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



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

FORM 20-F

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

OR

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

For the fiscal year ended on December 31, 2007

OR

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

For the transition period from ____________ to

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

Commission File Number 1-04212

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

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

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

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


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

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

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

None

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

None

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

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

o Yes     x No

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

o Yes     x No

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

Yes x No o



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

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

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

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

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

Item 17 x Item 18 o

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

o Yes     x No



TABLE OF CONTENTS

CERTAIN DEFINED TERMS
FORWARD-LOOKING STATEMENTS

PART I

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

3



CERTAIN DEFINED TERMS

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

FORWARD-LOOKING STATEMENTS

        This Annual Report on Form 20-F contains “forward-looking” statements, within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) (collectively, the “Safe Harbor Provisions”). These are statements that are not historical facts and include statements about our beliefs and expectations. These statements contain potential risks and uncertainties and actual results may differ significantly. Forward-looking statements are typically identified by the words “believe”, “expect”, “intend”, “estimate” and similar expressions. Such statements appear in this Annual Report and include statements regarding the intent, belief or current expectation of the Company or its directors or officers. Actual results may differ materially from those projected, expressed or implied in the forward-looking statements as a result of various factors including, without limitation, the factors set forth below under the caption “Risk Factors” (the Company refers to these factors as “Cautionary Statements”). Any forward-looking statements contained in this Annual Report speak only as of the date hereof, and the Company cautions potential investors not to place undue reliance on such statements. The Company undertakes no obligation to update or revise any forward-looking statements. All subsequent written or oral forward-looking statements attributable to the Company or persons acting on the Company’s behalf are expressly qualified in their entirety by the Cautionary Statements.

4



PART I

ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

Not applicable.

ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE

Not applicable.

ITEM 3. KEY INFORMATION

A. Selected Financial Data

        American Israeli Paper Mills Ltd. (“AIPM” or the “Company”) prepares its financial statements in accordance with Israeli GAAP. Israeli GAAP and U.S. GAAP vary in certain respects as it relates to the Company, as described in Item 17.

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

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

        The financial data is presented in New Israeli Shekel (NIS) as follows: AIPM made a transition to reporting in nominal NIS in 2004, pursuant to the directives of Standard 12 of the Financial Accounting Standards Board in Israel. Prior to 2004, AIPM’s reports were in NIS, adjusted to changes in the exchange rate of the U.S. dollar against the NIS.

        The comparison figures for the year 2003 are the dollar figures, as reported in the past, multiplied by the exchange rate of the U.S. dollar as at December 31, 2003, the day of the transition to NIS-based reporting pursuant to Standard 12 ($1 = NIS 4.379). See also note 1b to the Financial Statements.

5



Five Fiscal Year Financial Summary

According to Israeli GAAP

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


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

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

2 Dividend paid in 2003 includes a special dividend for 2003 in the sum of NIS 19.04 per share ($4.29 per share).
  Dividend for 2003 in the sum of NIS 25.12 per share ($5.54 per share) was declared in August 2004 and paid in September 2004.
  Dividend for 2005 in the sum of NIS 12.50 per share ($2.71 per share) was declared in August 2005 and paid in September 2005.
  Additional dividend for 2005 in the sum of NIS 12.49 per share ($2.71 per share) was declared in December 2005 and paid in January 2006.
  Dividend for 2006 in the sum of NIS 24.85 per share ($ 5.64 per share) was declared in June 2006 and paid in July 2006.

6



According to U.S. GAAP

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

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


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

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

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

2 Dividend paid in 2003 includes a special dividend for 2003 in the sum of NIS 19.04 per share ($4.29 per share).
  Dividend for 2003 in the sum of NIS 25.12 per share ($5.54 per share) was declared in August 2004 and paid in September 2004.
  Dividend for 2005 in the sum of NIS 12.50 per share ($2.71 per share) was declared in August 2005 and paid in September 2005.
  An additional dividend for 2005 in the sum of NIS 12.49 per share ($2.71 per share) was declared in December 2005 and paid in January 2006.
  Dividend for 2006 in the sum of NIS 24.85 per share ($ 5.64 per share) was declared in June 2006 and paid in July 2006.

7



Exchange Rates

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

Month
High
Low
1 U.S. dollar = 1 U.S. dollar =
 
December 2007 4.008 NIS 3.841 NIS
January 2008 3.861 NIS 3.625 NIS
February 2008 3.655 NIS 3.578 NIS
March 2008 3.656 NIS 3.377 NIS
April 2008 3.640 NIS 3.425 NIS
May 2008 3.461 NIS 3.233 NIS

        The average exchange rate between the NIS and U.S. dollar, using the average of the exchange rates on the last day of each month during the period, for each of the five most recent fiscal years, was as follows:

Period
Exchange Rate
January 1, 2003 - December 31, 2003 4.512 NIS/$1
January 1, 2004 - December 31, 2004 4.483 NIS/$1
January 1, 2005 - December 31, 2005 4.878 NIS/$1
January 1, 2006 - December 31, 2006 4.456 NIS/$1
January 1, 2007 - December 31, 2007 4.085 NIS/$1

B. Capitalization and Indebtedness

        Not applicable.

C. Reason for the Offer and Use of Proceeds

        Not applicable.

D. Risk Factors

Macro-economic risk factors

A slowdown in the market may result in a reduction of profitability

        A slowdown in the global markets as well as in the Israeli market may cause: a decrease in the demand for the Company’s and its associated companies’ products, an increase in the competition with imported products and a decrease in the profitability of export and that could result in a reduction in the Group’s* sales and a decline in its profitability.

Future legal restriction may negatively affect the results of operations

        The Company’s activities and its subsidiaries and associated companies’ activities are confined by legal constraints (such as government policy on various subjects, different requirements made by the authorities supervising environmental regulations and governmental decisions to raise minimum wages). These restrictions may affect the results of operations of the Group.


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

8



Any future rise in the inflation rate may negatively affect business

        Since the Company possesses a significant amount of CPI-linked liabilities, a high inflation rate may cause significant financial expenses. Consequently, the Company occasionally enter into hedging transactions to cover the exposure due to the liabilities. A high inflation rate may also affect payroll expenses, which, at the long run, tends to be adjusted to the changes in the CPI.

Exposure to Exchange Rate Fluctuation

        The Company, its consolidated subsidiaries and associated companies are exposed to risks due to changes in the foreign exchange rates, either due to importing raw materials and finished products or due to exporting to international markets. Changes in the foreign exchange rates of the different currencies compared to the New Israeli Shekel may cause erosion in profitability and cash flow.

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

Interest Risks

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

Risk Factors relating to the Company

The Company faces significant competition in the markets the Company operates in

        The Company operates in the packaging paper and office supplies industries, both of which are highly competitive. In the packaging paper industry the Company faces competition from imported paper. In the office equipment sector the Company faces competition from many suppliers that operate in the Company’s markets. The associated companies are also exposed to competition in all of their operations. This competition may negatively affect the future results. For further information see the section titled – “Competition” in Item 4B below.

The Company is exposed to increases in the cost of raw materials.

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

        There is an exposure in the associated companies resulting from fluctuation of prices of raw material and of the imported products, which arrive to Israel without tariffs or entrance barriers. Exceptional price increase of raw materials and imported products may have an adversary effect on these Companies’ profitability.

The Company is dependent on energy prices.

        AIPM’s activities are highly dependent on the consumption of energy and therefore are influenced by fuel and electricity prices. AIPM’s profitability may suffer if there is an exceptional increase in energy prices.

Account Receivable Risks

        Most of the Company’s and its subsidiaries’ sales are made in Israel to a large number of customers. Part of the sales is made without full security of payment. The exposure to credit risks relating to trade receivables is usually limited, due to the relatively large number of our customers. The Company performs ongoing credit evaluations of its customers to determine the required amount of allowance for doubtful accounts. An appropriate allowance for doubtful accounts is included in the financial statements.

9



The operations in Turkey may suffer as a result of the Turkish economy.

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

Risks Associated with credit from banks

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

Risk related to our paper and recycling business

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

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

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

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

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

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

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

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

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

10



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

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

Risk related to our office supplies business

We are dependent on continued success in securing large tenders.

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

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

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

Risks relating to our location in Israel

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

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

  any major hostilities involving Israel;

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

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

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

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

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

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

11



Risks relating to our ordinary shares

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

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

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

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

ITEM 4. INFORMATION ON THE COMPANY

A. History and Development of the Company

        American Israeli Paper Mills Ltd. was incorporated in 1951 under the laws of the State of Israel, and, together with its subsidiaries and associated companies (which together with the Company are referred to as the “Group”) is Israel’s largest manufacturer of paper and paper products.

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

        Over the last few years, the Group has participated in several joint ventures as follows:

    1.        In July 1992, the Group purchased 25% of the shares of Carmel Container Systems Ltd. (“Carmel”), a leading Israeli designer, manufacturer and marketer of containers, packaging materials and related products. On June 1, 2007 Carmel preformed a self-acquisition of its own shares, and as a result, the Group’s holding in Carmel increased. As of December 31, 2007, the Group held 36.2% of the shares of Carmel. Another major shareholder in Carmel is the Kraft Group LLC, an American shareholder holding49.6% of Carmel’s shares. Carmel shares were traded on the AMEX before it was delisted and deregistrated in 2005.

