HOGLA-KIMBERLY LTD.
NOTES TO FINANCIAL STATEMENTS
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
The following are the principal accounting policies applied in the
preparation of the financial statements in a manner consistent with
previous years:
A. ADJUSTED FINANCIAL STATEMENTS
(1) GENERAL
In accordance with pronouncements of the Institute of
Certified Public Accountants in Israel, the financial
statements, including comparative figures for previous
years, are presented on the basis of nominal historical cost
adjusted for changes in the exchange rate of the U.S. dollar
in relation to the NIS.
The adjusted amounts of non-monetary items presented in the
financial statements reflect their cost adjusted for changes
in the exchange rate of the U.S. dollar vis-a-vis the NIS,
and do not necessarily reflect realization or current
economic value of these items.
The term "cost" in these financial statements refers to
adjusted cost, unless otherwise indicated. The term "NIS"
refers to adjusted NIS, unless otherwise stated.
The Company's condensed financial statements in nominal
values, on the basis of which the adjusted financial
statements were prepared, are presented in Note 26.
(2) PRINCIPLES OF ADJUSTMENT
a. BALANCE SHEET ITEMS
Non-monetary items (items whose balances reflect
historical value at acquisition or upon establishment)
have been adjusted in accordance with the changes in
the exchange rate of the U.S. dollar from the date of
acquisition/establishment through December 31, 2003.
Investments in Subsidiaries and minority interest were
determined based on the dollar adjusted financial
statements of these companies.
Monetary items (items whose balance sheet amounts
represent current or realization value at the balance
sheet date) are presented in the December 31, 2003
balance sheet at their nominal value as of that date.
b. STATEMENT OF OPERATIONS ITEMS
Income and expenses reflecting transactions, other than
financial income and expenses, were adjusted for
changes in the exchange rate of the U.S. dollar from
the date of the transaction to the balance sheet date.
Income and expenses arising from non-monetary items
(mainly depreciation, amortization, deferred taxes and
changes in inventory) were adjusted in a manner
corresponding to the adjustment of the related balance
sheet items.
Financing income (expenses), net reflect income and
expenses in real terms and include exchange rate
differences derived from monetary items.
The Company's share and the minority interest in the
results of Subsidiaries were determined based on the
dollar adjusted financial statements of these
companies.
-8-
HOGLA-KIMBERLY LTD.
NOTES TO FINANCIAL STATEMENTS
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (cont.)
A. ADJUSTED FINANCIAL STATEMENTS (cont.)
(2) PRINCIPLES OF ADJUSTMENT (cont.)
c. ADJUSTMENT AND TRANSLATION OF FOREIGN SUBSIDIARIES
FINANCIAL STATEMENTS
The financial statements of Subsidiaries operating
abroad, which act as an integral operation of the
Group, are prepared in U.S. dollars and translated into
NIS based on the exchange rate of the U.S. dollar on
the balance sheet date.
B. PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include consolidation of
the consolidated financial statements of all Subsidiaries.
Material inter-company balances and transactions of and between
Subsidiaries have been fully eliminated.
The data included in the consolidated financial statements is
based on audited financial statements of the Subsidiaries
included therein.
The excess cost of an investment in a Subsidiary in Turkey over
the net book value upon acquisition of that Subsidiary is
allocated to fixed assets and is amortized at the rate applicable
to those assets, or upon their realization. The unallocated
excess cost reflects goodwill, which is presented in the balance
sheet as "other assets" and amortized by the straight-line method
over 15 years due to the unique economic conditions relating to
that Subsidiary and the expected economic benefit period from its
acquisition.
C. CASH AND CASH EQUIVALENTS
Cash and cash equivalents include bank deposits, available for
immediate withdrawal, as well as unrestricted short-term deposits
with maturities of less than three months from the date of
deposit.
D. ALLOWANCE FOR DOUBTFUL ACCOUNTS
The allowance for doubtful accounts is generally computed as
percentage from the relevant balances, on the basis of historical
experience, with the addition of a specific provision in respect
of accounts, which on management estimate are doubtful of
collection.
E. INVENTORIES
Inventories are presented at the lower of cost or market, with
cost determined as follows:
Finished products - Based on actual production cost.
Raw, auxiliary
materials and other - Based on moving-average basis.
-9-
HOGLA-KIMBERLY LTD.
NOTES TO FINANCIAL STATEMENTS
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (cont.)
F. INVESTMENTS IN SUBSIDIARIES
Investments in Subsidiaries are presented using the equity method
based on their audited financial statements. In relation to
excess cost of investment in Subsidiary in Turkey, see B above.
G. FIXED ASSETS
Fixed assets are presented at cost less accumulated depreciation
and amortization. Depreciation is calculated using the
straight-line method at rates considered adequate to depreciate
the assets over their estimated useful lives. Amortization of
leasehold improvements is computed over the shorter of the term
of the lease, including any option period, where the Company
intends to exercise such option, or their useful life.
The annual depreciation and amortization rates are: %
-
Buildings 2.5-4
Leasehold improvements 10-25
Machinery and equipment 5-10
Motor vehicles 15-20
Office furniture and equipment 10-33
IMPAIRMENT OF LONG-LIVED ASSETS
Management reviews long-lived assets on a periodic basis, as well
as when such a review is required based upon relevant
circumstances, to determine whether events or changes in
circumstances indicate that the carrying amount of such assets
may not be recoverable. According to the Israeli Accounting
Standards Board's Standard No.15, "Impairment of Assets", an
asset's recoverable value is the higher of the asset's net
selling price and the asset's value in use, the latter being
equal to the asset's discounted expected cash flows. If
applicable, an impairment loss is recorded at the amount in which
the carrying amount of the asset exceeds its recoverable value.
The adoption of Standard No. 15, which came effective commencing
January 1, 2003, had no impact on the Group's financial position
and results of operations.
H. OTHER ASSETS - GOODWILL
Goodwill derived from the acquisition of Subsidiary in Turkey is
amortized based on the straight line method over 15 years (see
also B above). Impairment examinations and recognition are
performed and determined based on the accounting policy outlined
in G above.
I. DEFERRED INCOME TAXES
The Group records deferred taxes in respect of temporary
differences between the carrying values of assets and liabilities
in the financial statements and their values for tax purposes,
including depreciation differences on leased property and fixed
assets. The Group records deferred-tax assets in respect of
temporary difference as well as in respect of carry-forward tax
losses so long as it is probable that those assets will be
realized in the foreseeable future. The deferred taxes are
computed by the tax rates expected to be in effect at
realization, as they are known at the balance sheet date.
-10-
HOGLA-KIMBERLY LTD.
NOTES TO FINANCIAL STATEMENTS
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (cont.)
I. DEFERRED INCOME TAXES (cont.)
The computation of deferred taxes has not taken into account
taxes that would have been applicable in case of future
realization of investments in Subsidiaries, since the Group does
not contemplate such realization in the foreseeable future.
Moreover, the computation also excludes deferred taxes in respect
of dividends distribution within the Group for cases in which
such dividend distributions are expected to be tax-exempt.
J. DIVIDENDS
Dividends proposed or declared subsequent to the balance-sheet
date, but prior to the financial statements approval date, are
presented as a separate component of shareholders' equity.
K. REVENUE RECOGNITION
Revenues are recognized upon shipment, when title has been
transferred and collectibility is reasonably assured.
Revenues are net of sales incentives, primarily: bonuses granted
to chains as a percentage of their purchases (target bonus);
volume discounts; and coupons distributed to customers entitling
price discounts.
An accrual for estimated returns and sales incentives, computed
primarily on the basis of historical experience, is recorded at
the time revenues are recognized and deducted from revenues.
L. EARNINGS PER SHARE
Earnings per share are computed based on the weighted average
number of paid up capital shares during the year.
