directors’ report and financial statements 2007 for the ... · yosef katz (chief executive ofﬁ...

AMIAD FILTRATION SYSTEMS Ltd

D.N. Galil Elyon 1, 12335, Israel

Phone: +972-4-690-9500

Fax: +972-4-690-9391

email: [email protected] www.amiad.com

Directors’ Report and Financial Statements 2007For the year ended December 31, 2007

AMIAD FILTRATIONSYSTEMS LTD

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Directors R

eport and Financial Statem

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Amiad R&A 2007 Covers.indd 1Amiad R&A 2007 Covers.indd 1 13/6/08 14:51:0913/6/08 14:51:09

For the year ended December 31, 2007

Amiad Filtration Systems Ltd. Annual Report 2007 3

Financial & Operational Highlights Page 4

Directors, Secretary & Advisors Page 5

Chairman’s Statement Page 6

Chief Executive’s Review Page 7

Chief Financial Offi cer’s Review Page 9

Directors’ Report Page 10

Directors’ Biographies Page 13

Corporate Governance Report Page 15

Independent Auditors Report 0

Consolidated Balance Sheets Page 21

Consolidated Income Statements Page 23

Consolidated Statements of Changes in Shareholders’ Equity Page 24

Consolidated Statements of Cash Flows Page 25

Notes to Consolidated Financial Statements Page 26

Appendix Page 58

Contents

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4 Annual Report 2007 Amiad Filtration Systems Ltd.

Highlights

Financial Highlights

• Turnover rose 29% to US$57.0m (2006: US$44.1m)• Operating income of US$6.3m (2006: US$4.6m) • Profi t before tax of US$5.9m (2006: US$3.7m) • Net Profi t of US$4.8m (2006: US$3.0m)• Cash from operations amounted to US$6.3m (2006: US$3.9m)• Gross margin reduced to 47.4% (2006: 49.9%) as a result of

weak US Dollar and higher raw material prices• Basic and fully diluted earnings per share of 24.1 US cents (2006:

15.0 US cents per share)• Final dividend for 2007 of 4.8 US cents per share (2006: 4.47 US

cents per share), making a total dividend for the year of 7.8 US cents per share (2006: 6.855 US cents per share)

Operational Highlights

• Sales growth in all main territories• Revenues for Europe increased by approximately 50% year-on-

year primarily led by increased penetration into Eastern Europe and Russia

• Sales in North America and Australia increased by approximately 30% and 40%, respectively

• New range of automatic microfi ber fi lters continued to gain traction and increased its contribution to group sales

• Increased demand for products in the irrigation segment due to climate change initiatives and investment in biofuel energy

• Entered fi rst quarter 2008 with a robust order book• Margins continue to be impacted by the weak US Dollar and higher raw materials prices

“The Company has entered 2008 with a backlog substantially higher than at

the corresponding time in 2007. The Company plans to continue increasing its

sales and marketing efforts globally and believes that global investment in

water filtration and treatment systems will continue to grow, driven by the

tightening in environmental and public health standards, as well as rising

demand for clean water. We believe that Amiad is well positioned to benefit

from these trends and to continue to deliver shareholder value.”

Rami Treger, Chief Executive

S nts

Hengyang, China

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Ara, New Zealand




Directors, Secretary & Advisors

Directors

Abraham Heifetz (Non-executive Chairman)

Rami Treger (Chief Executive Offi cer) (appointed as Chief Executive Offi cer on August 1, 2007 and as Director on September 5, 2007)

Itamar Eder (Chief Financial Offi cer)

Michael Rosenberg OBE (Non-executive Director)

Nathalie Schwarz (Non-executive Director)

Izhar Ben-Shlomo (Non-executive Director)

Mordechai Dabi (Non-executive Director) (resigned with effect from September 1, 2007)

Yosef Katz (Chief Executive Offi cer) (resigned as an executive Director and became a Non-executive Director with effect from August 1, 2007; resigned as a Non-executive Director with effect from September 5, 2007)

Ilan Ben-Guigui (Non-executive Director) (appointed on September 5, 2007 - resigned with effect from December 9, 2007)

Dan Falk (Non-executive Director) (appointed on December 12, 2007)

Yosef Rokah (Non-executive Director) (resigned with effect from February 4, 2008)

Following the year end, Tal Yeshua was appointed as Non-executive Director of the Company on 4 February 2008 and took over from Abraham Heifetz as Non-executive Chairman on 15 May 2008.

Company Secretary

Itamar Eder

Registered and Head Offi ce

Amiad Filtration Systems LtdDN Galil Elyon 112335Israel

Nominated Adviser and Broker

Panmure Gordon (UK) LimitedMoorgate Hall155 MoorgateLondonEC2M 6XBUK

Solicitors to the Company as to English Law

Berwin Leighton Paisner LLPAdelaide HouseLondon BridgeLondon, EC4R 9HAUK

Solicitors to the Company as to Israeli Law

Barnea & Co.Amzur House8 Hasadnaot StreetHerzilya Pituach 46728Israel

Auditors and Reporting Accountants

Kesselman & Kesselman (a member of PricewaterhouseCoopers International Limited)Certifi ed Public Accountant (Isr.) Trade Tower, 25 Hamered Street, Tel Aviv 68125 P.O.Box 452, Tel Aviv 61003 Israel

Bankers

Bank Hapoalim Ltd.Branch No. 542Rosh PinaIsrael

United Mizrahi Bank Ltd.Branch No. 487Kiryat ShmonaIsrael

Registrar

Capita IRG (Offshore) LimitedVictoria ChambersLiberation Square1/3 The Esplanade, St. HelierJersey JE4 0FFChannel Islands

Financial Public Relations Advisers

Corfi n Communications Ltd1 Alie Street, LondonE1 8DE UK




Chairman’s Statement

In 2007 the company started to benefi t from the fruits of its considerable investments in marketing, research and development and infrustracture in past years, showing 29% growth in sales year on year and strong and rising stream on orders in all its main territories.

For Amiad, 2007 has been a transformational year. We have made changes to the structure of the organisation within Amiad, primarily strengthening our sales and marketing team with a strong emphasis on business development. We have also continued to maintain a control on costs as to refl ect the changes occurring in the macro-economic climate.

Our CEO of 9 years, Yosef Katz, decided to step down for personal reasons and was replaced by the highly experienced Rami Treger, who brings experience of developing

companies on an international level is already delivering good results for the Company. There is a new culture within Amiad which is more business orientated.

Global investment in water fi ltration and treatment systems has continued to grow in 2007 due to climate change and increasing oil prices. Throughout last year Amiad continued to perform at the heart of clean water initiatives, enjoying growth in all main territories and segments in 2007.

Our vision has always been to help our customers reach their potential with clean water and Amiad understands that the future lies in becoming an end-to-end water treatment solutions company. Consequently, Amiad is constantly looking to expand its range of products and services and is pleased to report that the new range of automatic micro fi ber fi lters continues to gain traction.

Clean water is a limited resource subject to an ever increasing demand. Tightening environmental and public health standards, as well as growing climate change awareness are all factors generating an increased need for water purifi cation and recycling. All these factors will contribute to the growth of the Company. Additionally, the Company will maintain its focus on fi nding the right companies for M&A suitable for Amiad on either geographic or product line expansion.

On behalf of the Board, I would like to express everyone’s gratitude to Avi for the tremendous work he has done and for what Amiad has achieved under his chairmanship. I am pleased to be taking over from him as the Company enters a new phase in its development when global investment in water fi ltration and treatment systems continues to grow. I would also like to take this opportunity to thank the management, employees and all those involved and associated with Amiad for the tremendous support we have received during 2007.

Tal YeshuaChairmanJune 11, 2008

Ein Gev, Israel

ChairmanTal Yeshua

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Bulmers, UK

2007 Overview

I am pleased to report that, for Amiad, 2007 was a highly active and profi table year, enjoying positive progression and growth across all main territories. Revenues for the full year rose 29% to $57.0m compared to $44.1m in 2006, refl ecting Amiad’s increasing

penetration of the water fi ltration market globally.

Revenues for Europe increased by approximately 50% year-on-year primarily led by increased penetration into Eastern Europe and Russia and an increased demand for Amiad’s technologies in all product lines. For the City of Ramenskoe, the Company was involved in a project to remove iron from water to produce potable water. Three more projects in Russia ensued. In the industrial sector, we also received orders for the fi rst time in Kazakhstan and Ukraine to provide fi ltered water for use in the

steel industry. Earlier in the year, Amiad entered into a contract with H.P. Bulmer, the UK cider producing company, to install water fi lters at their production facility.

Sales in North America and Australia increased by approximately 30% and 40%, respectively, due to profi table water treatment projects. These projects resulted from severe drought and lack of clean water in Australia and an increasing demand for irrigation products due to climate change awareness and demand for biofuel energy in North America. The Company installed a fi ltration system in Bonita Bay, an industrial application for river use in the cooling process of a power generating station in Oklahoma and technology to produce potable water at a central hospital in Virginia.

Sales into East Asia grew by approximately 5% in 2007 year-on-year. However, in the second half of 2007, the Company achieved growth of approximately 25% compared with the second half of 2006 and growth of approximately 35% compared with the fi rst half of 2007, led by supply of fi lters to the oil and gas industry.

The Company saw growth in all its product lines, including in the new range of micro-fi bre fi lters, primarily as a result of projects in Russia, Ireland and Australia. Additionally, Amiad has seen a signifi cant interest in its fi lters for the pre-fi ltration of membrane systems, including for desalination projects. One of these systems was used to convert sea water into potable water at the Davis Research Station in Antarctica.

Also, the irrigation segment saw good growth in 2007 in all the main territories as Amiad’s products were used to counteract natural events, such as droughts, and the increased planting of crops, such as corn, sugar cane and soya beans, in response to the growing demand for alternative fuel sources.

Chief Executive Offi cerRami Treger

2007

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Chief Executive Offi cer

Chief Executive’s Review

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Chief Executive’s Review

Strategy

I have been at Amiad since July 2007. I was honoured to be asked to take over from Yosef Katz as CEO and am enthused about becoming part of this dynamic and thriving business. It is an exciting challenge for me and I will be using my international experience to take the Company forward.

Since joining, I have been focusing on the structure of the Company and the strengthening of the team wherever necessary. One fundamental change I made early on was to bring the function of business development under my direct supervision. It was felt that this was the best way to build the business internationally. Amiad operates in a huge and growing market and we are focused on building the Company and increasing our target markets. We intend to achieve this by:

• organic growth through broadening our customer base, applications and technology;

• increasing our production capacity and marketing efforts;

• focusing on R&D to produce next generation fi lters and staying ahead of the competition; and

• wherever we believe growth cannot be achieved organically, we will look to identify bolt-on acquisitions to add new technologies or penetrate new territories.

I look forward to reporting on our progress in 2008.

Outlook

The Company has entered 2008 with a backlog substantially higher than it did at the corresponding time in 2007. The Company plans to continue increasing its sales and marketing efforts globally and believes that global investment in water fi ltration and treatment systems will continue to grow, driven by the tightening in environmental and public health standards, as well as rising demand for clean water. Although margins continue to be impacted by the weak US Dollar and higher raw materials prices, the Company’s management believes that Amiad is well-positioned to benefi t from these trends and to continue to deliver shareholder value.

Rami TregerChief Executive Offi cerJune 11, 2008

Bafra, Cyprus

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Financial review

In 2007, the Company increased its revenues by 29% to US$57.0m (2006: US$44.1m). Profi t before tax was US$5.9m (2006: US$3.7m) and net profi t was US$4.8m (2006: US$3.0m). Basic and fully diluted earnings per share were 24.1 US cents per share (2006: 15.0 US cents per share).

In 2007, the gross margin was 47.4% (2006: 49.9%). As previously stated, the continued rise in raw material costs and the increasing weakness of the US Dollar are putting pressures on margins and profi ts.

In 2007, operating income was US$6.3m (2006: $4.6m) refl ecting the increased investment in sales and marketing.

Net cash and cash equivalents balance as of December 31, 2007 amounted to US$6.2m (2006: US$ 6.1m). Cash from operations for the full year improved to $6.3m, compared with US$3.9m in 2006.

Dividend

The Directors recommended a fi nal dividend for 2007 of 4.8 US cents per share (2006: 4.47 US cents per share) with an ex-dividend date of April 23, 2008, a record date of April 25, 2008 and a payment date of May 23, 2008.

This is in addition to the interim dividend of 3.0 US cents per share (2006: 2.385 US cents per share), making a total dividend for the year of 7.8 US cents per share (2006: 6.855 US cents per share).

Itamar EderChief Financial Offi cerJune 11, 2008

Chief Financial Offi cer’s Review

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Directors’ Report

The Directors have pleasure in presenting their report together with the audited accounts of the Company and its subsidiaries for the year ended December 31, 2007.

1. Principal activities

The Company was incorporated in Israel in June 1997. On December 5, 2005, the Company’s shares were admitted to trading on AIM, a market operated by the London Stock Exchange.

The Company is a producer and global supplier of water fi lters and fi ltration systems used in two key markets, namely the industrial and municipal market and the irrigation market.

The Company specialises in automatic self-cleaning fi lters that require low maintenance and that can be adapted to provide bespoke solutions to a wide range of applications in industries, in addition to a wide variety of other applications in the irrigation market.

2. Financial

A fi nancial review of the results for the year 2007 is set out on page 9 and the full fi nancial statements are from page 20 onwards.

3. Dividend

The Directors approved a fi nal dividend payment for the year 2007 of approximately 4.8 cents (USD) per share payable on May 23, 2008 to shareholders on the register on April 25, 2008.

4. Review of business and future prospects

The Company’s results for the period ended December 31, 2007 and the fi nancial position as at December 31, 2007 are considered satisfactory by the Directors. A review of the Company’s activities during this period and a review of future prospects are contained in the Chairman’s and Chief Executive’s reports set out on pages 6 and 7 respectively.

5. Share capital

Details of issued share capital and movements during the year 2007 are set out on page 47.

6. Research and development

As at December 31, 2007 the Company employed 25 people worldwide in research and development and engineering. It currently intends to invest 2 to 3 per cent. of sales in R&D on an ongoing basis.

7. Directors

The following Directors held offi ce at the end of the year:Abraham Heifetz Appointed February 2005 Michael Rosenberg Appointed November 2005Rami Treger Appointed September 2007 Nathalie Schwarz Appointed November 2005Itamar Eder Appointed November 2005 Izhar Ben-Shlomo Appointed July 2006Yosef Rokah Appointed April 2003 Dan Falk Appointed December 2007

Biographical details are set out on pages 13 – 14.





Directors’ Report

8. Directors’ Interests

As of December 31, 2007Director Number of Ordinary Number of Ordinary Percentage of issued

Shares Shares under option share capital on a fully

diluted basis

Abraham Heifetz 11,000 145,293 0.80Rami Treger Nil 54,722 0.28Itamar Eder Nil 72,961 0.37Michael Rosenberg Nil Nil NilNathalie Schwarz Nil Nil NilIzhar Ben-Shlomo1 10,166,571 Nil 52.16Yosef Rokah2 10,167,571 18,239 52.16Dan Falk Nil Nil Nil

1 Out of the 10,166,571 ordinary shares which Dr Ben-Shlomo was interested in, 4,000 were registered in his own name, 220,000 were registered in the name of A.M. SI Holdings (1997) Ltd (“AMS”) and 9,942,571 were registered in the name of Poalim Trust Services Ltd, which held 9,932,371 ordinary shares on trust for AMS and 10,200 ordinary shares on trust for Kibbutz Amiad Agricultural Cooperative Association (“Kibbutz Amiad”). Dr Ben-Shlomo is a member of the board of directors of Kibbutz Amiad.

