6-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549


FORM 6-K

Report of Foreign Private Issuer
Pursuant to Rule 13a-16 or 15d-16
of the Securities Exchange Act of 1934

For the Month of November 2008


HADERA PAPER LTD.
(Translation of Registrant’s Name into English)

P.O. Box 142, Hadera, Israel
(Address of Principal Corporate Offices)

Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F:

x Form 20-F    o Form 40-F

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1): o

Note: Regulation S-T Rule 101(b)(1) only permits the submission in paper of a Form 6-K if submitted solely to provide an attached annual report to security holders.

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7): o

Note: Regulation S-T Rule 101(b)(7) only permits the submission in paper of a Form 6-K submitted to furnish a report or other document that the registrant foreign private issuer must furnish and make public under the laws of the jurisdiction in which the registrant is incorporated, domiciled or legally organized (the registrant’s “home country”), or under the rules of the home country exchange on which the registrant’s securities are traded, as long as the report or other document is not a press release, is not required to be and has not been distributed to the registrant’s security holders, and, if discussing a material event, has already been the subject of a Form 6-K submission or other Commission filing on EDGAR.

Indicate by check mark whether the registrant by furnishing the information contained in this form is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934:

o Yes     x No

If “Yes” is marked, indicate below the file number assigned to the registrant in connection with Rule 12g3-2(b): 82-______________



        Attached hereto as Exhibit 1 and incorporated herein by reference is the Registrant’s press release dated November 11, 2008 with respect to the Registrant’s results of operations for the quarter ended September 30, 2008.

        Attached hereto as Exhibit 2 and incorporated herein by reference is the Registrant’s Management Discussion with respect to the Registrant’s results of operations for the quarter ended September 30, 2008.

        Attached hereto as Exhibit 3 and incorporated herein by reference are the Registrant’s unaudited condensed consolidated financial statements for the quarter ended September 30, 2008.

        Attached hereto as Exhibit 4 and incorporated herein by reference are the unaudited condensed interim consolidated financial statements of Mondi Paper Hadera Ltd. and subsidiaries with respect to the quarter ended September 30, 2008.

        Attached hereto as Exhibit 5 and incorporated herein by reference are the unaudited condensed interim consolidated financial statements of Hogla-Kimberly Ltd. and subsidiaries with respect to the quarter ended September 30, 2008.

SIGNATURE

        Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

HADERA PAPER LTD.
(Registrant)

By: /s/ Lea Katz
——————————————
Lea Katz
Corporate Secretary

Dated: November 12, 2008.



EXHIBIT INDEX

Exhibit No. Description

1. Press release dated November 11, 2008.

2. Registrant’s management discussion.

3. Registrant’s unaudited condensed consolidated financial statements.

4. Unaudited condensed interim consolidated financial statements of Mondi Paper Hadera Ltd. and subsidiaries.

5. Unaudited condensed interim consolidated financial 5. statements of Hogla- Kimberly Ltd. and subsidiaries.



Exhibit 1

  NEWS
 
  For Release:   IMMEDIATE

Hadera Paper Ltd.
Reports Financial Results For Third Quarter and Nine Months

Hadera, Israel, November 11, 2008 – Hadera Paper Ltd. (AMEX:AIP) (the “Company” or “Hadera Paper”) today reported financial results for the third quarter and first nine months ended September 30, 2008. The Company, its subsidiaries and associated companies – is referred to hereinafter as the “Group”.

Since the Company’s share in the earnings of associated companies constitutes a material component in the company’s statement of income (primarily on account of its share in the earnings of Mondi Hadera Paper Ltd. (“Mondi Hadera”) and Hogla-Kimberly Ltd.(“H-K”), before the presentation of the consolidated data below, the aggregate data which include the results of all the companies in the Hadera Paper Group (including the associated companies whose results appear in the financial statements under “earnings from associated companies”) is being presented, without considering the rate of holding therein and net of mutual sales.

As a result of the transition to reporting according to International Financial Reporting Standards (IFRS), the Company presented its financial statements for the reported period, as well as the comparison figures for the corresponding period last year and for the year ended December 31, 2007 according to IFRS

Aggregate sales amounted to NIS 2,442.5 million during the reported period (nine month period- January-September 2008), as compared with NIS 2,298.2 million in the corresponding period last year.

Aggregate sales in the third quarter this year amounted to NIS 823.9 million, as compared with NIS 805.5 million in the corresponding period last year, and as compared with NIS 771.0 million in the second quarter of the year.

Aggregate operating profit totaled NIS 160.5 million during the reported period, as compared with NIS 129.7 million in the corresponding period last year. The significant improvement in the aggregate operating profit is attributed to the performance improvement at some of the Israeli companies on the one hand, coupled with the continuing trend of a lower operating loss in Turkey on the other hand.

Aggregate operating profit totaled NIS 49.2 million in the third quarter of the year, as compared with NIS 59.6 million in the corresponding quarter last year, and as compared with NIS 51.5 million in the second quarter of the year.

The Consolidated Data set forth below excluding the results of operation of the associated companies: Mondi Hadera, H-K. Consolidated Data include the sales turnover of Carmel Containers Systems Ltd. (“Carmel”) and Frenkel- C.D. Ltd. (“Frenkel- C.D.”) that were consolidated as of September 2008 due to the completion of transaction for the acquisition of Carmel shares.