    2.        In 1996, Kimberly-Clark Ltd. (“KC”) acquired 49.9% of the shares of Hogla, a wholly-owned subsidiary of the Company and a leading Israeli consumer products company, which was then renamed Hogla-Kimberly Ltd (“H-K”). H-K is engaged in the production and marketing of household paper products, hygiene products, disposable diapers and complementary kitchen products. The partnership was intended to expand the local production base in Israel, in order to serve both local and regional demand, and to offer H-K access to international markets. In 1999, H-K purchased “Ovisan”, which was renamed to Kimberly-Clark Turkey (“KCTR”), a Turkish manufacturer and marketer of diapers and paper products. On March 31, 2000, KC increased its holdings in H-K to 50.1%.

    3.        Effective January 1, 2000, AIPM entered into a joint venture agreement (the “Agreement”) with Neusiedler AG, which later changed its name to Mondi Business Paper (“MBP”), pursuant to which MBP acquired 50.1% of AIPM’s printing and writing paper operations. The printing and writing paper operation was separated from AIPM upon the completion of this transaction and was sold to Neusiedler Hadera Paper (NHP), a subsidiary that was established for this purpose, of which MBP acquired 50.1%. NHP was renamed in 2004 to Mondi Business Hadera Paper, and was again renamed in February 2008 and is now called Mondi Hadera Paper (“Mondi Hadera”).

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

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

    5.        In July 1998, the Company signed an agreement with a strategic partner, Compagnie Generale d’Entreprises Automobiles (“CGEA”), for the sale of 51% of the operations of Amnir Industries and Environmental Services Ltd. (“Amnir Environment”) in the field of solid waste management. The agreement did not apply to Amnir’s operations in collecting and recycling paper and plastic. (As of February 13, 2007, the Company is no longer a shareholder in Amnir Environment – see Item 6 below.)

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

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

        Other important events in the development of the Company include:

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

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

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

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

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

Capital Expenditures and Divestitures

2007

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

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

2006

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

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

2005

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

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

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B. Business Overview

        I. The Group’s Operations and Principal Activities

        The Company is engaged through its subsidiaries in the manufacture and sale of packaging paper, in the collection and recycling of paper and plastic waste and in the marketing of office supplies, mainly to the institutional and business sector. The Company also holds interests in associated companies that deal in the manufacture and marketing of printing and writing paper, household paper products, hygiene products, disposable diapers, kitchen products, corrugated board containers and packaging for consumer goods.

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

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

        The Company operates in its main production site in Hadera according to the following standards:

        ISO 9001/2000 – quality management

        ISO 14001 – environmental regulations

        Israeli Standard 18001 - safety

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

  Grades of Paper and Board

        Printing and writing paper, publication papers in reels, coated paper, recycled paper, cut-size paper for copy laser and inkjet, copy-book paper, paper for continuous forms, paper for envelopes and direct mailing and various grades of packaging paper and board.

  Packaging Products

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

  Household Products

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

  Industrial, Hospital and Food Service Products

        Toilet paper, towel rolls, C-fold towels, napkins, place mats, coasters, bed sheets, wadding, paper, toilet seat covers, disposable bed-pans and urinals, sterilizing paper, bathroom tissue and paper towel dispensers, dispensers for liquid hand soaps and room deodorizing dispensers for washrooms and cleaners, detergents and cleaning complementary products, cups and plates, and examination gloves.

  Other Products

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

Sales and Marketing

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

        The Group’s office supplies products are sold to thousands of customers in the business to business sector and to institutions such as governmental offices, health maintenance organizations and banks. About 21% of the sales are made through tenders.

        The Group’s paper grade products are sold to publishers, big and medium size printers, converters, and wholesalers, some of which are part of the Group, as well as other customers.

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        The Group’s household products are marketed mainly through retail marketing chains, stores and the institutional market.

        The Group’s packaging products are sold to a wide range of customers in different sectors (e.g., to the agriculture, and food and beverage industries), including direct marketing to ultimate customers through subcontractors and agents.

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

  (a) Maintaining its existing dominant share in the Israeli market for paper grade and household products produced by the Group and imported by it, through short delivery times and prompt service, while constantly improving the quality of its products.

  (b) Meeting the growing and changing requirements of the market by adding new products and improving the quality of existing grades of paper in order to meet the technological changes required by new printing equipment and the needs of the customers.

  (c) Exploring new business opportunities in Israel and abroad, and increasing the range of its products and its production capacity.

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

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

Packaging Paper
Manufacturing
and Recycling 1

Marketing Office
Supplies 2

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










1. Packaging paper manufacturing and recycling – Manufacturing and marketing of packaging paper, including collecting and recycling of paper waste. The manufacturing of packaging paper relies mainly on paper waste as raw materials.

2. Marketing office supplies – Marketing of office supplies and paper, mainly to institutions.

Raw Materials

        The raw materials required for paper and board production are different wood pulps, secondary fibers (i.e., waste paper) and various chemicals and fillers. Pulp is imported primarily from major suppliers in Scandinavia, the United States, Portugal, Austria, Chile and Spain. The bulk of the pulp tonnage purchased by the Company is secured by revolving long-term agreements renewed on a yearly basis. All of the pulp for the printing and writing paper manufactured by Mondi Hadera is purchased by Mondi Paper (the Austrian parent company), which purchases pulp for its subsidiaries around the world. This ensures fluent supply and better prices.

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

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

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

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

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

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

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

Competition

        Most of the Group’s products that are sold in the Israeli market are exposed to competition with local and imported products. The imported products arrive in Israel exempt from import tariffs, especially from the European Economic Community (“EEC”), the European Free Trade Association (“EFTA”) and the U.S. Tariffs on imports of fine paper from other countries range up to 12%.

        The main competitors of the Group in the different fields of operation are Israeli companies which sell mainly imported products, except for sales of baby diapers and hygienic products (in which the main competitor of H-K is Proctor & Gamble Co.)

        In the market for office supplies that are sold directly to institutions and businesses, there are numerous local suppliers that compete with the Company.

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

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

        The competition has influence over the selling prices that the Group can charge. The Group competes with the imported products by emphasizing the advantages of having a local supplier by ensuring the customers uninterrupted supply and service on short notice and excellent quality of products.

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

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

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

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

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

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

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

C. Organizational Structure

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

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Significant subsidiaries and associated companies

Name of the Company
Ownership and
Voting

Country of
Incorporation

 
Subsidiaries    
Amnir Recycling Industries Ltd. 100.00% Israel
 
Graffiti Office Supplies & Paper Marketing Ltd. 100.00% Israel
 
Attar Marketing Office Supplies Ltd. 100.00% Israel
 
American Israeli Paper Mills Paper Industry (1995) Ltd. 100.00% Israel
 
Associated Companies
Hogla-Kimberly Ltd. 49.90% Israel
 
Kimberly -Clark Tuketim Mallari Sanayi Ve Ticaret A.S.
("KCTR") (held through H-K) 49.90% Turkey
 
Mondi Paper Hadera Ltd. 49.90% Israel
 
Barthelemi Holdings Ltd.** 35.98% Israel
 
T.M.M. Integrated Recycling Industries Ltd. (direct and indirect)** 43.08% Israel
 
Carmel Containers Systems Ltd. 36.21% Israel
 
Frenkel- CD Ltd. (direct and indirect through Carmel) 37.93* Israel
 
Cycle-Tec Recycling Technology Ltd. 30.18% Israel


* The holding in voting shares is 35.11%

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

D. Property, Plants and Equipment

        The Group’s principal executive offices and manufacturing and warehouse facilities are located on approximately 87.5 acres of land in Hadera, Israel, which is 31 miles south of Haifa. Hadera is a major seaport located 28 miles north of Tel Aviv. The Company owns 68.5 acres of the land on which it operates, of which 19.27 acres were purchased in 2005 for the amount of $4.4 million. An additional 17 acres are leased from the Israel Land Administration, an agency of the State of Israel, under several leases. The lease periods terminate from 2012 until 2056. Some of this land is rented to associated companies, which operate in Hadera.

        The Group’s facilities in Hadera are housed in two-story plants and several adjoining buildings. Approximately 1,200,000 square feet are utilized for manufacturing, storage and sales and administrative offices. In addition, AIPM leases from the Israel Land Administration approximately 6.25 acres in Nahariya, in northern Israel, under a lease agreement until 2018, which are rented to an associated company. Recently, the Company acquired the contractual rights via a development agreement in another area of approximately 0.9 acres in Nahariya, which will also be rented to the associated company. In September 2002, the Company signed an agreement with the Tel Aviv Municipality for the extension of the lease period until 2059 of a real estate lease for a plant in Tel Aviv that had been shut down at the end of 2002, in return for the payment of $6.2 million by the Company. The Company is investigating several options for using the land. According to the lease agreement, the Company is obliged to utilize its building permits until September 2009.

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

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

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

        Associated companies rent plants and office facilities in Caesarea and additional warehouses and waste paper collection sites throughout Israel.

        The machinery, equipment and assets of the Company are free of any mortgage, lien, pledge or other charge or security interest.

        The Group owns five paper machines that are used in the manufacture of various grades of paper and board. Most of the paper production facilities of the Company and its subsidiaries are located in Hadera, where the Company operates four of the five machines with a combined production capacity of over 320,000 tons per year. The fifth machine is located in Nahariya, which produces tissue paper with a production capacity of 20,000 tons per year.