2 Out of the 10,167,571 Ordinary Shares in which Mr Rokah is interested: ● 4,000 were registered in his own name; ● 1,000 were registered in the name of Joseph Rokah Livui Venihul Ltd, a company fully controlled by Mr. Rokah; ● 220,000 were registered in the name of AMS, a company fully controlled by Kibbutz Amiad ; and ● 9,942,571 were registered in the name of Poalim Trust Services Ltd, which held 9,932,371 Ordinary Shares on trust for AMS and 10,200

Ordinary Shares on trust for Kibbutz Amiad. Mr Rokah was the chairman of the board of directors of Kibbutz Amiad.

9. Directors’ remuneration

Name Salary/Fee benefi ts Pension contribution Total

(in US$) (in US$) (in US$)

For the year ended For the year ended For the year ended 2007 2006 2007 2006 2007 2006

Abraham Heifetz 52,800 48,000 Nil Nil 52,800 48,000Yosef Katz* 181,518 146,045 24,200 29,527 205,718 175,572Itamar Eder** 114,627 88,089 24,798 22,264 139,425 110,353Yosef Rokah 36,018 33,119 Nil Nil 36,018 33,119Mordechai Dabi* 24,012 33,119 Nil Nil 24,012 33,119Michael Rosenberg 36,018 33,119 Nil Nil 36,018 33,119Nathalie Schwarz 36,018 33,119 Nil Nil 36,018 33,119Izhar Ben-Shlomo 36,018 13,800 Nil Nil 36,018 13,800Rami Treger** 76,678 Nil 14,217 Nil 90,895 NilIlan Ben-Guigui*** 9,375 Nil Nil Nil 9,375 NilDan Falk 1,875 Nil Nil Nil 1,875 Nil

* Mr Katz and Mr Dabi ceased to serve as directors in September 2007.** Mr Treger and Mr Eder are each provided with a company car.*** Mr Ben-Guigui resigned with effect from December 9, 2007.

10. Health, safety and environmental policy

The Company recognises its legal responsibilities to ensure the well-being, safety and welfare of its employees and to maintain a safe environment for visitors and contractors. The Company has a health and safety policy which is available to all employees. The Company’s policy is to behave in an environmentally responsible manner, consistent with local legislation and protocols.




Directors’ Report

11. Substantial shareholders

As at December 31, 2007, the Company had been notifi ed of the following interests in 3 per cent or more of the issued ordinary share capital of the Company:

Name Number of shares % of issued ordinary share capital

Kibbutz Amiad Agricultural Cooperative Association 10,162,571 53.85Atorka Group 3,161,942 16.75Impax Assets Management 998,400 5.29AXA Framlington Investment Managers 827,300 4.38

12. Creditor payment policy and practice

The Company’s policy is that payments to suppliers are made in accordance with the terms and conditions agreed between the Company and its suppliers, provided that all trading terms and conditions have been complied with.

13. Going concern

The Directors have reviewed the latest forecast results and cash fl ow projections of the Company. The Directors have a reasonable expectation that the Company has adequate resources to continue in operational existence for the foreseeable future. The fi nancial statements have therefore been prepared on a going concern basis.

14. Directors’ responsibilities

The Israeli Companies Law, 1999 (the “Israeli Act”) requires the Directors to prepare fi nancial statements for each fi nancial year which give a true and fair view of the state of affairs of the Company as at the end of the relevant fi nancial year pursuant to applicable accounting standards.

15. Auditors

The Directors, after receiving the view of the Company’s Audit Committee, have decided to put to the Annual General Meeting a resolution to renew the appointment of Kesselman & Kesselman, a member of PricewaterhouseCoopers International Limited, as the Company’s auditors for the fi nancial year ending December 31, 2008.

By order of the BoardJune 11, 2008

Tal YeshuaChairman

Rami TregerChief Executive Offi cer




Tal Yeshua

Non-executive Chairman

Mr Yeshua joined the Board in February 2008 after being appointed chairman of Kibbutz Amiad in November 2007. He subsequently took over from Mr Heifetz as Non-executive Chairman of the Company on May 15, 2008. He is currently the chairman of Termokir Industries (1980) Ltd., Liam-Tnuvot Ltd., which is controlled by Mr. Yeshua, and of the appointed committee of Kibbutz Horshim in Israel. He was previously a chairman of Asiv Textile Industries Ltd., a director of Agrical Habonim Industries Ltd., Arad Technologies Ltd., S.H.R. Ltd., Mifne Ltd., Kibbutz Tel Katzir, Kibbutz Eilon, Kibbutz Hefetz Haim, Kibbutz

Habonim, Kibbutz Ramot Menashe, Kibbutz Givat Oz and Kibbutz Ratanim. Mr Yeshua has a Certifi cate in Business Management from the Negev College, Israel and a Degree in Practical Computer Engineering from the Ruppin Academic Centre, also in Israel.

Rami Treger

Chief Executive Offi cer

Mr Treger joined the Company on August 1, 2007 as its CEO and was appointed to the Board on September 5, 2007. Prior to joining Amiad, Mr Treger established, together with Sano Bruno’s Ltd., the chemicals import and distribution company – Sano Intertrans Ltd. and he is currently a partner and a director of that company. Mr Treger was also CEO of Zohar Dalia, an Israeli industrial company in the chemical and detergent business, and CEO of Sasa-Tech, a manufacturer of cleansing material and protective substances. Mr Treger holds an MBA in business administration and a BA in economics from the Hebrew University of Jerusalem, Israel.

Itamar Eder,

Chief Financial Offi cer

Mr Eder joined the Company as chief fi nancial offi cer in October 2004 and was appointed to the Board in November 2005. Mr Eder has sixteen years of experience in fi nance and operations including his position as chief fi nancial offi cer of Intelligent Information Systems Ltd., a NASDAQ quoted Israeli company, and Surf Communications Solutions Ltd., where he led a private $24 million private fundraising. Mr Eder holds an MBA from the Hebrew University of Jerusalem, Israel and a BA in economics and management from Ruppin Academic Center, also in Israel.

Abraham Heifetz

Non-executive Director

Mr Heifetz was appointed Non-executive Chairman of the Company in February 2005 and stepped down from his position on May 15, 2008. Mr Heifetz will cease to be a Non-executive Director of the Company on August 31, 2008. Prior to joining Amiad, he held key positions in several Israeli banking, industrial and governmental companies including Paz Oil Company Ltd. and the Union Bank of Israel. He has over 40 years of experience in managing companies and was managing director of Israel’s Ministry of Economic & Planning. Mr Heifetz holds an MBA from Tel Aviv University, Israel and a BA in economics from Bar-Ilan University, also in Israel.

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Directors’ Biographies




Michael Rosenberg OBE


Mr Rosenberg joined the Board in November 2005. Mr. Rosenberg spent the fi rst 17 years of his career with the merchant bank Samuel Montagu & Co Ltd and became director of corporate finance in 1972. In 1974 he left to join Allied Investments Ltd., a UK supplier of hospital management services in the Middle East and developing countries. In 1988, he was appointed a director of Raphael Zorn Hemsley Holdings Ltd (now Numis Corporation plc) and subsequently became chairman with specific responsibility for corporate finance. He left in 1999 to pursue private interests and is currently on the board of a number of listed and private companies including Pilat Media Global Plc(chairman), Catalyst Media Group Plc and Dori Media

Group Ltd. He is also director of the David Paradine Group of companies founded by Sir David Frost and was a co-founder of TV-AM, the first commercial breakfast TV channel in the UK. He served for ten years as a member of the China Britain Business Council and was chairman of the Hong Kong Advisory Committee of the UK Department of Trade and Industry.

Dan Falk


Mr Falk was appointed as a Non-executive Director on December 12, 2007. From 2001 to 2007, Mr Falk was a business consultant to several public and private companies. From 1999 to 2000, Mr Falk was Chief Operating Offi cer and Chief Executive Offi cer of Sapiens International Corporation N.V., a NASDAQ publicly traded company. From 1995 to 1999, Mr Falk was Executive Vice President of Orbotech Ltd. From 1985 to 1995, Mr Falk was Vice President of Finance and Chief Financial Offi cer of Orbot Systems Ltd. and of Orbotech Ltd. Mr Falk serves on the board of directors of Orbotech Ltd., Nice Systems Ltd., Ormat Technologies, Inc., Nova Measuring Systems Ltd., ClickSoftware Technologies Ltd., Attunity

Ltd., Jacada Ltd., Orad Hi-Tec Systems Ltd., Dmatek Ltd., Advanced Technology Ltd. and Plastopil Hazorea Company Ltd. He is also a director of the following private companies: Poalim Ventures 1 Ltd, Tasiot Gazit, VCortex Ltd. and Dan Falk Management Ltd. Mr Falk obtained a Master of Business Administration from the Hebrew University of Jerusalem in 1972 and a Bachelor of Arts in Economics and Political Science also from the Hebrew University of Jerusalem, Israel, in 1968.

Nathalie Schwarz


Ms Schwarz joined the Board in November 2005. Ms Schwarz qualified as a lawyer in 1995 at the global law firm Clifford Chance where she specialized in corporate finance, international mergers and acquisitions, corporate structuring and private equity. In 1998, Ms Schwarz joined Capital Radio Plc initially as Company Secretary and General Counsel. She was subsequently appointed to the Board as Group Strategy and Development Director. In 2005, Ms Schwarz joined Channel 4 Television Corporation to lead its entry into the UK radio market. In 2008, Ms Schwarz was promoted to the Channel 4 Board as New Business and Corporate Development Director to lead its development across all platforms (television, mobile, broadband and radio) and manage new business ventures.

Directors’ Biographies


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Dr Izhar Ben-Shlomo


Dr Ben-Shlomo has served as a Fulbright research fellow at the University of Maryland in Baltimore and as a visiting professor of Stanford University under the Feldman Foundation programme. Dr Ben-Shlomo has been as a Director of Kibbutz Amiad since 2003 and previously served as a Director of the Company between 2004 – 2005.




Corporate Governance Report

As the Company’s shares are traded on AIM, the Company is not required to comply with the Combined Code on Corporate Governance published by the Financial Reporting Council (the “Combined Code”). However, as stated in the Company’s AIM Admission Document, the directors recognise the importance of sound corporate governance and intend that the Company will comply with the main provisions of the Combined Code and the Guidelines for AIM companies issued by the Quoted Companies Alliance insofar as they are appropriate given the Company’s size and stage of development and insofar as is permitted by the Israeli Companies Law, 1999 (the “Israeli Act”). Accordingly, a statement of how the Combined Code has been applied by the Company and how it is intended it will continue to be applied is given below.

The Company also intends to comply with the applicable corporate governance requirements under Israeli law. Further details are set out below.

1. Board composition, roles and independence

During the course of 2007, the Company maintained a balanced board of directors (the “Board”) comprising two executive directors and between fi ve and seven non-executive directors.

Yosef Katz (Chief Executive Offi cer) was replaced by Rami Treger from August 1, 2007. The second executive director of the Company is Itamar Eder (Chief Financial Offi cer).

The non-executive directors of the Company during the year were:

– Abraham Heifetz (Chairman)

– Izhar Ben-Shlomo

– Nathalie Schwartz

– Michael Rosenberg

– Yosef Rokah (resigned with effect from February 4, 2008)

– Mordechai Dabi (resigned with effect from September 1, 2007)

– Yosef Katz (resigned as an executive Director and became a Non-executive Director with effect from August 1, 2007; resigned as a Non-executive Director with effect from September 5, 2007)

– Ilan Ben-Gigi (appointed on September 5, 2007 and resigned with effect from December 9, 2007)

– Dan Falk (appointed on December 12, 2007)

Following the year end, Yosef Rokah resigned as a Non-executive Director with effect from February 4, 2008 and Abraham Heifetz stepped down from his position as Chairman of the Board with effect from May 15, 2008. Mr Heifetz was succeeded as Chairman of the Board on the same date by Tal Yeshua, who had been appointed as a Non-executive Director with effect from February 4, 2008.

Ms Schwarz, Mr Rosenberg and Mr Falk are considered by the Board to be independent. The Senior Independent Non-executive Director is Mr Dan Falk.

The Board is responsible for formulating, reviewing and approving the Company’s strategy, budgets and corporate actions.




The roles of Chairman and Chief Executive Offi cer have been separated and clearly defi ned. The principal differentiating factors in their respective responsibilities are:

ChairmanReports to the BoardOnly the Chief Executive Offi cer reports to himResponsible for running the Board

Chief Executive Offi cerReports to the ChairmanAll executive management report to him, directly or indirectlyResponsible for running the businessResponsible for implementing the Board’s decisions

The Combined Code recommends that the board of directors of a listed company should include a balance of executive and non-executive directors (and, in particular, independent non-executive directors) such that no individual or small group of individuals can dominate the board’s decision taking. The Combined Code states that the board should determine whether a director is independent in character and judgement and whether there are relationships or circumstances which are likely to affect, or could appear to affect, the director’s judgement. The Board has considered the independence of its non-executive directors in line with the principles of the Combined Code (section A.3.1) and, following careful consideration, assessed that, in the period between January 1, 2007 to September 1, 2007 two of the Company’s directors were non-executive directors considered by the Board to be independent and in the period between September 5, 2007 to December 31, 2007 three of the Company’s directors were non-executive directors considered by the Board to be independent. Although the Combined Code also states that the chairman of the board should, on appointment, meet the independence criteria set out in the Combined Code, neither Mr Heifetz nor Mr Yeshua are considered by the Board to be independent.

2. Board conduct

The Company intends to hold board meetings at least four times each fi nancial year and at other times as and when necessary.

There were 14 Board meetings in 2007, held on January 31, March 1, March 25, April 12, April 19, May 16, May 30, July 11, July 27, August 29, November 7, December 12, December 21 and December 28. Izhar Ben-Shlomo was absent from the meetings which took place on March 1, April 19, July 11 and November 7. Joseph Rokah (who stepped down from his position as Non-executive Director on February 4, 2008) was absent from the meetings which took place on January 31, April 19, November 7, December 12, December 21 and December 28. Nathalie Schwarz was absent from the meeting which took place on November 7.

In 2007, the Board dedicated 2 days for meetings with senior management and to discuss strategy. This process is to give the non-executive directors a thorough understanding of the strategy of the Company as well as allowing them to impart their relevant experience.

At each Board meeting, there is a formal schedule of matters reserved for the Board’s attention.





Board packs containing relevant fi nancial and non-fi nancial information are supplied to directors in advance of each Board/committee meeting. Additional requests for information from directors are met and directors are entitled to table agenda items at Board meetings.

The appointment and removal of the Company secretary is a matter for the Board as a whole.

The non-executive directors’ terms of appointment entitle them to take independent professional advice as required, at the Company’s expense.

3. Retirement and re-election

Other than those directors who are “external directors” for the purpose of the Israeli Act and whose appointment must be made in accordance with the provisions of the Israeli Act, directors are, under the Company’s articles of association, required to stand for re-election at each Annual General Meeting.