M. EXCHANGE RATES AND LINKAGE BASIS
(1) Balances in foreign currency or linked thereto are included
in the financial statements based on the representative
exchange rates, as published by the Bank of Israel, that
were prevailing at the balance sheet date.
(2) Following are the changes in the representative exchange
rate of the U.S. dollar vis-a-vis the NIS and the Turkish
Lira, and in the CPI:
REPRESENTATIVE TURKISH LIRA EXCHANGE CPI
EXCHANGE RATE WITH THE U.S. "IN RESPECT
RATE OF THE DOLLAR DOLLAR OF"
AS OF (NIS PER $1) (TL'000 PER $1) (IN POINTS)
------------ --------------- -----------
December 31, 2003 4.379 1,393 178.58
December 31, 2002 4.737 1,640 182.02
December 31, 2001 4.416 1,447 170.91
INCREASE (DECREASE)
DURING THE YEAR ENDED: % % %
------------ --------------- -----------
December 31, 2003 (7.6) (15.0) (1.9)
December 31, 2002 7.3 13.3 6.5
December 31, 2001 9.3 115.3 1.4
(3) Exchange-rate differences are charged to operations as
incurred.
-11-
HOGLA-KIMBERLY LTD.
NOTES TO FINANCIAL STATEMENTS
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (cont.)
N. RECLASSIFICATION
Certain amounts in prior years' financial statements have been
reclassified in order to conform to the 2003 presentation.
O. SUPPLIER DISCOUNTS
Ongoing discounts granted by suppliers, as well as year end
discounts, in respect of which no commitments to meet given
targets are required by the Group, are included in the financial
statements upon the execution of purchases that grant the Group
said discounts. Supplier discounts contingent upon the Group's
fulfillment of certain targets, such as meeting a minimal annual
volume (in quantities or amount), or an increase in purchases
over previous periods, are included in the financial statements
in proportion to Group's purchases from suppliers during the
reported period, which advance the Group towards the stated
targets, only if it is expected that those targets will be
reached and the discounts can reasonably be estimated. The
estimate of meeting the targets is based, inter-alia, on
historical experience, Group's relationships established with the
suppliers and the estimated volume of purchases during the
remaining reported period.
P. RECENT ACCOUNTING STANDARDS - CESSATION OF FINANCIAL STATEMENTS
ADJUSTMENT, AND EFFECT OF CHANGES IN EXCHANGE RATES
In October 2001, the Israeli Accounting Standards Board issued
Standard No. 12, Cessation of Financial Statements Adjustment.
According to this Standard, as amended by Standard No. 17 in
November 2002, the adjustment of financial statements for
inflation or exchange rate of foreign currency will cease for
reporting periods commencing January 1, 2004. Through December
31, 2003, the Group prepared dollar-linked financial statements,
in accordance with the pronouncements of the Institute of
Certified Public Accountants in Israel. The adjusted amounts
presented in the December 31, 2003 balance-sheet will serve as
the opening nominal balances as of January 1, 2004.
In October 2001, the Israeli Accounting Standards Board issued
Standard No. 13, Effect of Changes in Foreign Currency Exchange
Rates. This Standard addresses the translation of transactions
denominated in foreign currency, as well as the translation of
financial statements of a foreign operation, for inclusion in the
financial statements of the reporting company. Standard No. 13,
as amended by Standard No. 17 in November 2002, will become
effective for reporting periods subsequent to December 31, 2003.
The implementation of Standards No. 12 and 13 will mainly affect
financing income and expenses items.
-12-
HOGLA-KIMBERLY LTD.
NOTES TO FINANCIAL STATEMENTS
NOTE 3 - CASH AND CASH EQUIVALENTS
CONSOLIDATED COMPANY
------------------ ------------------
DECEMBER 31,
------------------------------------------
2003 2002 2003 2002
------ ------ ------ ------
NIS IN THOUSANDS NIS IN THOUSANDS
------------------ ------------------
In NIS 527 597 520 596
In foreign currencies (primarily the
U.S. dollar) 36,813 20,733 31,125 10,236
------ ------ ------ ------
37,340 21,330 31,645 10,832
------ ------ ------ ------
NOTE 4 - TRADE RECEIVABLES
CONSOLIDATED COMPANY
-------------------- -------------------
DECEMBER 31,
----------------------------------------------
2003 2002 2003 2002
------- ------- ------ ------
NIS IN THOUSANDS NIS IN THOUSANDS
-------------------- -------------------
COMPOSITION:
Domestic
Open accounts 154,617 133,529 - -
Checks receivable 34,421 29,827 - -
Related parties 348 359 60,820 33,392
------- ------- ------ ------
189,386 163,715 60,820 33,392
Foreign
Open accounts 47,697 23,016 5,699 778
Related parties 206 717 8,191 7,057
------- ------- ------ ------
237,289 187,448 74,710 41,227
Less - allowance for doubtful accounts 7,310 4,880 42 51
------- ------- ------ ------
229,979 182,568 74,668 41,176
======= ======= ====== ======
The Company's products are marketed principally by its Subsidiaries.
NOTE 5 - OTHER RECEIVABLES
CONSOLIDATED COMPANY
------------------ ------------------
DECEMBER 31,
------------------------------------------
2003 2002 2003 2002
------ ------ ------ ------
NIS IN THOUSANDS NIS IN THOUSANDS
------------------ ------------------
Deferred taxes (Note 22D) 5,518 3,985 1,769 2,040
Prepaid expenses 2,908 3,021 1,570 1,373
Advances to suppliers 3,074 837 2,128 837
Value added taxes 236 - - -
Income tax advances, net 1,467 1,226 878 -
Loans to supplier and employees 477 1,077 262 915
Other 542 428 1,272 1,554
------ ------ ------ ------
14,222 10,574 7,879 6,719
====== ====== ===== =====
-13-
HOGLA-KIMBERLY LTD.
NOTES TO FINANCIAL STATEMENTS
NOTE 6 - INVENTORIES
CONSOLIDATED COMPANY
------------------ ------------------
DECEMBER 31,
------------------------------------------
2003 2002 2003 2002
------ ------ ------ ------
NIS IN THOUSANDS NIS IN THOUSANDS
------------------ ------------------
Raw and auxiliary materials 48,482 36,708 34,293 22,428
Finished goods 29,087 38,546 10,969 9,786
Spare parts and other 15,095 11,173 13,277 10,078
------ ------ ------ ------
92,664 86,427 58,539 42,292
====== ====== ====== ======
NOTE 7 - LONG-TERM DEPOSITS
CONSOLIDATED COMPANY
--------------------- ---------------------
DECEMBER 31,
INTEREST ----------------------------------------------
RATE 2003 2002 2003 2002
-------- ------- -------- ------ ---------
% (*) NIS IN THOUSANDS NIS IN THOUSANDS
-------- --------------------- ---------------------
A. COMPOSITION
Linked to the U.S. dollar 1.16-2.69 77,946 87,141 7,882 17,077
Less - current maturities 7,882 9,195 7,882 9,195
------ ------ ----- -----
70,064 77,946 - 7,882
====== ====== ===== =====
(*) Annual average interest rate as of December 31, 2003.
-14-
HOGLA-KIMBERLY LTD.
NOTES TO FINANCIAL STATEMENTS
NOTE 7 - LONG-TERM DEPOSITS (cont.)
B. The balance of the long-term deposits as of December 31, 2003 is
repayable as follows:
NIS IN
THOUSANDS
---------
2004 - current maturities 7,882
Thereafter - see D below 70,064
------
77,946
C. The deposits are held as collateral for long-term loans received
by Subsidiaries (see Note 15C).
D. The deposit is linked to the U.S. dollar and bears interest at a
rate of 0.994% as of December 31, 2003. The deposit is subject to
re-deposit every two years.