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

        The Group also operates converting lines for the production for personal care and household paper products in Hadera and Nahariya.

        The Group maintains facilities for collecting, sorting and baling waste paper and board in various locations in Israel. It also has a plant in Afula for the production of disposable baby diapers, incontinence absorbent products and feminine hygiene products, a plant in Migdal Haemek for the production of paperboard consumer packages and a plant in Hadera for recycling plastic waste.

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

20



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

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

        As part of the progress of examining and promoting the project, the Israeli Minister of National Infrastructure granted the Company a basic permit to generate electricity by means of power and heat systems (co-generation). In addition, in December 2004 the project was announced as a “National Infrastructure Project” by the Israeli Minister of National Infrastructure.

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

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

        Environmental Regulation Matters

        The business license for the main production site of the Group in Hadera includes conditions regarding sewage treatment, effluent quality, air quality and the handling of waste and chemicals. In addition, the Company is required to operate the site in accordance with the conditions specified by the Israeli water commission regarding effluent disposal. To the best knowledge of the Company, the Company operates the site in compliance with such requirements, and in the event of non-compliance, the Company acts in conjunction with such governmental authorities to rectify any violations.

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

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

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

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

21



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

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

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

ITEM 4A. UNRESOLVED STAFF COMMENTS

None.

ITEM 5 – OPERATING AND FINANCIAL REVIEW AND PROSPECTS

Critical Accounting Policies and Estimates

        The Company’s discussion and analysis of the financial condition and operations are based upon the Company’s consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in Israel (for information as to the reconciliation between U.S. and Israeli GAAP, see Item 17). The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities.

        The Company identified the most critical accounting principles upon which its financial status depends. The Company determined the critical principles by considering accounting policies that involve subjective decisions or assessments.

        The Company states its accounting policies in the notes to the consolidated financial statements and at relevant sections in this discussion and analysis.

        This discussion and analysis should be read in conjunction with the Company’s consolidated financial statements and related notes included elsewhere in this report.

The Company identified the following critical accounting policies:

Inventories

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

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

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

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

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

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

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

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

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Allowance for doubtful accounts

        The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. The Company provides an allowance for doubtful accounts as a percentage of all specific debts doubtful of collection. The allowances are based on the likelihood of recoverability of accounts receivable considering the aging of the balances, the Company’s historical write-off experience, (net of recoveries), change in credit worthiness of the customers, and taking current collection trends that are expected to continue. These estimated allowances are periodically reviewed, and customers’ payment histories analyzed. Actual customer collections could differ from the Company’s estimates.

Contingencies and risks involving the business

        The Company is subject, from time to time, to various claims arising in the ordinary course of operations. In determining whether liabilities should be recorded for pending litigation claims, the Company assesses, based on advice of its outside legal counsel, the allegations made and the likelihood that it will successfully defend itself.

        When the Company believes that it is probable that it will not prevail in a particular matter, it then estimates the amount of the liability. The evaluation of the probability of success of such claims and the determination of whether there is a necessity to include provisions in respect thereof require judgment by the Company’s legal counsel and management.

Deferred income taxes

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

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

        Taxes that would apply in the event of disposal of investments in subsidiaries and associated companies have not been taken into account in computing the deferred taxes, as it is the Company’s policy to hold these investments, not to realize them.

        The Group may incur an additional tax liability in the event of an intercompany dividend distribution derived from “approved enterprises” profits – see note 7a. No account was taken of this additional tax, since it is the Group’s policy not to cause distribution of dividends, which would involve an additional tax liability to the Group in the foreseeable future.

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

Impairment in value of Long-Lived Assets (including fixed assets and investments in associated companies)

        In February 2003, Accounting Standard No. 15 of the Israeli Accounting Standard Board (hereafter – IASB) – “Impairment of Assets”, became effective. According to this standard the Company assesses – at each balance sheet date – whether any events have occurred or changes in circumstances have taken place, which might indicate that there has been an impairment of non-monetary assets, mainly fixed assets and investments in associated companies. When such indicators of impairment are present, the Company evaluates whether the carrying value of the asset is recoverable from the cash flows expected from that asset. See Note 2g to the Financial Statements.

        The recoverable value of an asset is determined according to the higher of the net selling price of the asset or its value in use to the Company. The value in use is determined according to the present value of anticipated cash flows from the continued use of the asset, including those expected at the time of its future retirement and disposal.

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        When it is not possible to assess whether an impairment provision is required for a particular asset on its own, the need for such a provision is assessed in relation to the recoverable value of the cash-generating unit to which that asset belongs.

Discontinuance of Adjusting Financial Statements for Inflation

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

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

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

Offset of financial instruments

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

Deferred charges

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

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

Revenue Recognition

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

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

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

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

24



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

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

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

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

Share – Based Payment

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

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

Net Income per Share

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

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

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

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

Effects of Prior Year Misstatements

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

25



General

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

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

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

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

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

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

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

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

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

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

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A. Operating Results

        The following is a summary of the period-to-period changes in the principal items included in the Consolidated Statements of Income:

Amount and Percentage Increase (Decrease)

New Israeli Shekels (in thousands)1

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

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

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




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




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




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




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




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





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

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

2007 Compared to 2006

I. Overview of Results of Operations

1. Consolidated Data

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

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

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

2. Net Profit and Earnings Per Share

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


1     AIPM made the transition to reporting in nominal New Israeli Shekels (NIS) in 2004, pursuant to the directives of Standard 12 of the Financial Accounting Standards Board in Israel. In the past AIPM’s reports were in NIS, adjusted to changes in the exchange rate of the U.S. dollar against the NIS.

27



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

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

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

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

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

II. The Business Environment

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

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

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

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

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

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

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

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

III. Analysis of Operations and Profitability

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

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1. Sales

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

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

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

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

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

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

2. Cost of Sales

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

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

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

        Labor Wages

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

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

3. Selling, General and Administrative Expenses

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

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

4. Operating Profit

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

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

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

5. Financial Expenses

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

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

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

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

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

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

6. Taxes on Income

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

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

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

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

7. Company’s Share in Earnings of Associated Companies

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

        The Company’s share in the earnings (losses) of associated companies amounted to NIS (2.9) million in 2007, as compared with losses of NIS (26.7) million in 2006 and earnings of NIS 16.4 million in 2005.

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

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

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

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

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

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

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

2006 Compared to 2005

I. Overview of Results of Operations

1. Consolidated Data

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

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

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

    2.        Net Profit and Earnings Per Share

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

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

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

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

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

II. The Business Environment

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

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

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

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

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

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

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

General

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

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

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

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

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

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

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

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

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

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

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

III. Analysis of Operations and Profitability

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

1. Sales

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

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

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

2. Cost of Sales

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

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

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

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

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

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        Labor Wages

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

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

3. Selling, General and Administrative Expenses

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

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

4. Operating Profit

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

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

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

5. Financial Expenses

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

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

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

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

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

6. Taxes on Income

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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B. Liquidity and capital resources

1. Cash Flows

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

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

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

2. Financial Liabilities

        The Company believes that its existing credit lines and cash flow from operations are sufficient for financing its working capital needs. The Company uses its cash flow from operating activities to finance its investments and for repayment of loans and dividend distributions to its shareholders.

        Based on the Company’s balance sheet, the Company believes that it is unlikely that there will be any difficulties to obtain credit, whether short term debt or long-term debt, to finance anticipated investments.

        On December 21, 2003, the Company issued notes – through tender by private placement – in the amount of NIS 200 million, to institutional investors. These notes carry an interest rate of 5.65% per annum (a margin of 1.45% above government notes with a comparable average maturity at the time). The principal will be repaid in seven equal annual installments between the years 2007-2013 (average maturity of 6 years), with both the principal and the interest being linked to the CPI. The notes are not convertible into the Company’s ordinary shares and shall not be registered for trade on a public exchange.

        The long-term liabilities (including current maturities) of the Companies amounted to NIS 261.7 million as at December 31, 2007 as compared with NIS 297.9 million as at December 31, 2006.

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

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

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

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

  4. Other liabilities – see Note 4c to the Financial Statements attached.

        For information regarding financial instruments used for hedging purposes and market risks – see Item 11, “Quantitative and Qualitative Disclosure about Market Risk”.

        The Group may incur additional tax liabilities in the event of inter-company dividend distributions, derived from “approved enterprises” profits. The said dividend distributions from investee companies is in the amount of up to approximately NIS 97 million (of which the Company’s share of the additional tax is NIS 16 million, if this dividend is distributed). No account was taken of the additional tax, since AIPM has the ability and the intention that such earnings are to be reinvested and that no dividend would be declared which would involve additional tax liability to the Group in the foreseeable future.

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3. Material commitments for Capital Expenditures

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

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

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

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

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

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

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

D. Trend information

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

E. Off Balance sheet Arrangements

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

F. Contractual Obligations

In NIS in million
Total
Less than 1
year

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

* Including interest
** From natural gas agreement

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ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

6.A Directors and Senior Management

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

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

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

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

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

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

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

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

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

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

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

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

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

6.B Compensation

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

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

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

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

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

Remuneration of Directors

        The remuneration of the directors (including the external directors) for 2007 was approved at the 2007 general meeting of shareholders. Pursuant to regulations under the Israeli Companies Law, each external director of the Company must receive the same annual compensation, which must be between NIS 29,010 and NIS 47,135, plus an additional fee for each meeting attended which must be between NIS 1,021 and NIS 1,813. The Board determined that for 2007 the remuneration of each director, including the external directors, would be fixed at NIS 40,000 plus an additional NIS 1,550 for each meeting attended.