Each of the directors (other than the external directors) will seek re-election at the forthcoming Annual General Meeting of the Company. The Board considers that the performance of each of these directors has, since their appointment, been effective and that they have demonstrated commitment to their roles. Accordingly, the Board recommends the re-election of each of the directors (other than the external directors) at the forthcoming Annual General Meeting.

4. Relations with shareholders

The Chief Financial Offi cer meets with institutional shareholders and analysts. Non-executive directors are also available for such meetings, subject to institutional shareholder requests.

Press releases were issued throughout the year and the Company maintained a website (www.amiad.com) during that period. Additionally, this annual report, which is sent to all registered shareholders and holders of depositary interests, contains extensive information about the Company’s activities. Enquiries from individual shareholders on matters relating to their shareholdings and the business of the Company are welcomed.

The Annual General Meeting is a key forum for communication with shareholders. The notice of meeting and annual report and accounts will be sent out at least 20 working days before the meeting. Shareholders are encouraged to attend the Annual General Meeting to discuss the progress of the Company.

As was the case with the Company’s 2007 Annual General Meeting, separate votes will be held for each proposed resolution at this year’s Annual General Meeting and a proxy count will be given in each case.

5. Internal control

The Board has overall responsibility for the Company’s internal control and effectiveness in safeguarding the assets of the Company. Internal control systems are designed to refl ect the particular type of business and operations risks and to identify and manage risks, but not entirely all risks to which the business is exposed. As a result internal controls can only provide a reasonable, but not absolute, assurance against material misstatements or loss.

The processes used by the Board to review the effectiveness of the internal controls are through the audit committee, and the executive management reporting to the Board on a regular basis where business plans, budgets and authorisation limits for the approval of signifi cant expenditure, including investments, are appraised and agreed.




The Board also seeks to ensure that there is a proper organisational and management structure across the Company with clear responsibilities and accountability. The Board is also at liberty to engage independent professional advice on risk assessment matters.

6. Audit Committee

Under the Israeli Act, the board of directors of a public company must appoint an audit committee from among its members, which must include at least three directors. The number of members of the audit committee must be no fewer than three directors, including the two “external directors” which every Israeli public company is required to have. The Company has established an audit committee of the Board. In the period between January 1, 2007 and September 1, 2007, the committee comprised Mordechai Dabi, Nathalie Schwartz and Michael Rosenberg with formally delegated duties and responsibilities. In the period between September 5, 2007 and December 9, 2007, the committee comprised Ilan Ben-Guigui, Nathalie Schwartz and Michael Rosenberg. In the period between December 12, 2007 and December 31, 2007, the committee comprised Dan Falk, Nathalie Schwartz and Michael Rosenberg.

The audit committee has primary responsibility for monitoring the quality of internal controls and ensuring that the fi nancial performance of the Company is properly measured and reported on. It receives and reviews reports from the Company’s management and auditors relating to the interim and annual accounts and the accounting and internal control systems in use throughout the Company. The audit committee adheres to detailed terms of reference, which are available for inspection upon request. The audit committee is given unrestricted access to the Company’s auditors. Under the Israeli Act, the audit committee’s role also includes the review and approval of certain related party transactions and the remuneration of directors.

There were eight meetings of the audit committee in 2007, held on January 31, March 25, May 16, July 11, July 27, August 29, December 21 and December 28. All of the relevant committee members attended these meetings.

Pursuant to the provisions of the Israeli Act, the functions of the remuneration and nomination committees are carried out by the audit committee and, therefore, the Company does not have separate remuneration and nomination committees as provided for by the Combined Code. However, the functions of typical remuneration and nomination committees established pursuant to the provisions of the Combined Code are, insofar as is possible under the Israeli Act, carried out by the audit committee of the Board.

7. Internal Audit

Under the Israeli Act, the board of directors of a public company must appoint an internal auditor proposed by the audit committee. The role of the internal auditor is to examine whether such public company’s actions comply with the law, integrity and orderly business procedure. The internal auditor must not be an interested party or offi ce holder, or a relative of any interested party or offi ce holder, or a member or representative of the Company’s external auditors. The Israeli Act defi nes the term ‘‘interested party’’ for such purposes so as to include a person who holds fi ve per cent or more of the Company’s outstanding share capital or voting rights, a person who has the right to appoint one or more directors or the general manager or any person who serves as a director or as the general manager.

The Company’s internal auditor is a certifi ed accountant, nominated by the audit committee and approved by the Board. The internal auditor is invited to attend every meeting of the audit committee.





8. Share Dealings

The Company adopted, with effect from admission to AIM, a model code for directors and employee share dealings which, taking account of the fact that the Company is incorporated in Israel, is appropriate for a company whose securities are traded on AIM and is in accordance with Rule 21 of the AIM Rules for Companies.

9. External Directors

The Israeli Act requires public companies to elect at least two members who qualify as “external directors” under the Israeli Act. At least one of the external directors must have a “fi nancial and accounting speciality” and the other external director must have a “professional qualifi cation”. The conditions and criteria for a director qualifying as having a fi nancial and accounting speciality or a professional qualifi cation (as the case may be) are set out in regulations which have been adopted under the Israeli Act. The evaluation of the external directors’ expertise is being carried out by the Board.

Each external director must meet certain standards of independence at time of his or her appointment and during the two year period prior to such appointment. Pursuant to such standards, an external director must not have, at a time of his or her appointment and during a period of two years prior to his or her appointment, any affi liation with the Company, its controlling persons or any entity which was controlled by the Company or any of its controlling persons at the time of his or her appointment or at any time during the two year period immediately prior to his or her appointment. Affi liation includes employment relationships, business and professional relationships on a regular basis, control relationships and service as an offi ce holder. The term “affi liation” does not include an affi liation resulting form such person being appointed to serve as a director of the Company during a period that the Company’s shares are about to be offered for the fi rst time to the public. In addition, a person may not be appointed as an external director if his/her other activities or position create or are likely to create a confl ict of interest with his/her service as a director.

On 2 March 2006, Michael Rosenberg and Nathalie Schwarz were elected to serve as the Company’s external directors at a specially convened extraordinary general meeting.

By order of the BoardJune 11, 2008

Tal YeshuaChairman

Rami TregerChief Executive Offi cer




Independent Auditor’s Report

To the shareholders of

AMIAD FILTRATION SYSTEMS LTD.

We have audited the accompanying consolidated balance sheets of Amiad Filtration Systems Ltd. (hereafter - the

Company) and its subsidiaries (together, the Group) as of 31 December 2007 and 2006, and the related consolidated

income statements, statements of changes in equity and statements of cash fl ows for each of the years ended on

those dates. These fi nancial statements are the responsibility of the Company’s board of directors and management.

Our responsibility is to express an opinion on these fi nancial 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. Those standards require that we plan

and perform the audit to obtain reasonable assurance about whether the fi nancial statements are free of material

misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in

the fi nancial statements. An audit also includes assessing the accounting principles used and signifi cant estimates

made by the Company’s board of directors and management, as well as evaluating the overall fi nancial statement

presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion the consolidated fi nancial statements referred to above present fairly, in all material respects, the

fi nancial position of the Group as of 31 December 2007 and 2006, and the results of operations, changes in equity

and cash fl ows for each of the years ended on those dates, in accordance with International Financial Reporting

Standards.

Tel-Aviv, Israel

March 25, 2008


Consolidated Balance Sheets



31 DecemberNote 2007 2006

$ in thousandsAssets

CURRENT ASSETS: Cash and cash equivalents 20a 4,060 4,217Financial assets at fair value through profit or loss 20d 2,112 1,869 Accounts receivable and accruals: 20b

Trade 17,858 16,871 Other 1,126 1,009

Inventories 7 15,955 10,470 Current income tax assets 1,695 431

Total current assets 42,806 34,867

NON-CURRENT ASSETS:Loan to a related party 9 703 685Severance pay fund 15 196Long-term receivables 10 158 105Property and equipment 5 3,051 *2,617Intangible assets 6 3,815 *2,759Deferred income tax assets 19f 1,409 1,225

Total non-current assets 9,332 7,391

Total assets 52,138 42,258

*Reclassified

Date of approval of the financial statements Avi Heifetz Rami Treger Itamar Dov Ederby the board of directors: March 25, 2008. Chairman of the Board CEO and Director CFO and Director

31 DecemberNote 2007 2006

$ in thousandsLiabilities and equity

CURRENT LIABILITIES: Short-term credit and borrowings from bank 20c 8,674 7,532Accounts payable and accruals: 20e

Trade 12,028 7,862Other 5,313 3,111

Current income tax liability 398 488

Total current liabilities 26,413 18,993

NON-CURRENT LIABILITIES: Borrowings from banks and others

(net of current maturities) 13 2,202 2,786Severance pay obligations 15 – *37Deferred income tax liabilities 19f 477 542

Total non-current liabilities 2,679 3,365

Total liabilities 29,092 22,358

Amiad_R&A_2007_Financials.qxd:Layout 1 13/6/08 14:47 Page 21

Consolidated Balance Sheets



EQUITY 17Capital and reserves attributable to equity holders of the Company:Share capital 2,291 2,291Capital reserves 12,797 12,797Currency translation reserve 360 164Retained earnings 7,559 4,303

23,007 19,555MINORITY INTEREST 39 345

Total equity 23,046 19,900

Total liabilities and equity 52,138 42,258

The notes on pages 26 to 58 are an integral part of these consolidated financial statements.


Year ended 31 DecemberNote 2007 2006

$ in thousandsexcept per share data

Revenue 20f 56,955 44,076Cost of sales 20g 29,986 22,097

Gross profit 26,969 21,979Selling and marketing costs 20h 13,844 11,455Administrative and general expenses 20i 6,451 *5,581Amortization of intangible assets 6 372 *348Other losses – net 4

Operating profit 6,302 4,591Finance income 20j 610 357Finance costs (1,009) (1,221)

Finance cost – net 399 864

Profit before income taxes 5,903 3,727Income tax expenses 19g 1,139 736

Profit for the year 4,764 2,991

Attributable to:Equity holders of the Company 4,582 2,875Minority interest 182 116

4,764 2,991

*Reclassified

$Earnings per share attributable to the equity holders of the Company during the year

(See note 21):Basic 0.243 0.152

Diluted 0.241 0.150


Consolidated Income Statements




Attributable to equity holders of the Company

CurrencyNumber Share Capital Translation Retained Minority Total

of shares capital reserve reserve earnings Total interest equity

$ in thousands

BALANCE AT 1 JANUARY 2006 18,872,723 2,291 12,797 123 3,190 18,401 265 18,666CHANGES DURING THE YEAR

ENDED 31 DECEMBER 2006:Currency translation differences – – – 41 – 41 – 41Profit for the year – – – – 2,875 2,875 116 2,991

Total recognized profit for 2006 – – – 41 2,875 2,916 116 3,032Dividend ($0.1 per share) – – – – (1,905) (1,905) – (1,905)Dividend to minority – – – – – – (36) (36)Share-based payment – Value of employee services – – – – 143 143 – 143

BALANCE AT 31 DECEMBER 2006 18,872,723 2,291 12,797 164 4,303 19,555 345 19,900CHANGES DURING THE YEAR

ENDED 31 DECEMBER 2007:Currency translation differences – – – 196 196 196Profit for the year – – – 4,582 4,582 182 4,764

Total recognized profit for 2007 – – – 196 4,582 4,778 182 4,960Dividend ($0.07 per share) – – – (1,410) (1,410) (1,410)Purchase of treasury stocks by a subsidiary,

see note 16b(4)b – – – – – – (488) (488)Share-based payment – Value of employee services – – – – 84 84 – 84

BALANCE AT 31 DECEMBER 2007 18,872,723 2,291 12,797 360 7,559 23,007 39 23,046


Consolidated Statements of Changesin EquityFor the year ended December 31, 2007



Year ended 31 DecemberNote 2007 2006

$ in thousandsCASH FLOWS FROM OPERATING ACTIVITIES:

Cash generated from operations 22 6,312 *3,884 Interest paid (722) (633)Income taxes paid (2,029) (1,833)

Net cash generated from operating activities 3,561 1,418

CASH FLOWS FROM INVESTING ACTIVITIES:Purchase of property and equipment (1,254) *(794) Purchase of intangible assets (599) *(489) Investment grants received 169 79 Investment in financial assets at fair value through profit or loss, net (50) (1,853)Proceeds from sale of property and equipment 154 62 Long-term loan granted to a related party and others (53) (328)Collection of long-term loan granted to a related party 47 85

Net cash used in investing activities (1,586) (3,238)

CASH FLOWS FROM FINANCING ACTIVITIES:Dividends paid to minority interests (36)Dividends paid to equity holders of the Company (1,410) (1,905)Receipt of long-term borrowings and other liabilities 1,316 1,075 Purchase of treasury stocks by a subsidiary 16b (1,317)Repayments of long term borrowings (2,126) (1,872)Short-term borrowings from banks, net 1,354 1,092

Net cash used in financing activities (2,183) (1,646)

EXCHANGE GAIN (LOSSES) ON CASH AND CASH EQUIVALENTS 51 (9)NET DECREASE IN CASH AND CASH EQUIVALENTS (157) (3,475)CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 4,217 7,692

CASH AND CASH EQUIVALENTS AT END OF YEAR 4,060 4,217

*Reclassified


Consolidated Statements of Cash Flows




NOTE 1 – GENERAL INFORMATION:

a. Amiad Filtration Systems Ltd. (hereafter – the Company) and its subsidiaries (together – the Group) is a producer and global supplier of water filters andfiltration systems used in the industrial & municipal market and the irrigation market.

b. The Company was incorporated in Israel in June 1997. The address of its registered office is Kibbutz Amiad, Israel. The Company is traded on the Alternative Investment Market in London (AIM), a part of the London Stock Exchange since December 2005. The principal shareholders of the Company are Kibbutz Amiad (“the Kibbutz”), directly and through a Company controlled by the Kibbutz, A.M.S.I.Investments Ltd. (“AMSI”) which owns 53.85% of the Company’s outstanding shares, and the Atoka Group which owns 23.06% of the Company’s outstandingshares.

c. On 30 June, 1998, the Company entered into an agreement (“the purchase agreement”) with the Kibbutz and with the limited partnership, Amiad FiltrationSystems (“the Partnership”) in which the Kibbutz is the general partner whereby all of the Partnership’s business activities, assets, including goodwill andintellectual property, but excluding property rights (lease rights and/or ownership to land and buildings) were transferred to the Company in effect as from1 January, 1998 (“the transfer date”). All of the Partnership’s liabilities were also transferred to the Company as of the transfer date, except for certainguarantees and charges that remained in the Partnership.

The transfer of the above assets and liabilities was carried out at no consideration in accordance with the regulations of the Israeli Economy SettlementsRegulations (Legislation Amendments) Tax Reliefs Relating to Assistance Arrangements with Farmers, 1990.

According to these regulations, for income tax purposes, the cost of transferred assets, the respective accumulated depreciation and their purchase dateshall be as in the transferring partnership.

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

The principal accounting policies applied in the preparation of these consolidated financial statement, are set out below. These policies have been consistentlyapplied through all the years presented, unless otherwise stated.

a. Basis of preparationThe consolidated financial statements of the Group have been prepared in accordance with International Financial Reporting Standards (IFRS).

The consolidated financial statements have been prepared under the historical cost convention as modified by the revaluation of financial assets andfinancial liabilities at fair value through profit and loss.