NOTE 8 - CAPITAL NOTE OF SHAREHOLDER
The capital note of AIPM, denominated in NIS, is not linked and does
not bear interest. Repayment date will be mutually agreed upon. The
erosion or increase in value of the capital note was charged to
capital reserves until March 31, 2000 (the date on which AIPM ceased
to be the controlling shareholder).
NOTE 9 - INVESTMENTS IN SUBSIDIARIES
COMPANY
---------------------------
DECEMBER 31,
---------------------------
2003 2002
------- -------
NIS IN THOUSANDS
---------------------------
A. COMPOSITION
Cost of shares 972 972
Equity in post-acquisition earnings, net 190,860 153,442
Capital notes (*) 4,205 4,205
------- -------
196,037 158,619
======= =======
(*) The non-interest bearing capital notes, denominated in U.S.
dollar, are considered part of the Company's investments in
the Subsidiaries. Repayment dates have not yet been
determined. For purpose of the adjusted financial statements
(see Note 2A), the capital notes are treated as a
non-monetary item.
-15-
HOGLA-KIMBERLY LTD.
NOTES TO FINANCIAL STATEMENTS
NOTE 9 - INVESTMENTS IN SUBSIDIARIES (cont.)
CONSOLIDATED
---------------------------
DECEMBER 31,
---------------------------
2003 2002
------- -------
NIS IN THOUSANDS
---------------------------
B. GOODWILL:
Cost 41,532 41,532
Less - accumulated amortization 12,459 9,691
------ ------
29,073 31,841
====== ======
C. INVESTMENT IN OVISAN
As of December 31, 2003, the Group's investment in the Turkish
Subsidiary amounted to NIS 66,933 thousand (including goodwill in
the net amount of NIS 29,073 thousand).
D. CONSOLIDATED SUBSIDIARIES
The consolidated financial statements as of December 31, 2003,
include the financial statements of the following Subsidiaries:
OWNERSHIP AND
CONTROL AS OF
DECEMBER 31,
2003
------------
%
Rakefet Marketing and Trade Services Ltd. ("Rakefet") (*) 79.7
Subsidiaries of Rakefet:
Hogla-Kimberly Marketing Ltd. ("Marketing") (**) 99.5
Shikma Ltd. ("Shikma") (**) 99.0
Mollet Marketing Ltd. ("Mollet") 100.0
H-K Overseas (Holland) B.V 100.0
Subsidiaries of H-K Overseas (Holland) B.V.:
Ovisan Sihhi Bez Sanai ve Ticaret Anonim Sirketi ("Ovisan") 100.0
Hogla-Kimberly Holding Anonim Sirketi 100.0
(*) The remaining ownership and control of Rakefet are held by
AIPM group (10.1%) and by KC (10.2%).
(**) The remaining ownership and control of Marketing and Shikma
are held by the Company.
-16-
HOGLA-KIMBERLY LTD.
NOTES TO FINANCIAL STATEMENTS
NOTE 10 - FIXED ASSETS
OFFICE
MACHINERY FURNITURE
LEASEHOLD AND MOTOR AND
CONSOLIDATED BUILDINGS (1) IMPROVEMENTS EQUIPMENT VEHICLES EQUIPMENT TOTAL (2)
------ ----- ------- ------ ------ -------
NIS IN THOUSANDS
COST:
Balance - January 1, 2003 54,619 8,941 367,463 21,168 11,953 464,144
Changes during 2003:
Additions 250 517 19,452 588 1,100 21,907
Dispositions - (190) (2,297) (2,708) (1,112) (6,307)
------ ----- ------- ------ ------ -------
Balance - December 31, 2003 54,869 9,268 384,618 19,048 11,941 479,744
====== ===== ======= ====== ====== =======
ACCUMULATED DEPRECIATION:
Balance - January 1, 2003 14,855 4,771 150,568 14,651 8,583 193,428
Changes during 2003:
Additions 530 514 17,947 2,749 705 22,445
Dispositions - (188) (2,024) (2,417) (1,068) (5,697)
------ ----- ------- ------ ------ -------
Balance - December 31, 2003 15,385 5,097 166,491 14,983 8,220 210,176
====== ===== ======= ====== ====== =======
NET BOOK VALUE:
December 31, 2003 39,484 4,171 218,127 4,065 3,721 269,568
====== ===== ======= ====== ====== =======
December 31, 2002 39,764 4,170 216,895 6,517 3,370 270,716
====== ===== ======= ====== ====== =======
COMPANY
COST:
Balance - January 1, 2003 25,209 5,893 330,217 3,688 3,004 368,011
Changes during 2003:
Additions - 219 14,631 53 201 15,104
Dispositions - - (1,759) (582) - (2,341)
------ ----- ------- ------ ------ -------
Balance - December 31, 2003 25,209 6,112 343,089 3,159 3,205 380,774
====== ===== ======= ====== ====== =======
ACCUMULATED DEPRECIATION:
Balance - January 1, 2003 11,812 3,518 130,439 3,492 2,378 151,639
Changes during 2003:
Additions - 215 14,189 153 232 14,789
Dispositions - - (1,696) (569) - (2,265)
------ ----- ------- ------ ------ -------
Balance - December 31, 2003 11,812 3,733 142,932 3,076 2,610 164,163
====== ===== ======= ====== ====== =======
NET BOOK VALUE:
December 31, 2003 13,397 2,379 200,157 83 595 216,611
====== ===== ======= ====== ====== =======
December 31, 2002 13,397 2,375 199,778 196 626 216,372
====== ===== ======= ====== ====== =======
(1) Buildings include industrial buildings on lands leased by the Company
from AIPM (until 2004).
(2) The major fixed assets of the Group are located in Israel.
-17-
HOGLA-KIMBERLY LTD.
NOTES TO FINANCIAL STATEMENTS
NOTE 11 - TRADE PAYABLES
CONSOLIDATED COMPANY
-------------------- --------------------
DECEMBER 31,
----------------------------------------------
2003 2002 2003 2002
------- ------- ------- ------
NIS IN THOUSANDS NIS IN THOUSANDS
-------------------- --------------------
In Israeli currency
Open accounts 78,509 66,279 34,206 30,159
Related parties 13,682 10,840 114,455 46,310
In foreign currency
Open accounts 37,294 26,509 20,804 15,953
Related parties 10,070 24,001 5,115 3,148
------- ------- ------- ------
139,555 127,629 174,580 95,570
======= ======= ======= ======
NOTE 12 - OTHER PAYABLES AND ACCRUED EXPENSES
CONSOLIDATED COMPANY
--------------- --------------
DECEMBER 31,
--------------------------------
2003 2002 2003 2002
------ ------ ------ ------
NIS IN THOUSANDS NIS IN THOUSANDS
--------------- --------------
Accrued income taxes,
net of advances 8,663 9,042 - 9,817
Accrued payroll and related expenses 20,531 19,925 10,474 11,713
Value Added Tax 4,779 547 - -
Advances from customers 1,085 1,610 32 30
Other 2,574 1,378 139 88
------ ------ ------ ------
37,632 32,502 10,645 21,648
====== ====== ====== ======
NOTE 13 - LONG-TERM BANK LOANS
INTEREST CONSOLIDATED
RATE DECEMBER 31,
------ -------------------
% (*) 2003 2002
------ ------ ------
NIS IN THOUSANDS
-------------------
A. COMPOSITION
In U.S. dollar (**) 1.74 108,858 107,286
In Euro 3.75 2,627 -
Less - current maturities 15,147 24,960
------ ------
96,338 82,326
====== ======
(*) Annual average interest rate as of December 31,
2003
(**) As of December 31, 2003, NIS 38,794 thousand bear
interest based on Libor plus 1.55%.
B. MATURITIES (NIS in thousands)
2004 - current maturities 15,147
2005 26,274
Thereafter - see C below 70,064
-------
111,485
=======
C. Subject to renewal every two years - see Note 7D.
D. Liens - see Note 15C.
-18-
HOGLA-KIMBERLY LTD.
