20-F
As filed with the Securities and Exchange Commission on June 16, 2009


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, 2008

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

HADERA PAPER 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, Tel: 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 NYSE Amex

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. (Check 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 x
  Other o

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 o Item 18 x

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

PAGE
PART I    
 
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS 5
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE 5
ITEM 3. KEY INFORMATION 5
ITEM 4. INFORMATION ON THE COMPANY 12
ITEM 4A. UNRESOLVED STAFF COMMENTS 24
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS 24
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES 37
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS 43
ITEM 8. FINANCIAL INFORMATION 44
ITEM 9. THE OFFER AND LISTING 46
ITEM 10. ADDITIONAL INFORMATION 47
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 55
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES 58
 
PART II
 
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES 58
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS 58
  AND USE OF PROCEEDS
ITEM 15. CONTROLS AND PROCEDURES 59
ITEM 16. RESERVED 60
ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT 60
ITEM 16B. CODE OF ETHICS 60
ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES 60
ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES 61
ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED 61
  PURCHASERS
ITEM 16F. CHANGE IN REGISTRANTS CERTIFYING ACCOUNTANT 61
ITEM 16G. CORPORATE GOVERNANCE 61
 
PART III
 
ITEM 17. FINANCIAL STATEMENTS 62
ITEM 18. FINANCIAL STATEMENTS 62
ITEM 19. EXHIBITS 62

3



CERTAIN DEFINED TERMS

        In this annual report, unless otherwise provided, references to “Hadera Paper”, “AIP”, “HAP”, “Company,” “we,” “us.” and “our” refer to Hadera Paper Ltd. and its subsidiaries and references to the “Group” refers to Hadera Paper 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

        The following selected consolidated financial data of Hadera Paper Ltd. (“HAP” or the “Company”) and its subsidiaries (together, “HAP”, the “Company,” “our Company,” “we” or “us”) are derived from our 2008 consolidated financial statements and are set forth below in table format. Our 2008 consolidated financial statements and notes included elsewhere in this report were prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”). These are the Company’s first consolidated financial statements prepared in accordance with IFRS. Our previous financial statements were prepared in accordance with generally accepted accounting principles in Israel (“Israeli GAAP”). As for explanation to the transition from Israeli GAAP to IFRS in respect of the Company’s consolidated financial statements as of January 1, 2007 (the transition date to the IFRS) and December 31, 2007, see note 21 to the consolidated financial statements included in item 18. In accordance with the provision of IFRS1 (“First-Time Adoption of International Financial Reporting”) the Company presented balance sheets as of December 31, 2008 and 2007, and profit and loss for the years then ended in its first consolidated financial statements prepared in accordance with IFRS.

        The consolidated financial statements for the years ended December 31, 2008 and 2007 were audited by Brightman Almagor & Co., a firm of certified public accountants in Israel and a member of Deloitte Touche Tohmatsu, except for certain subsidiaries and associates which were audited by other auditors. Our selected consolidated financial data are presented in NIS.

        The selected financial data for the years ended December 31, 2008 and 2007 which are presented in the Table I derived from our consolidated financial statements prepared in accordance with IFRS and do not include consolidated financial data in accordance with U.S. GAAP. The selected financial data for the years ended December 31, 2006, 2005 and 2004 which are presented in Table II below are derived from our selected financial statements prepared in accordance with Israeli GAAP and include in Table III selected financial data in accordance with U.S. GAAP.

TABLE I Selected Financial Data In Accordance With IFRS

Year Ended December 31
2008
2007
(In Thousands of NIS Except Per Share Amounts)
 
Income Statement Data:            
Sales    673,484    583,650  
Income from ordinary operations    35,351    71,109  
Share in profits of associated companies, net    51,315    856  
Net income    67,960    31,535  
Selected Balance Sheet Data:   
Total assets    2,044,094    1,319,915  
Fixed assets    767,542    405,231  
Long-term debt    676,034    217,471  
Shareholders' equity    757,629    669,971  
Per Share Data:   
Shares outstanding at end of year    5,060,774    5,060,774  
Amount in NIS    50,608    50,608  
Net income per NIS 1 par value:  
    Primary attributed to company shareholders    13.77    7.63  
    Fully diluted attributed to company shareholders    13.77    7.62  

5



TABLE II Selected Financial Data In Accordance With Israeli GAAP

Year Ended December 31
2006
2005
2004
(In Thousands of NIS Except Per Share Amounts)
 
Income Statement Data:                
Sales    530,109    482,461    482,854  
Income from ordinary operations    50,501    43,338    54,438  
Share in profits (losses) of associated companies, net    **(26,202 )  16,414    25,072  
Net income    113,330    145,715    162,732  
Selected Balance Sheet Data:   
Total assets    1,173,287    1,155,758    1,162,387  
Fixed assets    400,823    379,934    345,239  
Long-term debt    256,290    260,581    261,269  
Shareholders' equity    430,842    523,384    575,313  
Per Share Data:   
Shares outstanding at end of year    4,032,723    4,002,205    3,996,674  
Amount in NIS    40,327    40,022    39,967  
Net income per NIS 1 par value:  
         Primary    3.31    11.43    15.77  
         Fully diluted    3.28    11.35    15.44  
Dividend declared per share    224.85    2*24.99    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 and 2004 (in the sum of 8,000 thousands and NIS 14,440 thousands respectively, which relate to certain tax benefits.

2 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



TABLE III Selected Financial Data In Accordance With U.S. GAAP

Year ended December 31
2006
2005
2004
(In Thousands of re-measured NIS Except Per Share Amounts)
 
Income Statement And Balance Sheet Data:                
Sales    530,109    482,461    482,854  
Income from ordinary operations    76,917    63,258    63,974  
Share in profits (losses) of associated companies, net   (19,686 )  8,193  29,213  
Net income    123,909    141,861    158,720  
Total assets    1,123,964    1,097,543    1,107,725  
Fixed assets    362,539    340,914    300,746  
Long-term debt    257,075    260,581    261,269  
Shareholders' equity    374,768    461,406    520,482  
Per Share Data:   
Shares outstanding at end of year    4,032,723    4,002,205    3,996,674  
Share outstanding to compute:  
Basic net income per share    4,025,181    3,999,910    3,978,339  
Diluted net income per share    4,055,628    4,051,610    4,043,714  
Amount in NIS    40,327    40,022    39,967  
Net income per share. (re-measured NIS)  
         Basic    5.94    10.47    14.76  
         Diluted    5.89    10.33    14.52  
Dividend declared per share    224.85    2**24.99    225.12  



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

1 The net income includes losses in the year 2005, in the sum of NIS 10,000 thousands, [representing other than temporary impairment of investment in associated companies.

Net income in the years 2005and 2004, includes gains of NIS 8,000 thousands and NIS 14,440 thousands respectively, originated from certain tax benefits.

2 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 3.958 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 2008 through May 2009, as published by the Bank of Israel, were as follows:

Month
High
Low
 
  1 U.S. dollar = 1 U.S. dollar =
 
December 2008 3.990 NIS 3.677 NIS
 
January 2009 4.065 NIS 3.783 NIS
 
February 2009 4.191 NIS 4.012 NIS
 
March 2009 4.245 NIS 4.024 NIS
 
April 2009 4.256 NIS 4.125 NIS
 
May 2009 4.169 NIS 3.958 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, 2004 - December 31, 2004 4.482 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 4.108 NIS/$1
January 1, 2008 - December 31, 2008 3.587 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

        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. The global credit crunch and the economic slowdown in Israel and overseas in 2008 may negatively impact the Company’s position. These circumstances could also reduce demand, increase competition from imports and as a result damage sales, financial results and profitability.

Future legal restriction may negatively affect the results of operations

        Our activities and the activities of our subsidiaries and associated companies’ 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 our results of operations.

8



Any future rise in the inflation rate may negatively affect business

        Since the Company has significant excess liabilities linked to the Consumer Price Index, primarily in respect of bonds issued by the Company, amounting to NIS 356 million in total, a high inflation rate may cause significant financing expenses. The Company occasionally enters into hedging transactions to cover the said exposure on account of the liabilities. A high inflation rate may also impact payroll expenses, which are adjusted over time to changes in the consumer price index.

In early 2009, the Company entered into hedging transactions for a period of one year, to protect itself against a rise in the CPI, in the amount of NIS 250 million, pursuant to previous transactions that were made in early 2008 and in August 2008 and terminated at the end of 2008.

We are exposed to exchange rate fluctuation

        The Company and its consolidated subsidiaries and associated companies are exposed to risks on account of changes in exchange rates, whether due to the import of raw materials and finished goods, or due to exports to foreign markets. Changes in exchange rates of various currencies against the NIS may erode profit margins and cash flows.

        Approximately half of the Company’s sales are denominated in US dollars, whereas a significant share of its expenses and liabilities are in NIS. The Company is therefore exposed to exchange rate fluctuations of the NIS vis-à-vis the US dollar.

        Following the purchase of the equipment for machine 8, whose prices are presented in Euro, true to December 31, 2008, the company entered into Forward transactions on the euro for periods of up to 5 months, at a total sum of €20 million. The company also entered into sale and purchase transactions of options on the euro/shekel, whose redemption date is one week from the date of the report, for a period of up to one year, at a total of €5 million.

We are exposed to Interest rate Risks

        The company is exposed to changes in interest rates, primarily in respect of bonds it has issued in the amount of NIS 593 million, as of December 31, 2008.

Risk Factors relating to the Company

We faces significant competition in the markets we operate 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.

We are 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, required increase of the paper collection volume to be used as raw material for production in the paper production sector, and location of more extensive collection sources. Consequently, upon start of operation of Machine 8, the Company would require twice as much paper waste. Absence of sufficient paper waste volume for production would impact the Company’s capacity to produce sufficient packaging paper.

        Absence of enforcement of the Recycling Act, which mandates waste recycling, would make it more difficult to obtain alternative sources for raw materials at a competitive cost. Nevertheless, approval of the Cleanliness Law in January 2007, which imposes a landfill levy on waste, may bring about, if effectively enforced, some improvement in the paper waste collection capacity, according to Company estimate.

        Furthermore, as to the prices of raw materials, primarily paper – which is a material component in the production cost of cardboard, and an increase in paper prices or in the prices of other raw materials and inputs, such as energy, electricity, transportation and starch – may impact Company profitability.

        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.

9



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.

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 HAP 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 December 2008, Israel was engaged in an armed conflict with Hamas in Gaza Strip. In addition, in the summer of 2006, for approximately one month, battles took place between the Israeli military and Lebanese guerilla units. 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.

11



        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.

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 on NYSE 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 NYSE 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

        Hadera Paper Ltd. (formerly: “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. The Company’s agent in the U.S: American Stock Transfer & Trust Company, address: 59 Maiden Lane , New York N.Y. 10007, telephone number: (718) 9218200.

        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. (hereinafter:“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 to 36.2% of the shares of Carmel. In August 2008, a transaction was completed for the acquisition of shares of Carmel, pursuant to an agreement signed on July 10, 2008, whereby the Company acquired the shares of Carmel held by Robert Kraft, the principal shareholder in Carmel, as well as those of several other shareholders, in consideration of a total of $20.77 million, paid upon closing of the transaction. The shares were acquired “As-Is” and the transaction closed subsequent to receiving the approval of the Antitrust Commissioner, which was a pre-condition for said closing. Upon conclusion of the transaction and as of May 31, 2009, the Company holds approximately 89.3% of Carmel shares and starting September 1, 2008, the financial statements of Carmel and those of Frenkel-CD Ltd. (hereinafter:” Frenkel”) have been consolidated with the Company’s financial statements. For impact of this acquisition on the Company, see Note 15 to the Company’s financial statements as of December 31, 2008.. Carmel shares were traded on the NYSE Amex before it was delisted and deregistrated in 2005.

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    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, HAP 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 HAP’s printing and writing paper operations. The printing and writing paper operation was separated from HAP 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 exercisable 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 exercisthe 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, in fiscal year 2008. See also Note 21(F)(4) to the financial statements included in this annual report.

    4.        Amnir Recycling Industries Ltd. (“Amnir”) (a wholly owned subsidiary of HAP), 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, 2009, 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, HAP 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”), HAP 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, HAP and CGEA together owned 75.74% of the shares of TMM. . As of December 31, 2006, HAP 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 HAP 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, design, production and marketing of consumer goods packaging.. C.D. was renamed to Frenkel-CD Ltd. (“Frenkel-C.D.”), as of January 1, 2006, upon conclusion of the aforementioned transaction, the Company directly held 27.85% of the issued capital of Frenkel- C.D. In August 2008, a transaction was concluded whereby the Company increased its holdings in Carmel, thereby increasing its holdings in Frenkel- C.D. to 28.92% directly and to 25.83% indirectly, via its holdings in Carmel, which holds 28.92% of the issued share capital of Frenkel- C.D., and starting on September 1, 2008, the Company holds in total 54.75% of Frenkel- CD, and the financial statements of Carmel and of Frenkel-CD Ltd. were consolidated with those of the Company (directly and indirectly through Carmel). In addition, Frenkel and Sons Ltd. held 42.16% of C.D.‘s shares.

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        The current Group Structure is as follows:

Hogla-Kimberly
Ltd.
(4)

Hadera Paper
Industries Ltd.

Carmel Container
Systems Ltd.
(5)

Graffiti Office
Supplies &
Paper Marketing
Ltd.


                                                                              

Amnir Recycling
Industries Ltd.

Frenkel- CD Ltd.

Attar Marketing
Office Supplies Ltd.

49.9%

49.9%

89.3%

100%

Hadera Paper Ltd.(1) (2)

100%

100%

Mondi Hadera
Paper Ltd.
(3)

100%

28.92%

28.92%

KCTR

(Turkey)

100%

Cycle-Tec Ltd.

30.18%

(1) In February 2007, the Company sold its holding in TMM Integrated Recycling Industries Ltd. (43% of TMM’s issued share capital) and no longer owns shares of TMM. For details of the aforementioned sale of holdings, see section 21.5, below.

(2) In addition, the Company has the following holdings in inactive companies: Integrated Energy Ltd.; Hadera Paper – Development and Infrastructure Ltd.; AIPM Marketing (1992) Ltd.; Yavnir Trading Company Ltd.; Nir Oz Investment Company Ltd.; and Dafnir Packaging Systems Ltd.

(3) Mondi has four wholly-owned subsidiaries: Mondi Hadera Paper Marketing Ltd., Grafinir Paper Marketing Ltd., Yavnir (1999) Ltd., and Mitrani Paper Marketing 2000 (1998) Ltd.

(4) In addition to KCTR, Hogla-Kimberly has two other wholly-owned subsidiaries: Hogla Kimberly Marketing Ltd. and Mollett Marketing Ltd.

(5) Carmel has a wholly-owned subsidiary: Tri-Wall Containers (Israel) Ltd.

        Other important events in the development of the Company include:

        During 2008, the Company has completed execution of the key agreements for purchase of major 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 and Italian company SEEI. For further details, see Item 10.C Material Contracts.

        In November 2007, the Company alloted 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.

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        On December 23, 2007, an agreement was signed with Prisma Capital Markets Ltd. for making a market in Company shares traded on Tel Aviv Stock Exchange (“TASE”), at a scope and under terms and conditions set forth in the agreement and subject to the stock exchange regulations and guidelines, in return for a monthly payment whose amount is immaterial for the Company. The agreement was signed for a two-year term, and each party may terminate the agreement after its first anniversary. On December 31, 2008, the Company announced that due to discontinuation of market making activities by the market maker, the latter’s activities have ceased as of January 21, 2009 and the agreement was terminated. As of the report date, the Company is reviewing optional contracting with a new market maker.

        On July 1, 2008, pursuant to approval by the Registrar of Companies, the Company changed its name from American Israeli Paper Mills Ltd. to Hadera Paper Ltd.

        On May 26, 2008, the Company publicly filed with the Israeli Securities Authority and the 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 will 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.

Subsequent to the shelf prospectus, the Company concluded on July 16, 2008, the offering of two bond series (Series 3 and 4) amounting in total to NIS 308,060 thousand. The Company has allotted NIS 187,500 thousand par value in bonds Series 3, for total consideration of NIS 187,500 thousand, bearing interest at 4.65% and repayable in equal annual installments on July 10 of each year between 2009 and 2018. In addition, the Company has allotted NIS 120,560 thousand par value in NIS-denominated bonds Series 4, for total consideration of NIS 120,560 thousand, bearing interest at 7.45%. These are repayable in equal annual installments on July 10 of each year between 2010 and 2015. Net of issuing expenses, the Company received net proceeds amounting to NIS 306,609 thousand.

On August 17, 2008, the Company concluded a further offering subsequent to the shelf prospectus, raising a total of NIS 120,000 thousand, in exchange for the allocation of NIS 114,997 thousand par value of bonds (Series 4), for total consideration of NIS 119,800 thousand, bearing interest at 7.45%. Total net proceeds, net of issuance expenses, amounted to NIS 119,167 thousand.Net of issuing expenses, the Company received net proceeds amounting to NIS 119,826 thousand.

Total net proceeds received by the Company from these two offerings amounted to a total of NIS 426,435 thousand.

        The corporation has obtained a rating by Maalot Standard and Poor’s for the bonds (Series 1-4) issued by the Company; these are rated (AA-) / Negative Outlook. This AA- rating was granted in December 2003, and in February 2008 it was further validated by a rating of (AA-)/Stable. Pursuant to the Company’s request to raise additional debt by issuing bonds amounting up to a total of NIS 435 million, the Company was issued, in July-August 2008, a rating of AA- / Negative Outlook for its bond issuance (Series 3 and Series 4), which also applies to all other Company bond series in circulation.

15



Capital Expenditures and Divestitures

2008

The Company’s investments in fixed assets totaled about NIS 263.7 million (about $ 69.3 million) in 2008. These investments included:

Investments of approximately NIS 7.7 million ($ 2.0 million) in environmental expenditures.

An investment of approximately NIS 4.7 million ($ 1.2 million) in a conversion to gas system.

Investments of approximately NIS 6.7 million ($ 1.8 million) in conversion and improvement of steam tanks.
Investments of approximately NIS 191.0 million (about $49.7 million) in new packaging paper production system (“Machine 8”).

Investments totaling NIS 53.6 million ($14.6 million) in buildings, equipment, transportation and information technology.