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

6.C Board Practices

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

        Notwithstanding the foregoing, if no directors were appointed at any Annual General Meeting, the directors appointed at the previous Annual General Meeting would continue in office. Directors, except for the external directors, may be removed from office earlier by a resolution at an Annual General Meeting of Shareholders.

        The Articles of Association of the Company provide that any director may, by written notice, appoint any person who is approved by the Board of Directors to be an alternate director and to act in his place and to vote at any meeting at which he is not personally present. The alternate director is entitled to notice of Board meetings and he will be remunerated out of the remuneration of the director appointing him. The alternate director shall vacate his office if and when the director appointing him vacates his office as director, or removes him from office by written notice.

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


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

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

External Directors

        Under the Israeli Companies Law, the Company (as a public company) is required to have at least two external directors as members of its Board of Directors. An external director may not have any financial or other substantial connection with the Company and must be appointed at the Annual General Meeting of Shareholders. The external directors are elected for a three-year term of office that may be extended for another three years. Due to the resignation of Ms. Ronit Blum, Mr. Makov is currently the only external director of the Company. For details of Ms. Blum's resignation, and for the period of time each director served in his or her respective position, see Item 6.A. Directors and Senior Management. The Company's Board of Directors has resolved to convene a special general meeting of the Company's shareholders, to be held on July 10, 2008, to elect Ms. Atalya Arad as an external director of the Company in place of Ms. Blum.

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

Audit Committee

        Under the Israeli Companies Law, members of the Audit Committee are elected from members of the Board of Directors of the Company by the Board of Directors. The Audit Committee must be comprised of at least three directors, including all of the external directors, but excluding: (i) the Chairman of the Board of Directors; (ii) any director employed by the Company or who provides services to the Company on a regular basis; or (iii) a controlling shareholder of the Company or his relative. In addition, according to the rules of the AMEX the audit committee must have at least three members, each of whom satisfies the independence standards of Section 803A of the AMEX Company Guide and Rule 10A-3 under the Securities Exchange Act of 1933, must not have participated in the preparation of the financial statements of the Company or any current subsidiary of the Company at any time during the past three years and is able to read and understand fundamental financial statements. Additionally, the Audit Committee must have at least one member who is financially sophisticated. The Audit Committee operates under a charter adopted by the board of directors.

        The role of the Audit Committee under the Israeli law is: (i) to examine flaws in the business management of the Company in consultation with its auditors and to suggest appropriate courses of action to rectify such flaws and (ii) to decide whether to approve actions or transactions which under the Israeli Companies Law require the approval of the Audit Committee (such as transactions with a related party).

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

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

Nominating Committee

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

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Compensation Committee

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

6.D Employees

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

        Some of the employees are subject to the terms of employment of collective bargaining agreements. The parties to such collective bargaining agreements are the Company and the employees, through the union. The Company believes that the relationship between the Company and the union are good.

6.E Share Ownership

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

        In April 2001, the Board of Directors adopted a stock option plan under which options to purchase a total of 194,300 shares may be granted to senior officers of the Company and certain other companies in the Group. All of the options were granted by July 2001. Each option is exercisable to purchase one ordinary share of NIS 0.01 par value of the Company. The options vest in four yearly installments. The vesting period of the first installment is two years, commencing on the date of grant, and the next three installments vest on the third, fourth and fifth anniversary of the grant date. Each installment is exercisable for two years from the vesting date of such installment. For further information regarding the 2001 plan, see Note 6 of the Notes to the Consolidated Financial Statements.

        In 2007, 35,425 options were exercised under the 2001 plan and 14,466 shares were issued following the exercise of options. As of the reporting date of this 20-F, the full amount of options allotted under said plan were exercised or have expired.

        In August 2001, the Board of Directors approved a stock option plan for employees of the Company and its subsidiaries that expired on November 3, 2006. Under this plan, up to 125,000 options may be granted without consideration. Each option is exercisable to purchase one ordinary share of NIS 0.01 par value of the Company. In November 2001, 81,455 options were granted under the 2001 employee plan. The vesting period of the options is two years from the data of grant. Each option is exercisable within three years from the end of the vesting period. For further information regarding the 2001 employee plan, see Note 6 of the Notes to the Consolidated Financial Statements. As of the reporting date, the full amount of options allotted under said plan were exercised or have expired.

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

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

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ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

7.A Major shareholders

        The following table sets forth, as of June 10, 2008, the number of ordinary shares of the Company beneficially owned by (i) all those persons who, to the Company's knowledge, were the beneficial owners of more than 5% of such outstanding shares, and (ii) all officers and directors of the Company as a group:

Name and Address:
Amount Beneficially Owned
Directly or Indirectly*

Percent of Class
Outstanding

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

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

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

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

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

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

43



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

        In 1980, DIC and Clal agreed for a period of ten years (subject to renewal for additional ten year periods) to coordinate and pool their voting power in the Company in order to appoint an equal number of each party’s nominees to the Board of Directors of the Company, and in order to elect their designees to the Board’s Committees. They also agreed to vote as a bloc in General Meetings of the Company on the subject of dividend distributions. This agreement has been extended up to the year 2010.

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

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

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

7.B Related Party Transactions

        The information is included in the Company’s attached Consolidated Financial Statements. For loans to associated companies, see Note 2 to the attached financial statements. For a capital note to an associated company, see Note 4c to the attached financial statements. For transactions and balances with related parties, see Note 13 to the attached financial statements.

        For further information see also Note 9b, 9c and 9d to the financial statements attached.

7.C Interests of Experts and Counsel

        Not applicable.

ITEM 8. FINANCIAL INFORMATION

8.A Consolidated Statements and Other Financial Information

        See the financial statements included in Item 17.

Export Sales

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

        Legal Proceedings

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

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

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

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

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

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

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

Dividend Policy

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

8.B Significant Changes

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

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

ITEM 9. THE OFFER AND LISTING

9.A Listing Details

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

American Stock Exchange
Tel Aviv Stock Exchange
High
Low
High
Low
High
Low
$
NIS
$*
 
Calendar Year
2007       67.50    41.00    259.40    185.00    65.60    43.65  
2006     52.12    38.50    237.00    168.50    53.01    38.42  
2005     57.98    37.50    246.90    176.90    56.42    38.24  
2004     60.73    48.75    267.10    217.60    60.33    48.72  
2003     54.66    29.22    239.00    143.60    54.58    30.01  

* Share prices have been converted from New Israeli Shekels (NIS) to U.S. Dollars at the representative rate of exchange, as reported by the Bank of Israel, on the dates when such high or low prices in NIS were recorded.

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

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

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

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

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

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

* Share prices have been translated from New Israeli Shekels (NIS) to U.S. Dollars at the representative rate of exchange, as reported by the Bank of Israel, on the dates when such high or low prices in NIS were recorded.

9.B Plan of Distribution

        Not applicable.

9.C Markets

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

9.D Selling Shareholders

Not applicable.

9.E Dilution

Not applicable.

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9.F Expenses of the Issue

Not applicable.

ITEM 10. ADDITIONAL INFORMATION

10.A Share Capital

        Not applicable.

10.B Memorandum and Articles of Association

        The Company was registered under Israeli law on February 10, 1951, and its registration number with the Israeli Registrar of Companies is 52-001838-3.

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

Objects and purposes of the company

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

Director’s personal interest

        The Israeli Companies Law requires that a director and an officer in a company disclose to the Company any personal interest that he may have, and all related material information, in connection with any existing or proposed transaction by the Company. The disclosure is required to be made promptly and in any event no later than the date of the meeting of the board of directors in which the transaction is first discussed. The Companies Law defines a “personal interest” as a personal interest of a person in an action or transaction by the company, including a personal interest of a relative and of a corporation in which he or his relative are interested parties, excluding a personal interest stemming solely from ownership of shares in the company.

        If the transaction is an extraordinary transaction, the approval procedures are as described below. Under the Israeli Companies Law, an extraordinary transaction is a transaction that is not in the ordinary course of business, a transaction not on market terms or a transaction that is likely to have a material impact on the Company’s profitability, assets or liabilities.

        Subject to the restrictions of the Israeli Companies Law, a director is entitled to participate in the deliberations and vote with regard to the approval of transactions in which he has a personal interest. A director is not entitled to participate and vote with regard to the approval of an extraordinary transaction in which he has a personal interest, the approval of indemnity, exemption or insurance of the directors or the approval of the directors’ compensation. If a majority of the directors have a personal interest in a certain decision, they may participate and vote but the issue must be approved also by the audit committee and by the shareholders. If the controlling shareholder has a personal interest in an extraordinary transaction, the transaction must be approved by the audit committee, board of directors and by shareholders at a general shareholders meeting byt the affirmative vote of the holders of a majority of the voting power represented at the meeting in person or by proxy, provided that either (i) such a majority includes at least one third of the total votes of shareholders who are not controlling shareholders or on their behalf, present at the meeting in person or by proxy (votes abstaining shall not be taken into account in counting the above-referenced shareholder votes); or (ii) the total number of shares of the shareholders mentioned in clause (i) above that are voted against does not exceed one percent (1%) of the total voting rights in the Company.