NOTES TO FINANCIAL STATEMENTS
NOTE 14 - SEVERANCE PAY
Obligations of the Group for severance pay to its employees are
covered by current payments to pension and severance funds.
Accumulated amounts in the pension and severance funds are not under
the control or administration of the Group, and accordingly, neither
those amounts nor the corresponding accruals are reflected in the
financial statements.
NOTE 15 - COMMITMENTS AND CONTINGENT LIABILITIES
A. COMMITMENTS
(1) The Group is obligated to pay royalties to a shareholder -
see Note 23B.
(2) The Company and its Subsidiaries lease certain of their
facilities under operating leases for varying periods with
renewal options. Future minimum lease rentals as of December
31, 2003 are as follows:
CONSOLIDATED COMPANY
----------- -------
NIS IN THOUSANDS
---------- -------
2004 13,918 6,477
2005 6,430 -
2006 6,430 -
2007 6,430 -
2008 and thereafter 28,936 -
---------- -------
62,144 6,477
========== =======
B. GUARANTEES
(1) The Company is contingently liable in respect of a guarantee
securing bank loans provided to a Subsidiary, the balance of
which as of December 31, 2003 amounted to NIS 33,280
thousand.
(2) As part of their normal course of business, the Subsidiaries
provided third parties with bank guarantees for contract
performance, the balance of which as of December 31, 2003
amounted to NIS 2,022 thousand.
C. LIENS
As a collateral for long-term loans given to Subsidiaries, the
Group recorded a lien on its bank deposits, in the amount of NIS
77,946 thousand as of December 31, 2003.
D. LEGAL ISSUES
In December 2003, certain customers filed a class action
complaint against the Company, alleging that the Company reduced
the number of items in each certain product packages. The Company
has filed a detailed defense motion, presenting its arguments for
denying the lawsuit from being recognized as a class action. As
of the approval date of the financial statements, court hearings
have not yet begun. Based on the opinion of the Company's legal
counsel for this matter, due to the very preliminary stage of the
proceedings, management is unable, at this stage, to estimate the
possible outcome of the lawsuit. However, based on the legal
counsels, management believes that the Company has valid
arguments to oppose the lawsuit and reasonable basis for denying
it from being recognized as a class action.
-19-
HOGLA-KIMBERLY LTD.
NOTES TO FINANCIAL STATEMENTS
NOTE 16 - SHARE CAPITAL
A. As of December 31, 2003 and 2002, share capital is composed of
ordinary shares of NIS 1.00 par value each. Authorized -
11,000,000 shares; issued and paid up - 8,263,473 shares.
B. Holders of ordinary shares are entitled to participate equally in
the payment of cash dividends and bonus share (stock dividend)
distributions and, in the event of the liquidation of the
Company, in the distribution of assets after satisfaction of
liabilities to creditors. Each ordinary share is entitled to one
vote on all matters to be voted on by shareholders.
NOTE 17 - NET SALES
CONSOLIDATED
---------------------------------------------------
YEAR ENDED DECEMBER 31,
---------------------------------------------------
2003 2002 2001
---- ---- ----
% % %
---- ---- ----
A. SALES TO MAJOR CUSTOMERS
Customer A 8.9 11.1 11.9
Customer B 10.1 11.8 12.0
NIS NIS NIS
---- ---- ----
IN THOUSANDS
---------------------------------------------------
B. SALES FROM COMMERCIAL OPERATIONS 376,974 311,360 319,277
======= ======= =======
C. FOREIGN SALES (PRINCIPALLY TURKEY) 106,935 80,184 84,979
======= ====== ======
NOTE 18 - COST OF SALES
CONSOLIDATED COMPANY
------------------------------------- -------------------------------------
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
------------------------------------- -------------------------------------
2003 2002 2001 2003 2002 2001
------- ------- ------- ------- ------- -------
NIS IN THOUSANDS NIS IN THOUSANDS
------------------------------------- -------------------------------------
Purchases (*) 446,008 425,365 441,782 178,339 122,861 130,930
Salaries and related expenses 67,516 55,999 57,349 56,812 46,389 49,618
Manufacturing expenses 79,810 55,834 51,245 73,281 51,229 47,662
Depreciation 18,221 14,207 12,764 15,309 11,423 10,739
------- ------- ------- ------- ------- -------
611,555 551,405 563,140 323,741 231,902 238,949
Change in finished
goods inventory 9,459 3,358 (3,967) (1,183) 1,194 4,642
------- ------- ------- ------- ------- -------
621,014 554,763 559,173 322,558 233,096 243,591
======= ======= ======= ======= ======= =======
(*) The purchases of the Company are related to manufacturing operations.
Consolidated purchases in excess of Company purchases relate principally to
commercial operations.
-20-
HOGLA-KIMBERLY LTD.
NOTES TO FINANCIAL STATEMENTS
NOTE 19 - SELLING EXPENSES
CONSOLIDATED COMPANY
--------------------------------- -------------------------------
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
--------------------------------- -------------------------------
2003 2002 2001 2003 2002 2001
------- ---------- ---------- ----- ----- -----
NIS IN THOUSANDS NIS IN THOUSANDS
--------------------------------- -------------------------------
Salaries and related expenses 46,887 (*)39,656 (*)43,049 - 16 744
Maintenance and
transportation expenses 26,596 24,332 22,966 5,810 3,868 2,703
Advertising and sales promotion 30,371 38,591 41,337 86 46 168
Commissions to distributors 4,571 2,007 3,644 - 453 629
Royalties to a shareholder 15,642 12,220 12,158 1,500 673 561
Depreciation 3,778 4,188 4,741 142 317 547
Other 2,825 2,961 3,238 - - -
------- ---------- ---------- ----- ----- -----
130,670 (*)123,955 (*)131,133 7,538 5,373 5,352
======= ========== ========== ===== ===== =====
(*) Reclassified
NOTE 20 - GENERAL AND ADMINISTRATIVE EXPENSES
CONSOLIDAD COMPANY
------------------------------ -----------------------------
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
------------------------------ -----------------------------
2003 2002 2001 2003 2002 2001
------ --------- --------- ----- ----- -----
NIS IN THOUSANDS NIS IN THOUSANDS
------------------------------ -----------------------------
Salaries and related expenses 18,283 (*)13,481 (*)15,913 2,567 2,423 2,404
Administrative and computer
services 6,287 6,210 7,380 1,190 1,188 1,636
Services provided by
Shareholder 1,161 1,161 1,180 215 736 818
Office maintenance 5,376 2,990 2,961 207 228 254
Depreciation 718 588 751 2 4 4
Goodwill amortization 2,768 2,768 2,768 - - -
Other 4,453 2,743 2,426 200 789 1,056
------ --------- --------- ----- ----- -----
39,046 (*)29,941 (*)33,379 4,381 5,368 6,172
====== ========= ========= ===== ===== =====
(*) Reclassified.
NOTE 21 - FINANCING INCOME (EXPENSES), NET
CONSOLIDATED COMPANY
--------------------------------- --------------------------------
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
--------------------------------- --------------------------------
2003 2002 2001 2003 2002 2001
----- ------ ------ ----- ------ ------
NIS IN THOUSANDS NIS IN THOUSANDS
--------------------------------- --------------------------------
Long-term loans (2,111) (2,794) (4,821) - - -
===== ====== ====== ===== ====== ======
Exchange rate differences
derived from capital note 2,476 (2,202) (3,015) 2,476 (2,202) (3,015)
===== ====== ====== ===== ====== ======
Long-term and
short-term deposits 1,357 1,804 8,504 486 31 1,445
===== ====== ====== ===== ====== ======
-21-
HOGLA-KIMBERLY LTD.