The preparation of financial statements in conformity with IFRS requires the use of certain critical accounting estimates. It also requires management toexercise its judgement in the process of applying the Company’s accounting policies. The areas involving a higher degree of judgement or complexity, orareas where assumptions and estimates are significant to the consolidated financial statements, are disclosed in note 3.

1. Standards and interpretations effective in 2007:• IFRS 7, ‘Financial instruments: Disclosures’, and the complementary amendment to IAS 1, ‘Presentation of financial statements – Capital

disclosures’, introduces new disclosures relating to financial instruments and does not have any impact on the classification and valuation of theGroup’s financial instruments, or the disclosures relating to taxation and trade and other payables.

• IFRIC 8, ‘Scope of IFRS 2’, requires consideration of transactions involving the issuance of equity instruments, where the identifiable considerationreceived is less than the fair value of the equity instruments issued in order to establish whether or not they fall within the scope of IFRS 2. Thisstandard does not have any impact on the Group’s financial statements.

• IFRIC 10, ‘Interim financial reporting and impairment’, prohibits the impairment losses recognized in an interim period on goodwill and investmentsin equity instruments and in financial assets carried at cost to be reversed at a subsequent balance sheet date. This standard does not have anyimpact on the Group’s financial statements.

2. Standards and interpretations effective in 2007 but not relevantThe following standards and interpretations to published standards are mandatory for accounting periods beginning on or after 1 January 2007 but theyare not relevant to the Group’s operations:

• IFRS 4, ‘Insurance contracts’;• IFRIC 7, ‘Applying the restatement approach under IAS 29, Financial reporting in hyper-inflationary economies’; and• IFRIC 9, ‘Re-assessment of embedded derivatives’.

Notes to Consolidated Financial Statements




3. Standards, amendments and interpretations to existing standards that are not yet effective and have not been early adopted by the GroupThe following standards, amendments and interpretations to existing standards have been published and are mandatory for the Group’s accountingperiods beginning on or after 1 January 2008 or later periods, but the Group has not early adopted them:

• IFRIC 11, ‘IFRS 2 – Group and treasury share transactions’ (effective from 1 January 2008). IFRIC 11 provides guidance on whether share-basedtransactions involving treasury shares or involving Group entities (for example, options over a parent’s shares) should be accounted for as equity-settled or cash settled share-based payment transactions in the stand-alone accounts of the parent and Group companies. This interpretation isnot expected to have an impact on the Group’s financial statement.

• IAS 23 (Amendment), ‘Borrowing costs’ (effective from 1 January 2009). It requires an entity to capitalise borrowing costs directly attributable to theacquisition, construction or production of a qualifying asset (one that takes a substantial period of time to get ready for use or sale) as part of thecost of that asset. The option of immediately expensing those borrowing costs will be removed. The Group will apply IAS 23 (Amended) from 1January 2009 but is currently not applicable to the Group as there are no qualifying assets.

• IFRS 8, ‘Operating segments’ (effective from 1 January 2009). IFRS 8 replaces IAS 14 and aligns segment reporting with the requirements of the USstandard SFAS 131, ‘Disclosures about segments of an enterprise and related information’. The new standard requires a ‘management approach’,under which segment information is presented on the same basis as that used for internal reporting purposes. The Group will apply IFRS 8 from 1January 2009. The standard is not expected to impact the segment reporting of the Company.

• IAS 1 (Revised) Presentation of Financial Statements (effective 1 January 2009). IAS 1 ( Revised) replaces IAS 1 (Amended 2005), it sets overallrequirements for the presentation of financial statements, guidelines for their structure and minimum requirements for their content. IAS 1 (Revised)requires that all owner changes in equity should be presented in the statement of changes in equity, separately from non-owner changes in equityit also changed the titles of the financial statements.

• IFRS 3 (Revised) Business Combinations (effective 1 January 2010). IFRS 3 (Revised) replaces IFRS 3. IFRS 3 (Revised) establishes principles andrequirements for how an acquirer: (a) recognises and measures in its financial statements the identifiable assets acquired, the liabilities assumedand any non-controlling interest in the acquire; (b) recognises and measures the goodwill acquired in the business combination or a gain from abargain purchase; and (c) determines what information to disclose to enable users of the financial statements to evaluate the nature and financialeffects of the business combination.

• IAS 27 (Amendment) – Consolidated and Separate Financial Statements (effective 1 January 2010).The amendments to the Standard relate, primarily, to accounting for non-controlling interests and the loss of control of a subsidiary.

The most significant changes of IFRS 3 (Revised) and IAS 27 (Amended) are:

– IFRS 3 (Revised) applies also to business combinations involving only mutual entities and to business combinations achieved by contract alone;– The definition of a business has been amended;– Transaction costs incurred by the acquirer in connection with the business combination do not form part of the business combination

transaction;– Acquisitions of additional non-controlling equity interests after the business combination are accounted for as equity transactions;– Disposals of equity interests while retaining control are accounted for as equity transactions;

• IFRIC 14, ‘IAS 19 – The limit on a defined benefit asset, minimum funding requirements and their interaction’ (effective from 1 January 2008). IFRIC14 provides guidance on assessing the limit in IAS 19 on the amount of the surplus that can be recognized as an asset. It also explains how thepension asset or liability may be affected by a statutory or contractual minimum funding requirement. The Group will apply IFRIC 14 from 1 January2008, but it is not expected to have any impact on the Group’s accounts.

• IFRIC 13, ‘Customer loyalty programmes’ (effective from 1 July 2008). IFRIC 13 clarifies that where goods or services are sold together with acustomer loyalty incentive (for example, loyalty points or free products), the arrangement is a multiple-element arrangement and the considerationreceivable from the customer is allocated between the components of the arrangement using fair values. The Group will apply IFRIC 13 from 1 July2008, but it is not expected to have any impact on the Group’s accounts.

• IAS 32 (Amendment) ‘Financial instruments presentation’ and IAS 1 (Amendment) ‘Presentation of financial statements’ (effective from 1 January2009). These refer particularly to the distinction between equity and debt in accounting for Company capital to which cancellation rights areattached (puttable financial instruments). Puttable financial instruments previously had to be classified as a liability, whereas in the future suchcancellable instruments are to be classified as a equity in certain circumstances. The amendments are to be applied for the first time for annualperiods beginning on or after 1 January 2009. The Group is currently evaluating the impact these amendments may have on the Group’s accounts.


NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (continued)


4. Interpretations to existing standard that are not yet effective and not relevant for the Group’s operationsThe following interpretation to an existing standard that has been published and are mandatory for the Group’s accounting periods beginning on or after1 January 2008 but are not relevant for the Group’s operations –

IFRIC 12, ‘Service concession arrangements’ (effective from 1 January 2008). IFRIC 12 applies to contractual arrangements whereby a private sectoroperator participates in the development, financing, operation and maintenance of infrastructure for public sector services. IFRIC 12 is not relevant tothe Group’s operations.

b. Foreign currency translation:

1. Functional and presentation currency

Items included in the financial statements of each of the Group entities are measured using the currency of the primary economic environment in whichthe entity operates (“the functional currency”). The consolidated financial statements are presented in U.S. dollar, which is the Company’s functionaland presentation currency.

Foreign currency transactions are translated into the functional currency using exchange rates prevailing at the dates of the transactions. Foreignexchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assetsand liabilities denominated in foreign currencies are recognized in the income statement.

2. Group companies.

The functional currency of the subsidiary in Australia is the Australian dollar (“AUD”).

The functional currency of the subsidiary in France is the EURO.

The functional currency of the jointly controlled entity in China is the Chinese RMB.

The results and financial position of those Group entities (none of which has the currency of hyperinflationary economy) that have a functional currencydifferent from the presentation currency are translated into the presentation currency as follows:

a) Assets and liabilities for each balance sheet presented are translated at the closing rate at that balance sheet date;

b) Income and expenses for each income statement are translated at average exchange rates; and

c) All resulting exchange differences are recognized as a separate component of equity.On consolidation, exchange differences arising from the translation of the net investment in foreign operations, are taken to equity. When foreign operations are partially disposed or sold, exchange differences that were recorded in equity are recognized in the income statementas part of gain on loss or sale. Goodwill and fair value adjustments arising on acquisition of foreign entity are treated as assets and liabilities of foreign entity and translated at theclosing rate.

c. Principles of consolidation

(1) SubsidiariesSubsidiaries are all entities over which the Group has the power to govern the financial and operating policies generally accompanying a shareholdingof more than one half of the voting rights. Subsidiaries are fully consolidated from the date on which control is transferred to the Group. They arede-consolidated from the date that control ceases.

The purchase method of accounting is used to account for the acquisition of subsidiaries by the Group. The cost of an acquisition is measured as thefair value of the assets given, equity instruments issued and liabilities incurred or assumed at the date of exchange, plus costs directly attributable tothe acquisition. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at theirfair values at the acquisition date, irrespective of the extent of any minority interest. The excess of the cost of acquisition over the fair value of theGroup’s share of the identifiable net assets acquired is recorded as goodwill. If the cost of acquisition is less than the fair value of the net assets of thesubsidiary acquired, the difference is recognized directly in the income statement.

Inter-Company transactions, balances and unrealized gains on transactions between Group companies are eliminated. Unrealized losses are alsoeliminated but considered an impairment indicator of the asset transferred. Accounting policies of subsidiaries have been changed where necessaryto ensure consistency with the policies adopted by the Group.






(2) Transactions and minority interestsThe Group applies a policy of treating transactions with minority interests as transactions with parties external to the Group. Disposals to minorityinterests result in gains and losses for the Group that are recorded in the income statement. Purchases from minority interests result in goodwill, beingthe difference between any consideration paid and the relevant share acquired of the carrying value of net assets of the subsidiary.

d. Proportionately consolidated companiesThere is a contractual agreement for joint control of the Company Yixing Taixing Environtec Co. Ltd (hereafter– Yixing Taixing), held 50%, with the otherventurers. Accordingly, it is accounted for by the proportionate consolidation method. Under this method, the Company combines its share of the assets,liabilities, revenues, and expenses of the jointly controlled entity with similar line items in the consolidated financial statements.

e. Property and equipment:

1) All property and equipment (including leasehold improvements) are stated at historical cost, less accumulated depreciation, impairment and investmentgrants. Historical cost includes expenditure that is directly attributable to the acquisition of the items.

Repairs and maintenance are charged to the income statement during the period in which they are incurred.

2) The assets are depreciated using the straight-line method over their estimated useful lives.

Annual rates of depreciation are as follows:%

Machinery and equipment 7 – 20 Office furniture and equipment 7 – 20Computers and peripheral equipment 20 – 33 Motor vehicles 15 – 20 Leasehold improvements Over the term of the lease

The assets’ residual values and useful lives are reviewed, and adjusted if appropriate, at each balance sheet date.

An asset’s carrying amount is written down immediately to its recoverable amount if the asset’s carrying amount is greater than its estimatedrecoverable amount (note 2(g)).

Leasehold improvements (fixtures) in buildings under operating leases are depreciated using the straight-line method over the term of the lease, whichis shorter than the estimated useful lives of the improvements.

3) Gains and losses on disposals are determined by comparing proceeds with the carrying amount. These gains and losses are included in the incomestatement, within other (losses) gain.

f. Intangible assets

1) GoodwillGoodwill represents the excess of the cost of an acquisition over the fair value of the Group’s share of the net identifiable assets of the acquiredsubsidiary at the date of acquisition. Goodwill on acquisition of subsidiaries is included in ‘intangible assets’. Separately recognized goodwill is testedannually for impairment and carried at cost less accumulated impairment losses. Impairment losses on goodwill are not reversed.

Goodwill is allocated to cash-generating units that are not larger then an operating segment for the purpose of impairment testing. The allocation ismade to those cash-generating units or Groups of cash-generating units that are expected to benefit from the business combination in which thegoodwill arose.

2) Customer relations and know-howAcquired customer relations and know-how are shown at historical cost. Customer relations and know-how have finite useful life and are carried atcost less accumulated amortisation. Amortisation is calculated using the straight line method (10 years).

3) Computer software and licencesAcquired computer software and licences are capitalised on the basis of the costs incurred to acquire and bring to use the specific software. Thesecosts are amortised over their estimated useful lives (three to five years).




g. Impairment of non-financial assetsAssets that have an indefinite useful life for example, goodwill are not subject to amortisation and are tested annually for impairment.

Assets that are subject to depreciation are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount maynot be recoverable. An impairment loss is recognized for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverableamount is the higher of an asset’s fair value less costs to sell and its value in use. For the purposes of assessing impairment, assets are grouped at the lowestlevels for which there are separately identifiable cash flows (cash-generating units).

Non financial assets other than goodwill that suffered impairment are reviewed for possible reversal of the impairment at each reporting date.

h. InventoriesInventories – are stated at the lower of cost and net realizable value. Cost is determined as follows:

Raw materials, auxiliary materials and packing materials – on the “first-in first-out” basis.

Work in progress – on the basis of average cost including materials, labour and other direct and indirect manufacturing costs.

Finished products – on the basis of average cost including materials, labour and other direct and indirect manufacturing costs.

Purchased products – on the “first-in, first-out” basis.

Net realizable value is the estimated selling price in the ordinary course of business less applicable variable selling expenses.

i. Financial assets at fair value through profit or lossFinancial assets at fair value through profit or loss are financial assets held for trading. A financial asset is classified in this category if acquired principallyfor the purpose of selling in the short-term. Assets in this category are classified as current assets.

Gains or losses arising from changes in the fair value of the ‘financial assets at fair value through profit or loss’ category are presented in the incomestatement in the period in which they arise.

j. Derivative financial instruments Foreign currencies derivatives are initially recognized at fair value on the date a derivative contract is entered into and are subsequently accounted at fairvalue through profit or loss. Changes in the fair value in any of these derivative instruments are recognized immediately in the income statement within‘finance income/loss’.

k. Trade receivables Trade receivables are recognized initially at fair value and subsequently measured at amortised cost less provision for impairment. A provision forimpairment of trade receivables is made when there is objective evidence that the Group will not be able to collect all amounts due according to the originalterms of the receivables.

Significant financial difficulties of the debtor, probability that the debtor will enter bankruptcy or financial reorganization, and default or delinquency inpayments are considered indicators that the trade receivable is impaired.

Impaired account is principally determined in respect of specific debts whose collection, in the opinion of the Company’s management, is uncollectible (note3(c)). The amount of the provision is recognized in the income statement within ‘administrative and general expenses’. When a trade receivable isuncollectible it is written off against the allowance account for trade receivables. Subsequent recoveries of amounts previously written off are creditedagainst administrative and general costs in the income statement.

l. Cash and cash equivalentsCash and cash equivalents includes cash in hand, deposits held at call with banks and other short-term highly liquid investments with original maturities ofthree months or less.

m. Current and deferred income taxThe current income tax charge is calculated on the basis of the tax laws enacted or substantively enacted at the balance sheet date in the countries wherethe Group’s subsidiaries operate and generate taxable income. Management periodically evaluates positions taken in tax returns with respect to situationsin which applicable tax regulation is subject to interpretation and establishes provisions where appropriate on the basis of amounts expected to be paid tothe tax authorities.






Deferred income tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and theircarrying amounts in the consolidated financial statements. However, the deferred income tax is not accounted for, if it arises from initial recognition of anasset or liability in a transaction other than a business combination that at the time of the transaction affects neither the accounting nor taxable profit.