2007

The Company’s investments in fixed assets totaled about NIS 76.5 million (about $ 19.9 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 34.4 million ($ 8.9 million) in buildings, equipment, transportation and information technology.

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, corrugated board containers and packaging for consumer goods, 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 and kitchen products.

        In 1995, the Company formed a wholly-owned subsidiary, AIPM Paper Industry (1995) Ltd. which was renamed to Hadera 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 Hadera Paper Industry Ltd. 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

16



        The principal products manufactured and/or marketed by the Group, through its subsidiaries and associated companies, 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 as well as 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 a subsidiary) 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 25% 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.

        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 $116.4 million to a volume of $300 million in the year 2015.

17



        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

Adjustment to
consolidation

Total
2008
2007
2008
2007
2008
2007
2008
2007
 
 543.1    465.3    131.1    119.0    (0.7 )  (0.6 )  673.5    583.7  









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 213,000 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, Hadera Paper Industries 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.

        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. 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 original agreement was signed for a period of 10 years. In order to resolve disagreements about extension of the aforementioned agreement, and in view of material changes in the economic environment, the parties signed an amendment to the original agreement in early 2009. This amendment to the original agreement stipulates that the original agreement would be extended by a further four years through December 31, 2020 and a different price mechanism was put in place, compared to the original agreement. 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.

18



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., as detailed below)

        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.

        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.

        On January 15, 2009, the Company announced that as producer of packaging paper, it had filed a complaint with the Supervisor of Anti-dumping Charges and Homogenization Charges at the Ministry of Industry, Trade and Employment (hereinafter: “the Supervisor”) concerning import in dumping prices of packaging paper from several European countries to Israel. Upon review of the complaint, the Supervisor decided to launch an investigation of this issue. The Company noted that in recent years it has faced importing of packaging paper at very low prices, suspected of being dumping prices, and after collecting the required information and identification of the sources of dumping, the Company filed the aforementioned complaint. There is no certainty that its complaint would be accepted, and the Company is currently unable to estimate the impact of such acceptance on its business results.

        There are two major competitors in paper waste collection, which operate throughout Israel – KMM Recycling Plants Ltd. and Tal-El Collection and Recycling Ltd. In addition, there are many competitors with small market share who mainly operate in a limited geography.

        In the cardboard packaging activity, Carmel has three major competitors: Cargal Ltd., YMA 1990 Packaging Product Manufacturing and Best Cardboard Ltd.

        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.

        Due to the global crisis, the competition between the paper importers increased, resulting in surplus supply of writing and printing papers in dumping prices. On February 26, 2009, Mondi Hadera had filed a complaint with the Supervisor concerning import and dumping of fine paper from several European countries to Israel. Upon review of the complaint, the Supervisor decided to launch an investigation of this issue. There is no certainty that its complaint would be accepted, and the Company is currently unable to estimate the impact of such acceptance on its business results.

19



        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, 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.

        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.

        Seasonality

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

        Most of the demand for cardboard packaging products is in winter months, due to the seasonal export of citrus and bell pepper crops. As for the other products of the paper and recycling segment, there is no seasonal impact on demand.

        Graffiti’s sales during the second half of the calendar year are usually higher than the first half of that same year, in light of the start of the school year and the realization of annual purchase budgets for institutions and businesses.

C. Organizational Structure

        As of May 20, 2009, 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 74.45% of DIC and 60.54% of Clal. See “Item 7. Major Shareholders and Related Party Transactions”.

20



Significant subsidiaries and associated companies

The following table lists our 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 
   
Hadera Paper Industry Ltd.    100.00 % Israel 
   
Carmel Containers Systems Ltd.    89.30 % Israel 
   
Frenkel- CD Ltd. (direct and indirect through Carmel)    54.74 * Israel 
   
Associated Companies   
Hogla-Kimberly Ltd.    49.90 % Israel 
   
Kimberly -Clark Tuketim Mallari Sanayi Ve Ticaret A.S.    49.90 % Turkey 
("KCTR") (held through H-K)  
   
Mondi Paper Hadera Ltd.    49.90 % Israel 
   
Cycle-Tec Recycling Technology Ltd.    30.18 % Israel 

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. 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, HAP 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.

        The Company leases from the Tel Aviv Municipality, until 2059, a real estate lease, of approximately 1.9 acres for a plant in Tel Aviv that had been shut down at the end of 2002. 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. Failure to use this right, if the above period is not extended, might constitute a violation of the agreement.

        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 holding in voting shares is 54.69%

21



        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 plus VAT, including land-betterment taxes that apply to the buyer, while the net proceeds to the company before betterment tax were NIS 43 million.

        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 (“Machine 8”). The machine will have an output capacity of 230,000 tons per annum. Subsequent to the construction of the new machine, planned for early 2010, 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 completed execution and signed the key agreements for purchase of major equipment, and true to the date of the report, part of the equipment has already been supplied while the remaining equipment is scheduled to be supplied by the end of 2009. Regarding the financing of the construction of the new machine, in addition to capital raised as part of the private placement in November 2007, as described in Item 4 Section A, and with the bond issuance in July and August of 2008, as set forth in Item 4 Section A above, the Company is evaluating several ways to raise the remaining funds required for completion of installation of the new machine.

        As part of construction of the new machine, the company is investing in the reorganization of the principal site in Hadera, including an expansion of the energy system and the adaptation of the traffic routes and upgrading of environmental systems, as required.

        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.

        At the end of 2008, the Company signed an agreement for leasing of a Logistics Center in Modi’in with an area of 74,500 square meters, as well as buildings with a total constructed area of 21,300 square meters, for the Company’s subsidiaries and associated companies, which would – in part – replace existing lease agreements. The Leasing Period shall be 15 years. For further details, See Item 10C – Material Contracts.

        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.

        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 significantly lowered the cost of energy to the Company, while concurrently significantly reduced 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. Due to the transition to natural gas, the savings in energy costs to the group (including associated companies), in 2008, amounted to NIS 46 million. 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.

22



        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, at a scope of up to 230 megawatts, at the HAP site in the Hadera Industrial Zone. As of the report date, the project is on hold, awaiting the business stabilization of potential gas sources in order to conclude the contract to acquire the required gas at a price range that would allow the Company to be competitive with expected IEC rates. Due to the pending finalization of the gas purchasing contract as set forth above, it is not possible to comply with the milestones set forth in the Company’s contingent production license. The Company has elected not to apply for an extension of the license during this holding phase, and will act to renew the license as progress is made on completion of gas purchasing for the station.

        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.

        The discovery of natural gas deposits drill sites in proximity to Hadera beach – and progress in negotiations with the Egyptian gas franchisee (EMG) – are both increasing the likelihood of renewed negotiations and project kick-off.

        In 2008, the Company launched the rapid development of paper types based on 100% recycled fibers, whose superior quality would allow to replace pulp-based packaging paper in the corrugated board industry in Israel and overseas. The technological and operational development process is currently in advanced stages and is meant to increase the volume of the potential market for packaging paper for the local corrugated board industry, from 170,000 tons per annum at the present time, to approximately 250,000 tons per annum in the coming years. In early 2009, the Company started marketing this products to both the domestic and export markets. The expansion of the sales volumes of these products is planned for 2009.

        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.

        HAP is working intensively on environmental issues, and is investing heavily in environmental projects with a special emphasis on the treatment of wastewater, cutting down on water consumption and improving airborne emissions with the transition to natural gas. HAP strives to achieve environmental excellence as business leverage on a strategic level. To this end, in 2008, the company received the Green Globe award for its handling and treatment of wastewater, representing recognition on the part of the umbrella organization of all green associations for the company’s environmental excellence.

        Company activities with regard to environmental protection are focused in three major areas: Treatment of sewage and quality of treated waste water, air quality and noise reduction.

        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 2000-2008, the Company invested approximately $18.3 million in projects intended for compliance with environmental protection regulations, of which $2.4 million in 2008, including investment of $1.2 million in the conversion of the energy system to burn natural gas instead of fuel oil, $0.1 million for noise reduction projects at the Hadera facility, as well as an investment of $0.7 million in the salvaging of treated waste water at the facility and increasing the reliability of the water and sewage treatment system.

23



        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 a total of NIS 30 million in converting its energy-generation systems, 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 significantly reduced the cost of energy to the Company, while concurrently significantly reduced the amount of emissions released into the atmosphere.. Due to the transition to natural gas, the savings in energy costs to the group (including associated companies), in 2008, amounted to NIS 46 million.

        Furthermore, over the past two years the Company has been implementing a gradual plan to further improve reduction of noise sources at the Company’s facility in Hadera. In 2008, the Company invested a total of NIS 0.1 million in implementation of this plan.

        Moreover, as part of the upgrading of the Hadera Site in preparation for Machine 8, the Company implemented a multi-annual program this year for noise treatment, prepared in collaboration with the Hadera Municipal Council. The Company is working to accelerate investments and shorten timetables in relation to the original plan. The cost of the estimated investment in this program, in 2009, has yet to be finalized.

        The Company estimates that its total environmental expenses in 2009, arising in the normal course of business, will amount to NIS 2.5 million. According to Company estimates, these expenses are not expected to decline in coming years.

        In 2008 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, as of December 31, 2008 and 2007 and for the years then ended prepared in accordance with International Financial Reporting Standards (“IFRS”). The Company’s previous financial statements were prepared in accordance with generally accepted accounting principles in Israel (“Israeli GAAP”) reconciled to US GAAP. In accordance with the provision of IFRS 1, the transition date of the Company to IFRS has been determined at January 1, 2007 (“Transition Date”) and the Company is obligated in the first year it implements IFRS to include statement of income for two years only. In addition, the Company has prepared opening balance as of the Transition Date in accordance with IFRS while adopting certain reliefes allowed for under IFRS 1 (First-Time Adoption of International Financial Reporting). IFRS principles differ in certain significant aspects, from those of the Israeli GAAP. As a result the Company’s financial statements prepared in accordance with IFRS as of the Transition Date and for December 31, 2007 differ from those previously issued by the Company for those dates and which were prepared in accordance with Israeli GAAP. As a result of the transition to IFRS, the Company’s shareholders’ equity attributed to the equity holders of the Company as of the Transition Date has decreased from NIS 678.1 million reported in accordance with Israeli GAAP to NIS 670 million reported in accordance with IFRS. In addition net income in 2007 attributed to the equity holder of the Company increased from NIS 31.4 million reported in accordance with Israeli GAAP to NIS 31.5 million reported in accordance with IFRS. As for additional information in respect of the material differences between IFRS and Israeli GAAP and their effect on the consolidated financial statements as of the Transition Date and December 31, 2007.- see note 21 to our consolidate financial statements included in Item 18 below. 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.

24



Critical Accounting Judgments And Key Sources Of Estimation Uncertainty

        A “critical accounting policy” is one that (i) is important to the portrayal of an entity’s financial condition and results of operations and (ii) requires management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain.

        In the application of our accounting policies, management is required to make judgments, estimates and assumptions about the carrying amounts of assets and liabilities that are not readily apparent from other sources. The estimates and associated assumptions are based on historical experience and other factors that are considered to be relevant. Actual results may differ from these estimates. The estimates and underlying assumptions are reviewed on an ongoing basis.

        The followings are the critical judgments and key sources of estimation uncertainty that management has made in the process of applying our accounting policies and that have the most significant effect on the amounts recognized in financial statements.

General

        In the application of the Group’s accounting policies, which are described in Note 2 for the financial statements, management is required to make judgments, estimates and assumptions about the carrying amounts of assets and liabilities that are not readily apparent from other sources. The estimates and associated assumptions are based on historical experience and other factors that are considered to be relevant. Actual results may differ from these estimates.

        The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimate is revised if the revision affects only that period or in the period of the revision and future periods if the revision affects both current and future periods.

Critical judgments in applying accounting policies

        The following are the critical judgments, and key sources of estimation uncertainty, that the management has made in the process of applying the Group’s accounting policies and that have the most significant effect on the amounts recognized in the financial statements:

Deferred taxes-

        The company recognizes deferred tax assets for all of the deductible temporary differences up to the amount as to which it is anticipated that there will be taxable income against which the temporary difference will be deductible. During each period, for purposes of calculation of the utilizable temporary difference, management uses estimates and approximations as a basis which it evaluates each period.

Length of fixed assets

        Approximation of length of life of items of fixed assets- is done each period. The company’s management evaluates residual values, depreciation methods and length of useful lives of the fixed assets.

Provisions for legal proceeding

        Against the company and its subsidiaries are 5 claims pending that are open in a total amount of approximately NIS 10,680 thousands (December 31, 2007: NIS 23,124 thousands), in respect of the said claims a provision was recorded in a sum of NIS 28 thousands (December 31, 2007: NIS 300 thousands was recorded). For purposes of evaluating the legal relevance of these claims, as well as determining the reasonableness that they will be realized to its detriment, the company’s management relies on the opinion of legal and professional advisors. After the company’s advisors lay their legal position and the probabilities of the claims, on the basis of whether the company will have to bear its consequences or whether it is will be able to rebuff it, the company approximates the amount which it must record in the financial statements, if at all.

        An interpretation that differs from that of the legal advisors of the company as to the existing legal situation, a varying understanding by the company’s management of the contractual agreements as well as changes derived from relevant legal rulings or the addition of new facts may influence the value of the overall provision with respect to the legal proceedings that are pending against the company and, thus material affect the company’s financial condition and operating results.

25



Employee benefits

        The present value of the company’s obligation for the payments of benefits to pensioners and severance pay to employees that are not covered under Section 14 to the Severance Pay Law is based upon actuarial estimations. The actuarial estimations take into consideration a great amount of data and utilize a large number of assumptions, among which, the capitalization rate. Changes in the actuarial assumptions could affect the book value of the obligation of the company for employees’ benefits payments, vacation and severance pay. The company approximates the capitalization rate once annually, on the basis of the capitalization rate of government bonds. Other key assumptions are determined on the basis of conditions present in the market, and on the basis of the cumulative past experience of the company.

Fair value of an option to sell shares of an associated company

        As stated in Note 2P (2) to the financial statements, the company has a liability that arises from an option to sell shares of an associated company, which is classified as a fair value liability through profit or loss. In establishing the fair value of the option, the company bases its decision on the valuation of an independent external expert with the required expertise and experience. This valuation is carried out once a quarter.

        The company strives to establish a fair value that is as subjective as possible, but at the same time the process of establishing the fair value includes some objective elements, since changes in the assumptions used in determining the fair value can have a material impact on the financial situation and operating results of the company.

Purchase price allocation

        For the purpose of allocating the purchase price and determining the fair value of the tangible and intangible assets as well as the liabilities of the consolidated subsidiaries at the date of consolidation, the Company’s management based the allocation primarily on valuations prepared by external and independent real-estate appraisers and assessors, possessing the required, experience and expertise.

        The fair value was determined according to generally-accepted valuation methods, including: Proposed market prices in active markets, discounting of cash flows and the comparison of selling prices of similar assets and company assets in the immediate proximity. When the discounted cash flows method was implemented, the interest rate for discounting the net cash flows expected from the assets possesses a material impact on its fair value.

        In determining the fair value, the business/operational risk associated with the company’s operations is taken into account, to the extent relevant. Part of the said risk is the risk associated with the nature of the sector wherein the company operates, while part of the risk stems from the Company’s specific characteristics. 

        The Group strives to determine a fair value that is as objective as possible, yet the process of estimating the fair value also includes subjective elements, originating inter alia from the past experience of the Company’s management and its understanding of expected events in the market wherein the Group operates at the date when the fair value was determined.  

        In light of the above, and in view of the aforementioned in the preceding paragraph, the setting of the fair value of the Group calls for implementing judgment. Changes in the assumptions that serve for setting the fair value can materially affect the Group’s situation and results of operation.

        For additional details regarding the Group’s use of measurement of purchase price allocation, see Note 15 to the financial statements.

General

1. On July 10, 2008 the Company has signed an agreement for the acquisition of shares of Carmel Container Systems Ltd. (“Carmel”, an affiliated company) from the principal shareholder of Carmel, Mr. Robert Kraft and a number of additional shareholders in Carmel, on an “as is” basis, for the total consideration of approximately $20.77 million, paid from the company’s own resources in one payment upon the business transaction. The completion of the acquisition was approved by law, including the approval of the Israeli Antitrust uthority during August 2008.Due to the completion of the acquisition of Carmel, the Company holds approximately 89.3% of Carmel shares (held before the acquisition 36.2% of Carmel shares) and holds 52.72% indirectly in Frenkel C.D. (held before the acquisition 37.93% of Frenkel C.D. shares).Since September 1 ,2008, the Company consolidates the financial statements of Carmel and Frenkel C.D. Ltd. (an affiliated company of the Company and Carmel), at the financial statements of the company.The cost of purchasing companies Carmel and Frenkel C.D. was in sum of NIS 70,695 thousands and NIS 4,000 thousands, respectively, and paid in cash as follows:

26



Main Activity
Acquisition Date
Rate of regular
shares purchased

Acquisition cost
NIS thousands
 
2008                    
Carmel Container   packaging material and  
Systems   carton    31. 8.2008    53.07 %  70,695  
       
Frenkel C.D.   Printing on carton  
    production    31.8.2008    14.79 %  4,000  

                   74,695  


For information regarding the acquisition of subsidiaries see note 15 to the consolidated financial statements.

2. In January 2009, the Board of Directors of the Company approved a grant of non transferable options to officers of consolidated companies as part of the 2008 plan for senior officers in the group that was approved by the board of directors of the company on January 2008. The date of grant of the options was January 8, 2009, subject to restrictions of Section 102 (capital route) of the Income Tax Ordinance. 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 0.3 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) 123.90
Exercise price (NIS) 223.965
Anticipated volatility (*) 31.01 %
Length of life of the options (years) 3-5
Non risk interest rate 6.30 %

(*) 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.