NOTES TO FINANCIAL STATEMENTS
NOTE 22 - INCOME TAXES
A. The Company and its Israeli Subsidiaries are subject to the Income Tax Law
(Inflationary Adjustments), 1985. Non-Israeli Subsidiaries are subject to
income tax provisions of their home country. The Company is an industrial
company in conformity with the Law for the Encouragement of Industry
(Taxes), 1965. The principal benefit that the Company is entitled to under
this law is accelerated depreciation rates and reduced tax rates.
During 2002, the Company's program for the establishment of a new facility
for manufacturing paper was granted Approved Enterprise status in
accordance with the Law for the Encouragement of Capital Investments, 1959,
under "alternative benefits" track. The approval program is for total
investments of approximately NIS 80 million. According to the terms of the
program, income derived from the Approved Enterprise will be tax-exempt for
a period of 10 years commencing in the year in which the program is
substantially completed. Distribution of dividends from tax exempt profits
of the Approved Enterprise will be subject to income tax at a rate equal to
the income tax rate of the Approved Enterprise had the Company not elected
the alternative benefits track. The Company completed the investments
relating to the new facility and commenced its operations during 2003.
CONSOLIDATED COMPANY
--------------------------------- ---------------------------------
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
--------------------------------- ---------------------------------
2003 2002 2001 2003 2002 2001
------ ------ ------ ------ ------ ------
B. COMPOSITION NIS IN THOUSANDS NIS IN THOUSANDS
--------------------------------- ---------------------------------
Current taxes 10,878 18,904 34,150 - 15,774 26,421
Taxes in
respect of prior years 1,437 (744) (701) 1,358 (744) (551)
Deferred taxes 8,251 1,072 3,028 10,417 1,046 2,508
------ ------ ------ ------ ------ ------
20,566 19,232 36,477 11,775 16,076 28,378
====== ====== ====== ====== ====== ======
-22-
HOGLA-KIMBERLY LTD.
NOTES TO FINANCIAL STATEMENTS
NOTE 22 - INCOME TAXES (cont.)
C. RECONCILIATION OF THE STATUTORY TAX RATE TO THE EFFECTIVE TAX RATE:
CONSOLIDATED COMPANY
---------------------------------- ----------------------------------
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
---------------------------------- ----------------------------------
2003 2002 2001 2003 2002 2001
------ ------ ------ ------ ------ ------
NIS IN THOUSANDS NIS IN THOUSANDS
---------------------------------- ----------------------------------
Income before
income taxes 83,954 44,543 79,609 30,610 37,697 76,693
====== ====== ====== ====== ====== ======
Tax computed by
statutory tax rate (36%) 30,223 16,035 28,659 11,020 13,570 27,609
TAX INCREMENTS
(SAVINGS)DUE TO:
Reduced tax rate (mainly
for approved enterprise( (1,185) (1,397) (2,882) (918) (1,397) (2,882)
Non-deductible expenses 1,874 (*)1,840 (*)2,586 434 248 262
Non-taxable income (65) (*)(2,198) (*)(3,348) - - -
Unrecorded deferred
taxes in connection
with tax loss carry forward - (*)1,074 (*)2,397 - - -
Utilization of prior
years unrecorded
deferred taxes in
connection with tax loss
carry forward (3,471) - - - - -
Unrecorded deferred
taxes in connection
with submitting
consolidated tax
returns - - - 2,053 - -
Differences arising from
basis of measurement (**) (7,629) 3,883 7,449 (1,753) 3,737 2,615
Income taxes for prior years 1,437 (744) (701) 1,358 (744) (551)
Other differences, net (618) 739 2,317 (419) 662 1,325
------ ------ ------ ------ ------ ------
20,566 19,232 36,477 11,775 16,076 28,378
====== ====== ====== ====== ====== ======
(*) Reclassified.
(**) U.S. dollar for financial reporting purposes vis-a-vis the Consumer
Price Index in Israel and the Turkish Lira for tax purposes.
-23-
HOGLA-KIMBERLY LTD.
NOTES TO FINANCIAL STATEMENTS
NOTE 22 - INCOME TAXES (cont.)
D. DEFERRED INCOME TAXES
CONSOLIDATED COMPANY
---------------------------------- ----------------------------------
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
---------------------------------- ----------------------------------
2003 2002 2001 2003 2002 2001
------ ------ ------ ------ ------ ------
NIS IN THOUSANDS NIS IN THOUSANDS
---------------------------------- ----------------------------------
Balance as of
beginning of year 15,659 14,587 11,559 14,552 13,506 10,998
Changes during the year 8,251 1,072 3,028 10,417 1,046 2,508
------ ------ ------ ------ ------ ------
Balance as
of end of year 23,910 15,659 14,587 24,969 14,552 13,506
====== ====== ====== ====== ====== ======
CONSOLIDATED COMPANY
------------------- --------------------
DECEMBER 31,
-----------------------------------------------
2003 2002 2003 2002
------ ------ ------ ------
NIS IN THOUSANDS NIS IN THOUSANDS
------------------- --------------------
DEFERRED TAXES ARE PRESENTED IN THE
BALANCE SHEETS AS FOLLOWS:
Long-term liabilities (in respect of
depreciable assets) 29,428 19,644 26,738 16,592
Other receivables and prepayments
(in respect of temporary
differences) - Note 5 (5,518) (3,985) (1,769) (2,040)
------ ------ ------ ------
23,910 15,659 24,969 14,552
====== ====== ====== ======
Deferred taxes are computed at rates between 32% and 36%.
E. The Company and one of its subsidiaries, are "Industrial Companies" as
defined in the Israeli Law for the Encouragement of Industry (Taxes)-1969.
Based on this Law, the Company and that subsidiary file consolidated tax
returns.
F. The Company and its Israeli Subsidiaries possess final tax assessments
through 2001.
NOTE 23 - RELATED PARTIES AND INTERESTED PARTIES
A. BALANCES WITH RELATED PARTIES
CONSOLIDATED COMPANY
------------------- --------------------
DECEMBER 31,
-----------------------------------------------
2003 2002 2003 2002
------ ------ ------ ------
NIS IN THOUSANDS NIS IN THOUSANDS
------------------- --------------------
Trade receivables (*) 554 1,076 8,354 242
====== ====== ====== ======
Capital note - shareholder 32,770 30,294 32,770 30,294
====== ====== ====== ======
Capital notes - Subsidiaries - - 4,205 4,205
====== ====== ====== ======
Trade payables (*) 23,752 34,841 24,097 15,965
====== ====== ====== ======
(*) Company - excludes Subsidiaries
-24-
HOGLA-KIMBERLY LTD.
NOTES TO FINANCIAL STATEMENTS
NOTE 23 - RELATED PARTIES AND INTERESTED PARTIES (cont.)
B. TRANSACTIONS WITH RELATED PARTIES AND SUBSIDIARIES
CONSOLIDATED COMPANY
--------------------------------- -------------------------------
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
--------------------------------- -------------------------------
2003 2002 2001 2003 2002 2001
------- ------- ------- ------ ------ ------
NIS IN THOUSANDS NIS IN THOUSANDS
--------------------------------- -------------------------------
Sales to related parties 6,103 17,646 23,026 4,169 15,247 21,713
Sales to Subsidiaries - - - 358,767 266,614 302,669
Cost of sales 169,469 224,682 207,087 61,703 63,723 51,671
Royalties 15,642 12,220 12,158 1,500 673 561
Other selling expenses (*) - 2,413 3,578 - 451 630
General and
administrative expenses (*) 8,201 7,380 8,435 1,428 2,167 2,454
Financing income, net (*) 3,314 2,076 2,339 2,526 1,381 1,268
(*) Company - excludes Subsidiaries
(**) The sales to and purchases from related parties
are in the ordinary course of business at market
prices and customary credit terms.
NOTE 24 - DISCLOSURE AND PRESENTATION OF FINANCIAL INSTRUMENTS
A. CREDIT RISK
The revenues of the Group's principal Subsidiaries are derived from two
major customers and a large number of smaller customers. Management
regularly monitors the balance of trade receivables and the financial
statements include an allowance for doubtful accounts based on management's
estimation. Taking the aforementioned into consideration, the exposure to
credit risk from trade receivables is immaterial.