As stated in note 19(c), upon distribution of dividends from tax-exempt income of “approved enterprises”, the amount distributed will be subject to tax at therate that would have been applicable had the Company not been exempted from payment thereof. The amount of the related tax is charged as an expensein the income statements.

Deferred income tax is determined using tax rates (and laws) that have been enacted or substantially enacted by the balance sheet date and are expectedto apply when the related deferred income tax asset is realized or the deferred income tax liability is settled.

Deferred income tax assets are recognized to the extent that it is probable that future taxable profit will be available against which the temporary differencescan be utilised.

Deferred income tax on temporary differences arising on investments in subsidiaries and in the event the distribution of earnings by investees as dividendsare not provided, since the Group controls the timing of the reversal of the temporary difference and it is probable that the temporary difference will notreverse in the foreseeable future.

Deferred income tax assets and deferred income tax liabilities are offset only if they relate to the same taxable entity and that entity has a legally enforceableright to offset those assets against the liabilities.

n. Employee benefits:

1. Severance pay obligationsLabour laws and agreements in Israel and abroad require companies in the Group to pay a certain multiple of monthly pay as severance benefits toemployees who are dismissed, resign or retire from their employment. The severance pay obligation is accounted for as a defined benefit plan.

The liability recognized in the balance sheet in respect of severance pay is the present value of the defined benefit obligation at the balance sheet dateless the fair value of plan assets, together with adjustments for unrecognized actuarial gains or losses. The obligation is measured annually byindependent actuaries using the projected unit credit method. The present value of the obligation is determined by discounting the estimated future cashoutflows using interest rates of government bonds that are denominated in the currency in which the benefits will be paid, and that have terms tomaturity approximating to the terms of the related severance pay obligations.

The Group purchases insurance policies and contributes to severance pay funds to manage its exposure to the severance pay obligation. The rights toreimbursement under insurance policies are recognized as severance pay assets when it is virtually certain that the insurance Company will reimbursesome or all of the expenditure required to settle the severance pay obligation. The severance pay assets from severance pay funds are stated at fairvalue through the income statements.

2) Vacation and recreation payUnder Israeli law, each employee is entitled to vacation days and recreation pay, both computed on an annual basis. The entitlement is based on thelength of the employment period. The Group recognizes a liability and an expense for vacation and recreation pay, based on the entitlement of eachemployee.

3) Profit-sharing and bonus plansThe Group recognizes a liability and an expense for bonuses and profit sharing based on a formula that takes into consideration the profit attributableto the Company’s shareholders after certain adjustments. The Group recognizes a provision where contractually obliged or where there is a pastpractice that has created a constructive obligation.

4) Share-based compensationEmployees (including senior executives) of the Group receive remuneration in the form of share-based payment transactions, whereby employeesrender services as consideration for equity instruments (equity-settled transactions).

The fair value of the employee services received in exchange for these grant of the share options is recognized as an expense. The total amount to beexpensed over the vesting period is determined by reference to the fair value of the options granted excluding the impact of any non-market vestingconditions. Non-market vesting conditions are included in assumptions about the number of options that are expected to vest. At each balance sheetdate, the entity revises its estimates of the number of options that are expected to vest. It recognises the impact of the revision of original estimates, ifany, in the income statements, and a corresponding adjustment to shareholders’ equity over the remaining vesting period.




Cancellations or settlements are accounted for as accelerations of vesting. As a result the Company recognises immediately the amount that otherwisewould have been recognized for services received over the remainder of the vesting period.

The proceeds received, net of any direct costs, are credited to share capital (nominal value) and share premium when the options are exercised.

Fair value of cash-settled awards is measured on the grant-date, and any portion of a periodic expense computed as above is recorded periodically andrecognized as a liability in the Group’s balance sheet. The accumulated liability is remeasured at each balance sheet date, until the said liability issettled. Changes in the amount of the liability are carried to statements of income.

o. Revenue recognition Revenue comprises the fair value of the consideration received or receivable for the sale of goods in the ordinary course of the Group’s activities. Revenueis shown, net of value-added tax, returns, rebates and discounts and after eliminating sales within the Group. Revenue is recognized as follows:

1. Sales of goodsSales of goods are recognized when a Group entity has delivered products to the customer and there is no unfulfilled obligation that could affect thecustomer’s acceptance of the products. Delivery does not occur until the risks of obsolescence and loss have been transferred to the customer, andeither the customer has accepted the products in accordance with the sales contract, the acceptance provisions have lapsed, or the Group hasobjective evidence that all criteria for acceptance have been satisfied.

2. Contract work performedContract costs are recognized when incurred.

When the outcome of a construction contract cannot be estimated reliably, contract revenue is recognized only to the extent of contract costs incurredthat are likely to be recoverable.

When the outcome of a construction contract can be estimated reliably and it is probable that the contract will be profitable, contract revenue isrecognized over the period of the contract. When it is probable that total contract costs will exceed total contract revenue, the expected loss isrecognized as an expense immediately.

The Group uses the ‘percentage-of-completion method’ to determine the appropriate amount to recognise in a given period. The stage of completion ismeasured by reference to the contract costs incurred up to the balance sheet date as a percentage of total estimated costs for each contract.

The Group presents as an asset the gross amount due from customers for contract work for all contracts in progress for which costs incurred plusrecognized profits (less recognized losses) exceed progress billings. Progress billings not yet paid by customers and retention are included within ‘tradeand other receivables’.

3. Interest incomeInterest income is recognized on time proportion basis, using the effective interest method.

p. Operating lease Leases in which a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases. Payments madeunder operating leases are charged to the income statement on a straight-line basis over the period of the lease.

q. BorrowingsBorrowings from banks and others are recognized initially at fair value, net of transaction costs incurred, and subsequently stated at amortised cost. Anydifference between proceeds (net of transaction costs) and the redemption value is recognized in the income statement over the period of the instrument,using the effective interest method. Borrowings are classified as current liabilities unless the Group has an unconditional right to defer settlement of theliability for at least 12 month after the balance sheet date.

r. Share capitalOrdinary shares are classified as equity. Incremental costs directly attributable to the issue of new shares or options are shown in equity as a deduction,net of tax, from the proceeds.

s. Dividend distributionDividend distribution to the Company’s shareholders is recognized as a liability in the Group’s financial statements in the period in which the dividends areapproved by the Company’s shareholders.






t. Trade payablesTrade payables are recognized initially at fair value and subsequently measured at amortised cost using the effective interest method.

u. Basic and diluted earnings per share:

(a) BasicBasic earnings per share is calculated by dividing the profit attributable to equity holders of the Company by the weighted average number of ordinaryshares in issue during the year.

(b) DilutedDiluted earnings per share is calculated by adjusting the weighted average number of ordinary shares issued and outstanding to assume conversion ofall dilutive potential ordinary shares, being employee share options under the 2005 plan. For employee share options, a calculation is made of the numberof shares that could have been acquired at fair value based on the monetary value of the subscription rights attached to outstanding share options. Thenumber of shares calculated as above is compared with the number of shares that would have been issued assuming the exercise of the share options.

v. Government grantsRoyalty-bearing grants from the Government of Israel for funding approved research projects and for participation in export marketing expenses arerecognized at the time the Company is entitled to such grants. Such grants are recorded as a liability when repayment is probable.

Non-royalty-bearing grants from the Government of Israel for purchases of fixed assets, in accordance with the Law for the Encouragement of CapitalInvestments, 1959, were deducted from the respective purchased assets.

w. Exchange rates and linkage basisMonetary assets and liabilities, denominated in currencies other then U.S. dollar, are translated using exchange rates in effect at balance sheet date.

Monetary assets and liabilities linked to the Israeli consumer price index (“CPI”) are presented according to the relevant index for each linked asset or liability.

Below are Data regarding the exchange rates of certain currencies in relation to the U.S. dollar and data regarding the CPI:

Exchange Exchange rate of Exchangerate of one one Australian rate of one

Euro Dollar NIS CPI*

At end of year:2007 1.471 0.878 0.260 113.632006 1.317 0.790 0.237 109.902005 1.183 0.734 0.217 110.00

Increase (decrease) during the year:2007 11.69% %11.14% 9.70% % 3.39%2006 11.33% % 7.63% 9.22% (0.01%)

* Based on the index for the month ending on each balance sheet date, on the basis of 2000 average = 100.

NOTE 3 – CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS

Estimates and judgements are continually evaluated and are based on historical experience and other factors, including expectations of future events that arebelieved to be reasonable under the circumstances.

The Group makes estimates and assumptions concerning the future. The resulting accounting estimates will, by definition, seldom equal the related actual results.The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financialyear are discussed below:

a. Severance pay benefitsThe present value of the severance pay obligations depends on a number of factors that are determined on an actuarial basis using a number of assumptions.The assumptions used in determining the net cost (income) for severance pay include the expected long-term rate of return on the relevant severance payassets and the discount rate. Any changes in these assumptions will impact the carrying amount of severance pay assets and obligations.




The expected return on the severance pay assets assumption is determined on a uniform basis, taking into consideration long-term historical returns.

The Group determines the appropriate discount rate at the end of each year. This interest rate is to be used in determining the present value of estimated futurecash outflows expected to be required to settle the pension obligations. The markets in high-quality corporate bonds are not sufficiently liquid in order to usethem in determining the discount rate. In determining the appropriate discount rate, the Group considers the interest rates of government bonds that aredenominated in the currency in which the benefits will be paid, and that have terms to maturity approximating the terms of the related pension liability.

Other key assumptions for pension obligations such as future salary increases are based on current rates of wage inflation.

b. Income and deferred tax assetsThe Group is subject to income taxes in several jurisdictions. Significant judgement is required in determining the worldwide provision for income taxes. Thereare many transactions and calculations for which the ultimate tax determination is uncertain during the ordinary course of business. The Group recognizesliabilities for anticipated tax audit issues based on estimates of whether additional taxes will be due. Where the final tax outcome of these matters is differentfrom the amounts that were initially recorded, such differences will impact the income tax and deferred tax provisions in the period in which suchdetermination is made.

The Group recognizes deferred tax assets and liabilities based on the differences between the financial statement carrying amounts and the tax bases ofassets and liabilities. The Group regularly reviews its deferred tax assets for recoverability, based on historical taxable income, projected future taxableincome, the expected timing of the reversals of existing temporary differences and the implementation of tax planning strategies. If the Group is unable togenerate sufficient future taxable income in certain tax jurisdictions, or if there is a material change in the actual effective tax rates or time period within whichthe underlying temporary differences become taxable or deductible, the Group could be required to eliminate a portion of the deferred tax assets, resulting inan increase in its effective tax rate and an adverse impact on operating results.

c. Provision for impairment of receivablesThe Group follows the guidance of IAS 39 (revised 2004) on determining whether a trade receivable is impaired. This determination requires significantjudgement. In making this judgement, the Group evaluates, among other factors, the ageing analysis of the balances, historical bad debts, repayment patterns,the financial health and the near-term business outlook of the customer and industry trends.

d. Estimated impairment of goodwill The Group tests annually whether goodwill has suffered any impairment, in accordance with the accounting policy stated in Note 2(f)(1).

e. Inventory ValuationInventory, which is a material part of the Group’s total assets, is valued at the lower of cost and net realizable value. Raw materials and purchased products aredetermined on the "first-in first-out" basis. Work in progress and finished products determined on basis of average cost. If actual market prices for finishedproducts prove less favorable than those projected by management, inventory write-downs may be required. Inventory is written down for estimatedobsolescence based upon assumptions about future demand and market conditions. Likewise, favorable future demand and market conditions could positivelyimpact future operating results in inventory that has been written down as sold.

NOTE 4 – FINANCIAL RISK MANAGEMENT:

a. Financial risk factorsThe Group’s activities expose to a variety of financial risks: market risk (including currency risk, fair value interest rate risk and cash flow interest rate risk),credit risk and liquidity risk. The Group’s overall risk management program focuses on the unpredictability of financial markets and seeks to minimize potentialadverse effects on the Group’s financial performance. The Group uses derivative financial instruments to hedge certain risk exposures.

Risk management is carried out by the central treasury department (Group treasury) under policies approved by the board of directors and management.Group treasury identifies, evaluates and hedges financial risks in close co-operation with the Group’s operating units.

1) Market risk

a. Foreign exchange riskThe Group operates internationally and is exposed to foreign exchange risk arising from various currency exposures, primarily with respect to theNIS, Euro and Australian Dollar. Foreign exchange risk arises from future commercial transactions, recognized assets and liabilities and netinvestments in foreign operations.




NOTE 3 – CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS (continued)


Management has set up a policy which requires central treasury to manage Group foreign exchange risk against the Company’s functional currency.To manage the foreign exchange risk arising from future commercial transactions and recognize assets and liabilities, the central treasury usesvarious hedging instruments. Foreign exchange risk arises when future commercial transactions or recognize assets or liabilities are denominated ina currency that is not the Company‘s functional currency.

When hedging (hereafter – economic hedge but not qualified as accounting hedge) activity in countries where the functional currency differs fromthe Company‘s functional currency, the Company adopts a hedging policy which is not recognized as hedging accounting under IFRS, therefore thehedging activities are shown in the financial statements as finance income or expenses.

The Group treasury’s risk management policy is to hedge between 15% and 70% of anticipated cash flows (net sales over purchase of inventory andother expenses) in each major foreign currency for the subsequent 9 months mainly in NIS and Euro.

At 31 December 2007, the Company’s balance sheet was exposed to various currencies. The table below summarizes the pre-tax impact of 10%strengthening/weakening of the U.S. dollar against the currencies with most significant exposure.

31 December 20072007 2006

Currency $ in thousands

NIS 872 639Euro 340 391Australian dollar 213 336

b. Cash flow and fair value interest rate riskAs the Group has no significant interest-bearing assets, the Group’s income and operating cash flows are substantially independent of changes inmarket interest rates.

The Group’s interest rate risk arises from long-term borrowings. Borrowings issued at variable rates expose the Group to cash flow interest raterisk. Borrowings issued at fixed rates expose the group to fair value interest rate risk.

Most of the Group’s long-tem borrowings are at variable rate. During 2007 and 2006, the group’s borrowings at variable rate were denominated inUSD dollar, NIS, Euro and AUS dollar.

At 31 December 2007, if interest rates on USD-denominated floating rate borrowings had been 1% higher/lower with all other variables heldconstant, pre-tax profit for the year would have been $48 thousands (2006: $62 thousands) lower/higher, as a result of higher/lower interestexpenses; At 31 December 2007, if interest rates on NIS-denominated floating rate borrowings at that date had been 1% higher/lower with all othervariables held constant, pre-tax profit for the year would have been $24 thousands (2006: $12 thousands) lower/higher, as a result of higher/lowerinterest expenses.

At 31 December 2007, if interest rates on Euro-denominated floating rate borrowings had been 1% higher/lower with all other variables heldconstant, pre-tax profit for the year would have been $2 thousands (2006: $0 thousands) lower/higher, as a result of higher/lower interest expenses;At 31 December 2007, if interest rates on AUS dollar-denominated floating rate borrowings at that date had been 1% higher/lower with all othervariables held constant, pre-tax profit for the year would have been $0 thousands (2006: $1 thousands) lower/higher, as a result of higher/lowerinterest expenses.