27



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)

Year ended 12/31/08
v.
year ended 12/31/07
Changes
%
NIS
 
Net sales      89,834    15.4  
Cost of sales    101,648    23.1  


Gross profit    (11,814 )  (8.3 )
Selling, administrative, general and other expenses    23,944    33.3  


Income from ordinary operations    (35,758 )  (50.3 )
Financial income    1,421    13.3  
Financial expenses    5,705    (17.4 )
Profit after financial expenses    (28,632 )  (58.5 )


Share in profits of associated companies, net    50,459    5,894.7  


Income before taxes on income    21,827    43.8  
Taxes on income    14,598    (79.9 )


Profit for the year    36,425    115.5  


   
Attributed to:   
Company shareholders    38,175    121.1  
Minority interests    (1,750 )  -  

     36,425    115.5  


* The statements of income for the years ended December 31, 2008 and 2007 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 decreased over the prior year by (-1.1%) and (-9.0%) in 2007 and 2008, respectively. See Note 2 to the Financial Statements attached for the anticipated effect of adopting of accounting pronouncements that have been issued but are not yet adopted.

2008 Compared to 2007

I. Overview of Results of Operations

1. Consolidated Data

        Consolidated sales in 2008 amounted to NIS 673.5 million, as compared with NIS 583.6 million in 2007, representing growth of approximately 15.4%.

        The consolidated profit from ordinary operation amounted to NIS 35.4 million in 2008, as compared with NIS 71.1 million in 2007.

        Profit after taxes and before HAP’s share in earnings of associated companies for 2008, amounted to NIS 16.7 million, as compared with NIS 30.7 million in 2007.

2. Net profit and the Earnings per Share Attributed to the Company’s Shareholders

        The net profit attributed to the Company’s shareholders in 2008 amounted to NIS 69.7 million, as compared with net profit of NIS 31.5 million in 2007, representing an increase of 121.1 %.

        The net profit attributed to the Company’s shareholders in 2008 was affected by the improvement in the profitability of some of the Group’s companies in Israel, from recording profit from the allocation of excess negative cost as a result of the acquisition of Carmel and Frenkel CD – whose net impact on the net profit attributed to the Company’s shareholders amounted to NIS 10.6 million and the significant reduction of the Company’s share in the losses of the operations in Turkey (KCTR), as compared with 2007. On the other hand, the net profit decreased as a result of recording an expenditure of NIS 10.0 million from the valuation of a PUT option at Mondi.

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        The surplus purchasing of Carmel and Frenkel C.D. was calculated to the consolidation date of the companies. See note 15 to the financial statements regarding details of the acquisition of Carmel and Frenkel.

        The net profit attributed to the shareholders of the company in the fourth quarter this year amounted to NIS 10.2 million, as compared with net profit attributed to the company’s shareholders of NIS 17.5 million in the corresponding quarter last year.

        Basic earnings per share amounted to NIS 13.77 per share ($3.62 per share) in 2008, as compared with basic earnings per share of NIS 7.63 per share ($1.98 per share) in 2007.

        Diluted earnings per share amounted to NIS 13.77 per share ($3.62 per share) in 2008, as compared with diluted earnings per share of NIS 7.62 per share ($1.98 per share) in 2007.

II. The Business Environment

        Global financial markets suffered a considerable upheaval in 2008, an upheaval that reached new highs during the period between September and October 2008, with the collapse of several large financial entities in the United States and elsewhere around the world, along with global stock markets. This economic and financial crisis came in the wake of the subprime mortgage crisis, that began in the second half of 2007 and affected additional financial sectors. The global economic and financial crisis resulted inter alia in severe damage to global capital markets, downturns and fierce fluctuations in stock exchanges both in Israel and worldwide and in the worsening of the credit crunch that started in the wake of the subprime mortgage crisis. Following the said events, several nations initiated various measures in order to stabilize and prevent an additional deterioration of financial markets, by way of injecting funds into financial institutions while also lowering interest rates. However, there is still no certainty that these measures have indeed tamed the crisis or prevented its deterioration and there is no certainty that they will in fact do so.

        Over the last several months, the said financial crisis began to materialize in the form of a real economic crisis, as various economies around the world, including the United States, central economies in Europe and the Israeli market as well, entered into a recession, accompanied by the discontinuation of numerous operations and mass employee layoffs in various market sectors, including industry, services and high-tech.

        As of the report date, it would seem that the direct economic repercussions of the aforementioned crisis have yet to run their course, and a concern exists that Israel’s economy may slide into recession, similar to other economies around the world.

        In view of the global recession, the Company formulated in recent months an action plan which includes aggressive measures to improve efficiency, cut current investments, cut general expenses, continued measures for improved efficiency across the group, focus on purchasing operations in order to reduce expenses related to the purchase of raw materials, services and products as well as focused management of operational working capital and control of customer credit exposure. Along with these actions, the Company continues to identify business opportunities to enable accelerated growth and improved margins in its various sectors of operation in Israel and overseas.

        Alongside the said global financial crisis, several events occurred in the Israeli economy in the second half of 2008, including significant fluctuations in the exchange rates of principal currencies vis-à-vis the NIS.

        These market developments and fluctuations may potentially have adverse effects on the business results of the Company and its investee companies, including an effect on their liquidity, the value of their assets, the ability to divest assets, the state of their business, their financial indicators and standards, their credit rating, ability to distribute dividends, ability to rise financing for their current operations and long-term plans, as well as on their financing terms.

        As of the date of publication of the financial statements, there is no material impact as a result of the escalation of the crisis, on the Company’s business results, its financial robustness or the value of its assets.

        In the course of the third quarter, the Company conducted two offerings in the total sum of NIS 426 million, by way of issuing to the public series of debentures that render it possible for the company to promote the long-term strategic projects on which it is focusing. The Company does not currently anticipate difficulties in raising additional financing in case of need.

        As of the date of publication of these financial statements, no material changes have occurred to the Company’s risk management policy.

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        In the first half of 2008, input prices rose for energy, fibers, chemicals and commodities – a trend that was reversed in the second half of the year due to the global crisis. The Company’s transition, in the fourth quarter of 2007, to using natural gas, has led to NIS 46 million in Group-wide energy-cost savings in 2008, as compared with last year – primarily due to the transition to steam production using natural gas and to self-generation of electricity based on gas rather than on fuel oil. These savings were partially offset as a result of the increase in electricity prices in 2008, by an average rate of 17% in relation to 2007, as mentioned above.

        In the second half of 2008, the global paper market – and particularly in Europe –saw the start of a trend of slowing demand that led to surplus production in the market. Due to the said surplus production, the importing of fine paper and packaging paper from Europe at dumping prices rose in the second half of 2008. In order to avoid erosion of its gross margin, the Company announced on January 15, 2009, that it had filed a complaint, as a manufacturer of packaging paper, with the Supervisor of Anti-Dumping Charges and Homogenization Charges at the Ministry of Industry, Trade and Employment (hereinafter: “the Supervisor”), regarding dumping imports of packaging paper from several European nations to Israel. Upon review of the complaint, the Supervisor decided to launch an investigation of this issue. On February 26, 2009, the company announced that the associated company Mondi Hadera Paper had filed a complaint to the supervisor, regarding the dumping imports of fine paper from several European nations to Israel. Upon review of the complaint, the Supervisor decided to launch an investigation of this issue. There is no certainty that the above complaints would be accepted, and we are currently unable to estimate the impact of such acceptance on its business results.

        The average revaluation of the NIS against the US$ – amounting to approximately 13% in 2008 as compared with 2007 – coupled with the revaluation of the NIS against the euro had a positive impact on the Company with regard to imported inputs while, on the other hand, serving to erode the selling prices in the main operating segments of the Company whose prices are denominated in US$. In the most recent quarter, the trend in input prices was reversed and prices started to decline due to the aforementioned crisis – which served to somewhat offset the looming slowdown in operations in both local and export markets.

        The overall business range and currency operation of the Group, including its associated companies, is relatively balanced and the Company’s exposure to sharp fluctuations in exchange rates is therefore low.

        The sharp fluctuations in global fuel prices in 2008 had no material impact on the Company, due to the transition to the use of natural gas instead of fuel oil in its production processes, which began in the fourth quarter of 2007. This fact served to improve the Group’s competitive capability vis-à-vis its European competitors and partially offset the aforementioned impact of the price erosion.

        The inflation rate in 2008 amounted to 3.8%, as compared with an inflation rate of 3.4% in 2007.

        Considerable volatility was recorded in 2008 in the exchange rate of the US dollar in relation to the NIS, throughout the year. The US dollar exchange rate fell by 1.1% in 2008, in addition to a 9% decrease in 2007.

III. Analysis of Operations and Profitability

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

1. Sales

The consolidated sales during 2008 amounted to NIS 673.5 million, as compared with NIS 583.6 million in 2007, representing growth of 15.4%.

Sales of the packaging paper, recycling and cardboard activity in 2008 amounted to NIS 543.1 million, as compared with NIS 465.3 million in 2007.

Higher sales in the packaging paper, recycling and cardboard activity were primarily due to the initial consolidation, starting in September, of sales by Carmel and Frenkel CD, amounting to NIS 160.9 million on the one hand, and on the other hand to the decrease in the sales of packaging paper and recycling due to the impact of the weaker dollar on the selling prices, which was not offset by a rise in NIS-denominated prices (segment sales are impacted by dollar-denominated import prices).

Sales of the Office Supplies Marketing activity in 2008 amounted to NIS 131.1 million, as compared with NIS 119.0 million in 2007, representing growth of 10.2% due to continued implementation of the growth plan in this segment.

The consolidated sales in the fourth quarter amounted to NIS 226.3 million, as compared with NIS 154.9 million in the corresponding quarter last year, representing an increase of 46.5%, that is primarily attributed to the inclusion of the data of Carmel and Frenkel CD in the fourth quarter, in the sum of NIS 119.9 million, that were not consolidated last year, as mentioned above. Net of the sales of Carmel and Frankel CD, the sales amounted to NIS 106.4 million, primarily as a result of the decrease in the sales of packaging paper as a result of price erosion in dollar terms, coupled with the apparent slowdown in the markets and the global financial crisis.

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2. Cost of Sales

        The cost of sales amounted to NIS 542.4 million – or 80.5% of sales – in 2008, as compared with NIS 440.7 million – or 75.5% of sales – in 2007.

        The gross profit totaled NIS 131.1 million in 2008 (approximately 19.5% of sales), as compared with NIS 142.9 million (24.4% of sales) in 2007, representing a decrease of approximately 8.3% in relation to 2007.

        The decrease in the gross profit and gross margin in relation to 2007 is attributed primarily to the erosion of the dollar-linked prices of packaging paper in light of the change in the exchange rate, coupled with a decrease in the quantitative sales on the local market as a result of the impact of the cold spell, the approximately 17% rise in electricity prices and the rise in paper waste collection costs – that were partially offset by the continuing efficiency measures and the transition to manufacture using natural gas. Additionally, the cost of sales included an amortization of approximately NIS 5.5 million in excess cost, as a result of excess cost recorded from the sale of Carmel and Frenkel CD.

        Labor Wages

        The labor wages within the cost of sales amounted to NIS 149.2 million in 2008 (22.3% of sales), as compared with NIS 115.7 million last year (approximately 19.8% of sales).

        The labor wages within the general and administrative expenses amounted to NIS 73.9 million in 2008 (approximately 11.0% of sales), as compared with the sum of NIS 58.3 million last year (approximately 10.0% of sales).

        The Increase in salary costs as compared to 2007 is attributed to additional salary expenses of approximately NIS 50.0 million resulting from the consolidation of Carmel and Frenkel CD and the increase in personal, primarily at Amnir and in the packaging paper sector, as part of the preparations for and the execution of the expanded collection of cardboard and newspaper waste that is to serve the upcoming operation of the new packaging paper manufacturing network, coupled with a nominal increase of 4% in wages.

        Moreover, the labor costs include an increase in labor expenses as detailed in Section 3 below, as a result of expenses derived from the issue of options to executives and the allocation of the expenses thereupon, at an accrued sum of NIS 4.9 million in 2008 – an expenditure that does not involve cash flows.

        As part of the alignment with the global economic crisis, the Company’s management adopted a policy of mutually-agreed pay cuts for executives. In this capacity, senior executives and managers have mutually agreed to cut their wages by 8% to 10% in 2009, while senior employees have agreed that their wages be cut by 5%.

3. Selling, General and Administrative Expenses

        Selling, general and administrative expenses (including wages) and other expenses in 2008, amounted to NIS 95.7 million – approximately 14.3% of sales – as compared with NIS 71.8 million – approximately 12.3% of sales – in 2007. Net of the revenues from attribution of excess negative cost at a subsidiary and non-recurring expenses as set forth below, selling, general and administrative and other expenses amounted to NIS 94.5 million.

        The increase in selling, general and administrative and other expenses was primarily attributed to the consolidation of the expenses of Carmel and Frenkel CD in the Company’s financial statements, in the amount of NIS 17.3 million, along with the increase in wages expenses as a result of NIS 4.9 million in wages expenses recorded in respect of the option plan for executives approved in January 2008, as well as the increase in other expenses following the revaluation of a Mondi PUT option in the amount of NIS 10.0 million pursuant to IFRS.

        The selling, general and administrative expenses amounted to NIS 37.8 million, approximately 16.7% of sales – in the fourth quarter of the year, as compared with NIS 20.9 million, approximately 13.5% of sales, in the corresponding quarter last year. The growth is primarily attributed to the inclusion of the expenses of Carmel and Frankel CD in the sum NIS 12.8 million in the quarter, as well as a result of recording an expenditure on account of a PUT option on an associated company, in the sum of approximately NIS 4.3 million in the fourth quarter.

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4. Operating Profit

        The operating profit amounted to NIS 35.4 million, approximately 5.3% of sales – in 2008, as compared with NIS 71.1 million, approximately 12.2% of sales – in 2007. Most of the erosion in the profit was due to changes in the dollar exchange rate, which negatively impacted the selling prices of packaging paper and recycling, as well as to the dumping prices of competing imports, as set forth above, coupled with the apparent slowdown in the operations of the various companies during the final quarter as a result of the financial crisis.

        Operating profit for the packaging paper, recycling and cardboard activity in 2008 amounted to approximately NIS 32.1 million, as compared with NIS 70.4 million in 2007 – primarily due to the aforementioned impact of the exchange rate, at which segment sales are denominated, as well as due to the dumping prices of competing imports, as set forth above, and the impact of the severe cold spell on the demand for exported agricultural produce.

        The operating profit of the office supplies operations amounted to NIS 3.2 million, as compared with a profit of NIS 0.7 million in 2007.

        The operating loss amounted to NIS 2.6 million in the fourth quarter of the year, as compared with approximately NIS 18.1 million in the corresponding quarter last year. This is primarily attributable to the decrease in sales for exports as well as the development of recycled products from pulp replacements, the influence of currency and the erosion of selling prices, as well as the result of recording an expenditure on account of a PUT option for an associated company in the sum NIS 4.3 million in the fourth quarter of the year. Net of influence of the Put option and losses from companies consolidated during the quarter, the operating profit for the quarter amounted to approximately NIS 5.5 million.

5. Financial Expenses

        The financial expenses in 2008 amounted to NIS 15.0 million, as compared with NIS 22.2 million in the corresponding period last year, representing a decrease of 32.4%.

        The total average of net interest-bearing liabilities, charged to the Company’s financial expenses, decreased by approximately NIS 85 million, between 2007 and 2008. This decrease was primarily due to proceeds of the private placement received last year, to the positive cash flows from operating activities in those years, offset by investments in fixed assets.

        The interest on the short-term credit decreased by approximately NIS 6.3 million, both as a result of the decrease in the balance of short-term credit and as a result of the lower interest rate between the two periods. The interest expenses in respect of CPI-linked long-term liabilities (debentures) grew by approximately NIS 0.7 million, as compared with 2007, despite the decrease in the balance of debentures following redemptions made to the holders of the debentures both as a result of the increase in the costs of the hedging transactions on the CPI-linked debentures against the increase in the CPI, which grew by an annual rate of 2.6% in 2008, as compared with 1.3% in 2007, and as a result of the valuation of the hedging transactions to their fair value, in accordance with international standards. The actual index rose by approximately 3.8% in this period.

        Furthermore, the Company recorded financial revenues in 2008 amounting to NIS 5.2 million in respect of a dollar currency transaction executed in the third quarter of this year, as compared with financial revenues of NIS 4.6 million from euro currency transactions executed in late 2007. These revenues were offset last year by financial expenses amounting to NIS 2.3 million, primarily due to the impact of the revaluation of the NIS vis-à-vis the USD by 9.0% in 2007, as compared with a 1.1% revaluation in 2008, applicable to USD asset balances.

6. Taxes on Income

        Expenses of taxes on income amounted to NIS 3.7 million in 2008, as compared with NIS 18.3 million in 2007. The sharp decrease of approximately NIS 14.6 million is primarily attributed to the sharp drop in taxable income (income after financial expenses, net of non-recurring income of approximately NIS 14.6 million from the allocation of a negative excess of cost), the inclusion of NIS 0.9 million in last year’s tax expenses in respect of the closing of assessments for the years 2002 through 2005 and the decrease in the current tax rate this year as compared with the preceding year.

7. Company’s Share in Earnings of Associated Companies

        The companies whose earnings are reported under this item (according to Hadera Paper’s holdings therein), include primarily: Mondi Hadera, Hogla-Kimberly and Carmel Container Systems (until August 31, 2008 – the date of initial consolidation of the Carmel financial statements).

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        The company’s share in the earnings of associated companies totaled NIS 51.3 million in 2008, as compared with NIS 0.9 million in 2007. The Company’s share in the earnings of associated companies amounted to NIS 14.7 million in the fourth quarter of the year, as compared with NIS 7.9 million in the corresponding quarter last year, representing an increase of 86% in relation to the corresponding quarter last year.

        The following principal changes were recorded in the Company’s share in the earnings of associated companies, in relation to 2007:

  The Company’s share in the net profit of Mondi Hadera Paper (49.9%) rose by NIS 0.6 million. The increased income was primarily attributed to the improvement in Mondi’s operating profit, which grew from NIS 33.6 million last year to NIS 34.1 million this year – primarily due to a quantitative increase in sales, operating efficiency and lower energy costs due to the transition to using natural gas at the Hadera site. The net profit also increased as a result of the decrease in financial expenses this year in relation to last year, primarily on account of the impact of the revaluation of the NIS against the dollar.