        Any power of the Company which has not been conferred by law or by the Articles to any other body, may be exercised by the Board of Directors. The management of the Company is guided by the Board of Directors.

Powers and function of directors

        According to the Companies Law, the Board of Directors shall formulate the policies of the Company and shall supervise the performance of the office and actions of the General Manager (CEO), including, inter alia, examination of the financial position of the Company and determination of the credit framework of the Company. According to the Company’s Articles, as authorized by the Companies Law, and without derogating from any power vested in the Board of Directors in accordance with the Articles, the Board of Directors may, from time to time, at its discretion, decide upon the issuance of a series of debentures, including capital notes or undertakings, including debentures, capital notes or undertakings which can be converted into shares, and also the terms thereof, and mortgage of the property of the Company, in whole or in part, at present or in future, by floating or fixed charge. Debentures, capital notes, undertakings or other securities, as aforesaid, may be issued either at a discount or at a premium or in any other manner, whether with deferred rights or special rights and/or preferred rights and/or other rights, all at the Board of Directors’ discretion.

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

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

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

        As described in Item 6.C “Board Practices”, all directors, except external directors, stand for election annually at the General Meeting. The directors need not be shareholders of the Company in order to qualify as directors.

The shares – rights and restrictions

        All of the Company’s shares are ordinary shares. Every ordinary share in the capital of the Company has equal rights to that of every other ordinary share, including the right to dividends, to bonus shares and to participation in the surplus assets of the Company upon liquidation proportionately to the par value of each share, without taking into consideration any premium paid in respect thereof. All the aforesaid is subject to the provisions of the Articles.

        Each of the ordinary shares entitles the holder thereof to participate at and to one vote at Annual General Meetings of the Company.

        Subject to the provisions of the Israeli Companies Law, the Board of Directors may decide whether or not to distribute a dividend. When deciding on the distribution of a dividend, the Board of Directors may decide that the dividend shall be paid, in whole or in part, in cash or by way of the distribution of assets in specie, including securities or bonus shares, or in any other manner at the discretion of the Board of Directors.

        Dividends on the Company’s ordinary shares may only be paid out of retained earnings, as defined in the Israeli Companies Law, as of the end of the most recent fiscal year or profits accrued over a period of two years, whichever is higher.

        The Company may, by resolution adopted at an Annual General Meeting by an ordinary majority, decrease the capital of the Company or any reserve fund from redemption of capital.

        In case of winding up of the Company, the liquidator may determine the proper value of the assets available for distribution and determine how the distribution among the shareholders will be carried out.

        The liability of the shareholders is limited to the payment of par value of their ordinary shares.

        Under the Israeli Companies Law, each shareholder has a duty to act in good faith in exercising his rights and fulfilling his obligations toward the Company and other shareholders and to refrain from abusing his power in the Company.

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

        Furthermore, any controlling shareholder who knows that he possesses the power to determine the outcome of a shareholder vote, and any shareholder that, pursuant to the provisions of the Articles, has the power to appoint or to prevent the appointment of an officer in the Company or any other power regarding the Company, is under a duty to act in fairness toward the Company. The Israeli Companies Law does not describe the substance of this duty of fairness. These various shareholder duties may restrict the ability of a shareholder to act in what the shareholder perceives to be its own best interests.

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Modification of rights of shares

        If the share capital is divided into different classes, the Company may by resolution adopted at a General Meeting by a special majority of 60% of the votes of shareholders (in present or by proxies) voting at the General Meeting (except if the terms of the issuance of the shares of such class otherwise provide) annul, convert, expand, supplement, restrict, amend or otherwise modify the rights of a class of shares of the Company, provided that the consent, in writing, of all the shareholders of such class thereto shall be received or that the resolution shall have been approved by a General meeting of the shareholders of such class by special majority, or in the event that it was otherwise provided in the terms of the issuance of a particular class of the shares of the Company, as may have been provided in the terms of issuance of such class, provided that the quorum at the class meeting shall be the presence, in person or by proxy, at the opening of the meeting of at least two shareholders who own at least twenty five percent (25%) of the number of the issued shares of such class.

        The rights conferred upon the shareholders or owners of a class of shares, whether issued with ordinary rights or with preference rights or with other special rights, shall not be deemed to have been converted, restricted, prejudiced or altered in any other manner by the creation or issuance of additional shares of any class, whether of the same degree or in a degree different or preferable to them, nor shall they be deemed to have been converted, restricted, prejudiced or altered in any other manner by a change of the rights linked to any other class of shares, all unless otherwise expressly provided in the terms of the issuance of such shares.

Shareholders meeting

        The Company shall hold an Annual General Meeting each year not later than fifteen months after the previous Annual Meeting, at such time and place as may be determined by the Board. Any other General Meeting is referred to as a “Special Meeting”.

        A notice of a General Meeting shall be published in at least two widely distributed daily newspapers published in Israel in Hebrew. The notice shall be published at least twenty-one days prior to the meeting date. In addition, the Company provides a notice of the meeting and related proxy statement in English to the holders of its ordinary shares listed on the records of the Company’s registrar and stock transfer agent in the United States.

        Apart from the notices as to the General Meeting described above, the Company is not required by the Articles and the Israeli Companies Law to give any additional notice as to the General Meeting, either to the registered shareholders or to shareholders who are not registered. The notice as to a General Meeting is required to detail the place, the day and the hour at which the meeting will be held, to include the agenda as well as a summary of the proposed resolutions, and to include any other details required by law.

        The Board of Directors of the Company may determine to convene a Special Meeting, and shall also convene a Special Meeting at the demand of any two directors, or one quarter of the directors in office, or one or more shareholders who hold at least five percent of the issued capital and one percent of the voting rights, or one or more shareholders who hold at least five percent of the voting rights.

        If the Board of Directors receives a demand for the convocation of a Special Meeting as aforesaid, the Board of Directors shall within twenty one days of receipt of the demand convene the meeting for a date fixed in the notice as to the Special Meeting, provided that the date for convocation shall not be later than thirty five days from the date of publication of the notice, all the aforesaid subject to the provisions of the Companies Law.

        In the resolution of the Board to convene a meeting, the Board of Directors may, at its discretion and subject to the provisions of the law, fix the manner in which the items on the agenda will be determined and the manner in which notice will be given to the shareholders entitled to participate at the meeting.

        Each shareholder holding at least ten percent (10%) of the issued capital and one percent (1%) of the voting rights, or each shareholder holding at least ten percent (10%) of the voting rights, is entitled to request that the Board include in the agenda any issue, provided that this issue is suitable to be discussed in a General Meeting.

        No business shall be transacted at any General Meeting unless a quorum is present at the time the meeting begins consideration of business. A quorum shall be constituted when two shareholders, holding collectively at least twenty five percent (25%) of the voting rights, are present in person or by proxy within half an hour from the time provided in the meeting notice, unless otherwise determined in the Articles.

        If a quorum is not present within half an hour, the meeting shall be adjourned for seven days, to the same day of the week at the same time and place, without need for notification to the shareholders, or to such other day, time and place as the Board may by notice to the shareholders determine.

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

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Voting and adopting resolutions at General Meetings

        A shareholder who wishes to vote at a General Meeting shall prove to the Company his ownership of his shares in the manner required by the Companies Law. The Board of Directors may issue directives and procedures relating to the proof of ownership of shares of the Company.

        A shareholder is entitled to vote at a General Meeting or class meeting, in person, or by proxy or by proxy card. A voting proxy need not be a shareholder of the Company.

        Any person entitled to shares of the Company may vote at a General Meeting in the same manner as if he were the registered holder of such shares, provided that at least forty eight hours before the time of the meeting or of the adjourned meeting, as the case may be, at which he proposes to vote, he shall satisfy the Board of Directors of his right to vote such shares (unless the Company shall have previously recognized his right to vote the shares at such meeting).

        The instrument appointing a proxy shall be in writing signed by the principal, or if the principal is a corporation, the proxy appointment shall be in writing and signed by authorized signatories of the corporation. The Board of Directors is entitled to demand that prior to the holding of the meeting, there shall be produced to the Company a confirmation in writing of the authority of signatories to bind the corporation to the satisfaction of the Board of Directors. The Board of Directors may also establish procedures relating to such matters.

        The proxy appointment or an office copy to the satisfaction of the Board shall be deposited at the registered office or at such other place or places, in or outside of Israel, as may from time to time be determined by the Board of Directors, either generally or in respect to a specific meeting, at least forty eight hours prior to the commencement of the meeting or the adjourned meeting, as the case may be, at which the proxy proposes to vote on the basis of such proxy appointment.

        A voting proxy is entitled to participate in the proceedings at the General Meeting and to be elected as chairman of the meeting in the same manner as the appointing shareholder, unless the proxy appointment otherwise provides. The proxy appointment shall be in a form customary in Israel or any other form which may be approved by the Board.

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

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

Right of non-Israeli shareholders to vote

        There is no limitation on the right of non-resident or foreign owners of any class of the Company’s securities to hold or to vote according to the rights vested in such securities.