2) Credit riskCredit risk is monitored on Group basis and managed based on the analysis currency exposure as reflected at the Company’s books. Credit risk arisesfrom cash and cash equivalents, derivative financial instruments and deposits with banks and financial institutions, as well as credit exposures tocustomers, including outstanding receivables and committed transactions. For non governmental securities in Group’s investment portfolio, onlysecurities rated ‘AA+’ and above are accepted. With regards to customer credit control, the Group uses the services of credit insurance companies toidentify the financial strength of its customers. If there is no available rating, risk control assesses the credit quality of each specific customer, takinginto account its financial position, past experience and other factors. Individual risk limits are set based on internal or external information inaccordance with limits set by the management. The utilization of credit limits is regularly monitored. The Group insures considerable part of itsoutstanding receivables.


NOTE 4 – FINANCIAL RISK MANAGEMENT: (continued)


The table below shows the balance of the 6 major counterparties at the balance sheet date.

31 December 31 December2007 2006

Counterparty Rating Balance Balance

Bank A AAA 977 83Bank B AAA 520 1,689Bank C AAA 184 361

1,681 2,133

Customer Q A+ 1,594 1,388Customer T A+ 782 620Customer Z A+ 392 605

2,768 2,613

No credit limits were exceeded during the reporting period, and management does not expect any losses from non-performance by these counterparties.

3) Liquidity riskPrudent liquidity risk management implies maintaining sufficient cash and marketable securities, the availability of funding through an adequate amountof committed credit facilities and the ability to close out market positions. Due to the dynamic nature of the underlying businesses, central treasurymaintains flexibility in funding by maintaining availability under committed credit lines.

The table below analyses the Group’s financial liabilities into relevant maturity groupings based on the remaining period at the balance sheet to thecontractual maturity date. The amounts disclosed in the table are the contractual undiscounted cash flows. Balances due within 12 months equal theircarrying balances as the impact of discounting is not significant.

Between Between Less than 1 and 2 2 and 5

1 year* years* years*

At 31 December 2007:Credit banks and Borrowings 8,674 1,121 1,081Trade and other payables 17,139

At 31 December 2006:Credit banks and Borrowings 7,532 1,420 1,366Trade and other payables 11,461

b. Fair value estimation. The fair value of financial instruments traded in active markets is based on quoted market prices at the balance sheet date. The quoted market priceused for financial assets held by the Group is the current closing price.

The carrying value less impairment provision of trade receivables and payables are assumed to approximate their fair values.

Bank balance statements are used to determine fair value for the financial instruments, such as fair value of foreign exchange hedging contracts.




NOTE 4 – FINANCIAL RISK MANAGEMENT: (continued)


a. Composition of assets, grouped by major classifications, and changes therein is as follows:

Year ended 31 December 2007:Cost1 Accumulated depreciation

Netbook amount

Balance at Additions Disposals Balance Balance at Additions Disposals Balancebeginning during during Exchange at end beginning during during Exchange at end 31 December

of year the year the year differences of year of year the year the year differences of year 2007

$ in thousands $ in thousands $ in thousands

Machinery andequipment 6,660 440 60 7,160 5,219 343 50 5,612 1,548

Computers andPeripheralequipment 563 21 (6) 10 588 549 15 (5) 9 568 20

Office furnitureand equipment 1,827 224 (33) 2 2,020 1,405 139 (6) 1 1,539 481

Motor vehicles 809 323 (214) 13 931 271 129 (91) 7 316 615Leasehold

improvements 325 191 19 535 123 19 6 148 387

10,184 1,199 (253) 104 11,234 7,567 645 (102) 73 8,183 3,051

Year ended 31 December 2006:Cost1 Accumulated depreciation

Netbook amount

Balance at Additions Disposals Balance Balance at Additions Disposals Balancebeginning during during Exchange at end beginning during during Exchange at end 31 December

of year the year the year differences of year of year the year the year differences of year 2006

$ in thousands $ in thousands $ in thousands

Machinery andequipment 6,292 *334 (2) 36 6,660 4,879 *312 (2) 30 5,219 1,441

Computers andPeripheralequipment 579 11 (32) 5 563 557 19 (32) 5 549 14

Office furnitureand equipment 1,826 *144 (146) 3 1,827 1,418 132 (146) 1 1,405 422

Motor vehicles 782 151 (132) 8 809 205 118 (56) 4 271 538Leasehold

improvements 300 15 – 10 325 107 12 – 4 123 202

9,779 655 (312) 62 10,184 7,166 593 (236) 44 7,567 2,617

*Reclassified

1. Net of investments grants amounting to $3,898 thousands (2006 – $3,844 thousands) which the and a subsidiary received by virtue of the law forencouragement of capital investments, 1959 – see note 19(b).

2. Bank borrowings are secured on machinery and equipment for the value of $11,123 thousands (2006 – $10,116 thousands) (see Note 14(b)).


NOTE 5 – PROPERTY AND EQUIPMENT:


Customer SoftwareKnowhow relationship Goodwill and licenses Total

$ in thousands

Year ended 31 December, 2007Opening net book amount 1,381 337 685 356 2,759Additions during the year 24 575 599Acquisition of minority interest through the purchase of treasury

stocks by a subsidiary **829 829Amortization during the year (254) (85) (33) (372)

Closing net book amount 1,151 252 1,514 898 3,815

Year ended 31 December, 2006Opening net book amount 1,511 422 685 2,618Additions during the year 124 *365 489Amortization during the year (254) (85) *(9) (348)

Closing net book amount 1,381 337 685 356 2,759

*Reclassified**See note 16b(4)

NOTE 7 – INVENTORIES:

Composition of inventories grouped by major classification:31 December

2007 2006$ in thousands

Raw materials, auxillary materials and packing materials 6,380 3,811Work in progress 3,874 2,624 Finished products 4,306 3,084Purchased products 1,395 951

15,955 10,470




NOTE 6 – INTANGIBLE ASSETS:


NOTE 8 – INTEREST IN JOINTLY CONTROLLED ENTITY:

The Group has a 50% interest in a joint controlled entity, Yixing Taixing Environtec co. Ltd (“Tiaxing”), a registered in China.The following amounts represent the Group’s 50% of the assets and liabilities and sales and results of Taixing. They are included in the consolidatedfinancial statements:

31 December2007 2006

$ in thousandsCurrent assets 2,803 2,377Non-current assets 471 416

3,274 2,793

Current liabilities 222 429

222 429

Revenues 1,273 1,509Expenses (841) (1,165)

Net Income 432 344

There are no contingent liabilities relating to the Group’s interest in Taixing and no contingent liabilities of Taixing itself.

NOTE 9 – LOAN TO A RELATED PARTY:


$ in thousandsBalance 753 730Less – current maturities 50 45

703 685

The loans to the Partnership, in which the Kibbutz is the general partner, are linked to the Israeli CPI and bear annual interest at the rate of 4%. Thematurity dates of the loans are between 2008 and 2030. See also note 23c.

NOTE 10 – LONG TERM RECEIVABLE:


$ in thousandsCustomers in Israel* 37 59Prepaid expenses 65 31Loans to others 56 15

158 105

* The receivables are due over a period ending in 2010.



NOTE 11 – FINANCIAL INSTRUMENTS BY CATEGORY:

The accounting policies for financial instruments have been applied to the line items below:

Assets at fairvalue through

Loans and the profit andreceivables loss Total

$ in thousands

31 December 2007:Assets as per balance sheet:Cash and cash equivalents 4,060 4,060Trade and other receivables 18,984 18,984Financial assets at fair value through profit and loss 2,112 2,112Current income tax assets 1,695 1,695

Total 20,679 6,172 26,851

Assets at fairvalue through

Loans and the profit andreceivables loss Total

$ in thousands

31 December 2006:Assets as per balance sheet:Cash and cash equivalents 4,217 4,217Trade and other receivables 17,880 17,880Financial assets at fair value through profit and loss 1,869 1,869Current income tax assets 431 431

Total 18,311 6,086 24,397

NOTE 12 – CREDIT QUALITY OF FINANCIAL ASSETS:

The credit quality of financial assets that are neither past due nor impaired can be assessed by reference to historical information about counterparty defaultrates:


$ in thousandsTrade receivables:AA 9,934 9,262A+ 6,765 5,538A 1,159 2,071

17,858 16,871

Definitions according to Group’s internal rating:AA = Big customers with no late payment in the past.A+ = Big customers with minor late payment in the past.A = Small/medium customers and new customers.






$ in thousandsCash at bank and short-term bank deposits:AAA 2,208 2,817AA 1,827 1,389

4,035 4,206

Financial assets:AAA 2,112 1,869

Definitions according to Group’s internal rating:AAA = Israeli & first class international banks.AA = First class local bank in subsidiaries countries

NOTE 13 – LONG-TERM BORROWINGS FROM BANKS AND OTHERS:

a. The long term borrowings from banks and other may be classified by currency of linkage terms and interest as follows:

Weighted Weightedaverage averageinterest 31 December interest 31 December

rates 2007 rates 2006

$ in $ in% thousands % thousands

In U.S. dollars 6.61 3,177 7.21 4,059 Denominated in Euro 5.98 573 5.73 323 Denominated in NIS, unlinked 5.56 118 5.56 139 Denominated in NIS, linked to the Israeli CPI 4.34 73 4.18 220

3,941 4,741

Current maturities of long-term borrowings from banks and others 1,739 1,955

2,202 2,786

The borrowings bears interest at variable rates. The carrying amount of the long term borrowings equals their fair value.

b. The loans mature in the following years after balance sheet dates:31 December


First year – current maturities 1,739 1,955Second year 1,121 1,420Third year 609 818Fourth year 401 348Fifth year 71 200

3,941 4,741

c. As to the Company’s charges – see note 14b.


NOTE 12 – CREDIT QUALITY OF FINANCIAL ASSETS: (continued)


NOTE 14 – LIABILITIES SECURED BY PLEDGES AND RESTRICTIONS PLACED IN RESPECT OF LIABILITIES:

a. Financial covenantsAs to December 31, the Group has no financial covenants in respect to banks.

b. Charges:1) As collateral for liabilities to banks, a fixed charge was recorded on all of the machinery, equipment, share capital and goodwill of the Group’s

companies and a floating charge was recorded on all of the Group’s assets.The balances of secured liabilities to banks as of 31 December, 2007 are as follows:

$ in thousands

Current liabilities 6,933Long-term liabilities (including current maturities) 3,928Performance guarantees 262

11,123

2) As for charges with respect to grants received under the Law for the Encouragement of Capital Investments, 1959, see note 16b(3).

NOTE 15 – SEVERANCE PAY ASSETS AND OBLIGATIONS:

a. Labour laws and agreements in Israel and abroad require companies in the Group to pay a certain multiple of monthly pay as severance benefits toemployees who are dismissed, resign or retire from their employment. This obligation is covered partly by regular deposits with severance pay fundsand by purchase of insurance policies.

b. There are no liabilities for severance pay obligations with respect to members of Kibbutz Amiad or with respect to candidates for Kibbutz Amiadmembership employed at the Company’s plant. This is based on a legal opinion which the Company has received according to which an employee-employer relationship does not exist between the Company and members of Kibbutz Amiad or candidates for membership employed at the Company’splant.

c. Severance pay obligations:

31 December20072007 2006

$ in thousandsPresent value of obligations 2,844 1,909Less fair value of plan assets 3,040 1,872

(196) 37

The movement in the obligation recognized in the balance sheet is as follows: Year ended 31 December


Beginning of the year 1,909 2,118Current service cost 306 192Interest cost 116 142Actuarial loss (gain) 348 (315)Translation differences 236 173Benefits paid (71) (401)

2,844 1,909Less fair value of plan assets (3,040) (1,872)

(196) 37





The movement in the plan assets recognized in the balance sheet is as follows:

Year ended 31 December20072007 2006

$ in thousandsBeginning of the year 1,872 1,808Expected return 91 100Translation differences 248 190Contributions paid 311 275Benefits paid (69) (128)Return transferred to compensation element (59)Revaluation of opening balance of plan assets 468Actuarial gain (loss) 178 (373)

End of the year 3,040 1,872

d. Income statement charge for severance pay:


$ in thousandsCurrent service cost 306 192Interest cost 116 142

422 334Current actuarial loss 170 58Return transferred to compensation element 59Revaluation of opening balance of plan assets (468)Exchange differences (12) (17)Expected return on plan assets (91) (100)

Total expense included in employee benefit expenses 80 275

The principal actuarial assumptions used were as follows:20072007 2006

Discount rate 6% 6%Future salary increases 5% 3%Expected return on plan assets 6% 2%

NOTE 16 – CONTINGENT LIABILITIES AND COMMITMENTS:

a. Commitments:

1) Employee incentive plan –

On 27 July 2007, the board of directors approved a bonus scheme (hereafter “the Bonus Scheme”), which will be available to staff members andsenior management, including three members of the board of directors.

a. Senior Management – The Bonus Scheme will be in operation in relation to financial year ending 31 December 2007 which will pay a bonus tosenior management by reference to their monthly salary. The level of bonus payable will be dependent on the achievement of targets as set outin the Bonus Scheme. The maximum total bonus liability for the Company is NIS 600,000 (approx $156,000).

Any bonus shall be paid following Board of directors approval of the 2007 financial statement in March 2008. If any member of seniormanagement is not employed by the Company for the whole of the bonus Year or is not employed at the bonus payment date, the payment ofany bonus to that individual shall be subject to the absolute discretion of the Chairman and/or CEO of the Company.


NOTE 15 – SEVERANCE PAY ASSETS AND OBLIGATIONS: (continued)


b. Staff members – a discretionary Bonus Scheme will be in operation in relation to the financial year ending 31 December 2007 which will providea bonus pool for staff members to recognize their contribution to the success of the business. The level of bonus payable will be dependent onthe achievement of targets as set out in the Bonus Scheme. The total amount of the bonus for the staff will be calculated as a bonus pool, theamount in the pool depends on the achievement of the targets. The maximum bonus pool is NIS 900,000 (approx $234 thousand).

A portion of the bonus pool may be paid to the Kibbutz subject to the formula that is presented in the bonus scheme.

The Company recorded a provision in the amount of $292 thousand in respect of this bonus plan.

2) The Group has lease agreements in respect of motor vehicles, which terminate between 2008 and 2010. The estimated annual lease payments are$340 thousand.

3) According to a lease agreement between the Company and the Kibbutz, the Company pays the Kibbutz $32.5 thousand per month for the rental ofits offices and plant. The rent is reviewed every three years (see also Note 23c).

On 1 January, 2007, the Company, entered an additional agreement with the Kibbutz, for the rent of an additional building. The lease payments forthe additional building amount to $1.9 thousand per month.

Certain subsidiaries have lease contracts for various periods with estimated monthly lease payments of $52 thousand.

4) The future aggregate minimum lease payments under non-cancellable operating lease agreements subsequent to the balance sheet date are asfollows:


$ in thousandsNot later than 1 year 1,301 1,059Later than 1 year and not later than 5 years 1,935 2,211Later than 5 years 1,136 1,460

4,372 4,730

Operating lease expenses for 2007 were $1,299 (2006: $1,101).