  The company’s share in the net earnings of Hogla-Kimberly Israel (49.9%) increased by approximately NIS 12.3 million. Hogla’s operating profit grew from NIS 136.3 million to NIS 169.0 million this year. The improved operating profit originated from a quantitative increase in sales, improved selling prices net of the impact of higher raw material prices, the continuing implementation of efficiency measures and the continuing trend of raising the proportion of some of the premium products out of the products basket, while innovating products and empowering the Company’s brands.

  The Company’s share in the losses of KCTR Turkey (formerly: “Ovisan”) (49.9%) decreased by NIS 48.0 million. The significant decrease in the loss is attributed to the growth in the volumes of operation that led to a significant reduction in the operating loss, from NIS 73.7 million last year to approximately NIS 33.4 million this year. In 2007, the Company recorded a non-recurring loss in respect of termination of trade agreements with distributors following the transition to distribution by Unilever, amounting to approximately NIS 6 million ($1.5 million), of which the Company’s share amounts to approximately NIS 3 million. Moreover, the tax asset that was recorded in previous years in Turkey, in the sum of approximately NIS 26.8 million (approximately $6.4 million) was reduced, of which our share is NIS 13.4 million. Moreover, due to the increase in the shareholders’ equity of KCTR through a financial influx from Hogla, the bank loans were repaid, while significantly reducing the financial expenses, thereby leading to an additional reduction in the net loss.

  The Company’s share in the loss of Carmel (36.21% as at August 31, 2008 – the date of consolidation), increased by NIS 6.4 million. This increase is attributed to the sharp erosion in the operating margin as a result of lower demand for packaging due to the slowdown in industrial exports on account of the erosion of currency exchange rates vis-à-vis the NIS, coupled with the damages of the cold spell in the agricultural sector. On the other hand, the prices of imported raw materials did not decrease in NIS terms, due to hedging transactions on exchange rates.

B. Liquidity and capital resources

1. Cash Flows

        The cash flows from operating activities in 2008 amounted to approximately NIS 113.9 million, as compared with NIS 91.9 million in 2007. The increase in the cash flows from operating activities in 2008, as compared with 2007, originated primarily as a result of the sharp improvement in net profit as well as from the decrease in working capital in 2008, that amounted to approximately NIS 41 million, as compared with a NIS 8.0 million decrease last year. The decrease in working capital in 2008 originated primarily from the reduction in the accounts receivable balance as a result of the lower dollar exchange rate, that is affecting the selling prices in NIS, especially as regards packaging paper and recycling.

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.

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        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 unpaid balance of the notes will be repaid in five equal annual installments between the years 2009-2013 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.

        On July 14, 2008 the Company contemplated a public offering pursuant to the shelf prospectus published by the Company in Israel on May 26, 2008 of two new series of debentures. The Company has offered an aggregate principal amount of NIS 187,500 thousands of debentures (Series 3 – CPI linked) issued in return for approximately NIS 187,500 thousands bearing an interest rate of 4.65% and payable annually each on July 10th of the years 2010-2018. In addition the company has offered an aggregate principal amount of NIS 120,560 thousands of (Series 4) debentures issued in return for approximately NIS 120,560 thousands bearing an interest rate of 7.45% and payable annually each on July 10th of the years 2010-2015. The net proceeds of the offering net of issue expenses are NIS 306,000 thousands.

        On August 14, 2008 the Company raised of (Series 4) debentures according to the shelf prospectus published by the Company in Israel on May 26, 2008. The company issued NIS 114,997 thousands of Series 4 debentures issued in return for approximately NIS 119,800 thousands bearing an interest rate of 7.45%. The net proceeds of the offering net of issue expenses are NIS 119,167 thousands.

        The long-term liabilities (including current maturities) of the Companies amounted to NIS 785.3 million as at December 31, 2008 as compared with NIS 260.2 million as at December 31, 2007.

        The Company uses loans from local financial institutions, mostly banks, to finance its activities. As of December 31, 2008, these loans consisted of the following:

  1. Short-term credit from banks – HAP has a bank credit facility of some NIS 360 Million. Of this, as of December 31, 2008, some NIS 77.7 Million were utilized. The Company does not have any credit limitations (i.e. – financial covenants) other than this. see Notes 8b and 13c to the Financial Statements attached.

  2. Notes – see Note 8a to the Financial Statements attached.

  3. Long Term Loans – See Note 8b to the Financial Statements attached.

  4. Other liabilities – see Note 8d to the Financial Statements attached.

        For information regarding financial instruments used for hedging purposes and market risks – see note 17 to the financial statements and Item 11, “Quantitative and Qualitative Disclosure about Market Risk”.

3. Financial liabilities at fair value through the statement of income

        Put option for shareholder at an associated company

        As part of an agreement dated November 21, 1999 with Mondi Business Paper (hereinafter – MBP, formerly Neusiedler AG) Mondi Hadera acquired the Group’s operation in fine paper and issued MBP 50.1% of its shares.

        As part of this agreement, MBP was granted the 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% – the higher of the two. According to verbal understandings that were reached in proximity to the signing of the agreement, between elements at the company and elements at MBP, the latter can exercise the option only in the most exceptional cases, such as those that paralyze production in Israel for long periods of time.

        Due to the extended period of time that has passed since these understandings were reached and in view of recent changes in the management of MBP, the Company has decided to adopt a conservative approach in this respect and to reflect the economic value of the option. The value of the option was calculated according to IFRS and was recognized as a liability that is measured at fair value, with changes in fair value being allocated to the statement of income in accordance with IAS 39.

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        The difference between the value of the liabilities according to the agreement – NIS 54.7 million – as compared with the value of the liabilities through fair value – NIS 13.9 million – amounts to NIS 40.8 million.

        The liability on account of the Put option for shareholder at the associated company shares as at December 31, 2008, December 31, 2007, and as at January 1, 2007, amounts to NIS 13.9 million, NIS 3.9 million and NIS 1.6 million, respectively.

        On account of the Put option, other expenses grew by NIS 10.0 million in 2008, as compared with growth of NIS 2.3 million in 2007.

        The principal factors responsible for the change in fair value in 2008 include the change in the risk-free interest rate and the change in the standard deviation of the Hadera Paper share – that serve for calculating the value of the option as a result of fluctuations in the price of the share during 2008 and in the risk-free, dollar-denominated interest rate.

4. 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 is fulfill the Company’s requirements in the coming years, for the operation of the existing energy generation plants using cogeneration at the Hadera plant, 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 (5 years from the initial supply of gas, but no later than 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, 2008 the remainder of the agreement was worth approximately € 0.2 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 €55.4 million. Some of the equipment 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.

  In November 3, 2008, the general meeting of the company approved the validity of a lease agreement signed on September 8, 2008 between the Company and Gev-Yam Lands Ltd (hereinafter – “the lessor”), a public company indirectly controlled by the controlling shareholder in the Company, pursuant to which the Company will rent a plot in Modiin, with a space of 74,500 square meters, and buildings that the lessor plans to build for the Company, covering a total space of 21,300 square meters, which will be used as a center for the purposes of logistics, industry and office (hereinafter – “the logistic center”) for subsidiaries and associated companies of the Company and in part will substitute existing lease agreements. The term of the lease will be 15 years from the date of delivery of possession in the leased property in addition to which the Company will have an option to extend the lease by a further 9 years and 11 months. The cost of annual lease amounts to NIS 13.6 million linked to the Consumer Price Index for July 2008.

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.

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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

2-3 years
4-5 years
More than
5 years

 
Long term debt obligations*      933.4    122.6    326.6    261.5    222.7  
Purchase obligations**    95.9    36.0    59.9    -    -  

* 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, 2009)
Avi Brener 56 Chief Executive Officer
Israel Eldar 64 Controller and responsible for risks and business interruption management.
Shaul Gliksberg 47 Chief Financial Officer and Business Development Manager
Lea Katz 58 Legal counsel and Corporate Secretary.
 
Gur Ben David 57 General manager of Packaging Paper and Recycling Division.
 
Gideon Liberman 59 General Manager of Development and Infrastructure Division, Chief Operating Officer
Amir Moshe 43 General Manager, Graffiti Office Supplies & Paper Marketing Ltd.
Uzi Carmi 53 General Manager, Amnir Recycling Industries Ltd.
Simcha Kenigsbuch 51 Chief Information Officer
Doron Kempler 59 General Manager, Carmel Container Systems Ltd.
David Basson 50 Group Purchasing Manager
Michal Mendelson 50 Group Marketing Manager
Noga Alon 44 Group Organizational Development Manager
Abraham Tenenboum 57 Development and Innovation Manager
Gabi Kenan 65 Senior Manager for projects (Until December 31, 2008)
Pinhas Rimon 69 Senior manager (Until June, 30, 2008)
 
Senior Management in Affiliated
Companies (as of June 10, 2009)
Arik Schor 52 General Manager, Hogla-Kimberly Ltd. (Until June 30, 2009)
Ari Melamud 41 General Manager, Hogla-Kimberly Ltd. (From July 1, 2009)
Avner Solel 54 General Manager, Mondi Business Paper Hadera Ltd.
 
Directors of the Company
Zvi Livnat(1) 56 Chairman of the Board
Ari Bronshtein(2) 40 Director
Atalya Arad(3) 54 External Director (From July 10, 2008)
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 of directors since 2006.
(2) Mr. Bronsthein has been a member of our board of directors since 2006.
(3) Ms. Arad has been a member of our Board of Directors since 2008.
(4) Mr. Milo has been a member of our Board of Directors since 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.

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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.

        Ms. Atalya Arad. Ms. Arad served an Chairman External Director of “Bank Otsar Ha-hayal”. During 2004-2008, Ms. Arad served as the head of the Investigation Department of the Israel Securities Authority. During 2000- 2004, Ms. Arad served as a head of fraud investigations department) chief superintendent) in the Israeli Police.

        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 Deputy Chairman 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. 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 (28 officers and directors) as a group for services provided by them during 2008 was approximately NIS 21,356,627 (approximately $5,965,538). 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 2008 was approximately NIS 1,906,468 (approximately $532,533).

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        As part of the alignment with the global economic crisis, the Company’s management adopted a policy of mutually-agreed pay cuts for executives. In this capacity, executives in various levels gave their consent to a 8%-10% cut in their pay for a limited period.

        The aggregate remuneration above includes payments to the Company's five most-highly compensated officers1

Following below is the accounting cost of remuneration (remuneration paid during the reporting year, including the company’s undertakings of remuneration on account of the reported year) for the five highest-paid senior officers of the Company:

It should be noted that the Group CEO renounced 10% of his salary until the end of 2009 in comparison with former year, and all the senior officers in the Company renounced 8% of their salary for the same period.

Recipient Details
Remuneration for Services (in NIS thousands)
Total in NIS
Thousands

Name
Position
scope of
employment

Salaries
Bonus
Total
Salaries +
Bonus

Share based
payment for
Options "out of
the money"*

Total
 
Avi Brener (1)     Group CEO      100 %  (2)1,823    (3)680    2,503    (4)1,124    3,628  
Shaul Glicksberg (5)    VP Finance and
Business Development.
    100 %  (6)1,126    (7)312    1,438    (8)307    1,746  
Gabi Keinan (9)    Senior Manager    100 %  (10)1,633    (11)100    1,733    __    1,733  
Gideon Lieberman (12)    COO    100 %  (13)951    (14)275    1,226    (15)307    1,533  
Gur Ben David (16)    General Manager,
Packaging Paper &
Recycling Division
    100 %  (17)966    (18)225    1,191    (19)307    1,498  

* The sum appearing under the column Share-based Payment reflects the expenditure recorded by the company in 2008 according to IFRS 2, on account of the location of the stock options. The options today are “out of the money”

  The exercise periods of the stock options are as follows:

  The offeree will be eligible to exercise into options one quarter of the quantity of the stock options (hereinafter: Starting with the end of 1 year from January 14, 2008 (”The Determining Date”) and until the end of four years from The Determining Date.

  the offeree would be eligible to exercise into shares an additional [second] quarter of the total sum of stock options, starting with the end of two years from The Determining Date and until the end of four years from The Determining Date.

  The offeree would be eligible to exercise into shares an additional [third] quarter of the total sum of stock options, starting with the end of three years from The Determining Date and until the end of five years from The Determining Date.

  The offeree would be eligible to exercise into shares an additional [fourth] quarter of the total sum of stock options allocated to him according to the plan, starting with the end of four years from The Determining Date and until the end of six years from The Determining Date.

1. Avi Brener – employed as the company’s CEO since January 1, 2005.

  According to the employment agreement, each one of the parties may terminate the engagement at any time while providing advanced notice of six months.

2. The salaries component appearing in the table above includes all of the following components: Labor wages, social and additional deductions as normally accepted, bonus 13th paycheck annually and company car.

3. The sum appearing under the Bonus column is the sum of the bonus to the company decided to pay to Avi Brener in the March 2009 paycheck, on account of 2008. Pursuant to the employment agreement, the annual bonus of the CEO will be equal to between six and nine paychecks, according to the discretion of the Company’s Board of Directors. The bonus in the amount of NIS 680,000 for 2008 is 20% lower from the bonus granted for 2007 as detailed hereinafter, partly due to the financial crisis as aforementioned in this annual report.

  The bonuses paid by the company in March 2008, amounting to NIS 850,000, on account of 2007, were included in the Annual Report for 2007.

4. On March 28, 2008, as part of his employment conditions, Avi Brener was allocated a sum of 40,250 stock options, exercisable to up to 40,250 ordinary shares of the Company, according to the terms of the employee stock option plan adopted by the Company.

5. Shaul Glicksberg – Employed as the company’s VP of Finance since January 1, 2008.

According to the employment agreement, each one of the parties may terminate the engagement at any time by providing advanced notice of three months.

6. The salaries component appearing above includes all of the following components: Basic salary, social and additional deductions as normally accepted, bonus 13th paycheck annually and company car.


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 2008 filed with the Israel Securities Agency in March 2009.

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7. The sum appearing under the Bonus column reflects a special bonus paid by the Company to Shaul Glicksberg in August 2008, in addition to a bonus that the Company decided to pay to Shaul Glicksberg in the March 2009 paycheck on account of 2008. Shaul Glicksberg does not have a guaranteed bonus and the sums of the bonuses were determined according to the discretion of the Board of Directors, based on their estimation of the contribution made by Shaul Glicksberg to the results of operations of the Company.

8. On March 10, 2008, as part of his employment conditions, Shaul Glicksberg was allocated a sum of 11,000 stock options, convertible into up to 11,000 ordinary shares of the Company, according to the terms of the employee stock option plan adopted by the Company.

9. Gabi Keinan – VP Projects, has been employed by the company since March 29, 1998 and terminated his employment for the company on December 31, 2008.

10. The salaries component appearing above includes all of the following components: Basic salary, social and additional deductions as normally accepted, bonus 13th paycheck annually and company car and vacation balance accumulated until end of employment.

11. The sum appearing under the Bonus column reflects the sum of the bonus paid by the Company to Gabi Keinan in 2008. Includes retirement compensation of NIS 252,000. The employment agreement of Gabi Keinan does not include a guaranteed bonus and the sums of the bonuses were determined according to the discretion of the Board of Directors, based on their evaluation of the contribution made by Gabi Keinan to the results of operation of the Company. The bonus paid by the Company at March 2008 in the amount of NIS 200,000 for 2007, was included at the annual report for 2007.

12. Gideon Lieberman – COO, employed by the company since August 25, 1975.

  According to the employment agreement, each one of the parties may terminate the engagement at any time while providing advanced notice of three months.

13. The salaries component appearing above includes all of the following components: Basic salary, social and additional deductions as normally accepted, bonus 13th paycheck annually and company car.

14. The sum appearing under the Bonus column reflects the sum of the bonus paid by the Company to Gideon Lieberman in the March 2009 paycheck, on account of 2008. The employment agreement of Gideon Lieberman includes no guaranteed bonus and the sums of the bonuses were determined according to the discretion of the Board of Directors, based on their evaluation of the contribution made by Gideon Lieberman to the results of operation of the Company

The bonuses paid by the company in March 2008, amounting to NIS 250,000, on account of 2007, were included in the Annual Report for 2007.

15. On March 10, 2008, as part of his employment conditions, Gideon Lieberman was allocated a sum of 11,000 stock options, exercisable into up to 11,000 ordinary shares of the Company, according to the terms of the employee stock option plan adopted by the Company. For details regarding the exercise periods on the stock options and for additional details regarding the stock option plan.

16. Gur Ben David – General Manager, Packaging Paper Division, employed at the company since August 1, 2006.

According to the employment agreement, each one of the parties may terminate the engagement at any time while providing advanced notice of three months.

17. The salaries component appearing above includes all of the following components: Basic salary, social and additional deductions as normally accepted, bonus 13th paycheck annually and company car.

18. The sum appearing under the Bonus column reflects the sum of the bonus paid by the Company to Gur Ben David in the March 2009 paycheck, on account of 2008. The employment agreement of Gur Ben David includes no guaranteed bonus and the sums of the bonuses were determined according to the discretion of the Board of Directors, based on their evaluation of the contribution made by Gur Ben David to the results of operation of the Company. The sum of the bonus paid by the company in March 2008 amounts to NIS 180,000 on account of 2007.

19. On March 10, 2008, as part of his employment conditions, Gur Ben David was allocated a sum of 11,000 stock options, convertible into up to 11,000 ordinary shares of the Company, according to the terms of the employee stock option plan adopted by the Company

        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 10b of the Financial Statements.

Remuneration of Directors

        The Audit Committee and the board of directors decided to update the annual remuneration and attendance compensation for all Company board members, including board members who are controlling shareholders or relatives thereof, independent board members and the external directors of the Company.. 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 45,000 and NIS 73,200, plus an additional fee for each meeting attended which must be between NIS 1,590 and NIS 2,820. 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. Accordingly, effective on July 10, 2008, the board of directors determined that for 2008 the remuneration of each director, including the external directors, would be fixed at NIS 59,100 plus an additional NIS 2,200 for each meeting attended.

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            Pursuant to the resolutions of the general meetings of the company dated June 21, 2006 and July 14, 2004, the company issued letters of indemnification to all the directors and officers of the company, including directors that may be considered controlling shareholders in the company (Mr. Zvi Livnat and Mr. Issac Manor), by virtue of being controlling shareholders in IDB Holdings, which is an indirect controlling shareholders of the company.