Change of control

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

        For purposes of shareholders’ approval, unless a court rules otherwise, in the vote by the shareholder meeting of a merging company whose shares are held by the other merging company, the merger will not be deemed approved if a majority of the shares held by shareholders voting at the general meeting, other than the shareholders who are also shareholders in the other merging company or any person who holds 25% or more of the shares or the right to appoint 25% or more of the directors in the other merging company, vote against the merger. Upon the request of a creditor of either party to the proposed merger, a court may delay or prevent the merger if it concludes that there exists a reasonable concern that, as a result of the merger, the surviving company will be unable to satisfy the merger obligations. . In addition, a merger may not be completed unless at least 30 days have passed from the date that the merger was approved at the general meetings of any of the merging companies and at least 50 days have passed from the date that a proposal of merger was filed with the Israeli Registrar of Companies.

        The Israeli Companies Law also provides that an acquisition of shares of a public company must be made by means of a tender offer if, as a result of the acquisition, the purchaser would become a 25% shareholder of the Company, and there is no existing 25% or more shareholder in the Company at the time. If there is no existing shareholder of the Company who holds more than 45% of the voting rights in the Company, the Companies Law provides that an acquisition of shares of a public company must be made by means of a tender offer if, as a result of the acquisition, the purchaser would become a shareholder of more than 45% of the voting rights in the Company.

        If, following any acquisition of shares, the acquirer will hold 90% or more of the Company’s shares, the acquisition may not be made other than through a tender offer to acquire all of the shares of such class. If more than 95% of the outstanding shares are tendered in the tender offer, all the shares that the acquirer offered to purchase will be sold to it. However, the remaining minority shareholders may seek to alter the consideration by court order.

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

Transfer Agent and Registrar

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

Listing

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

10.C Material Contracts

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

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

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

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

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

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

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

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

10.D Exchange Controls

Foreign exchange regulations

        There are no Israeli governmental laws, decrees or regulations that restrict or that affect the export or import of capital, including but not limited to, foreign exchange controls on remittance of dividends on ordinary shares or on the conduct of the Group’s operations, except as otherwise set forth in the paragraph below regarding taxation.

10.E Taxation

The following information is regarding Israeli law only.

        Investors are advised to consult their tax advisors with respect to the tax consequences of their purchases, ownership and sales of ordinary shares, including the consequences under applicable state and local law and federal estate and gift tax law, and the application of foreign laws or the effect of nonresident status on United States taxation. This tax summary does not address all of the tax consequences to the investors of purchasing, owning or disposing of the ordinary shares.

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

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

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

Income taxes on dividends distributed by the Company to non-Israeli residents

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

        Generally, under the Tax Treaty Between the Government of the United States of America and the Government of the State of Israel with Respect to Taxes on Income (“U.S. Treaty”), the maximum rate of withholding tax on dividends paid to a shareholder who is a resident of the United States (as defined in the U.S. Treaty) will be 25%. However, when a U.S. tax resident corporation is the recipient of the dividend, the rate on a dividend out of regular (non-Approved Enterprise) profits may be reduced to 12.5% under the treaty, where the following conditions are met:

          the recipient corporation owns at least 10% of the outstanding voting rights of the Company for all of the period preceding the dividend during the Company’s current and prior taxable year; and

          generally not more than 25% of the gross income of the paying corporation for its prior tax year consists of certain interest and dividend income.

        Otherwise, the usual rates apply.

52



        United States individual citizens and residents and U.S. corporations generally will be required to include in their gross income the full amount of dividends received from the Company with respect to the ordinary shares owned by them, including the amount withheld as Israeli income tax. Subject to the limitations and conditions provided in the Internal Revenue Code of 1986, as amended (the “Code”), such persons may be eligible to claim a credit for such withheld amounts against their United States federal income tax liability. As an alternative, the persons enumerated above (provided such persons, in the case of individual taxpayers, itemize their deductions) may elect to deduct such withheld tax from their gross income in determining taxable income (subject to applicable limitations on the deductions claimed by individuals). However, such a credit or deduction may be limited for U.S. alternative minimum tax purposes, depending on the taxpayer’s specific circumstances.

        Dividend payments on the ordinary shares will not be eligible for a dividends received deduction generally allowed to United States corporations under the Code.

Income taxes on dividends distributed by the Company to Israeli residents

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

Tax on capital gains of shareholders – General

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

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

        Pursuant to the 2006 Tax Reform, the current applicable corporate tax rate in 2007 is to be gradually reduced from 29% to 25%, in the following manner: the tax rate for 2007 was – 29% , in 2008 – 27%, in 2009 – 26%, in 2010 and afterwards – 25%. The maximum tax rate for individuals is 48% in 2007 and shall also be gradually reduced to 44% in 2010 and afterwards. These rates are subject to the provisions of any applicable bilateral double taxation treaty. Israeli law generally imposes a capital gains tax on the sale of securities and any other capital assets.

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

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

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

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

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

Corporations which are subject to the Inflationary Adjustments Law

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

53



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

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

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

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

        The U.S. Israeli Tax Treaty exempts U.S. residents who hold directly or indirectly an interest of less than 10% of the Israeli company, and who held an interest of less than 10% during all the 12 months prior to a sale of their shares, from Israeli capital gains tax in connection with such sale. Certain other tax treaties to which Israel is a party also grant exemptions from Israeli capital gains taxes.

Uncertainty in income taxes

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

10.F Dividends and Paying Agents

        Not applicable.

10.G Statement by Expert

        Not applicable.

10.H Documents on Display

        A copy of each document (or a translation thereof to the extent not in English) concerning the Company that is referred to in this Annual Report on Form 20-F is available for public view at our principal executive offices at American Israeli Paper Mills Ltd., 1 Meizer Street, Industrial Zone, Hadera 38100, Israel. We are subject to the information requirements of the Exchange Act. In accordance with these requirements, we file reports and other information with the Securities and Exchange Commission (the “SEC”).

        Copies of this annual report and the exhibits hereto may be inspected and copied at the SEC’s Public Reference Room at 100 F Street, NE, Washington, D.C. 20549. The public may obtain information on the operation of the SEC’s Public Reference Room by calling the SEC in the United States at 1-800-SEC-0330.

ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

        Due to its operations, the Company is exposed to market risks, consisting primarily of changes in interest rates – on both short and long-term loans, changes in exchange rates and changes in raw material and energy prices. These changes in interest rates affect the Company’s financial results.

        The Company’s Board of Directors determines the policy to address these risks, according to which financial instruments are employed and defines the objectives to be attained, taking into account the Group’s linkage balance sheet and the impact of changes in various currencies and in the Consumer Price Index on the Company’s cash flows and on its financial statements.

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

54



        Furthermore, limited use is made of derivative financial instruments, which the Company employs for hedging the cash flows, originating from the existing assets and liabilities.

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

        As of December 31, 2007 AIPM owned CPI-linked long-term loans (notes) in the total amount of approximately NIS 195.5 million. The interest on such loans is not higher than the market interest rate. In the event that the inflation rate rises significantly, a loss may be recorded in AIPM’s financial statements, due to the surplus of CPI-linked liabilities.

        In order to hedge this exposure, AIPM entered into forward transactions, in early 2008 for hedging NIS 190 million against a rise in the CPI until December 2008. These transactions replaced hedging transactions of NIS 220 million that terminated in December 2006 and January 2007.

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

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

Total book
value

Total fair
value

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

Credit Risks

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

        Most of these companies’ sales are made in Israel, to a large number of customers. The exposure to credit risks relating to trade receivables is limited due to the relatively large number of customers. The Group performs ongoing credit evaluations of its customers to determine the required amount of allowance for doubtful accounts. The Company believes that an appropriate allowance for doubtful debts is included in the financial statements.

Fair Value of Financial Instruments

        The fair value of the financial instruments included in working capital of the Group is usually identical or close to their carrying value. The fair value of loans and other liabilities also approximates the carrying value, since they bear interest at rates close to the prevailing market rates, except as described below.

55



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

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

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

Profit (loss) from changes
Interest
rise 10%

Interest
rise 5%

Interest
decrease
10%

Interest
decrease
5%

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

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

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

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

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

Profit (loss) from changes
Revaluation
of € 10%

Revaluation of
€ 5%

Devaluation
of € 10%

Devaluation of
€ 5%

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

        See Note 12a to the financial statements.

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

Profit (loss) from changes
Revaluation
of $ 10%

Revaluation of
$ 5%

Devaluation of
of $ 10%

Devaluation of
$ 5%

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

Other accounts receivable reflect primarily short-term customer debts.

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

Accounts payable reflect primarily short-term liabilities to suppliers.

56



Quantitative Information Regarding Market Risk

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

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

Non-Monetary
Items

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





      Total Assets     313.7    0.4    180.3    824.7    1,319.1  





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





      Total liabilities and equity     394.6    195.5    10.4    718.6    1,319.1  





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

ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES

Not applicable.

57



PART II

ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES

None.

ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS

None.

ITEM 15. CONTROLS AND PROCEDURES

(a) Disclosure Controls and Procedures

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

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

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

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

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

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

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

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

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

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

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

58



ITEM 16. [RESERVED]

ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT

        Amos Mar-Haim, a member of the Company’s Audit Committee, meets the criteria of an Audit Committee Financial Expert under the applicable rules and regulations of the SEC and his designation as the Audit Committee’s Financial Expert has been ratified by the Board of Directors. Amos Mar-Haim is “independent”, as that term is defined in the AMEX’s listing standards.