Cash and cash equivalents and long-term deposits (including amounts in
foreign currency) are deposited with major banks in Israel and abroad.
Therefore, it is not expected that such banks will fail to meet their
obligations.
B. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of financial instruments (cash and cash equivalents,
deposits, receivables, trade and other payables) did not materially differ
from their fair value, unless stated otherwise.
-25-
HOGLA-KIMBERLY LTD.
NOTES TO FINANCIAL STATEMENTS
NOTE 25 - RECONCILIATION TO US GAAP
The consolidated financial statements of the Company have been
prepared in accordance with generally accepted accounting principles
applicable in Israel (Israeli GAAP). The following describes the
effects on the Company's financial statements had the Company prepared
its financial statements in accordance with accounting principles
generally accepted in the United States of America (US GAAP).
A. BALANCE SHEETS
According to Israeli GAAP, goodwill is to be amortized over the
expected estimated economic life of the asset acquired, while
according to US GAAP (SFAS 142), commencing January 2002 goodwill
is no longer amortized but rather is reviewed annually (or more
frequently if impairment indicators arise) for impairment.
Following are the corresponding balance-sheet items presented
according to US GAAP with regard to the goodwill associated with
the acquisition of Ovisan (see Note 9B) and the other GAAP
differences outlined in B. below:
As of December 31, 2003
-----------------------------------
AS AS PER
REPORTED ADJUSTMENT US GAAP
-------- ---------- -------
NIS IN THOUSANDS
-----------------------------------
Other assets - Goodwill 29,073 5,536 34,609
Shareholders' equity 412,981 (3,003) 409,978
As of December 31, 2003
-----------------------------------
AS AS PER
REPORTED ADJUSTMENT US GAAP
-------- ---------- -------
NIS IN THOUSANDS
-----------------------------------
Other assets - Goodwill 31,841 2,768 34,609
Shareholders' equity 389,571 13,060 402,631
B. STATEMENTS OF OPERATIONS
CONSOLIDATED AND COMPANY
----------------------------------
YEAR ENDED DECEMBER 31,
----------------------------------
2003 2002 2001
------ ------ ------
NIS IN THOUSANDS
----------------------------------
Net income under Israeli GAAP 56,253 22,712 41,601
Effect of material differences between
Israeli GAAP and US GAAP:
Change in basis of measurement
from adjusted NIS to nominal NIS (5,694) 19,321 19,601
Amortization of goodwill 2,768 2,768 -
Deferred taxes (4,458) (1,016) (483)
------ ------ ------
Net income under US GAAP 48,869 43,785 60,719
====== ====== ======
-26-
HOGLA-KIMBERLY LTD.
NOTES TO FINANCIAL STATEMENTS
NOTE 25 - RECONCILIATION TO US GAAP (cont.)
C. CHANGES IN SHAREHOLDERS' EQUITY IN ACCORDANCE WITH US GAAP
NIS IN THOUSANDS
----------------
Shareholders' equity under US GAAP as of January 1, 2003 402,631
Dividend (36,499)
Translation adjustments (5,023)
Net income for the year under US GAAP 48,869
-------
Shareholders' equity under US GAAP as of December 31, 2003 409,978
=======
NOTE 26 - COMPANY'S FINANCIAL STATEMENTS IN NOMINAL VALUES
A. BALANCE SHEETS
COMPANY
--------------------
DECEMBER 31,
--------------------
2003 2002
------- -------
CURRENT ASSETS NIS IN THOUSANDS
--------------------
Cash and cash equivalents 31,645 11,718
Current maturities of long-term bank deposits 7,882 9,947
Trade receivables 74,668 44,542
Other receivables 6,139 5,085
Inventories 58,539 45,749
------- -------
178,873 117,041
======= =======
LONG-TERM INVESTMENTS
Long-term deposit - 8,527
Capital note from shareholder 32,770 32,770
Investments in Subsidiaries 189,340 159,658
------- -------
222,110 200,955
======= =======
FIXED ASSETS, NET 203,572 200,933
======= =======
604,555 518,929
======= =======
CURRENT LIABILITIES
Short-term bank credit 1,087 -
Trade payables 174,580 103,384
Other payables and accrued expenses 10,645 23,418
------- -------
186,312 126,802
======= =======
SHAREHOLDERS' EQUITY 418,243 392,127
------- -------
604,555 518,929
======= =======
-27-
HOGLA-KIMBERLY LTD.
NOTES TO FINANCIAL STATEMENTS
NOTE 26 - COMPANY'S FINANCIAL STATEMENTS IN NOMINAL VALUES (cont.)
B. STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31,
------------------------------------
2003 2002 2001
------- ------- -------
NIS IN THOUSANDS
------------------------------------
Net sales 387,019 308,566 318,000
Cost of sales 334,764 245,936 229,517
------- ------- -------
GROSS PROFIT 52,255 62,630 88,483
Selling expenses 7,827 6,038 5,151
General and administrative expenses 4,327 5,762 6,035
------- ------- -------
OPERATING PROFIT 40,101 50,830 77,297
Financing income (expenses), net (5,995) 3,676 8,283
Other income, net 255 254 515
------- ------- -------
INCOME BEFORE INCOME TAXES 34,361 54,760 86,095
Income taxes 1,428 16,344 25,154
------- ------- -------
INCOME AFTER INCOME TAXES 32,933 38,416 60,941
Equity in net earnings
of Subsidiaries 29,682 8,881 1,080
------- ------- -------
NET INCOME FOR THE YEAR 62,615 47,297 62,021
======= ======= =======
-28-
HOGLA-KIMBERLY LTD.
NOTES TO FINANCIAL STATEMENTS
NOTE 26 - COMPANY'S FINANCIAL STATEMENTS IN NOMINAL VALUES (cont.)
C. STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
DIVIDEND
DECLARED
AFTER
SHARE CAPITAL RETAINED BALANCE
CAPITAL RESERVES EARNINGS SHEET DATE TOTAL
----- ------- ------- ------ -------
NIS IN THOUSANDS
-------------------------------------------------------------
BALANCE - JANUARY 1, 2001 8,263 132,127 189,116 - 329,506
CHANGES DURING 2001:
Dividend declared (44,160) (44,160)
Net income for the year 62,021 62,021
----- ------- ------- ------ -------
BALANCE - DECEMBER 31, 2001 8,263 132,127 206,977 - 347,367
CHANGES DURING 2002:
Dividend declared after
balance-sheet date (35,528) 35,528 -
Exchange rate differences of prior
year declared dividend (2,537) (2,537)
Net income for the year 47,297 47,297
----- ------- ------- ------ -------
BALANCE - DECEMBER 31, 2002 8,263 132,127 216,209 35,528 392,127
CHANGES DURING 2003:
Dividend paid (35,528) (35,528)
Exchange rate differences of prior
year declared dividend (971) (971)
Net income for the year 62,615 62,615
----- ------- ------- ------ -------
BALANCE - DECEMBER 31, 2003 8,263 132,127 277,853 - 418,243
===== ======= ======= ====== =======
-29-
ERNST & YOUNG Kost Forer Gabbay & Phone: 972-3-6232525
Kasierer Fax:972-3-5622555
3 Aminadav St.
Tel-Aviv 67067, Israel
REPORT OF INDEPENDENT AUDITORS
To the Shareholders of
CARMEL CONTAINER SYSTEMS LTD.