        On June 24, 2008, following the approval of the Company’s audit committee and board of directors, the Company’s shareholders’ meeting approved the Company’s engagement for the acquisition of an officers’ liability insurance policy for the period commencing June 1, 2008 until May 31, 2009, and a premium payment in the amount of $40,000. The policy was acquired from an insurance company, which is a company owned by a controlling shareholder in the Company. The policy is under market conditions and in accordance with customary transactions of this type. According to the Company’s resolution, said insurance policy will also apply to directors that may be considered controlling shareholders in the company (Messrs. Zvi Livnat and Issac Manor). The amount of insurance coverage ($6 million) and premium under said policy are identical to the amount of coverage and premium of previous policies for the years 2007 and 2006.

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.

In reliance upon Section 801(a) of the NYSE Amex Company Guide, as a “controlled company”, 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 NYSE Amex Company Guide. The Company is considered a “controlled company” under the NYSE 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 NYSE 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 composed of ten members, of whom to the Company’s best knowledge five meet the independence requirements of the NYSE Amex Company Guide, namely, Amir Markov, Avi Yehezkel, Roni Milo, Atalya Arad and Amos Mar-Haim, and five are non-independent directors, namely Zvi Livnat, Ari Bronshtein, Avi Fischer, Isaac Manor and Adi Rozenfeld.

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. Mr. Makov and Ms. Arad are the external directors of the Company. For the period of time each director served in his or her respective position, see Item 6.A. Directors and Senior Management.

        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 NYSE Amex the audit committee must have at least three members, each of whom satisfies the independence standards of Section 803A of the NYSE 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.

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        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, Atalya Arad and Amir Makov. All of whom to the Company’s best knowledge, meet the independence requirements of the NYSE Amex Company Guide and Rule 10A-3 under the Securities Exchange Act of 1934.

        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 NYSE 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 NYSE Amex Company Guide.

Compensation Committee

        As a controlled company, the Company has elected not to follow the requirement that a listed company have a compensation committee of the board of directors comprised entirely of independent directors that is responsible for recommending the compensation of the chief executive officer of all other officers, pursuant to Section 805 of the NYSE Amex Company Guide. The Company has a Compensation Committee that is comprised of two independent directors, namely, Amos Mar-Haim and Amir Makov and one non-independent director, namely, Zvi Livnat. As such the Company has only a majority of independent directors on its Compensation Committee. In addition, the compensation of the CEO is determined by a majority of the Board of Directors.

6.D Employees

        As of April 30, 2009, the Group had 3,019 employees in Israel, of which the Company and its subsidiaries had 1,632 employees in Israel. Of the Company employees in Israel, 182 were engaged in the office supplies activities, 690 in the packaging paper and recycling division, 737 in the corrugated board containers activities (starting September 1, 2008, since the financial statements of Carmel and those of Frenkel-CD Ltd. have been consolidated with the Company’s financial statements) and 23 were management and clerical personnel at the Company’s headquarters in Hadera. The associated companies had 1,390 employees in Israel, of whom 1080 were engaged in the household paper activities (in addition, KCTR had 334 employees in Turkey engaged in household paper activities) and 310 in the printing and writing paper 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 (stock option plan for Group employees and stock option plan for Group senior officers), whereby it granted 275,755 stock options to Group employees and senior officers. As of the report date, all options granted in conjunction with said plans have been 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 (281,500 stock options of at the date of this annual report), each exercisable into one ordinary share of the Company with NIS 0.01 par value, 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 bonus plan, see Note 10 of the financial statements included elsewhere in this annual report.

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        Of the 281,500 options under the bonus plan, 40,250 options were allotted to the CEO of the Company, 135,500 were allotted to management of the subsidiaries and 74,750 were allotted 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. In the course of the first quarter of 2008, a sum of 250,500 stock options were granted as aforesaid, and on January 8, 2009, a sum of 34,000 stock options were granted, out of 35,250 stock options that were allocated to the trustee, as a reservoir for future granting. As of the date of the report, the balance of options warrants held by the trustee is 1,250 option warrants.

ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

7.A Major shareholders

        The following table sets forth, as of June 10, 2009, 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 directly and indirectly 100% of the equity and voting power in IDB Development Corporation Ltd. (“IDBD”), which, in turn, holds 74.45% of the equity of and voting power in DIC and 60.54% of the equity of and voting power in Clal. IDBH, Clal and DIC are public companies traded on the Tel Aviv Stock Exchange. IDBD is a privet company, whose securities are registered for trade 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 55.26% of the outstanding shares of IDBH (of which, approximately 17.5% 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; (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 13.43% 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 13.42% 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.

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  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.

  Avi Fischer holds, directly and through a private company controlled by Avi Fischer and his wife, directly and indirectly, 9.23% 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 of directors’ Committees. They also agreed to vote together at the general meetings of the Company on the subject of dividend distributions. This agreement has been extended until the year 2010.

        Since May 23, 2005, beneficial ownership percentages for Clal and DIC increased by 5.65% and 3.18%, respectively, as compared to the percentages as indicated in the chart above.

        The Company estimates that as of May 30, 20098.46 % of its outstanding ordinary shares were held in the United States by 711 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 our consolidated financial statements, included elsewhere in this annual report. For loans to associated companies, see Note 4 to the attached financial statements. For a capital note to an associated company, see Note 8d to the attached financial statements. For transactions and balances with related parties, see Note 18 to the attached financial statements.

For further information see also Notes 12b and 12c to our financial statements, included elsewhere in this annual report.

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 18.

Export Sales

        In 2008, the Company had NIS 55.8 million of export sales, which represents approximately 8.3% of the NIS 673.5 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 November 2006, the Environmental Protection Ministry announced that, even though the Company’s 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 into the air. Based on the opinion of its legal advisors, the Company anticipates that the investigation will not materially impact its operations.

        In September 2008 the Municipality of Hadera submitted a request for a land betterment levy in the amount of NIS 1.4 million in respect of a change in the use of land which is designated for the construction of a new manufacturing line for packaging papers. The Company contested the amount of the levy with a counter assessment in the amount of NIS 28,000. The Company created a provision in the amount of NIS 28,000 in respect of this request in its financial statements.

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        During 2008, a consolidated company decided to sue one of its suppliers in the amount of NIS 1,750 thousands for refund payments compensation as a result of the supplierr’s failure to supply ERP system to the consolidated company. On the other hand, the supplier requires the completion of the outstanding value carrier.

        During 2008, a consolidated company received from the Municipality of Netanya and from the renter of a property, claims of payment amounting to NIS 2,700 thousands relating to assessments regarding taxes and levies for the years 2000-2008 for the above company’s enterprise in Netanya. The consolidated company submitted an appeal on the claim, in the amount of NIS 2,000 thousands, which was rejected by the Municipality. The consolidated company submitted an appeal on the rejection. The financial statements include a provision which, according to management’s opinion based on estimates of its legal consultant’s, is sufficient in these circumstances.

Dividend Policy

        The Company does not have a defined policy for distributing dividends.

8.B Significant Changes

        The following significant changes occurred since December 31, 2008, the date of the most recent annual financial statements included elsewhere in this document:

        On January 15, 2009, the Company announced that as producer of packaging paper, it had filed a complaint with the Supervisor of Anti-dumping Charges and Homogenization Charges at the Ministry of Industry, Trade and Employment (hereinafter: “the Supervisor”) concerning import and dumping of packaging paper from several European countries to Israel. . On February 26, 2009, the Company announced that as a producer of packaging paper, it had filed a complaint with the Supervisor concerning import and dumping of packaging paper from several European countries to Israel. In both cases upon review of the complaint, the Supervisor decided to launch investigations of those issues. According to the Company announcement, there is no certainty that its complaints would be accepted, and the Company is currently unable to estimate the impact of such acceptance on its business results. For further details, see ITEM 4.B. above.

        On February 26, 2009 an associated company decided to allocate preferred shares to the Company, which will grant the Company the right to receive a special dividend in accordance with board of directors resolutions of the associated company from time to time.

        On February 26, 2009, an associated company decided to distribute a special dividend to the Company in respect of preferred shares allocated thereto in the amount of NIS 32.77 million.

        On February 26, 2009 an associated company announced the distribution of a dividend in the amount of $ 10 million to its shareholders. As of the date of signing the financial statements a distribution date has not been determined.

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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 NYSE Amex and TASE for the five most recent full fiscal years:

NYSE Amex
Tel Aviv Stock Exchange
High
Low
High
Low
High
Low
$
NIS
$*
 
Calendar Year                            
   
         2008    80.80    26.55    270.20    104.50    83.58    26.98  
   
         2007    67.50    41.90    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  

*     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.

        The following table sets forth the high and low market prices of the Company’s ordinary shares on NYSE Amex and TASE for each fiscal quarter for the two most recent fiscal years and the first quarter of 2009:

NYSE Amex
Tel Aviv Stock Exchange
2009 Quarter Ended
High
Low
High
Low
High
Low
$
NIS
$1
 
March 31      39.48    29.62    164.00    117.30    39.16    29.73  
June 9     43.13    35.00    173.40    147.70    42.28    35.11  

2008 Quarter Ended
High
Low
High
Low
High
Low
$
NIS
$1
 
March 31      69.05    56.5    261.30    192.10    67.68    56.83  
June 30     80.8    59.71    270.20    212.10    83.58    62.09  
September 30    74.5    52.5    256.10    186.70    74.73    53.02  
December 31    60.25    26.55    205.60    104.50    58.84    26.98  

2007 Quarter Ended
High
Low
High
Low
High
Low
$
NIS
$1
 
March 31      49.84    41.90    207.50    185    49.61    43.65  
June 30     67.5    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  

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

NYSE Amex
Tel Aviv Stock Exchange
High
Low
High
Low
High
Low
$
NIS
$*
 
May 2009      41.68    37.25    173.40    154.70    42.28    37.32  
   
April 2009    39.5    35.0    170.10    147.7    40.74    35.11  
   
March 2009    39.48    29.62    164.0    126.4    39.16    30.37  
   
February 2009    34.1    30.05    138.0    127.3    34.12    30.59  
   
January 2009    33.59    30.0    133.5    117.3    34.10    29.73  
   
December 2008    38.8    28.00    158.60    104.50    39.84    26.98  

* 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 NYSE Amex since 1959. The ordinary shares have also been listed on TASE since 1961. The trading symbol for the ordinary shares on NYSE Amex is “AIP”.

9.D Selling Shareholders

        Not applicable.

9.E Dilution

        Not applicable.

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.

Objects and purposes of the company

        As indicated in Article 5 of the Articles of Association of the company (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 Company Memorandum of Association (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.

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        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 by 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.

        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 Securities 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.

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        Each of the ordinary shares entitles the holder thereof to participate at and to one vote at any general meeting 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 a 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.

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 (present in or by person proxy) 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 of directors. 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 include the place, the day and the hour at which the meeting will be held, the agenda as well as a summary of the proposed resolutions, and any other details required by law.

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        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.

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.

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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.

        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 NYSE 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.”

        In February 2007, HAP 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, HAP 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 agreem ent 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, HAP 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 HAP, 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 HAP, 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.

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        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. As of the date of this annual report, the Company is dependent on Tethys Sea Group for the supply of natural gas, since to the best of the Company’s knowledge, as of a little prior to publication of this report, Tethys Sea Group is the only natural gas supplier in Israel for the manufacturing market, except for an Egyptian gas supplier which supplies gas to the Israel Electric Company.

        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-year. 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.

        During 2008, the Company has completed execution of the key agreements for purchase of major 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 and Italian company SEEI. According to the signed agreements, the Company will pay a total sum of approximately € 60 million for the equipment detailed above. The company has signed most of the agreements for the supply of equipment and construction, and as the date of this annual report, part of the equipment has already been supplied while the remaining equipment is scheduled to be supplied by the end of 2009. Pursuant to the signed agreements, the Company is expected to sign agreements with additional suppliers and contractors in order to complete installation of the production system and its planned operation start in early 2010.

        On November 3, 2008, the Company’s General Meeting approved the lease agreement signed on September 18, 2008 between the Company and Gav-Yam Land Ltd. (“the Lessor”), a public company controlled by the Company’s indirect controlling shareholders, whereby the Company would lease a plot in Modi’in with an area of 74,500 square meters, as well as buildings to be constructed by the Lessor for the Company, with a total constructed area of 21,300 square meters, to serve as a logistics center, industrial and office space (“LogCenter”) for the Company’s subsidiaries and associated companies, which would, in part, replace existing lease agreements. The leasing period shall be 15 years from the date of receiving possession of the leased property. The Company will also have an option to extend the lease by an additional 9 years and 11 months. For further details, see the Company’s Proxy Statement dated October 15, 2008.

        In August 2008, a transaction was completed for the acquisition of shares of Carmel, pursuant to an agreement signed on July 10, 2008, whereby the Company acquired the shares of Carmel held by Robert Kraft, the principal shareholder in Carmel, as well as those of several other shareholders, in consideration of a total of $20.77 million, paid upon closing of the transaction. The shares were acquired “As-Is” and the transaction closed subsequent to receiving the approval of the Antitrust Supervisor, which was a pre-condition for said closing. Upon conclusion of the transaction and as of May 31, 2009, the Company holds approximately 89.3% of Carmel shares and starting September 1, 2008, the financial statements of Carmel and those of Frenkel-CD Ltd. have been consolidated with the Company’s financial statements.

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.

52



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.

        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.

53



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 the2006 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

        Israeli companies that were subject to the Income Tax Law (Inflation Adjustments) – 1985 (the “Adjustment Law”) prior to the publication of Amendment No. 147 are subject to corporate tax rate on capital gain driven from the sale of the shares.

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.

54



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 Hadera Paper Ltd., 1 Meizer Street, Industrial Zone, Hadera 38100, Israel. We are subject to the information and periodic reporting requirements of the Securities Exchange Act of 1934, as amended. In accordance with these requirements, we file reports and other information with the Securities and Exchange Commission (the “SEC”).

        Copies of our securities filing, including 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.

        As a foreign private issuer, we are exempt from the rules under the Exchange Act relating to the furnishing and content of proxy statements, and our officers, directors and principal shareholders are exempt from the reporting and short-swing profit recovery provisions contained in Section 16 of the Exchange Act. In addition, we are not required under the Exchange Act to file periodic reports and financial statements with the Securities and Exchange Commission as frequently or as promptly as United States companies whose securities are registered under the Exchange Act.

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.

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

        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, 2008 HAP owned CPI-linked long-term loans (notes) in the total amount of approximately NIS 356.5 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 HAP’s financial statements, due to the surplus of CPI-linked liabilities.

        In order to hedge this exposure, HAP entered into forward transactions, in early 2009 for hedging NIS 250 million against a rise in the CPI until December 2009. These transactions replaced hedging transactions of NIS 190 million that terminated in early 2008 and in August 2008.

        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.

55



Maturity
In NIS thousands
2009
2010-11
2012-13
More than 5
years

Total book
value

Total fair
value

 
Series 1 debentures      7,422    -    -    -    7,422    7,537  
   
Series 2 debentures    31,712    63,424    63,424    -    158,560    155,637  
   
Series 3 debentures    -    42,342    42,342    105,856    190,540    195,959  
   
Series 4 debentures    -    78,519    78,519    78,519    235,557    269,078  

Credit Risks

        The Company’s and its subsidiaries’ cash and cash equivalents and the short-term deposits as of December 31, 2008 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.

56



Sensitivity Analysis Tables for Sensitive Instruments, According to Changes in Market Elements
as at December 31, 2008:

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

Sensitivity to Interest Rates
Sensitive Instruments
Profit (loss) from changes
Profit (loss) from changes
Interest
rise
10%

Interest
rise
5%

Fair value
As at
Dec-31-08

Interest
decrease
5%

Interest
decrease
10%

In NIS thousands
 
Series 1 Debentures      (16 )  (8 )  (7,537 )  8    16  
Series 2 Debentures    (1,866 )  (937 )  (155,637 )  947    1,903  
Series 3 Debentures    (3,979 )  (2,005 )  (195,959 )  2,037    4,105  
Series 4 Debentures    (3,956 )  (1,990 )  (269,078 )  2,013    4,050  
Other liabilities    (134 )  (57 )  (31,359 )  68    136  
Long-term loans and capital  
notes - granted    212    106    49,355    (106 )  (213 )

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 (4.5% in 2008).

Regarding the terms of the debentures and other liabilities – See Note 8 to the financial statements

Regarding long-term loans and capital notes granted – See Note 4 to the financial statements

Sensitivity of €-linked instruments to changes in the € exchange rate
Sensitive Instruments
Profit (loss) from changes
Profit (loss) from changes
Rise in €
10%

Rise in €
5%

Fair value as
at
Dec-31-08

Decrease in
€ 5%

Decrease in €
10%

In NIS thousands
 
Cash and cash equivalents      268    134    2,681    (134 )  (268 )
Designated deposits    12,575    6,287    125,747    (6,287 )  (12,575 )
Other Accounts Receivable    321    160    3,206    (160 )  (321 )
 Supplier engagement  
transaction - Alstom    (92 )  (46 )  (922 )  46    92  
Other Accounts Payable    (2,397 )  (1,198 )  (23,969 )  1,198    2,397  
PUT options    -    -    (836 )  (2,088 )  (3,412 )
NIS-(euro)forward transaction    12,293    6,996    1,304    (3,599 )  (8,896 )

Sensitivity to the US Dollar Exchange Rate
Sensitive Instruments
Profit (loss) from changes
Profit (loss) from changes
Revaluation
of $ 10%

Revaluation
of $ 5%

Fair value
as at
Dec-31-08

Devaluation
of $ 10%

Devaluation
of $ 5%

In NIS thousands
 
Cash and cash equivalents      233    116    2,327    (116 )  (233 )
Other Accounts Receivable    1,472    736    14,722    (736 )  (1,472 )
 Accounts Payable    (3,246 )  (1,623 )  (32,549 )  1,623    3,246  

Other accounts receivable reflect primarily short-term customer debts.

Capital note – See Note 4d to the financial statements.

Accounts payable reflect primarily short-term liabilities to suppliers.