5) As for other agreements with the Kibbutz, see Note 23.

b. Contingent liabilities:

1) According to the purchase agreement (see Note 1(c)), the Company agreed to indemnify the Partnership and the Kibbutz for any claim filed againstthem in connection with the transferred activity up to the date of transfer. This liability does not pertain to tax liabilities that may apply to the Kibbutzin respect of the Partnership’s operation, including the transfer of its assets to the Company and in respect of payments claimed from the Kibbutzdue to claims as to the existence of employee-employer relationships between the Company and the Kibbutz members employed by the Company.

Further, the Company has undertaken to assume all of the liabilities in connection with investment grants that the Partnership received from theState of Israel up to the date of transfer under the Law for the Encouragement of Capital Investments, 1959.

The receipt of grants by the Partnership, as above, and the receipt of other grants by the Company, is conditional upon the fulfillment of theconditions of the letters of approval. In the event of failure to comply with the conditions of the approval, the amount of the grants may be requiredto be refunded, including interest and linkage differences from the date of receipt. As Collateral for the fulfillment of the conditions relating to thereceipt of investment grants, the Company recorded floating charges on all of its assets in favor of the State of Israel. The Company’s managementbelieves that as of the date of the approval of the financial statements, the Company is meeting the conditions of the letters of approval.

2) The Group is contingently liable in respect of performance guarantees provided by banks to customers in the amount of $262 thousand at 31December, 2007 ($556 thousand at 31 December 2006).

3) The Company and a subsidiary participate in programs sponsored by the Israeli Government for the support of research and development activities.The Company and its subsidiary obtained grants from the Office of the Chief Scientist in the Israeli Ministry of Industry, Trade and Labor (“the OCS”).

The Company and the subsidiary are obligated to pay royalties to the OCS amounting to 2% of the sales of the products and other related revenuesgenerated from such projects, up to an amount equal to 100% of grants received, linked to the exchange rate of the U.S. dollar.




NOTE 16 – CONTINGENT LIABILITIES AND COMMITMENTS: (continued)


The Israeli Government awarded a subsidiary grants for participation in foreign marketing expenses, for which the subsidiary is obligated to payroyalties at the rate of 3% of the increase in export sales in relation to the base year, up to the amount of the grants received, linked to the U.S.dollar.

As of 31 December, 2007, the Company and the subsidiary had recorded a liability for grants received in the amount of $244 thousand. The Companyand the subsidiary have an outstanding contingent obligation to pay royalties in the amount of $451 thousand, in respect of projects for which thereis a reasonable assurance that part or all of the grants received will not be repaid. The Company and the subsidiary will record this obligation as aliability if facts and circumstances would require the Company and the subsidiary to revise upwards their estimates of future sales.

4) a. In March 2006, a claim was filed in the supreme court of Victoria against the subsidiary in Australia, Amiad Australia PTY Ltd. (hereafter – thesubsidiary) as well as 8 other defendants (together, the Parties) for damages allegedly caused by inducing certain people who were thenemployed by the claimant to breach their employment and other duties to the claimant, and otherwise interfered with their employmentcontracts.

In May 2007, the claimant filed an Amended Statement of Claim which altered the nature of the claim and increased the quantum of the claimagainst the subsidiary and the other defendant.

On March 6 2008 a settlement agreement was signed between the claimant and the parties.

According to the settlement agreement Plastro Irrigation Systems Ltd. (hereafter – Plastro, one of the defendants) will pay, or cause itssubsidiary in Australia, Plastro Asia Pacific Pty Ltd, to pay a final amount of AUD$2,000,000, plus GSP to the claimant.

Based on its agreement with Plastro, as of February 26 2008, the Company will pay Plastro AUD$100,000, as participation in the settlementagreement.

The Company included in its accounts a provision in this respect.

b. In August 2007, Amiad USA, Inc (hereafter “Amiad USA”) received a draft complaint from counsel for Yitzhak Orlans, the former President anddirector of Amiad USA, Inc (here after “Orlans”). The draft complaint alleges age discrimination, disability discrimination, employmentdiscrimination, wrongful termination and further alleges various other violations of the California Labor Code and the California Business &Professions Code in connection with the termination of Mr. Orlans employment with Amiad USA, Inc. The draft complaint indicates that Mr.Orlans is seeking damages in excess of $2,625 thousand as well as unspecified amounts of non-economic damages, punitive damages andattorneys’ fees and costs.

In November 2007 Amiad USA and Orlans signed a settlement agreement. According to the settlement agreement, the parties agree that:

Amiad USA shall pay Orlans an amount of $80 thousand less all applicable employment-related withholding taxes and deductions as a paymentof a lump-sum retirement package.

In addition, Amiad USA shall redeem Orlans shares in Amiad USA for an aggregate price of $1,317 thousand.

As a result of the purchase of the shares from Orlans by Amiad USA the Company holds the entire outstanding share capital of Amiad USA andit recorded a decrease in minority interest in the amount of $488 thousand and additional goodwill in the amount of $829 thousand.

NOTE 17 – SHAREHOLDERS’ EQUITY:

a. Composed of ordinary shares of NIS 0.5 par value, as follows:

Number of shares

31 December

2007 2006

Authorized 20,000,000 20,000,000

Issued and fully paid* 18,872,723 18,872,723

*The shares are quoted on the London Stock Exchange Alternative Market (AIM), as of 31 December, 2007 at GBP 2 per ordinary share of NIS 0.5 par value.


NOTE 16 – CONTINGENT LIABILITIES AND COMMITMENTS: (continued)


b. Share options:

1) On 12 August 2005, the Company granted to three senior employees, the chairman of the board of directors and to the Kibbutz options to purchase386,682, 154,674 and 77,336 Ordinary Shares, respectively. The options to the senior employees were granted in the framework of the Company’soption plan that was submitted to the Israeli Tax Authorities, in accordance with the provisions of Section 102 to the Israeli Income Tax Ordinanceand the remaining options were granted under the provisions of section 3(i) of the Income Tax Ordinance.

Under section 102, the grantee’s income will be taxed at a reduced tax rate of 25% and the Company will not be allowed to deduct the correspondingexpense for tax purposes with the exception of the work–income benefit component, if any, determined on the grant date.

The options vest over a period of four years (except in the case of the CEO where the period is three years) and have an exercise price of $1.53 pershare. The options will be held during the vesting period by a trustee and will be released in accordance with the terms of the option plan.Unexercised options expire 10 years after date of grant.

The weighted average fair value of the options as at the grant date is $0.49 per share, and was estimated using a binomial option pricing modelbased on the following significant data and assumptions: Share price – $1.53; exercise price – $1.53, expected volatility – 38.4%; risk-free interestrate – 4.4%, expected dividends – 0% and expected average life of options 4 years.

The volatility measured at the standard deviation of expected share price returns is based on the historical volatility of similar listed entities.

2) On 19 April 2007, following a request made by the Company, the senior employees and the chairman of the board of directors gave written noticeto the Company of their waiver, with immediate effect, of 21,874 and 8,751 options respectively granted to them by the Company.

At the same time, the Company received written notice from Kibbutz Amiad of its waiver, with immediate effect, of its right to options granted to itby the Company over 77,336 ordinary shares.

As a result of the cancellation of such options, the Company recognized an amount of $50 thousand, in respect of options not yet vested.

3) On 19 April 2007, the board of directors resolved to grant options over 72,961 ordinary shares under the 2005 options plan to a director of theCompany, at an exercise price of $1.53 per ordinary share (being the same price as the exercise price for the options previously granted to theKibbutz and all other option holders), such options vest over a period of two years and one month. Unexercised options expire eight years and onemonth after date of grant. The actual grant date of the above option was 26 June 2007 following the approval of the grant at the Company’s annualgeneral meeting on such date.

The weighted average fair value of the options at the grant date is $1.19 per share, and was estimated using a binomial option pricing model basedon the following significant data and assumptions: Share price – $2.5; exercise price – $1.53, expected volatility – 39%; risk-free interest rate – 4.6%,expected dividends – 1.3% and an expected life of options eight years and one month.

The volatility measured at the standard deviation of expected share price returns is based on the historical volatility of the Company.

4) In 2007 the CEO of the Company resigned and terminated his employment with the Company. As a result 54,722 options, with vesting period of 11August 2008, were forfeited.

5) On 5 July, 2007 the Company entered into an employment agreement with a new CEO in respect of his employment as of 1 august 2007.

On 5 July, 2007 the Company granted to the new CEO, under 2005 option plan, options to purchase 54,722 ordinary shares of the Company at anexercise price of GBP 1.355 ($2.74) per ordinary share, such option vest over a period of three years and 11 months. Unexercised options expire tenyears after date of grant.

The weighted average fair value of the options as at the grant date is $1.06 per share, and was estimated using a binomial option pricing modelbased on the following significant data and assumptions: Share price – $2.73; exercise price – $2.74, expected volatility – 39.79%; risk-free interestrate – 4.44%, expected dividends – 1.38% and expected average life of options 6 years.

The volatility measured at the standard deviation of expected share price returns is based on the historical volatility measures.

As to phantom bonus granted to the new CEO see note 18.

6) The expense recognized in respect of equity grants in the 12-month period ended 31 December 2007 is $84 thousand (in the year ended in 31December 2006 $143 thousand).




NOTE 17 – SHAREHOLDERS’ EQUITY: (continued)


Movements in the number of potential shares to be issued under outstanding average exercise prices in respect to equity grants are as follows:

2007 2006

Exercise price Number of Exercise price Number ofper share potential shares per share potential shares

At 1 January $1.532 618,692 $1.532 618,692Granted $2.05 127,683 –Forfeited* $1.532 (162,683) –

At 31 December 583,692 618,692

As of 31 December 2007, out of the 583,693 outstanding potential shares to be issued, 188,783 options (2006 – 116,006) are exercisable.

Below are the number of outstanding potential shares to be issued in respect to equity grants, having the following expiry dates and exercise prices asof 31 December 2007 and 2006.

*Including sum of 107,961 potential shares that had been wavered.

Expiry date Exercise price Number of potential shares

2007 2006

11 August 2015: $1.532 528,970 618,6925 September 2017: $2.74 54,722

583,692 618,692

e. The Company’s board of Directors has adopted a dividend policy, pursuant to which the Company, subject to future performance and fundingrequirements, will distribute annual dividends of up to 50% of the net income in the calendar year.

On 4 May, and 1 November 2006, the Company distributed dividends to its shareholders in the amount of NIS 6,553 thousand, NIS 1,967 thousand,respectively (total $1,905 thousand).

On 17 May, 2007 and 22 October, 2007 the company distributed dividends to its shareholders in the amount of NIS 3,337 thousand, NIS 2,275 (total$1,410 thousand).

NOTE 18 – PHANTOM BONUS:

On 5 July 2007, the Company entered into an employment agreement with a new CEO in respect of his employment as of 1 August 2007. Pursuant to the termsof the agreement the CEO is entitled to receive a cash phantom bonus which will be calculated based of the changes in the average price of the Company’sordinary share for the 2 year period ended in August 2009. The bonus will be paid on August 2009, provided that the CEO is employed by the Company atsuch date.

The fair value of the phantom bonus as of 31 December 2007 is $110 thousand, and was estimated using a Monte Carlo option pricing model based on thefollowing significant data and assumptions: Share price – $1.987; exercise price – $0, expected volatility – 39.79%; risk-free interest rate – 4.44%, and expectedaverage life of options 1.59 years.

The volatility measured at the standard deviation of expected share price returns is based on the historical volatility of the Company.

The expense recognized in respect of the phantom bonus in the 12-month period ended 31 December 2007 is $23 thousand. The Company recorded arespective liability in the amount of $23 thousand.


NOTE 17 – SHAREHOLDERS’ EQUITY: (continued)


NOTE 19 – TAXES ON INCOME:

a. Tax rates applicable to income

The income of the Company is taxed at the regular tax rate.

In July 2004, Amendment No.140 to the Income Tax Ordinance was enacted. One of the provisions of this amendment was that the corporate tax rate isto be gradually reduced from 36% to 30%. In August 2005, a further amendment (No.147) was published, which made a further revision to the corporatetax rates prescribed by Amendment No.140. As a result of the aforementioned amendments, the corporate tax rates for 2004 and thereafter are asfollows: 2006 – 31%, 2007 – 29%, 2008 – 27%, 2009 – 26% and for 2010 and thereafter – 25%. Foreign subsidiaries are taxed on the basis of the tax lawsin their countries of residence.(The tax rates are between 20%-40%).

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, the results for tax purposes are measured in real terms, adjusted for the changes in the Israeli CPI. TheCompany is taxed under this law.

Under the Income Tax (Inflationary Adjustments) Law, 1985 (hereafter – the inflationary adjustments law) (Amendment No. 20, 2008, hereafter – theamendment), that was enacted in the Kneset (the Israeli parliament) on February 26, 2008, the provisions of the Inflationary Adjustments Law will nolonger apply to the company in 2008 and thereafter. The amendment specifies transitional provisions regarding the discontinuance of the provisions ofthe Inflationary Adjustments Law that have applied to the company through the end of 2007.

c. The Law for the Encouragement of Capital Investment, 1959:

In the context of the purchase agreement (as discussed in Note 1(c)), the partnership transferred to the Company all of the rights and obligations relatingto two investment plans of the partnership which have been granted status as an “approved enterprise” under the Law for the Encouragement of CapitalInvestments, 1959 and which are entitled to grants and tax benefits. By virtue of this status, the Company is entitled to tax reductions on taxable incomederived from the approved enterprises.

The main benefit, which relates to income derived from the approved enterprises, is a tax exemption during the first two years and a reduced tax rateof 25%, instead of the statutory tax rate, during the following five years. The benefit period begins in the year in which taxable income is first earned,and it’s limited to 12 years from the year that the approved enterprise began operations, or 14 years from the year in which the approval was granted,whichever is earlier. The Company is also eligible for accelerated depreciation on assets used by the approved enterprises

In the event of distributions of dividends out of income derived from an approved enterprise, which was tax exempt, the Company shall be liable to paytax at the rate of 25% on the distributed earnings. The Company didn’t distribute dividend from tax exempt income in 2007 or 2006.

Dividend distributions derived from an approved enterprise are subject to 15% withholding tax.

The benefit period for the first program ended in 2002. The benefit period for the second and the third programs will end in 2009 and in 2013 respectively.

The above benefits are conditional upon the fulfillment of the conditions stipulated by the law, regulations published thereunder and the letters ofapprovals for the specific investment in the approved enterprises. In the event of failure to comply with these conditions, the benefits may be cancelledand the amounts of the benefits refunded, including interest. Management believes that the Company is meeting the aforementioned conditions.

d. The Law for the Encouragement of Industry (Taxation), 1969

The Company is an “industrial Company” as defined by this law. According to this status and by virtue of regulations published, the Company is entitled toa deduction for accelerated depreciation on equipment used in industrial activity, as determined in the regulations effective under the Inflationary Law.

In addition, the law allows the Company to deduct the IPO costs as an expense for tax purposes over a period of three years. Accordingly, the Companyrecorded a tax benefit of $186 thousand and $229 thousand for the years 2007 and 2006 respectively.