ITEM 16B. CODE OF ETHICS

        The Company has adopted a code of ethics which is applicable to all directors, officers and employees of the Company, including its principal executive officer, principal financial officer, and principal accounting officer or controller and persons performing similar functions (the Code of Ethics”). The Code of Ethics covers areas of professional and business conduct, and is intended to promote honest and ethical behavior, including fair dealing and the ethical handling of actual or apparent conflicts of interest; support full, fair, accurate, timely and understandable disclosure in reports and documents the Company files with, or submits to, the SEC and other governmental authorities, and in its other public communications; deter wrongdoing; encourage compliance with applicable laws and governmental rules and regulations; and ensure the protection of the Company’s legitimate business interests. The Company encourages all of its officers and employees promptly to report any violations of the Code of Ethics, and has provided mechanisms by which they may do so. The Company will provide a copy of the Code of Ethics to any person, without charge, upon written request addressed to the Corporate Secretary of the Company at the Company’s corporate headquarters in Hadera, Israel.

ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES

        The Audit Committee maintains a policy of approving and recommending only those services to be performed by the Company’s external auditors which are permitted under the Sarbanes-Oxley Act and the applicable rules of the SEC relating to auditor independence, and which are otherwise consistent with and will encourage, and are remunerated at levels that accord with, the basic principles of auditor independence. The practice of the Audit Committee is to receive from the Company’s management a list of all services, including audit, audit-related, tax and other services, proposed to be provided during the current fiscal year to the Company and its subsidiaries by Brightman Almagor & Co., a member firm of Deloitte Touche Tohmastu (on April 15, 2007, at a General Meeting the shareholders approved the appointment of Brightman Almagor & Co. as the Company’s external auditors for the year 2007. Brightman Almagor & Co replaced Kesselman & Kesselman & Co. who served as the Company’s external auditors since 1954 until 2006.). After reviewing and considering the services proposed to be provided during the current fiscal year and, where appropriate in order better to understand their nature, discussing them with management, the Audit Committee approves prior to the accountant being engaged such of the proposed services, with a specific pre-approved budget, as it considers appropriate in accordance with the above principles. Additional services from Brightman Almagor and any increase in budgeted amounts will similarly be approved during the year by the Audit Committee prior to the accountant being engaged on a case-by-case basis.

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

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

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


Total    312    150  

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

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

59



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

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

ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES

        Not applicable.

ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS

        Neither the Company nor any affiliated purchaser purchased any of the Company’s equity securities during 2007.

60



PART III

ITEM 17. FINANCIAL STATEMENTS

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

        The Company prepares its financial statements in accordance with Israeli GAAP. The effect of the material differences between Israeli GAAP and U.S. GAAP, as it relates to the Company, are described below:

a. The functional currency of the Company

        Through December 31, 1993, the financial statements of the Company, presented in NIS values adjusted for the changes in the general purchasing power of the Israeli currency based on the changes in the exchange rate of the dollar were also used for the purposes of reporting in conformity with U.S. GAAP applicable to entities operating in hyper-inflationary economic environments, as prescribed by Statement No. 52 of the Financial Accounting Standards Board of the United States (“FASB”). Since the inflation rate in Israel has decreased considerably, the Company decided that for reporting purposes, commencing in 1994, it would implement the rules relating to economies no longer considered hyper-inflationary in accordance with U.S. GAAP.

        Under those rules:

1)        The functional currency of the Company (the currency in which most income is derived and most expenses are incurred) is the New Israeli Shekel (NIS);

2)        The opening balances for 1994 are the balances presented in the Company’s balance sheet at December 31, 1993;

3)        Transactions performed from January 1, 1994 are presented on the basis of their original amounts in Israeli currency.

        The term “Re-measured NIS” signifies the currency used for FASB 52 purposes, as described above.

        As to the effect of application of these rules – see i below.

        As to the discontinuance of the adjustment of the financial statements under Israeli GAAP, to the exchange rate of the dollar as from January 2004, see note 1b to the financial statements.

b. Deferred income taxes

        Under Israeli GAAP, no deferred taxes have been provided through December 31, 2004 in respect of certain long-lived (more than 20 years) assets, such as buildings and land. Under U.S. GAAP, in accordance with the provisions of FAS 109, income taxes are to be provided for any assets that have a different basis for financial reporting and income tax purposes. Following the adoption of Israeli Standard No. 19 in 2005, except for land that originated from business combinations consummated prior to January 1, 2005, these differences no longer exist.

        In addition, for U.S. GAAP purposes deferred taxes are to be provided for with respect to un-remitted earnings of investee companies. Under Israeli GAAP due to the Company’s policy to hold its investments in investee companies, and not to realize them, these temporary differences are considered differences permanent in duration for which deferred taxes are not provided for.

        Through 1999, as long as the main investments of the Company were subsidiaries which were controlled by the Company, the Company did not provide for deferred taxes also for U.S. GAAP reporting purposes, since those differences were deemed to be not taxable due to the tax free inter-company dividend distribution law in Israel and tax planning on its behalf, accordingly.

        From 2000, due to changes in certain of the Company’s investments from subsidiaries to associated companies, deferred taxes were provided for any portion that arose from investee companies sources other than pre-1993 undistributed earnings (taking into account the Company’s tax strategy).

As to the effect of application of this treatment, see (i) below.

61



c. Stock based compensation

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

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

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

        For U.S. GAAP purposes, prior to January 1, 2006 the Company accounted for employee stock based compensation under the intrinsic value model in accordance with Accounting Principles Board Opinion No. 25 “Accounting for Stock Issued to Employees” (“APB 25”) and related interpretations. In accordance with FAS 123 – “Accounting for Stock-Based Compensation” (“FAS 123”), the Company disclosed pro forma data assuming the Company had accounted for employee stock option grants using the fair value-based method defined in FAS 123.

        In December 2004, the Financial Accounting Standards Board (“FASB”) issued the revised Statement of Financial Accounting Standards (“FAS”) No. 123, Share-Based Payment (“FAS 123R”), which addresses the accounting for share-based payment transactions in which the Company obtains employee services in exchange for (a) equity instruments of the Company or (b) liabilities that are based on the fair value of the Company’s equity instruments or that may be settled by the issuance of such equity instruments. In March 2005, the SEC issued Staff Accounting Bulletin No. 107 (SAB 107) regarding the SEC’s interpretation of FAS 123R.

        FAS 123R eliminates the ability to account for employee share-based payment transactions using APB 25 -, and requires instead that such transactions be accounted for using the grant-date fair value based method. This statement applies to all awards granted or modified after the statement’s effective date. In addition, compensation cost for the unvested portion of previously granted awards that remain outstanding on the statement’s effective date shall be recognized on or after the effective date, as the related services are rendered, based on the awards’ grant-date fair value as previously calculated for the pro-forma disclosure under FAS 123.

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

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

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

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

        At December 31, 2006 all options are fully vested.

62



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

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

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

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

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

2007
2006
2005
Weighted
average
exercise
Price

Weighted
average
exercise
Price

Weighted
average
exercise
Price

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






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






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







* The options plan expired during July 2007.

d. Earnings per share (“EPS”)

        Israeli GAAP relating to computation of EPS was changed as of January 1, 2006 with retroactive effect. As to the provisions of the new standard see note 1v to the financial statements attached.

The EPS computation according to U.S. GAAP presented below is in accordance with FAS 128.

        As applicable to the Company, after the implementation of the new Israeli standard No. 21, there are no material GAAP differences with regard to the computation of the basic EPS, however there is a difference in the computation of the diluted EPS as follows:

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

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

63



        Following are data relating to the weighted average number of shares for the purpose of computing basic and diluted earnings per share under U.S. GAAP:

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



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




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

Carmel

        Under Israeli GAAP, an investment in an associated company is tested for impairment under the provisions of Israeli Standard No. 15 of the Israeli Accountant Standard Board – “Impairment of Assets” (see note 1i to the financial statements). Based on the provisions of this Standard, and as explained in note 2f to the financial statements, the Company determined that the recoverable value of the investment in Carmel exceeds its carrying value (based, among other things, on its Discounted Cash Flows), and accordingly, the investment was not written down.

Under U.S. GAAP (APB 18 – “The Equity Method of Accounting for Investments in Common Stock”), SEC Staff Accounting Bulletin (SAB) No. 59 (“Accounting for Non current Marketable Equity Securities”) and EITF 03-1 (The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments), a decline in value of investment in an associated company which is other than temporary was recognized as a realized loss in 2003, establishing a new carrying value for the investment. Factors considered in determining that a decline is other than temporary included, among other things, the length of time and the extent to which the market value has been less than the carrying value of the investment. The relevant market value for determining the impairment loss is the market value at December 31, 2003.

        Therefore, although according to the Israeli GAAP the recoverable value of this investment exceeds its carrying value (see above) under U.S. GAAP and SEC rules described above, the decline in the market value of Carmel shares was the significant factor in determining that the decline was other than a temporary decline. Accordingly, for U.S.GAAP reporting, since the decline in the market value of Carmel was long and extensive, the Company reduced the carrying value of this investment to its market value as of December 31, 2003, and recorded an impairment loss amounting to NIS 16,986,000.

        Under U.S. GAAP, since there was no goodwill and non amortizable assets, the impairment was attributed only to Carmel’s fixed assets; therefore the Company amortizes the impairment at the rates applicable to Carmel’s fixed assets. The amortization of the impairment, as above, resulted in an increase in the share in profits of the associated company amounting to NIS 1,699 thousands in the years 2007, 2006 and 2005.