57



Quantitative Information Regarding Market Risk

        The following are the balance-sheet components by linkage bases at December 31, 2008:

NIS millions
Unlinked
CPI-linked
In foreign
currency, or
linked
thereto
(primarily
US$)

€-linked
Non-Monetary
Items

Total
 
Assets                            
Cash and cash equivalents    8.1         2.3    2.7         13.1  
Short-term deposits and investments    123.9              125.7         249.6  
Other Accounts Receivable    396.0    0.9    15.8    3.2    3.9    419.8  
Inventories                        168.8    168.8  
Current tax assets    6.3                        6.3  
Investments in Associated Companies    53.0                   265.1    318.1  
Deferred taxes on income                        29.8    29.8  
Fixed assets, net                        767.6    767.6  
Intangible Assets                        31.5    31.5  
Other assets                        38.9    38.9  
Assets on account of employee benefits    0.6                        0.6  






Total Assets    587.9    0.9    18.1    131.6    1,305.6    2,044.1  






Liabilities  
Short-term credit from banks    77.7                        77.7  
Other Accounts Payable    240.3         36.8    24.0         301.1  
Financial liability at fair value through the
statement of income
              13.9              13.9  
Deferred taxes on income                        76.6    76.6  
Long-term loans, including current maturities    124.0    35.2                   159.2  
Notes (debentures) - including current maturities    238.6    354.7                   593.3  
Liabilities on account of employee benefits    31.9                        31.9  
Other Liabilities    32.8                        32.8  
Equity, funds and reserves                        757.6    757.6  






Total liabilities and equity    745.3    389.9    50.7    24.0    834.2    2,044.1  






Surplus financial assets (liabilities) as at  
Dec-31-2008       (157.4 )   (389.0 )   (12.6 )   107.6     471.4        







ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES

        Not applicable.

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.

58



ITEM 15. CONTROLS AND PROCEDURES

(a) Disclosure Controls and Procedures

        As of the end of the period covered by this report, we performed an evaluation of the effectiveness of our disclosure controls and procedures that are designed to ensure that the material financial and non-financial information required to be disclosed in the report that the Company files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Securities Exchange Act of 1934, as amended, is accumulated and communicated to the our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. There can be no assurance that our disclosure controls and procedures will detect or uncover all failures of persons within the Company to disclose material information otherwise required to be set forth in our reports. Nevertheless, our disclosure controls and procedures are designed to provide reasonable assurance of achieving the desired control objectives. Based on our evaluation, our management, including our Chief Executive Officer and Chief Financial Officer, have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15(d) -15(e) of the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this report are effective at such reasonable assurance level.

(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(e) and 15d-15(e)). 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, 2008 based on the framework in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

        In conducting the management’s evaluation of the effectiveness of its internal control over financial reporting, management determined the internal control systems at Carmel Container Systems Ltd and Frenkel CD Ltd which were acquired in August 2008, would be excluded from the 2008 internal control assessment, as permitted by the Securities and Exchange Commission. Accordingly as of and for the year ended December 31, 2008 approximately 17% and 20% of the consolidated net and total assets, respectively, approximately 25% of consolidated revenues and approximately 14% of net income were excluded from management’s evaluation of the effectiveness of internal control over financial reporting.

        Our management’s assessment of the effectiveness of the Company’s internal control over financial reporting concluded that, as of December 31, 2008, the Company’s internal control over financial reporting was effective.

(c) Attestation report of the registered public accounting firm

        Our independent auditors, Brightman Almagor & Co a member firm of Deloitte Touche Tohmatsu and registered public accounting firm, 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, 2008.

59



(d) Changes in Internal Control Over Financial Reporting

        There were no changes in our internal controls over financial reporting that occurred during the year end period covered by this Form 20-F that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting

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 NYSE 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 June 24, 2008, at a General Meeting the shareholders approved the appointment of Brightman Almagor & Co. as the Company’s external auditors for the year 2008. 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 2008 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, 2008 and 2007, respectively.

U.S. $ in thousands
2008
2007
 
Audit fees            
Audit of financial statements(including shelf prospectus in 2008)    206    150  
Auditing IFRS reconciliation    -    22  
Audit-related Fees   
ICFR audit    73    120  
Tax Fees     -    -  
All Other Fees     -    -  
Differentials    47    20  


Total    326    312  

60



“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.

“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 2008.

ITEM 16F. CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT.

        Not applicable.

ITEM 16G. CORPORATE GOVERNANCE

        There are no significant ways in which the corporate governance of our company, as a foreign private issuer, differ from those followed by domestic companies listed on the NYSE Amex. For more information regarding the structure of our board of directors and its committees and the exemption available to our company as a “controlled company”, see “Item 6.C. Board Practices

61



PART III

ITEM 17. FINANCIAL STATEMENTS

In lieu of responding to this item, we have responded to Item 18 of this annual report

ITEM 18. FINANCIAL STATEMENTS

The information required by this item is set beginning on page F-1 of this annual report.

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, 2008 (including Reports of Independent Registered Public Accounting Firms).

  (ii) Financial statements of Mondi Paper Hadera Ltd. for the year ended December 31, 2008.

  (iii) Financial statements of Hogla-Kimberly Ltd. for the year ended December 31, 2008.

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

62



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.

HADERA PAPER LTD.


By: /s/ Shaul Gliksberg
——————————————
Shaul Gliksberg
Chief Financial and Business Development Officer

Dated: June 16, 2009

63



EXHIBIT INDEX

Exhibit
Number

Description
 
1.1 Memorandum of Association of HAP (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 HAP.*

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 HAP.

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.*

  *Filed herein.

64



HADERA PAPER LTD

CONSOLIDATED FINANCIAL STATEMENTS

AS OF DECEMBER 31, 2008



HADERA PAPER LTD

CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2008

TABLE OF CONTENTS

Page
 
REPORTS OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM F-2-F-3
CONSOLIDATED FINANCIAL STATEMENTS:
    Balance sheets F-4
    Statements of income F-5
    Statements of Recognized Income and expenses F-6
    Statements of cash flows F-7-F-8
    Notes to financial statements F-9-F-98



  Brightman Almagor Zohar
Haifa office
5 Ma'aleh Hashichrur Street
P.O.B. 5648, Haifa 31055
Israel
 
Tel: +972 (4) 860 7333
Fax: +972 (4) 867 2528
info-haifa@deloitte.co.il
www.deloitte.com

Report of Independent Registered Public Accounting Firm

To the shareholders of

Hadera Paper ltd.

We have audited the accompanying consolidated balance sheets of Hadera Paper Ltd. (“the Company”) as of December 31, 2008 and 2007, and the related consolidated statements of operations, statement of recognized income and expenses and cash flows for each of the two years in the period ended December 31, 2008. These financial statements are the responsibility of the Company’s board of directors and management. Our responsibility is to express an opinion on these financial statements based on our audits.

We did not audit the financial statements of certain subsidiaries, whose assets constitute approximately 20% of total consolidated assets as of December 31, 2008, and whose revenues constitute approximately 25% of total consolidated revenues for the year ended December 31, 2008.

Likewise 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 45,933 Thousands NIS, and the Company’s share in their profits or losses is a net amount of 1,440 and 7,627 Thousands NIS, for the years ended December 31, 2008 and 2007, respectively. 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 includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by the Company’s management, as well as evaluating the overall financial statement presentation. We believe that our audits and the reports of the other independent auditors provide a reasonable basis for our opinion.

In our opinion, based on our audit and the reports of other independent auditors, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2008 and 2007, and the consolidated results of its operations, and cash flows, for each of the two years in the period ended December 31, 2008, in conformity with International Financial Reporting Standards as issued by the International Accounting Standards Board (IASB)

We also have 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, 2008, based on the criteria established in Internal Control–Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated June 16, 2009 expressed an unqualified opinion thereon.

Brightman Almagor & Co.
Certified Public Accountants
A Member Firm of Deloitte Touche Tohmatsu

Israel
June 16, 2009

F - 2



  Brightman Almagor Zohar
Haifa office
5 Ma'aleh Hashichrur Street
P.O.B. 5648, Haifa 31055
Israel
 
Tel: +972 (4) 860 7333
Fax: +972 (4) 867 2528
info-haifa@deloitte.co.il
www.deloitte.com

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders of
Hadera Paper Ltd 

We have audited the internal control over financial reporting of Hadera Paper Ltd. and subsidiaries (the “Company”) as of December 31, 2008, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

As described in Management’s Report on Internal Control over Financial Reporting, management excluded from its assessment the internal control over financial reporting at Carmel Container Systems Ltd and Frenkel CD Ltd, which were acquired on August 2008 (collectively, the “Acquisitions”), and whose aggregated financial statements constitute 17% of net assets, 20 % of total assets, 25 % of net revenue, and 14% of net income of the consolidated financial statements amounts of the company as of and for the year ended December 31, 2008. Accordingly, our audit did not include the internal control over financial reporting at the acquisitions.

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 audits.

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 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 audits provide 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 its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.  Also, projections of any evaluation of 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, 2008, based on the criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements as of and for the year ended December 31, 2008 of the Company and our report dated June 16, 2009 expressed an unqualified opinion on those financial statements.

Brightman Almagor & Co.
Certified Public Accountants
A member firm of Deloitte Touche Tohmatsu
June 16, 2009

F - 3



HADERA PAPER LTD

CONSOLIDATED BALANCE SHEETS

December 31
Note
2 0 0 8
2 0 0 7
NIS in thousands
 
Current Assets                
    Cash and cash equivalents    2e    13,128    167,745  
    Designated deposits    2e    249,599    -  
    Accounts receivable:    13a            
       Trade receivables         318,926    178,553  
       Other receivables         100,888    94,415  
    Current tax assets         6,271    -  
    Inventories    13b    168,755    69,607  


              857,567     510,320  


Non-Current Assets    
    Fixed assets    5    767,542    405,231  
    Investments in associated companies    4    318,101    346,403  
    Deferred tax assets    11    29,848    20,622  
    Deferred lease expenses    6    36,344    34,900  
    Other intangible assets    7    31,519    1,578  
    Other assets         2,549    -  
    Employee benefit assets    9    624    861  


              1,186,527     809,595  


              2,044,094     1,319,915  


Current Liabilities    
    Credit from banks    8b, 13c    77,655    143,015  
    Current maturities of long-term notes and long term loans    8a, b    76,469    42,775  
    Trade payables    13d    195,020    108,409  
    Other payables and accrued expenses    13d    104,943    70,585  
    Short term employee benefit liabilities         17,478    11,603  
    Other financial liabilities    8c    32,770    -  
    Financial liabilities at fair value through profit and loss    2p(2)    13,904    3,901  
    Current tax liabilities         -    908  


              518,239     381,196  


Non-Current Liabilities    
    Loans from banks and others    8b    121,910    28,127  
    Notes    8a    554,124    158,134  
    Other financial liabilities    8c    -    31,210  
    Deferred tax liabilities    11    76,641    40,515  
    Employee benefit liabilities    9    15,551    10,762  


                                                                                                768,228   268,748


Capital and reserves       10              
   Issued capital         125,267    125,267  
   Reserves         299,949    308,267  
   Retained earnings         306,097    236,437  


   Capital and reserves attributed to shareholders             731,313     669,971  
   Minority Interests         26,316    -  
   Total capital and reserves             757,629     669,971  


              2,044,094     1,319,915  




————————————————
Z. Livnat
Chairman of the Board of Directors

————————————————
A. Brener
Chief Executive Officer

————————————————
S. Gliksberg
Chief Financial and Business
Development Officer

Approval date of the financial statements: June 16, 2009.

The accompanying notes are an integral part of the financial statements

F - 4



HADERA PAPER LTD

CONSOLIDATED INCOME STATEMENTS

Year ended
December 31

Note
2 0 0 8
2 0 0 7
NIS in thousands
 
Revenue      13e    673,484    583,650  
Cost of sales    13f    542,387    440,739  


   
Gross profit             131,097     142,911  


     13g            
Selling, marketing, general and administrative expenses    
Selling and marketing expenses         45,674    31,344  
   
General and administrative expenses         54,970    35,991  
   
Other (income) expenses, net    13k    (4,898 )  4,467  


   
Total expenses             95,746     71,802  


   
Profit from ordinary operations             35,351     71,109  


   
Finance income         12,069    10,648  
Finance expenses         27,112    32,817  


   
Finance expenses, net       13j     15,043     22,169  


Profit after financial expenses             20,308     48,940  
   
Share in profit of associated companies, net    4    51,315    856  


Profit before taxes on income             71,623     49,796  
   
Taxes on income    11    3,663    18,261  


   
Profit for the year             67,960     31,535  
   
Attributed to:    
Company shareholders         69,710    31,535  
Minority interests         (1,750 )  -  
   
              67,960     31,535  



NIS
 
Earning for regular share of NIS 0.01 par value (see note 14):            
Primary attributed to Company shareholders    13.77    7.63  


   
Fully diluted attributed to company shareholders    13.77    7.62  


   
Number of share used to compute the primary earnings per share    5,060,774    4,132,728  


   
Number of share used to compute the fully diluted earnings per share    5,060,774    4,139,533  



The accompanying notes are an integral part of the financial statements

F - 5



HADERA PAPER LTD

CONSOLIDATED STATEMENT
OF RECOGNIZED INCOME AND EXPENSES

Year ended
December 31

Note
2 0 0 8
2 0 0 7
NIS in thousands
 
Exchange differences arising on translation of foreign operations      10    (25,996 )  3,810  
Profit (loss) on cash flow hedges, net    10    (5,564 )  (652 )
Actuarial profit (loss) and defined benefit plans, net    10    (1,808 )  -  
Reevaluation from step acquisition    10    17,288    -  


Net income (loss) recognized directly in equity         (16,080 )  3,158  


Transfer to profit or loss from equity on cash flow hedges, net    10    1,467    17  
Profit for the year    67,960  31,535


Total recognized income and expense for the period         53,347    34,710  


   
Attributed to:   
Company shareholders         55,115    34,710  
Minority interests         (1,768 )  -  


          53,347    34,710  



The accompanying notes are an integral part of the financial statements

F - 6



HADERA PAPER LTD

CONSOLIDATED CASH FLOWS STATEMENTS

Year ended
December 31

2 0 0 8
2 0 0 7
NIS in thousands
 
Cash flows - operating activities            
   Net Profit for the year    67,960    31,535  
   Taxes on income recognized in profit and loss    3,663    18,261  
   Finance expenses recognized in profit and loss    15,043    22,169  
   Capital loss on sale of fixed assets    (284 )  1,403  
   Capital loss on sale investment in associated company    -    28  
   Share in profit of associated companies    (51,315 )  (856 )
   Depreciation and amortization    59,784    36,138  
   Share based payments expense    4,913    -  
   Gain from negative goodwill    (14,664 )  -  


        85,100     108,678  


   
Changes in assets and liabilities:    
   Decrease (Increase) in trade and other receivables    66,805    (5,416 )
   Increase in inventories    (19,868 )  (7,498 )
   Increase (Decrease) in trade and other payables    (16,923 )  18,646  
   Increase in financial liabilities at fair value through profit and loss    10,003    2,289  
   Increase (Decrease) in employee benefit liabilities    (3,063 )  2,913  


        36,954     10,934  


   
        Tax Payments    (8,182 )  (27,755 )


   
      Net cash generated by operating activities       113,872     91,857  



The accompanying notes are an integral part of the financial statements

F - 7



HADERA PAPER LTD

CONSOLIDATED CASH FLOWS STATEMENTS

Year ended
December 31

2 0 0 8
2 0 0 7
NIS in thousands
 
Cash flows - investing activities            
   Acquisition of fixed assets    (230,053 )  (83,363 )
   Acquisition of subsidiaries    (70,567 )  -  
   Proceeds from sales of fixed assets    825    31,415  
   Investment in designated deposits    (255,244 )  -  
   Interest received    7,764    1,716  
   Prepaid leasing expenses    (2,622 )  (2,596 )
   Acquisition of other assets    (2,770 )  -  
   Associated companies:  
   Granting of loans and shares purchasing    (422 )  (318 )
   Collection of loans    2,851    2,893  
   Proceeds from sale of investment of associated companies    -    27,277  


   Net cash used in investing activities       (550,238 )   (22,976 )


   
Cash flows - financing activities    
   Proceeds from private share allocating    -    211,645  
   Proceeds from issuing notes    424,617    -  
   Short-term bank credit - net    (111,444 )  (59,988 )
   Borrowings received from banks    39,448    -  
   Repayment of borrowings from banks    (11,801 )  (5,212 )
   Interest Paid    (20,360 )  (24,994 )
   Redemption of notes    (38,904 )  (37,167 )


   
   Net cash generated by financing activities       281,556     84,284  


   
   Increase (decrease) in cash and cash equivalents       (154,810 )   153,165  
   Cash and cash equivalents beginning of period    167,745    13,621  
   Net foreign exchange difference    193    959  


   Cash and cash equivalents end of period       13,128     167,745  



The accompanying notes are an integral part of the financial statements

F - 8



HADERA PAPER LTD

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 DESCRIPTION OF BUSINESS AND GENERAL

  A. Description Of Business

  Hadera Paper Limited (former – 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 productions 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 19.

  B. Definitions:

The Company - Hadera Paper Limited.
 
The Group - the Company and its Subsidiaries.
 
Related Parties - as defined by IAS 24.
 
Interested Parties - as defined in the Israeli Securities law and Regulations 1968.
 
Controlling Shareholder - as defined in the Israeli Securities law and Regulations 1968.
 
NIS - New Israeli Shekel.
 
CPI - the Israeli consumer price index.
 
Dollar - the U.S. dollar.
 
Subsidiaries - companies in which the Company control, (as defined by IAS 27) directly or indirectly, and whose financial statements are fully consolidated with those of the Company.
 
Associated Companies - companies in which the Group has significant influence, and the Group investments in them, directly or indirectly are included in the financial statements using the equity method.
 
Affiliated Companies - Subsidiaries and associated companies.

F - 9



HADERA PAPER LTD

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

  A. Applying International Accounting Standards (IFRS)

  (1) Basis of preparation

  The consolidated financial statements have been prepared using accounting policies in conformity with International Financial Reporting Standards (hereafter – IFRS) as issued by the International Accounting Standards Board (“IASB”).

  The principal accounting policies described in the following notes were applied in accordance to the IFRS, in a manner consistent with previous reporting periods presented in these consolidated financial statements and in accordance to the opening balance sheet.