Pursuant to regulations prescribed by force of Amendment 147 to the Income Tax Ordinance, the Group is entitled to deduct as a depreciation expensethe entire depreciated cost balance of equipment which was acquired in the period from 1 July, 2005 through 30 September, 2006 in a manner thatequipment which was acquired in 2005 shall be fully depreciated in 2006 and equipment that was acquired in 2006 shall be fully depreciated in 2007. In2007 the Company chose not to fully depreciate the cost of equipment that was acquired in 2006.

e. Tax assessments:

The Company received final tax assessments through 2003 and it’s Israeli subsidiary through 2002.Amiad USA received final tax assessments through 2005, the rest of the foreign subsidiaries have not received final tax assessments since theirincorporation.





f. Deferred income tax assets (liabilities):

1) The Deferred income tax assets (liabilities) balance and deferred tax benefit (expenses) recognized in the income statements are as follows:

31 December20072007 2006

$ in thousands

Depreciable assets (477) (542)Temporary differences in recognition of income and expenses 646 722Unrealized gains on inventories 763 503

Total 932 683

2) Deferred income tax balances are measured using the enacted tax rates expected to be in effect when the differences are expected to reverse andare presented in the balance sheet as follows:

31 December20072007 2006

$ in thousands

Assets 1,409 1,225Liabilities (477) (542)

932 683

3) The Deferred income tax assets (liabilities) are expected to be recovered as follows:31 December


Deferred income tax assets:Within 12 months 1,286 1,079After more than 12 months 123 146

1,409 1,225

Deferred income tax liabilitiesAfter more than 12 months 477 542

g. Taxes on income (tax benefit):

1) As follows:Year ended 31 December


For the reported year:Current 1,351 1,106Deferred income taxes (232) (174)

1,119 932For previous years – current 20 (196)

1,139 736

Current taxes are computed at an average tax rate of 32% and 35% for the years 2007 and 2006, respectively.


NOTE 19 – TAXES ON INCOME: (continued)


2) Theoretical tax reconciliation:

Following is a reconciliation of the theoretical tax expense, assuming all income is taxed at the regular tax rates applicable to companies in Israel(note 19 above) and the actual tax expense:


$ in thousands

Income before taxes on income 5,903 3,727

Theoretical tax expense in respect of the profit or loss – at 29% (2006: 31%) 1,712 1,155 Increase (decrease) in taxes on income due to:

Differences between the basis of measurement of Income reported for tax purpose and the basis ofmeasurement of income for financial reporting purposes – net (115)

Reduced tax rates on approved enterprises (57) (47)Different tax rates applicable to foreign subsidiaries 23 38 Adjustment to deferred tax balances due to changes in tax rates (7) 43 Taxes in respect of currency differences (387) (170)Taxes in respect of previous years 20 (196)Previous year tax losses utilised during the year (218) (96)Previous year tax losses for which deferred income tax asset is recognized during the year (46)Non-deductible expenses and other differences 168 59

Income tax expense 1,139 736

NOTE 20 – SUPPLEMENTARY FINANCIAL STATEMENT INFORMATION:

31 December20072007 2006

$ in thousandsa. Cash and cash equivalent:

U.S. dollars 1,324 2,485Pound sterling 14New Israeli shekel 471 88Euro 1,132 450Chinese RMB 439 448Australian dollar 625 649Other 55 97

4,060 4,217

b. Account receivables1) Trade

Open accounts 18,492 17,011Checks receivable 404 370

18,896 17,381Less – provision for impairment of trade receivables (1,038) (510)

17,858 16,871




NOTE 19 – TAXES ON INCOME: (continued)


Movements on the Group provision for impairment of trade receivables are as follows:20072007 2006

$ in thousands

At 1 January 510 355Provision for receivables impairment 533 177Collection of receivables (5) (22)

At 31 December 1,038 510

The maximum exposure to credit risk at the reporting date is the carrying value of each class of receivable mentioned above. The Group does nothold any collateral as security.

The trade receivables carrying amount represent the fair value since it is short term receivables.

As of 31 December 2007, trade receivables of $3,107 thousands (2006: $3,587 thousands) were past due but not impaired. These relate to a numberof independent customers for whom there is no material history of default. The ageing analysis of these trade receivables is as follows:

31 December20072007 2006

$ in thousands

Up to 3 months 2,211 2,2253 to 6 months 523 760Above 6 months 373 602

3,107 3,587

31 December20072007 2006

$ in thousands2) Other

Government authorities 86 329 Prepaid expenses 165 185 Advances to suppliers 179 69 Investment grants receivable 27 142 Current maturities of long-term loans to related party 50 45 Employees 37 53 Receivables from other institutions 423 *46 Other 159 *140

1,126 1,009

*Reclassified


NOTE 20 – SUPPLEMENTARY FINANCIAL STATEMENT INFORMATION: (continued)


The amounts of trade and other receivables are denominated in the following currencies:31 December


Trade:NIS 2,402 1,777U.S. dollar 6,963 7,502Euro 3,464 3,321Australian dollar 3,250 2,789RMB 1,779 1,482

17,858 16,871

Other:NIS 783 784U.S. dollar 104 99Euro 83 17Australian dollar 10 15Other currencies 146 94

1,126 1,009

c. Short-term borrowings from banks:

1) Composed as follows:Bank credits and short-term bank borrowings 6,935 5,577Current maturities of long-term borrowings from Banks 1,739 1,955

8,674 7,532

2) Classified by currency, linkage terms and interest rates, the short-term bank borrowings (excluding current maturities of long-term loans (note 13(a))are as follows:

Weighted Weightedaverage averageinterest 31 December interest 31 December

rates* 2007 rates* 2006

$ in $ in% thousands % thousands

In U.S. dollars 6.52 3,805 7.49 3,623 Denominated in NIS 6.66 3,080 6.65 1,707 Denominated in Australian dollars 8.24 124Denominated in Euro 6.53 48 5.22 89 In other currencies 6.85 2 6.75 34

6,935 5,577

Current maturities of long-term loans frombanks and others (see note 13) 1,739 1,955

8,674 7,532

* The credit bears interest at variable rates. The weighted average interest rates are as of 31 December for each of the years.






3) The Group has the following undrawn borrowing facilities:31 December


Floating rate:Expiring within one year 8,687 6,894

d. Financial assets at fair value through profit or loss:31 December


Corporate bonds 2,005 1,869Derivatives 107 –

2,112 1,869

31 December20072007 2006

$ in thousands

e. Accounts payables:

1) Trade payablesOpen accounts 12,022 7,800Checks receivable 6 62

12,028 7,862

2) Other accounts payableEmployee benefit expenses and other liabilities for wages and salaries

(including accrued vacation pay) 1,311 1,293Customer advances 1,423 303Related parties (the Kibbutz) 509 424Provision for settlement of claims 29 79Commissions and other accrued expenses 1,201 627Provision for governments grants (see note 16b(3)) 244 120Sundry 596 265

5,313 3,111




31 December20072007 2006

$ in thousands

f. Sales by customer location:North America 14,761 11,558Europe 14,705 9,842Australia 8,827 6,252East Asia 8,036 7,655Israel 5,791 4,486South America 3,707 3,051Africa 1,128 1,232

Total 56,955 44,076

g. Cost of sales:Materials consumed 14,498 9,995Subcontractors 5,634 3,649Employee benefit expenses 4,169 3,347Manpower services provided by the Kibbutz 1,650 1,456Depreciation 435 352Rent and maintenance 375 360Other manufacturing expenses 2,308 1,396

29,069 20,555

Increase in inventories of work in progress (1,250) (514)Increase in inventories of finished products (1,221) (126)

Total changes in inventories (2,471) (640)Cost of purchased products 3,388 2,182

Total 29,986 22,097

h. Selling and marketing costs:Employee benefit expenses 4,717 3,846Distribution, commissions and maintenance of sales offices 2,724 2,206Delivery, packing, release and insurance 1,775 1,436Advertising 1,122 955Travel Abroad 648 735Motor vehicle maintenance 525 428Manpower services provided by the Kibbutz 387 395Sundry 1,946 1,454

13,844 11,455






31 December20072007 2006

$ in thousands

i. Administrative and general expenses:Employee benefit expenses 2,532 2,403Rent and maintenance 431 386Professional fees 1,161 1,112Depreciation 179 *212Manpower services provided by the Kibbutz 327 198Doubtful accounts and bad debts 537 114Telephone and communication 227 233Office expenses 265 254Sundry 792 669

6,451 5,581

*Reclassified

j. Finance income and costs:Interest expenses – Loans 834 774Foreign exchange differences 271Bank commissions 168 147Tax interest 7 30

Finance costs 1,009 1,222

Finance income:Interest income on the short-term bank deposits 149 237Gains from corporate bonds 86 12Foreign currencies derivative 172 109Foreign exchange differences 203

Finance income 610 358

Net finance costs 399 864

k. Expenses by nature:Materials consumed 14,498 9,995Other manufacturing expenses 2,309 1,395Cost of purchased products 3,388 2,182Changes in inventories (2,472) (640)Employee benefit expenses 11,418 9,597Manpower services provided by the Kibbutz 2,364 2,049Subcontractors 5,634 3,649Professional fees 1,161 1,112Delivery, packing, release and insurance 1,775 1,436Distribution, commissions and maintenance of sales offices 2,724 2,206Advertising 1,122 955Rent and maintenance 806 746Depreciation 645 595Impairment of receivables 533 177Sundry 4,376 3,679

50,281 39,133




NOTE 21 – EARNINGS PER SHARE:

Data regarding the earning per share:Year ended 31 December


Weighted averge number of Ordinary shares outstanding (in thousands)

Basic:Number of shares in the beginning of the period 18,873 18,873

Number of shares used for calculation of earnings per share – basic 18,873 18,873

Diluted:Number of shares used for calculation of earnings per share – basic 18,873 18,873Adjustments for share options 151 309

Number of shares used for calculation of earnings per share – diluted 19,024 19,182

Net income attributable to equity holders of the parent 4,582 2,875

Basic earnings per share (in U.S. dollars) 0.243 0.152

Diluted earnings per share (in U.S. dollars) 0.241 0.150

NOTE 22 – CASH FLOWS FROM OPERATING ACTIVITIES:


$ in thousands

Profit for the year 4,764 2,991(a) Adjustments to reconcile net income to net cash used in operating activities:

Depreciation, and impairment amortization 1,017 941Interest paid 722 633Income taxes paid 2,029 1,833Share based payment 84 143Deferred income taxes, net (249) (184)Accrued severance pay, net (233) 76Exchange rate differences on borrowings 12 69Gain from marketable securities (193) (12)Loss (gain) on sale of fixed assets (3) 14Exchange rate differences on loans to related party and others (70) (48)

7,880 6,456

Changes in working capital:Increase in accounts receivable:

Trade (607) (2,261)Other (1,476) *(108)

Increase in accounts payable:Trade 3,684 1,802Other 2,059 131

Increase in inventories (5,228) (2,136)

(1,568) (2,572)

Cash generated from operations 6,312 3,884

Non-cash transaction – grant receivables regarding the purchase of fixed assets (55) 139

* Reclassified





NOTE 23 – RELATED PARTIES – TRANSACTIONS AND BALANCES:

a. Transactions with related parties:Year ended 31 December


1) Income:Financial income from the Kibbutz, see note 9 34 21

2) Expenses:Manpower services – Kibbutz members (c) 2,280 1,953Lease fees to the Kibbutz (see c below and note 16a(3)) 438 385Maintenance fees to the Kibbutz (c) 433 235Key management compensation:

Wages and salaries including bonuses 1,145 797Share-based payment including phantom options, see note 18 107 143

b. Balances with related parties:31 December


1) Current receivables from related parties – presented in the balance sheets among current assets:Jointly-controlled entity 398 492Long-term loan to a related party (including current maturities) 753 730

Trade and other receivables from related parties 1,151 1,222

2) Current payables from related parties – presented in the balance sheets among current liabilities:Other accounts payables to related parties 509 424Other accounts payables to key management 162

671 424

c. According to several agreements between the Kibbutz and the Company, the Kibbutz provides the Company with manpower and management services,use of land and buildings, utilities and maintenance services.

According to a lease agreement dated 30 June 1998 between the Company, the Kibbutz and Amiad Filtration Systems LLP (now Amiad Assets 2005 LLP)the Company pays a monthly rent of $32.5 thousand. The rent is reviewed every 3 years. The term of the sublease is 10 years as of the date of theaddendum, with an option to extend until 31 December 2022. The Company is obliged to assist, by way of a loan, with the financing of changes made tothe leased property by the Lessor at the request of the Company. Such loan is repayable to the Company by the Lessor offsetting against such loan anyincreased rent due by virtue of the changes to the property having increased the value of the leased property. The outstanding loan accrues interest atthe minimum rate stipulated by the applicable Israeli law and is linked to the Consumer Price Index. As at 31 December 2007 and 2006, the balance ofthe loan due to the Company was $753 thousand and $730 thousand respectively (see note 9). As for a new lease agreement see note 16(a)(3).

According to a manpower service agreement dated 30 June 1998 between the Company and the Kibbutz, as amended by an addendum dated 24November 2005, the Kibbutz agreed to supply the Company with manpower. The term of the agreement is 10 years commencing on 1 October 2005. Theagreement is automatically renewable for additional periods of 10 years each, unless either party notifies the other of its intention not to renew the termof the agreements six months prior to the end of the agreement. The Kibbutz may terminate the agreement by a six months written notice at any time.Upon termination, all personnel supplied by the Kibbutz, may become employees of the Company. The cost of the manpower services under theagreement will be paid monthly based on a formula which varies depending on the number of workers and the function each worker undertakes at theCompany.

According to a service agreement dated June 1998 between the Company and the Kibbutz, as amended by an addendum dated 24 November 2005, theKibbutz agreed to provide the Company with various services including utilities, maintenance, etc. the term of the agreement is 10 years commencingon 1 October 2005. The agreement is automatically renewable for additional period of 10 years every 10 years, unless either party notifies the other ofits intention not to renew the term of the agreements six months prior to the end of the agreement. In accordance with the addendum, the cost ofservices is $13 thousand per month.

d. As for senior management incentive plan, see note 16(a)1; As to phantom bonus see note 18, as to share options , see note 17b(5).



NOTE 24 – EVENTS AFTER THE BALANCE SHEET DATE

On March 25, 2008 the Company’s board of directors resolved to distribute a cash dividend on record on April 23, 2008, in the amount equal to $0.048 per share,out of the retained earnings at December 31, 2007. The dividend shall be paid in May 2008.

APPENDIX 1

List of subsidiariesPercentage

of shareholdingName of Company Country and control

31 December20072007 2006

% %Amiad USA Inc USA 100 82Filtration Ltd Israel 100 100Filtration & Control Systems PTE Ltd Singapore 100 100Yixing Taixing Environtec Co. Ltd China 50 50Amiad Australia Pty Ltd Australia 100 100Amiad Filtration Solutions Ltd Germany 100 100Amiad France SARL France 66 66





AMIAD FILTRATION SYSTEMS Ltd

D.N. Galil Elyon 1, 12335, Israel

Phone: +972-4-690-9500

Fax: +972-4-690-9391

email: [email protected] www.amiad.com

Directors’ Report and Financial Statements 2007For the year ended December 31, 2007

AMIAD FILTRATIONSYSTEMS LTD

AM

IAD

FILTRATIO

N S

YSTE

MS LTD

Directors R

eport and Financial Statem

ents - For the year ended Decem

ber 31

, 20

07

Amiad R&A 2007 Covers.indd 1Amiad R&A 2007 Covers.indd 1 13/6/08 14:51:0913/6/08 14:51:09

directors’ report and financial statements 2007 for the ... · yosef katz (chief executive ofﬁ...

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