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

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

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

64



TMM –

        Under Israeli GAAP, an investment in an associated company is tested for impairment under the provisions of Israeli Standard No. 15 of the Israeli Accountant Standard Board – “Impairment of Assets” (see note 1h to the financial statements). Until December 31, 2005 based on the provisions of this Standard, a the Company determined that the recoverable value of the investment in TMM based on an outside appraiser exceeded its carrying value (based, among other things, on its Discounted Cash Flows), and accordingly, the investment was not written down.

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

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

        Under U.S. GAAP (APB 18 – “The Equity Method of Accounting for Investments in Common Stock”), SEC Staff Accounting Bulletin (SAB) No. 59 (“Accounting for Non-current Marketable Equity Securities”) and EITF 03-1 (The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments), a decline in value of investment in an associated company which is other than temporary was recognized as a realized loss in 2005, establishing a new carrying value for the investment. Factors considered in determining that a decline is other than temporary included, mainly, the length of time and the extent to which the market value has been less than the carrying value of the investment. The relevant market value for determining the impairment loss is the market value at December 31, 2005.

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

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

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

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

f. Reclassification of deferred charges

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

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

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

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

65



h. Put option for investee

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

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

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

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

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

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

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

  1) Consolidated statement of income figures:

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

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



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



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



      Diluted    7.91    5.89    10.33  




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

66



  2) Shareholders’ equity:

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


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



  3) Consolidated balance sheet figures:

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

Under U.S. GAAP
As Reported Under
Israeli GAAP

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




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




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




   
Deferred charges    -    625    -    785  




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




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




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




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





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

67



j. Statement of cash flows

        The Company presents its cash flow information, under Israeli GAAP net of the effects of inflation.

The information to be included under U.S. GAAP for the years ended December 31, 2005, 2006 and 2007, respectively, is presented below:

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



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



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




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

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

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

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

l. Recently issued accounting pronouncements in the Untied States:

1. SFAS No. 157 –Fair Value Measurements

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

68



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

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

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

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

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

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

Schedule – Valuation and Qualifying Accounts

Three Years Ended December 31, 2007

(NIS in thousands)

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

(reductions)
Additions
charged to
expenses

Deductions
Balance at
end of period

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




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




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





ITEM 18. FINANCIAL STATEMENTS

Not applicable.

69



ITEM 19. EXHIBITS

(a) The following financial statements and supporting documents are filed with this report:

  (i) Consolidated Audited Financial Statements of the Company for the year ended December 31, 2007 (including Reports of Independent Registered Public Accounting Firms).

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

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

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

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

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

70



SIGNATURES

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

AMERICAN ISRAELI PAPER MILLS LIMITED


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

Dated: June 22, 2008

71



EXHIBIT INDEX

Exhibit
Number


Description


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

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

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

8.1 Table of subsidiaries of AIPM.*

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

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

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

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

* Field herein.

72



AMERICAN ISRAELI PAPER MILLS LIMITED
2007 CONSOLIDATED FINANCIAL STATEMENTS



AMERICAN ISRAELI PAPER MILLS LIMITED
2007 CONSOLIDATED FINANCIAL STATEMENTS

TABLE OF CONTENTS

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



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Shareholders of
American Israeli Paper Mills Ltd.

We have audited the accompanying consolidated balance sheets of American Israeli Paper Mills Ltd. (“the Company”) and its subsidiaries as of December 31, 2007 and the related statements of operations, changes in shareholders’ equity and comprehensive income, and cash flows for the year ended December 31, 2007. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

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

We did not audit the financial statements of certain associated companies, the Company’s interest in which as reflected in the balance sheets as of December 31, 2007 is NIS 66.5 million, and the Company’s share in excess of profits over losses of which is a net amount of NIS 2.9 million, for the year ended December 31, 2007. The financial statements of those companies were audited by other Independent registered Public Accounting Firms whose reports have been furnished to us, and our opinion, insofar as it relates to amounts included for those companies, is based solely on the reports of the other independent auditors.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, based on our audits and the reports of the other independent auditors, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Company and its subsidiaries as of December 31, 2007 and the consolidated results of their operations and their consolidated cash flows for year ended December 31, 2007, in conformity with generally accepted accounting principles in Israel. Furthermore, in our opinion, the financial statements referred to above are prepared in accordance with the Securities Regulations (Preparation of Annual Financial Statements,) 1993.

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

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

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

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

F - 2



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Shareholders of
American Israeli Paper Mills Ltd.  

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

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

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

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

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

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

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

F - 3



AMERICAN ISRAELI PAPER MILLS LIMITED
CONSOLIDATED BALANCE SHEETS

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


           Total current assets        521,232    390,464  


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


                                                                     352,269    382,000  


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


                                                                      445,566    400,823  


DEFERRED CHARGES,   
    net of accumulated amortization   1i           


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



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

Date of approval of the financial statements: 22 June 2008

The accompanying notes are an integral part of the financial statements

F - 4



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


           Total current liabilities         381,434    444,542  


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


           Total long-term liabilities         259,546    297,903  


COMMITMENTS AND CONTINGENT LIABILITIES     9            


           Total liabilities         640,980    742,445  


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


           Total shareholders equity         678,087    430,842  


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



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

F - 5



AMERICAN ISRAELI PAPER MILLS LTD.
CONSOLIDATED STATEMENTS OF INCOME

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



GROSS PROFIT          142,796    111,384    99,282  



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



          67,427    60,883    55,944  



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



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



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



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



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



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



    Net income per share         7.61    3.31    11.43  



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



    Net income per share         7.60    3.28    11.35  



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



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




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

F - 6



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

Share capital
Capital
surpluses

Capital surplus
resulting from
tax benefit on
exercise
of employee options

Differences from
currency translation
resulting from
financial
statements of
associated companies

Retained
earnings

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






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






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






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







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

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

F - 7



AMERICAN ISRAELI PAPER MILLS LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS

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



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



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



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



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



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



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



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




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

F - 8



AMERICAN ISRAELI PAPER MILLS LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS

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



     43,290    43,255    29,966  



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



     (5,194 )  (3,480 )  12,879  



     38,096    39,775    42,845  



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



    Interest paid    26,428    23,714    15,828  




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

F - 9



AMERICAN ISRAELI PAPER MILLS LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS

2005
NIS in thousands
(see note 1b)

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

(C)  Information on activities not involving cash flows:

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

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

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

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

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

F - 10



AMERICAN ISRAELI PAPER MILLS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 – SIGNIFICANT ACCOUNTING POLICIES

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

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

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

  a. General:

  1) Activities of the Group

  American Israeli Paper Mills Limited and its subsidiaries (hereafter – the Company) are engaged in the production and sale of paper packaging, in paper recycling activities and in the marketing of office supplies. The Company also has holdings in associated companies that are engaged in the production and sale of paper and paper products including the handling of solid waste (the Company and its investee companies – hereafter –the Group). Most of the Group’s sales are made on the local (Israeli) market. For segment information, see note 14.

  2) Use of estimates in the preparation of financial statements

  The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting years. Actual results could differ from those estimates.

  3) Definitions:

  Subsidiaries – companies over which the Company has control and over 50% of the ownership, the financial statements of which have been consolidated with the financial statements of the Company.

  Associated companies – investee companies, which are not subsidiaries, over whose financial and operational policy the Company exerts material influence, the investment in which is presented by the equity method. Material influence is deemed to exist when the percentage of holding in said company is 20% or more, unless there are circumstances that contradict this assumption.

  Interested parties – as defined in the Israeli Securities (Preparation of Annual Financial Statements) Regulations, 1993.

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

F - 11



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

NOTE 1 – SIGNIFICANT ACCOUNTING POLICIES (continued):

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

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

  b. Basis of presentation of the financial statements

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

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

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

  c. Principles of consolidation:

  1) The consolidated financial statements include the accounts of the Company and its subsidiaries. A list of the main subsidiaries is presented in a schedule to the financial statements.

  2) Intercompany transactions and balances, as well as profits on intercompany sales that have not yet been realized outside the Group, have been eliminated.

  d. Inventories

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

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

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

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

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

NOTE 1 – SIGNIFICANT ACCOUNTING POLICIES (continued):

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

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

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

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

  e. Investments in associated companies:

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

  2) Profits on intercompany sales, not yet realized outside the Group, have been eliminated according to the percentage of the Company’s holding in such companies.

  3) The Company reviews at each balance sheet date whether any events have occurred or changes in circumstances have taken place, which might indicate that there has been an impairment of its investments in associated companies – see i. below.

  4) The excess of cost of the investment in associated companies over the equity in net assets at time of acquisition (“excess of cost of investment”) or the excess of equity in net assets of associated companies at time of acquisition over the cost of their acquisition (“negative excess of cost of investment”) represent the amounts attributed to specific assets upon acquisition, at fair value. The excess of cost of investment and the negative excess of cost of investment are presented at their net amount and are amortized over the remaining useful life of the assets. The average rate of amortization is 10%.

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

  f. Marketable securities

  These securities are stated at market prices.

  The changes in value of the above securities are carried to financial income or expense.

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

NOTE 1 – SIGNIFICANT ACCOUNTING POLICIES (continued):

  g. Real estate for investment

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

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

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

  Sale during the ordinary course of business

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

  h. Fixed assets:

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

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