  (2) First time IFRS standards adoption

  According to standard No. 29 “Adoption of International Financial Reporting Standards”– IFRS (“standard No. 29”), the Company applies International Financial Reporting Standards and interpretations of the committee of the International Accounting Standard Board (IASB) Starting January 1, 2008.

  In compliance with the above mentioned, the consolidated financial statements, as of December 31, 2008 and for the year then ended, have been prepared under accounting policies consistent with International are the first consolidated Financial Reporting Standards.

  In these consolidated financial statements the Company applied IFRS 1 – “First time Adoption of International Financial Reporting Standards” (“IFRS No. 1”), which determines instructions for first time implementation of IFRS.

  According to IFRS No. 1 the effective date for implementing IFRS standards is commencing January 1, 2007.

  The Company has applied in a retroactive manner the IFRS standards for all reporting periods presented in the financial statements. The Company implemented the IFRS standards which have been published as of the preparation date of the Financial Statements and expected to be affective as of December 31, 2008.

  In implementing the transitional rules as above, the Group elected to apply the following concessions permitted by IFRS 1:

  1. Share based payments

  The rules of IFRS 2, which deals with share based payments, were not retroactively applied with regard to share based payment which had been granted prior to November 7, 2002 and vested before the transition date.

  2. Translation differences

  The company elected to desist from retroactively applying the rules of IAS 21 for translation differences accumulated as of January 1, 2007 with respect to foreign operations. As a result, accumulated translation differences have not been included in the Opening Balance Sheet.

  3. Deemed cost for items of fixed assets

  IFRS 1 permits the measurement of items of fixed assets as of the transition date to the IFRS, or at an earlier date, on the basis of a revaluation executed according to previously applied generally accepted accounting principles, as deemed cost as of the date of the revaluation, if, in general, the revaluation was comparable to the cost or to the cost net of accumulated depreciation according to the IFRS standards, adjusted for changes such as changes in the CPI.

  Through December 31, 2003, the Company adjusted its financial statements to changes in the rate of exchange of the dollar, in accordance with the rules of Accounting Opinion 36 of the Institute of Certified Public Accountants. For purposes of the transition to reporting pursuant to the IFRS, the Company chose to apply the concession in IFRS 1 as above and to measure the items of its fixed assets acquired or constructed through December 31, 2003 at deemed cost as of that date, based on their amounts, as adjusted to changes in the rate of exchange of the dollar up to that date.

F - 10



HADERA PAPER LTD

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont.)

  B. The Prior to the adoption of the IFRS, the Group prepared its financial statements according to accounting principles generally accepted in Israel. The latest annual financial statements of the company according to accounting principles generally accepted in Israel were prepared as of December 31, 2007 and for the year ended on that date. Comparative figures for that period were restated in these financial statements pursuant to the IFRS.

  See Note 21 with respect to the material differences between reporting pursuant to the IFRS and reporting according to Israeli generally accepted accounting principles, as they are relevant to the Group.

  C. Basis of preparation

  Until December 31, 2003, Israel was considered a country in which hyper-inflation conditions exist. Therefore, non-monetary balances in the balance sheet were presented in the historical nominal amount and were adjusted to changes in the exchange rate of the U.S. dollar. As of December 31, 2003 when the economy ceases to be hyper-inflationary and the Company no longer adjusted its financial statements to the U.S. dollar, the adjusted amounts as of this date were used as the historical costs. The financial statements were prepared on the basis of the historical cost, except for:

  Derivative financial instruments measured by fair value.

  Inventories are stated at the lower of cost and net realizable value.

  Property, plant and equipment are presented at the lower of the cost less accumulated depreciation and the recoverable amount. Intangible assets are presented at the lower of the cost less accumulated amortization and the recoverable amount.

  Liabilities to employees as described in note 2W below.

  D. Foreign currencies

  The individual financial statements of each entity in the Group are presented in the currency of the primary economic environment in which the entity operates (its functional currency). For the purpose of the consolidated financial statements, the results and financial position of each entity are expressed in the New Israeli Shekel (“NIS”), which is the functional currency of the Company and the presentation currency for the consolidated financial statements, see note 2Y (3) as follows with regard to the exchange rate and the changes in them during the reported period.

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HADERA PAPER LTD

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont.)

  D. Foreign currencies (cont.)

  In preparing the financial statements of the individual entities, transactions in currencies other than the entity’s functional currency (foreign currencies) are recorded at the rates of exchange prevailing at the dates of the transactions. At each balance sheet date, monetary items denominated in foreign currencies are translated at the rates prevailing at the balance sheet date. Non-monetary items carried at fair value that are denominated in foreign currencies are translated at the rates prevailing at the date when the fair value was determined. Non-monetary items that are measured in terms of historical cost in a foreign currency are not retranslated.

  Exchange differences are recognised in profit or loss in the period which they were created, except for exchange differences on transactions entered into in order to hedge certain foreign currency risks (Hedge accounting details are set out in Note 2Q below) and for rate differences of loans taken in different currency then NIS (see note 2M below).

  For the purpose of presenting consolidated financial statements, the assets and liabilities of the Group’s foreign operations of associated company (mainly because of it’s investment in a subsidiary company that presents it’s financial statements in foreign currency) are expressed in NIS using exchange rates prevailing at the balance sheet date. Income and expense items are translated at the average exchange rates for the period, unless exchange rates fluctuated significantly during that period, in which case the exchange rates at the dates of the transactions are used, and the related translation differences are recorded in the share holders equity in “capital reserve from translation exchange due to foreign activity”. The said translation differences are recognized in the income statement when the foreign activity, for which they were created, is realized.

  Goodwill and fair value adjustments arising on the acquisition of a foreign operation are treated as assets and liabilities of the foreign operation and translated at the closing rate.

  E. Cash and cash equivalents

  Cash and cash equivalents include deposits, available for immediate withdrawal, as well as unrestricted short-term deposits with maturities of less than three months from the date of deposit.

  Deposits that are restricted in use or whose maturity at the time of investment, is greater than three months but less than one year are classified under designated deposits.

  F. Basis of consolidation

  (1) General

  The consolidated financial statements incorporate the financial statements of the Company and entities controlled by the Company (its subsidiaries). Control is achieved where the Company has the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities.

  The results of subsidiaries acquired or disposed of during the year are included in the consolidated income statement from the effective date of acquisition or up to the effective date of disposal, as appropriate.

  Where necessary, adjustments are made to the financial statements of subsidiaries to bring their accounting policies into line with those used by other members of the Group.

  All intra-group transactions, balances, income and expenses are eliminated in full on consolidation.

  For the effect of the issuance of IAS 27 (revised) “Consolidated and Separate Financial Statements” see note 2Z below.

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HADERA PAPER LTD

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont.)

  F. Basis of consolidation (Cont.)

  (2) Minority interests

  Minority interests in net assets (except for goodwill) of consolidated subsidiaries are presented separately under the Group’s shareholders’ equity. Minority interests include the sum of these interests on the date of the business combination (see below) as well as the share of minority shareholders in the changes that occurred in the equity of the consolidated company subsequent to the date of the business combination. Losses of consolidated subsidiaries that relate to minority, which exceed the minority interests in the shareholders’ equity of the consolidated subsidiary, are allocated to minority interests up to the amount in which the minority has a valid obligation and ability to perform additional investments to cover the losses.

  G. Business combinations

  Acquisitions of consolidated subsidiaries and activities are measured by using the purchase method. The cost of a business combination is measured based on the aggregate fair value (as of the date of exchange) of the assets acquired, liabilities incurred and equity instruments issued by the group in exchange for obtaining control in the acquired company, plus any acquisition costs incurred to the group which directly relate to the business combination. The identifiable assets of the acquired company, liabilities and contingent liabilities that meet the recognition criteria in accordance with IFRS 3 regarding business combinations are recognized at fair value on the date of acquisition, except for non-current assets (or disposal groups) that are classified as held for sale in accordance with IFRS 5 regarding non-current assets held for sale and discontinued activities, which are recognized and measured at fair value net of selling costs.

  Goodwill arising from the business combination is recognized as an asset and initially measured at cost, which represents the excess cost of the business combination over the group’s interest in the net fair value of the identifiable assets, liabilities and contingent liabilities that were recognized. If, after re-assessment, the total group’s interests in the net fair value of the identifiable assets, liabilities and contingent liabilities recognized exceed the cost of the business combination, the excess must be immediately recognized in the statement of income.

  In business combinations, where control is obtained after several exchange transactions (acquisition in stages) the assets, liabilities and contingent liabilities of the acquired company will be measured at fair value on the date in which control was obtained, while the difference between their fair value on the date of the acquisitions that preceded the business combination and their fair value on the date of the business combination shall be carried to a “Capital reserve from reevaluation from acquisition in stages”, which is transferred to retained earnings on the date in which the item in respect of which has been created is amortized or retired to income statement.

  The interests of minority shareholders in the acquired company are initially measured on the date of the business combination in accordance with their pro rata share in the net fair value of the assets, liabilities and contingent liabilities that were recognized. As to the accounting policy with respect to minority interest see note 2(F)2 above.

  As to the publication of IFRS 3 (amended) “Business Combinations”, see note 2Z below.

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HADERA PAPER LTD

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont.)

  H. Investments in associated companies

  An associated company is an entity over which the Group has significant influence and that is neither a subsidiary nor an interest in joint venture. Significant influence is the power to participate in the financial and operating policy decisions of the investee but it has no control or joint control over those policies.

  Where necessary, adjustments are made for the financial statements of the associated companies to bring their accounting policies into line with those used by the Group.

  The results and assets and liabilities of associates are incorporated in these financial statements using the equity method of accounting. Under the equity method, investments in associates are carried in the consolidated balance sheet at cost as adjusted for post-acquisition change in the Group’s share of the net assets of the associate, less any impairment in the value of individual investments. Losses of an associate in excess of the Group’s interest in that associate (which includes any long-term interest that, in substance, form part of the Group’s net investment in the associate) are recognized only to the extent that the Group has incurred legal or constructive obligations or made payments on behalf of the associate.

  Where a group entity transacts with an associate of the Group, profits and losses, if material, are eliminated to the extent of the Group’s interest in the relevant associate.

  I. Goodwill

  Goodwill arising on the acquisition of a subsidiary represents the excess of the cost of acquisition over the Group’s interest in the net fair value of the identifiable assets, liabilities and contingent liabilities of the subsidiary is recognized at the date of acquisition.

  Goodwill is initially recognized as an asset at cost and is subsequently measured at cost less any accumulated impairment losses.

  For the purpose of impairment testing, goodwill is allocated to each of the Group’s cash-generating units expected to benefit from the synergies of the combination. Cash-generating units to which goodwill has been allocated are tested for impairment annually, or more frequently when there is an indication that the unit may be impaired. If the recoverable amount of the cash-generating unit is less than the carrying amount of the unit, the impairment loss is allocated first to reduce the carrying amount of any goodwill allocated to the unit and then to, the other assets of the unit pro-rata on the basis of the carrying amount of each asset in the unit. An impairment loss recognized for goodwill is not reversed in a subsequent period.

  On disposal of a subsidiary, the attributable amount of goodwill is included in the determination of the profit or loss on disposal.

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HADERA PAPER LTD

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont.)

  J. Property, plant and equipment

  Property, plant and equipments are tangible items, which are held for use for manufacturing for the supply of goods or services, or for lease to others, which are predicted to be used for more than one period. The Company presents its property, plant and equipments items according to the cost model.

  Under the cost method – property, plant and equipment are presented at the balance sheet at cost (net of any investment grants), less any accumulated depreciation and any accumulated impairment losses. The cost includes the cost of the asset’s acquisition as well as costs that can be directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management. The cost of property, plant and equipment includes borrowing costs which should be capitalized. See note 2M.

  Spare parts which are not used on a current basis are designated for use as specific items of fixed assets, where necessary. The reason for holding the spare parts is to prevent delays in the manufacturing process and to avoid a shortage in spare parts in the future. The spare parts that are not used on a current basis have not been installed on items of fixed assets and are, therefore, not available for use in their present state. In light of the above, spare parts that are not being used currently are presented within the fixed assets and are depreciated beginning the date that they are installed on the items of fixed assets for which they were purchased.

  Depreciation is calculated using the straight-line method at rates considered adequate to depreciate the assets over their estimated useful life. The depreciation starts once the asset is ready for use and takes into consideration the anticipated residual value at the end of the asset’s useful life.

Annual depreciation rates are as follows:
Years
 
Buildings 10-50
Machinery and equipment 7-20
Motor vehicles 5-7
Office furniture and equipment 3-17

  Management reviews residual value, depreciation method and the assets useful life in the end of every financial year. Changes are handled as a change of estimation and are applied from here on.

  The gain or loss arising on the disposal or retirement of an item of property, plant and equipment is determined as the difference between the sales proceeds and the carrying amount of the asset and is recognized in income statement.

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HADERA PAPER LTD

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont.)

  K. Intangible assets

  (1) Intangible assets, except for goodwill

  Intangible assets with an indefinite useful life are not amortized, instead they are tested for impairment once a year or more frequently if indications exist that there may be a decline in the value of the asset in accordance with the provisions of IAS 36. The useful life of intangible assets with an indefinite useful life is estimated at the end of each reporting year. The accounting treatment with respect to the useful life of an intangible asset that has changed from indefinite to finite, is carried out prospectively.

  Intangible assets with a definite useful life are amortized using the straight line method over the estimated useful life of the assets subject to an impairment test. The accounting treatment of the change in the estimated useful life of an intangible asset with a finite life, is carried out prospectively.

  As to the accounting treatment of goodwill see note 2I.

  The useful life which is used to amortize intangible assets with a finite useful life is as follows:

  Customer relations 5-10 years
  Software 3 years

  (2) Intangible assets acquired under a business combination

  Intangible assets acquired under a business combination are identified and recognized separately from goodwill when they meet with the definition of intangible asset and their fair value can be measured reliably. The cost of these intangible assets is their fair value on the date of the business combination.

  In subsequent periods to the initial recognition, intangible assets acquired under a business combination are presented at cost less any accumulated amortization and subsequent accumulated impairment loss. The amortization of intangible assets with a finite life is calculated based on the straight line method over the estimated useful life of these assets. The estimated useful life and method of amortization are tested at the end of each reporting year while the effect of changes in the estimates useful life is accounted for prospectively.

  As to the amendment of IAS 38 “Intangible Assets” under the improvements to International Financial Reporting Standards see note 2Z.

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HADERA PAPER LTD

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont.)

  L. Impairment of value of tangible and intangible assets, excluding goodwill

  At each balance sheet date, the Group examines the carrying amount of its tangible and intangible assets for the purpose of determining whether there are any indications that point towards losses from impairment of value of these assets. Should there be any such indications, the recoverable amount of the asset is estimated for the purpose of determining the amount of the impairment loss that was created, if at all. If it is not possible to estimate the recoverable amount of an individual asset, the Group estimates the recoverable amount of the cash- generating unit to which the asset is relevant. Shared assets are also allocated to individual cash generating units to the extent that a reasonable and consistent basis can be identified for such allotment. Should allocating the shared assets to individual cash generating units on the above basis not be feasible, the shared assets are allocated to the smallest groups of cash generating units as to which a reasonable and consistent basis for allocation can be identified.

  Intangible assets with an indefinite useful life and intangible assets that are still not available for use are tested for impairment once a year or more frequently if indications exist that there may be a decline in the value of the asset.

  The recoverable amount is the higher of the sales price of the asset, less selling costs, and of its utility value. In estimating utility value, an approximation of future cash flows is discounted to their present value, using a pre- tax discount rate which reflects the current market estimates of the value of money over time and the specific risks for the asset for which the estimate of future cash flows has not been adjusted.

  If the carrying value of the asset (or of the cash generating unit) exceeds recoverable amount, the book value of the asset (or of the cash generating unit) is reduced to its recoverable amount. The impairment loss is recognized immediately as an expense in the income statement.

  If an impairment loss that was recognized in previous periods is reversed, the book value of the asset (or of the cash generating unit) will be restored back to estimation of the recoverable value but not to exceed the book value of the asset (or of the cash generating unit) that would have existed, had a related impairment loss not been recognized in prior periods. The reversal of the loss from impairment of value is immediately recognized in the statement of income.

  As to the impairment of goodwill see note 2I. As to the impairment of investment in an affiliate company, see note 2H.

  M. Borrowing costs

  Borrowing costs directly attributable to the acquisition, construction or production of qualifying assets, which are assets that necessarily take a substantial period of time to get ready for their intended use or sale, are capitalized to the costs of those assets, until the assets are substantially ready for their intended use or sale.

  Investment income earned on the temporary investment of specific borrowings pending their expenditure on qualifying assets is deducted from the borrowing costs eligible for capitalization.

  The rest of the borrowing costs are recognized in profit or loss.

  For the effect of the issuance of IAS 23 (revised) “Borrowing costs” see Note 2Z below.

F - 17



HADERA PAPER LTD

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont.)

  N. Inventories

  Inventories are assets held for sale in the ordinary course of business, in the process of production for such sale or in the form of materials or supplies to be consumed in the production process or in the rendering of services.

  Inventories are stated at the lower of cost and net realizable value. Cost of inventories includes all the cost of purchase, direct labor, fixed and variable production over heads and other cost that are incurred, in bringing the inventories to their present location and condition.

  Net realizable value is the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale.

  Inventories that purchased on differed settlement terms, which contains a financing element, are stated in purchase price for normal credit terms. The difference between the purchase price for normal credit terms and the amount paid is recognized as interest expense over the period of the financing.

  Cost determined as follows:  
  Raw, auxiliary materials and others Based on weighted-average basis.
  Finished products and products in process Based on overhead absorption costing of manufacturing costs created in the manufacturing of finished products

  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.

  O. Financial assets

  (1) General

  Investments are recognized and derecognized on trade date where the purchase or sale of an investment is under a contract whose terms require delivery of the investment within the timeframe established by the market concerned, and are initially measured at fair value, plus transaction costs, except for those financial assets classified as at fair value through profit or loss, which are initially measured at fair value.

  Financial assets are classified into loans and receivables and to financial assets through profit and loss. The classification of those categories arises from the reason of the financial assets holding and it is determined at its initial recognition.

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HADERA PAPER LTD

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont.)