We have audited the accompanying consolidated balance sheets of Carmel
Container Systems Ltd. ("the Company") and its subsidiaries as of December 31,
2002 and 2003, and the related consolidated statements of operations, changes in
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 2003. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits. We did not audit the financial
statements of subsidiaries whose assets included in the consolidation constitute
approximately 10% and 10% of total consolidated assets as of December 31, 2002
and 2003, respectively, and whose revenues included in the consolidation
constitute approximately 29%, 9% and 9% of total consolidated revenues for the
years ended December 31, 2001, 2002 and 2003, respectively. Those financial
statements were audited by other auditors whose reports have been furnished to
us, and our opinion, insofar as it relates to amounts included for those
subsidiaries is based on the report of the other auditors. The financial
statements for the year ended December 31, 2001 of one of the subsidiaries
referred to above whose revenues included in the consolidation constitute
approximately 9% of total consolidated revenues for the years ended December 31,
2001, were audited by Luboshitz Kasierer, a member of Andersen Worldwide, who
issued an unqualified opinion in their report dated January 28, 2002. Andersen
Worldwide has ceased operating as a member of the Securities and Exchange
Commission Practice Section of the American Institute of Certified Public
Accountants.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits and the reports of other auditors provide a reasonable basis for our
opinion.
In our opinion, based on our audit and the reports of other auditors,
the consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of the Company and its
subsidiaries as of December 31, 2002 and 2003, and the consolidated results of
their operations and cash flows for each of the three years in the period ended
December 31, 2003, in conformity with accounting principles generally accepted
in Israel, which differ in certain respects from accounting principles generally
accepted in the United States (see Note 21 to the consolidated financial
statements).
/s/ KOST FORER GABBAY & KASIERER
Tel-Aviv, Israel KOST FORER GABBAY & KASIERER
March 9, 2004 A Member of Ernst & Young Global
Kost Forer Gabbay & Kasierer is a member practice of Ernst & Young Global
ERNST & YOUNG
AUDITORS' REPORT
To the Shareholders of
TMM INTEGRATED RECYCLING INDUSTRIES LTD.
We have audited the balance sheets of TMM Integrated Recycling Industries
Ltd. ("the Company") as of December 31, 2003 and 2002 and the consolidated
balance sheets as of such dates and the related statements of operations,
changes in shareholders' equity, and cash flows - of the Company and
consolidated - for each of the two years in the period ended December 31, 2003
(not presented separately herein). These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits. The financial
statements of the Company and consolidated for the year ended December 31, 2001
were audited by other auditors whose report dated March 4, 2002, expressed an
unqualified opinion on those statements.
We did not audit the financial statements of certain subsidiaries, whose
assets included in consolidation constitute approximately 4% and 8.4% of total
consolidated assets as of December 31, 2003 and 2002, respectively, and whose
revenues included in consolidation constitute approximately 7% and 11% of total
consolidated revenues for each of the years ended on those dates, respectively.
Furthermore, we did not audit the financial statements of an affiliate, the
investment in which on the equity basis of accounting totaled approximately NIS
19,829 thousand as of December 31, 2003 and the Company's share in its losses
totaled approximately NIS 14 thousand for the year then ended. The financial
statements of those companies were audited by other auditors, whose reports have
been furnished to us, and our opinion, insofar as it relates to amounts included
for those companies, is based on the reports of the other auditors.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States) and in Israel, including
those prescribed by the Auditors' Regulations (Auditor's Mode of Performance),
1973. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the reports of other auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audits and the reports of other auditors,
the financial statements referred to above present fairly, in all material
respects, the financial position - of the Company and consolidated - as of
December 31, 2003 and 2002, and the results of operations and cash flows - of
the Company and consolidated - for each of the two years in the period ended
December 31, 2003, in conformity with generally accepted accounting principles
in Israel. Furthermore, in our opinion, the financial statements referred to
above are prepared in accordance with the Securities Regulations (Preparation of
Annual Financial Statements), 1993.
As explained in Note 2a, the financial statements referred to above are
presented in values adjusted for the changes in the general purchasing power of
the Israeli currency, in accordance with pronouncements of the Institute of
Certified Public Accountants in Israel.
/s/ KOST FORER GABBAY & KASIERER
Tel-Aviv, Israel KOST FORER GABBAY & KASIERER
March 3, 2004 A Member of Ernst & Young Global
-1-
ERNST & YOUNG
REPORT OF INDEPENDENT AUDITORS ON RECONCILIATION
OF ISRAELI GAAP TO U.S. GAAP
T.M.M. Integrated Recycling Industries Ltd.
Tel Aviv
We have audited the consolidated financial statements of T.M.M. Integrated
Recycling Industries Ltd. ("the Company") as of December 31, 2003 and 2002, and
for each of the two years in the period ended December 31, 2003, (not presented
separately herein) and have issued our report thereon dated March 3, 2004
(included elsewhere in this Form 20-F). Our audits also included the
Reconciliations of Israeli GAAP to U.S. GAAP for each of the two years in the
period ended December 31, 2003 (not presented separately herein). These
Reconciliations are the responsibility of the Company's management. Our
responsibility is to express an opinion based on our audits. We did not audit
the financial statements of certain subsidiaries, whose assets included in
consolidation constitute approximately 4% and 8.4% of total consolidated assets
as of December 31, 2003 and 2002, respectively, and whose revenues included in
consolidation constitute approximately 7% and 11% of total consolidated revenues
for each of the years ended on those dates, respectively. Furthermore, we did
not audit the financial statements of an affiliate, the investment in which on
the equity basis of accounting totaled approximately NIS 19,829 thousand as of
December 31, 2003 and the Company's share in its losses totaled approximately
NIS 14 thousand for the year then ended. We have been furnished with the reports
of other auditors with respect to the Reconciliations of the aforementioned
subsidiaries and affiliate.
In our opinion, based on our audits and the reports of other auditors, the
Reconciliations referred to above, when considered in relation to the basic
financial statements taken as a whole, present fairly in all material respects
the information set forth therein.
/s/ KOST FORER GABBAY & KASIERER
Tel-Aviv, Israel KOST FORER GABBAY & KASIERER
March 3, 2004 A Member of Ernst & Young Global
-2-
INDEPENDENT AUDITORS' REPORT
To the Shareholders of
T.M.M. Integrated Recycling Industries Ltd.
We have audited the accompanying balance sheets of T.M.M. Integrated Recycling
Industries Ltd. ("the Company") as of December 31, 2001 and 2000 and the
consolidated balance sheets as of those dates, and the statements of operations,
changes in shareholders' equity and cash flows - of the Company and on a
consolidated basis - for each of the years then ended. These financial
statements are the responsibility of the Company's Board of Directors and
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
The Company's financial statements as of December 31, 1999 were audited by other
auditors, whose unqualified report was issued on March 30, 2000.
We did not audit the financial statements of proportionately consolidated
subsidiaries, whose assets included in consolidation constitute 7.3% and 7.5% of
total consolidated assets at December 31, 2001 and 2000, respectively, and whose
revenues included in consolidation constitute 9.2% and 9.6% of total
consolidated revenues for the years then ended respectively. The financial
statements of those companies were audited by other auditors, whose reports have
been furnished to us, and our opinion, insofar as it relates to amounts included
for those companies, is based solely on the reports of the other auditors.
We conducted our audits in accordance with generally accepted auditing standards
in the United States of America and in Israel, including those prescribed by the
Israeli Auditors (Mode of Performance) Regulations, 1973. Those standards
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by the board of
directors and management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, based on our audit and the reports of the other auditors, the
financial statements referred to above present fairly, in all material respects,
the financial position - of the Company and on a consolidated basis as of
December 31, 2001and 2000, and the results of operations, changes in
shareholders' equity and cash flows - of the Company and on a consolidated basis
- for each of the years then ended, in conformity with generally accepted
accounting principles. In addition, in our opinion, these financial statements
are presented in accordance with the Israeli Securities Regulations (Preparation
of Annual Financial Statements), 1993.
As explained in Note 2A, these financial statements have been prepared in values
adjusted to reflect the changes in the general purchasing power of the Israeli
currency, in accordance with pronouncements of the Institute of Certified Public
Accountants in Israel.