  O. Financial assets (Cont.)

  (2) Loans and receivables

  Trade receivables, loans, and other receivables that have fixed or determinable payments that are not quoted in an active market are classified as loans and receivables. Loans and receivables are measured at amortized cost using the effective interest method, less any impairment. Interest income is recognized by applying the effective interest rate, except for short-term receivables when the recognition of interest would be immaterial.

  (3) Financial assets at FVTPL

  Financial assets are classified as at FVTPL where the financial asset is either held for trading or it is designated as at FVTPL.

  A financial asset is classified as held for trading if:

  it has been acquired principally for the purpose of selling in the near future; or

  it is a part of an identified portfolio of financial instruments that the Group manages together and has a recent actual pattern of short-term profit-taking; or

  it is a derivative that is not designated and effective as a hedging instrument.

  Financial assets at FVTPL are stated at fair value, with any resultant gain or loss recognized in profit or loss. The net gain or loss recognized in profit or loss incorporates any dividend or interest earned on the financial asset.

  (4) Impairment of financial assets

  Financial assets, except for financial assets classified as at fair value through profit or loss, are assessed for indicators of impairment at each balance sheet date.

  Financial assets are impaired where there is objective evidence that, as a result of one or more events that occurred after the initial recognition of the financial asset, the estimated future cash flows of the investment have been impacted.

  Objective evidence of impairment could include:

  Significant financial difficulty of the issuer or counterparty; or

  Default or delinquency in interest or principal payments; or

  It becoming probable that the borrower will enter bankruptcy or financial re-organization.

  For certain financial assets, such as customers as to which no indications of value impairment have been identified, the company evaluates value impairment on a specific basis, in reliance on past experience and changes in the level of delinquency in payments, as well as economic changes related to the sector and the economic environment in which it operates.

  The carrying amount of the financial asset is reduced by the impairment loss directly for all financial assets with the exception of trade receivables, where the carrying amount is reduced through the use of an allowance account.

When a trade receivable is considered uncollectible, it is written off against the allowance account. Subsequent recoveries of amounts previously written off are credited against the allowance account. Changes in the carrying amount of the allowance account are recognized in profit or loss.

F - 19



HADERA PAPER LTD

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont.)

  P. Financial liabilities and equity instruments issued by the Group

  (1) Classification as debt or equity

  Debt and equity instruments are classified as either financial liabilities or as equity in accordance with the substance of the contractual arrangement.

  An equity instrument is any contract that evidences a residual interest in the assets of an entity after deducting all of its liabilities. Equity instruments issued by the Group are recorded at the proceeds received, net of direct issue costs.

  Financial liabilities are classified as either financial liabilities “at FVTPL” or “Other financial liabilities” for the published IAS 32 (amended), financial instruments: present an IAS-1: presentation of financial statements see note 2Z as follows.

  (2) Options to sell shares of an associate

  The company has an obligation that derive from an option given for the sale of shares of an associate, which provide the holder thereof with the right to sell its holdings in the associate in consideration of a variable amount of cash.

  The value of the option was computed according to the economic value of the option and is presented with non current liabilities, and classified as a liability at fair value through operations.

  Any gain or loss that results from changes in the fair value of the option is recognized in operations.

  See Note 4B (3) below for further details on the conditions of the option.

  (3) Other financial liabilities

  Other financial liabilities (capital note issued to an associate), are initially measured at fair value, net of transaction costs. Other financial liabilities are subsequently measured at amortized cost using the effective interest method.

  The effective interest method is a method of calculating the amortized cost of a financial liability and of allocating interest expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash payments through the expected life of the financial liability, or, where appropriate, a shorter period. Financial liabilities which stand for immediate payment, presented at their full value.

  For the treatment at CPI-linked other financial liabilities see note 2P (4) below.

  (4) CPI-linked liabilities

  The Company has liabilities that are linked to the Consumer Price Index (hereinafter – the CPI), which are not measured at fair value through profit and loss. The Company determines the effective interest rate in respect of these liabilities as a real rate with the addition of linkage differences in line with actual changes in the CPI until the balance sheet date.

F - 20



HADERA PAPER LTD

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont.)

  Q. Derivative financial instruments

  (1) General

  The Group enters into a variety of derivative financial instruments to manage its exposure to foreign exchange rate risk, including foreign exchange forward contracts on exchange rate, options on exchange rate and contracts on the CPI due to notes.

  Derivatives are initially recognized at fair value at the date a derivative contract is entered into and are subsequently remeasured to their fair value at each balance sheet date. The resulting gain or loss is recognized in profit or loss immediately unless the derivative is designated and effective as a hedging instrument, in which event the timing of the recognition in profit or loss depends on the nature of the hedge relationship. The Group designates certain derivatives as hedges of highly probable forecast transactions or hedges of foreign currency risk of firm commitments (cash flow hedges).

  A derivative is presented as a non-current asset or a non-current liability if the remaining maturity of the instrument is more than 12 months and it is not expected to be realised or settled within 12 months. Other derivatives are presented as current assets or current liabilities.

  (2) Hedge accounting

  The Group designates certain hedging instruments, which include derivatives, and non-derivatives in respect of foreign currency risk, as cash flow hedges.

  At the inception of the hedge relationship, the entity documents the relationship between the hedging instrument and the hedged item, along with its risk management objectives and its strategy for undertaking various hedge transactions. Furthermore, at the inception of the hedge and on an ongoing basis, the Group documents whether the hedging instrument that is used in a hedging relationship is highly effective in offsetting changes in fair values or cash flows of the hedged item.

  The balance-sheet classification of hedging instruments was determined in accordance with the remaining term of the hedging ratios as at the balance sheet date. If at the balance sheet date, the remaining term of the hedging ratio exceeds 12 months, then the hedging instrument is classified in the balance sheets as a non-current asset or liability. If at the balance sheet date, the remaining term of the hedging ratio does not exceed 12 months, then the hedging instrument is classified in the balance sheets as a current asset or liability.

  The Group implements cash flow hedge accounting both in respect of future transactions, foreign currency deposits and options transactions on foreign currency that are designed to secure payments for the acquisition of fixed assets in foreign currency in respect of future transactions for the purchase or sale of foreign currency that are designed to secure payments for imports and which are linked to foreign currency and in respect of future transaction on the Consumer Price Index, which are designed to secure payments on CPI-linked bonds.

  The effective part of the changes in the value of financial instruments designed for cash flow hedging is immediately recognized in shareholders’ equity under the headline “capital reserve in respect of cash flow hedging” and the non-effective part is immediately recognized in the statement of income.

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HADERA PAPER LTD

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont.)

  Q. Derivative financial instruments (Cont.)

  (2) Hedge accounting (Cont.)

  Hedge accounting for cash flows is discontinued when the hedging instrument expires, sold or realized of when the hedging relations no longer meet the threshold conditions for hedging. After the discontinuation of hedge accounting, the amounts carried to shareholders’ equity are carried to the income statement while the hedged item or the hedged projected transactions are recorded in the income statement.

  When hedging a forecasted transaction on non-monetary assets (fixed income), the capital reserve is added to the initial cost of the hedged item immediately upon the initial recognition of said item and recorded in the income statement over the period of amortization of the fixed asset in respect of which it was recorded.

  R. Revenue recognition

  Revenue is measured at the fair value of the consideration received or receivable. Revenue is reduced for estimated customer returns, rebates and other similar allowances.

  (1) Sale of goods

  Revenue from the sale of goods is recognised when all the following conditions are satisfied:

  The Group has transferred to the buyer the significant risks and rewards of ownership of the goods;

  The Group retains neither continuing managerial involvement to the degree usually associated with ownership nor effective control over the goods sold

  The amount of revenue can be measured reliably;

  It is probable that the economic benefits associated with the transaction will flow to the entity; and

  The costs incurred or to be incurred in respect of the transaction can be measured reliably.

  (2) Interest revenue

  Interest revenue is accrued on a time basis, by reference to the principal outstanding and at the effective interest rate applicable, which is the rate that exactly discounts estimated future cash receipts through the expected life of the financial asset to that asset’s net carrying amount.

  (3) Dividends

  Revenue is recognized when the Group’s right to receive the payment is established.

  (4) Reporting of revenues on a gross basis or a net basis

  The Company’s revenues as an agency or intermediary from providing electricity, water, steam, and logistical services to the Group without bearing the risks and returns that derive from the transaction are presented on a net basis.

F - 22



HADERA PAPER LTD

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont.)

  S. Leasing

  Leases are classified as finance leases whenever the term of the lease transfer substantially all the risks and rewinds of ownership to the lessee. All other leases are classified as operating leases.

  Leases of land from the Israel Lands Administration

  Leases of land from the Israel Lands Administration are classified as operating leases. The deferred lease payments that were made on the date of the start of the lease are presented in the balance sheet as Deferred lease expenses in the balance sheet, and are amortized on the straight line basis over the balance of the lease period, including the extension option.

  The company has land lease rights from the Municipality of Tel Aviv which comply with the definition of investment real estate, though pursuant to IAS 40, have been classified as operating leases and not as investment real estate.

  T. Provisions

  Provisions are recognized when the Group has a present obligation (legal or constructive) as a result of a past event, it is probable that the Group will be required to settle the obligation, and a reliable estimate can be made of the amount of the obligation. The amount recognized as a provision is the best estimate of the consideration required to settle the present obligation at the balance sheet date, taking into account the risks and uncertainties surrounding the obligation.

  Where a provision is measured using the cash flows estimated to settle the present obligation, its carrying amount is the present value of those cash flows.

  When some or all of the economic benefits required to settle a provision are expected to be recovered from a third party, the receivable is recognized as an asset if it is virtually certain that reimbursement will be received and the amount of the receivable can be measured reliably.

  U. Share – Based payments

  In accordance with IFRS 2 and IFRIC 11, equity-settled share based payments to employees and others providing similar services are measured at the fair value of the equity instruments at the grant date. The Company determines the fair value of equity-settled share-based transaction according to the Black-Scholes model. Details regarding the determination of the fair value of share-based transactions are set out in note 10.

  The Company recognizes share-based payment arrangements in the financial statements over the term of the vesting period against an increase in shareholders’ equity, under the item “Share-based payment reserves”. At each balance sheet date, the Company estimates the number of equity instruments that are expected to vest. A change in the estimate in relation to preceding periods is recognized in the statements of income over the remaining term of the vesting period

  For the effect of the issuance of amendment to IFRS 2 Share Based Payment- Vesting and Revocation Conditions, see note 2Z below.

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HADERA PAPER LTD

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont.)

  V. Taxation

  (1) General

  Tax expenses (tax incomes) represent the sum of the current tax and the change in deferred tax excluding deferred tax as result of transaction that was attribute directly to the equity.

  (2) Current tax

  Current tax expenses are based on taxable profit for the year of the Company and its subsidiaries. Taxable profit differs from profit before taxes on income because it excludes items of income or expense that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. Current tax liabilities and current tax assets are calculated using tax rates that have been enacted or substantively enacted by the balance sheet date.

  (3) Deferred tax

  The Group recognize deferred tax on temporary differences between the carrying amounts of assets and liabilities tax bases and the corresponding in the financial statements. Deferred tax assets and liabilities are measured at the tax rates that are expected to apply in the period in which the liability is settled or the asset realised, based on tax rates (and tax laws) that have been enacted or substantively enacted by the balance sheet date. The measurement of deferred tax liabilities and assets reflects the tax consequences that would follow from tha manner in which the Group expects, at the reporting date, to recover or settle the carrying amount of its assets and liabilities.

  Deferred tax liabilities are generally recognised for all taxable temporary differences, and deferred tax assets are generally recognised for all deductible temporary differences to the extent that it is probable that taxable profits will be available against which those deductible temporary differences can be utilised.

  In calculating the deferred taxes, the taxes that would have applied in the event of a realization of investments in investee companies are not taken into consideration, since it is the Company’s intention to hold and develop these investments. Deferred taxes on account of the distribution of earnings at these investee companies are also not taken into consideration, since it is the Company’s policy not to distribute any dividends that are liable for taxes in the foreseeable future.

  Deferred tax assets and liabilities are offset when there is a legally enforceable right to set off current tax assets against current tax liabilities and when they relate to income taxes levied by the same taxation authority and the Group intends to settle its current tax assets and liabilities on a net basis.

F - 24



HADERA PAPER LTD

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont.)

  W. Employee benefits

  (1) Post-Employment Benefits

  The Group’s post-employment benefits include: benefits to retirees and liabilities for severance and retirement benefits. The Group’s post-employment benefits are classified as either defined contribution plans or defined benefit plans. Most of the Group’s employees have signed Section 14 to the Severance Law, 1963, pursuant to which the Group’s regular deposits with pension funds and/or insurance policies exempt it from any further obligations to the workers, for whom said amounts were deposited. The Group’s deposits under the Defined Contribution Plan are carried to the income statements on the date of the provision of work services, in respect of which the Group is obligated to make the deposit and no additional provision in the financial statements is required.

  Expenses in respect of a Defined Benefit Plan are carried to the income statement in accordance with the Projected Unit Credit Method, while using actuarial estimates that are performed at each balance sheet date. The current value of the Group’s obligation in respect of the defined benefit plan is determined by discounting the future projected cash flows from the plan by the market yields on government bonds, denominated in the currency in which the benefits in respect of the plan will be paid, and whose redemption periods are approximately identical to the projected settlement dates of the plan.

  Actuarial profits and losses are carried to the statement of recognized income and expenses on the date they were incurred. The Past Service Cost is immediately recognized in the Group’s income statement to the extent the benefit has vested. A past service cost which has not yet vested is amortized on a straight-line basis over the average vesting period until the benefit becomes vested.

  The Group’s liability in respect of the Defined Benefit Plan which is presented in the Group’s balance sheet, includes the current value of the obligation in respect of the defined benefit, with the addition (net of) actuarial profits (losses), which were not yet recognized and less past service cost that was not yet recognized, net of the fair value of the plan’s assets. A net plan, which is created from said calculation, is limited to the amount of the actuarial losses and past service cost that were not yet recognized with the addition of the current value of available economic benefits in the shape of returns from the plan or in the shape of reduction in future contributions to the plan.

  (2) Other long term employee benefits

  Other long term employee benefits are benefits which it is anticipated will be utilized or which are to be paid during a period that exceeds 12 months from the end of the period in which the service that creates entitlement to the benefit was provided.

  Other employee benefits of the company include liabilities for vacation pay. These liabilities are recorded to operations in accordance with the projected unit credit method, through the use of actuarial estimates which are performed at each balance sheet date. The present value of the company’s obligation for vacation pay was determined by means of the capitalization of anticipated future cash flows from the program at market yields of government bonds, denominated in the currency in which the benefits for vacation will be paid and having redemption dates nearly identical to the forecasted payment dates of the vacation pay.

  Gains and losses are recorded to the statement of operations at the time that they are created. Past service cost is immediately recognized in the financial statements of the company.

F - 25



HADERA PAPER LTD

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont.)

  W. Employee benefits (Cont.)

  (3) Short term employee benefits

  Short term employee benefits are benefits which it is anticipated will be utilized or which are to be paid during a period that does not exceed 12 months from the end of the period in which the service that creates entitlement to the benefit was provided.

  Short term company benefits include the company’s liability for short term absences, payment of grants, bonuses and compensation. These benefits are recorded to the statement of operations when created. The benefits are measured on a non capitalized basis. The difference between the amount of the short term benefits to which the employee is entitled and the amount paid is therefore recognized as an asset or liability.

  X. Net income per share

  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 incomeper 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).

  Y. Exchange Rates and Linkage Basis

  (1) Foreign currency balance, or balances linked to foreign currency are included in the financial statements according to the exchange rate announced by the Bank of Israel on the balance sheet date.

  (2) Balances linked to the CPI are presented according to index of the last month of the report period (the index of the month of the financial reports).

  (3) Following are the changes in the representative exchange rates of the Euro and the U.S. dollar vis-a-vis the NIS and in the Israeli Consumer Price Index (“CPI”):

Representative
exchange rate of
the dollar
(NIS per $1)

Representative
exchange rate of
the Euro (NIS per
€1)

CPI
"in respect of"
(in points)

 
As of:                
December 31, 2008    3.802    5.297    198.42  
December 31, 2007    3.846    5.659    191.15  

%
%
%
 
Increase (decrease) during the:                
Year ended December 31, 2008    (1.1 )  (6.39 )  3.8  
Year ended December 31, 2007    (9.0 )  1.7    3.4  

F - 26



HADERA PAPER LTD

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont.)

  Z. Adoption of new and revised Standards and interpretations

  (1) New effective standards and interpretations, which are implemented in these financial statements

  IFRS 2, IFRIC 11 - "Group and Treasury Share Transactions"

  IFRIC 11 provides guidance on applying IFRS 2 with respect to certain arrangements of share-based payments involving an entity’s own equity instruments as well as arrangements involving the parent company’s equity instruments. The interpretation stipulates the method of classification of these arrangements as share-based payment transaction that are settled with equity instruments or as share-based payment transactions that are settled in cash.

  IAS 19, IFRIC 14 – “The limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction”

  IFRIC 14 determines the meaning of “refunds from the plan or reductions in future contributions to the plan” during the calculation of the a defined benefit asset that will be recognized in respect of a defined benefit plan, and clarifies how an asset or liability guidance in respect of a pension plan could be affected by statutory or contractual funding requirements. The provisions of IFRIC 14 apply to annual reporting periods commencing on January 1, 2008

  The implementation of IFRIC 14 does not have any impact on the Group’s financial statements.

  (2) Standards, Amended Standards and Clarifications that have been Published but not yet Become Effective, and have not been Adopted by the Company in Early Adoption

  IAS 1 (Amended) “Presentation of Financial Statements”

  The standard stipulates the presentation required in the financial statements, and itemizes a general framework for the structure of the financial statements and the minimal contents which must be included in the context of the report. Changes have been made to the existing presentation format of the financial statements, and the presentation and disclosure requirements for the financial statements have been broadened, including the presentation of an additional report in the framework of the financial statements known as the “report of comprehensive income”, and the addition of a balance sheet as of the beginning of the earliest period that was presented in the financial statements, in cases of changes in accounting policy by means of retroactive implementation, in cases of restatement and in cases of reclassifications.

  The standard applies, by way of retroactive implementation, to reporting periods commencing on January 1, 2009. Pursuant to the provisions of the standard the Group published a report on the total