/s/ Brightman Almagor & Co.
---------------------------
Brightman Almagor & Co.
Certified Public Accountants
Tel Aviv, March 4, 2002
ERNST & YOUNG
AUDITORS' REPORT
To the Shareholders of
BARTHELEMI HOLDINGS LTD.
We have audited the balance sheets of Barthelemi Holdings Ltd. ("the
Company") as of December 31, 2003 and 2002 and the consolidated balance sheets
as of such dates and the related statements of operations, changes in
shareholders' equity, and cash flows - of the Company and consolidated - for
each of the two years in the period ended December 31, 2003 (not presented
separately herein). These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We did not audit the financial statements of certain subsidiaries, whose
assets included in consolidation constitute approximately 4% and 7.4% of total
consolidated assets as of December 31, 2003 and 2002, respectively, and whose
revenues included in consolidation constitute approximately 7% and 11% of total
consolidated revenues for each of the years ended on those dates, respectively.
Furthermore, we did not audit the financial statements of an affiliate, the
investment in which on the equity basis of accounting totaled approximately NIS
19,829 thousand as of December 31, 2003 and the Company's equity in its losses
totaled approximately NIS 14 thousand for the year then ended. The financial
statements of those companies were audited by other auditors, whose reports have
been furnished to us, and our opinion, insofar as it relates to amounts included
for those companies, is based on the reports of the other auditors.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States) and accordance with generally
accepted accounting standards in Israel, including those prescribed by the
Auditors' Regulations (Auditor's Mode of Performance), 1973. Those standards
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by the management, as
well as evaluating the overall financial statement presentation. We believe that
our audits and the reports of other auditors provide a reasonable basis for our
opinion.
In our opinion, based on our audits and the reports of other auditors,
the financial statements referred to above present fairly, in all material
respects, the financial position - of the Company and consolidated - as of
December 31, 2003 and 2002, and the results of operations, changes in equity and
cash flows - of the Company and consolidated - for each of the two years in the
period ended December 31, 2003, in conformity with accounting principles
generally accepted in Israel which differ in certain respects from those
followed in the United States, as described in Note 23 to the financial
statements.
As explained in Note 2a, the financial statements referred to above are
presented in values adjusted for the changes in the general purchasing power of
the Israeli currency, in accordance with pronouncements of the Institute of
Certified Public Accountants in Israel.
/s/ KOST FORER GABBAY & KASIERER
Tel-Aviv, Israel KOST FORER GABBAY & KASIERER
March 3, 2004 A Member of Ernst & Young Global
BAR-LEV, MERRARI, GEVA & CO. C.P.A (ISR.)
To the shareholders of
EFFEH Landfill Ltd
We have audited the financial statements of EFFEH Landfill Ltd. (hereafter - the
Company): balance sheets as of December 31, 2003 and the related statements of
income, changes in shareholders' equity and cash flows for the year ended
December 31, 2003. These financial statements are the responsibility of the
Company's board of directors and management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States) and in Israel, including those
prescribed by the Israeli Auditors (Mode of Performance) Regulations, 1973.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by the
Company's board of directors and management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, based on our audits, the financial statements referred to above
present fairly, in all material respects, the financial position of the Company
as of December 31, 2003 and the results of operations, the changes in
shareholders' equity and the cash flows of the Company for the year ended
December 31, 2003, in conformity with accounting principles generally accepted
in Israel.
As explained in note 2, the financial statements referred to above are presented
in values adjusted for the change in the general purchasing power of the Israel
currency, in accordance with pronouncements of the Institute of Certified Public
Accountants in Israel.
Accounting principles generally accepted in Israel vary in certain significant
respects from accounting principles generally accepted in the United States of
America. The application of the latter would have no significant affected the
determination of the results of operations for the year ended December 31, 2003.
The above opinion is a mere translation of the Hebrew version of the opinion as
given in the aforementioned date.
/s/ BAR-LEV, MERRARI, GEVA & CO.
BAR-LEV, MERRARI, GEVA & CO.
Certified Public Accountants (Israel) Tel Aviv, February 9, 2004
A MEMBER OF
DFK MUALEM GLEZER INBAR JUNIO & Co
INTERNATIONAL CERTIFIED PUBLIC ACCOUNTANTS (Isr.).
TEL AVIV, 30 Yavets St. P.O.B. 29145 Tel- Aviv, 61291 Tel: 972-3-5100124,
Fax: 5176024 E-mail : cpa@netvision.net.il
--------------------------------------------------------------------------------
To the shareholders of
M.M.M United Landfill Industries (1998) Ltd
We have audited the financial statements of M.M.M United Landfill Industries
(1998) Ltd. (hereafter - the Company): balance sheets as of December 31, 2003
and 2002 and the related statements of income, changes in shareholders' equity
and cash flows for each of the three years in the period ended December 31,
2003. These financial statements are the responsibility of the Company's board
of directors and management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States) and in Israel, including those
prescribed by the Israeli Auditors (Mode of Performance) Regulations, 1973.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by the
Company's board of directors and management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, based on our audits, the financial statements referred to above
present fairly, in all material respects, the financial position of the Company
as of December 31, 2003 and 2002 and the results of operations, the changes in
shareholders' equity and the cash flows of the Company for each of the three
years in the period ended December 31, 2003, in conformity with accounting
principles generally accepted in Israel.
As explained in note 2b, the financial statements referred to above are
presented in values adjusted for the change in the general purchasing power of
the Israel currency, in accordance with pronouncements of the Institute of
Certified Public Accountants in Israel.
Accounting principles generally accepted in Israel vary in certain significant
respects from accounting principles generally accepted in the United States of
America. The application of the latter would have no significant affected the
determination of the results of operations for the three years in the period
ended December 31, 2003.
The above opinion is a mere translation of the Hebrew version of the opinion as
given in the aforementioned date.
/s/ Mualem Glezer Inbar Junio & Co.
Mualem Glezer Inbar Junio & Co.
Certified Public Accountants (Israel) Tel Aviv, January 28, 2004
ANDERSEN
Luboshitz Kasierer
AUDITORS' REPORT TO THE SHAREHOLDERS
OF
HOGLA-KIMBERLY LTD.
We have audited the accompanying balance sheets of HOGLA-KIMBERLY LTD (the
Company) and the consolidated balance sheets of the Company and its subsidiaries
as of December 31, 2001 and 2000, and the related statements of income, changes
in shareholders' equity and cash flows - Company and consolidated - for each of
the three years in the period ended December 31, 2001. These financial
statements are the responsibility of the Company's Board of Directors and
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards
in the United States and in Israel, including those prescribed under the
Auditors' Regulations (Auditor's Mode of Performance), 1973. Those standards
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by the Board of
Directors and management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position - of the Company and on a
consolidated basis - as of December 31, 2001 and 2000, and the results of
operations, changes in shareholders' equity and cash flows - of the Company and
on a consolidated basis - for each of the three years in the period ended
December 31, 2001, in conformity with generally accepted accounting principles
in Israel (as to reconciliation to generally accepted accounting principles in
the United States, see Note 25). Also, in our opinion, the financial statements
referred to above are prepared in conformity with the Securities Regulations
(Preparation of Annual Financial Statements), 1993.
As described in Note 2A, the financial statements referred to above have been
prepared in values adjusted for changes in the general purchasing power of the
Israeli currency as measured by the changes in the exchange rate of the U.S.
dollar in relation to the shekel, in accordance with pronouncements of the
Institute of Certified Public Accountants in Israel.
Without qualifying our opinion, we draw attention to Note 2L(2) to the financial
statements regarding the presentation of a dividend declared subsequent to
balance sheet date.
/s/ Luboshitz Kasierer
-----------------------------------
Luboshitz Kasierer
Certified Public Accountants (Isr.)
Tel-Aviv, March 4, 2002