Consolidated sales during the reported period amounted to NIS 447.2 million, as compared with approximately NIS 428.8 million in the corresponding period last year.

Operating profit totaled NIS 38.0 million during the reported period, as compared with NIS 53.0 million in the corresponding period last year. Most of the erosion in profit is attributed to the change in the dollar exchange rate that negatively influenced the selling prices in the packaging paper and recycling activity.

The net profit attributed to the Company’s shareholders totaled NIS 59.5 million during the reported period, as compared with net profit attributed to the Company’s shareholders of NIS 14.0 million in the corresponding period last year. The net profit was affected by the improvement in the Group’s profitability 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 income allocated to the Company’s shareholders amounted to NIS 11.7 million coupled with the significant reduction of the Company’s share in the losses of the operations in Turkey (KCTR).

The net profit attributed to the Company’s shareholders for the third quarter this year amounted to NIS 20.2 million, as compared with a net profit attributed to the Company’s shareholders of NIS 7.7 million in the corresponding quarter last year. The net profit attributed to the Company’s shareholders in the third quarter last year appears net of our share (49.9%) in the amortization of the tax asset in Turkey (KCTR) in the sum of NIS 7.4 million.

Basic earnings per share amounted to NIS 11.75 per share ($3.44 per share) in the reported period, as compared with NIS 3.47 per share ($0.87 per share) in the corresponding period last year.

Basic earnings per share attributed to the Company’s shareholders amounted to NIS 3.99 per share ($1.17 per share) in the third quarter of the year, as compared with earnings of NIS 1.90 per share ($0.47 per share) in the corresponding quarter last year.

The inflation rate during the reported period amounted to 4.4%, as compared with an inflation rate of 2.3% in the corresponding period last year.

Mr. Avi Brener, Chief Executive Officer of the Company said that “Due to the surplus manufacturing capacity, the import volumes of fine paper and packaging paper from Europe in dumping prices, have recently grown and the company is working to preserve its market share and quantitative sales, that as a result causing to certain erosion of gross margins. The sharp change in the currency exchange rates that took place in the reported period – as the shekel grew stronger vis-à-vis the US dollar and the euro – is working in the benefit of the Company in terms of the imported inputs, while also eroding the selling prices in those areas whose prices are denominated in US dollars. The whole business of the Hadera Paper Group – including the associated companies – is relatively balanced and the company’s exposure to sharp fluctuations in exchange rates is therefore low”.

In the reported period, KCTR continued to implement its strategic plan formulated together with the international partner, Kimberly Clark.

Financial expenses during the reported period amounted to NIS 11.9 million, as compared with NIS 19.8 million in the corresponding period last year.

The company’s share in the earnings (losses) of associated companies totaled NIS 36.6 million during the reported period, as compared with a loss of NIS (7.0) million in the corresponding period last year.

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

  The Company’s share in the net profit of Mondi Hadera (49.9%) increased by approximately NIS 1.8 million. Most of the change in profit originated primarily from Mondi’s highly improved operation profit, which recorded an increase from operating profit of NIS 25.9 million last year to an operating profit of NIS 27.4 million this year – primarily as a result of the raising of quantitative sales, the operating efficiency and the decrease in energy prices as a result of the transition to the use of netural 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 10.9 million. Hogla’s operating profit grew from NIS 100.9 million to NIS 126.6 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 and from currency exchange rates causing to decrease Company’s expenses that are mostly dollar dominated.

  The Company’s share in the losses of KCTR Turkey (49.9%) was reduced by NIS 39.9 million. The significant reduction in loss originated primarily from to the growth in the volume of operations that resulted in a significant reduction in the operating loss, from NIS 61.2 million last year to approximately NIS 29.4 million this year. In the corresponding period last year, a non-recurring loss of approximately NIS 6 million ($1.5 million) was included on account of the termination of trade agreements with distributors due to the transition to distribution by Unilever, of which our share was approximately NIS 3 million. Moreover, the tax asset that was recorded in previous years in Turkey, in the sum of approximately 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 Kimberly, 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 4.8 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 the exchange rate.

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.

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Pursuant to the shelf prospectus published by the Company on May 26, , the Company completed the offering – on July 16, 2008 – of two debenture series in the total sum of NIS 308,060 thousands. Net of offering expenses, the Company received net proceeds of approximately NIS 306, 609 thousands. On August 17, 2008 the Company raised in an additional offering a total of NIS 120,000 thousand in return for that allocation of NIS 114,997 thousand par value in bonds (Series 4). Net of issuance expenses, the Company received net proceeds amounting to NIS 119,826 thousand. The Company raised from the two offerings a net proceeds amounting to approximately NIS 426,435 thousand.

Following Company’s request to raise an additional amount by a shelf offering of debentures in the total amount of NIS 400 million, on July 6, 2008, the Maalot Rating Company (Standard and Poor’s) announced a rating of AA- with Negative Outlook for the Company’s debenture series (Series 3 and Series 4), that applies also to the rest of the Company’s debenture series. On August 14, 2008, Maalot clarified that the rating also applies to an overall issuance of up to NIS 426 million.

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 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 hold an option to extend the lease by an additional 9 years and 11 months.

On August 24, 2008, a transaction was completed for the acquisition of shares of Carmel Container Systems Ltd. (“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 in a single installment upon closing of the transaction. The shares were acquired “As Is”. The transaction was concluded after receiving approval from the Antitrust Supervisor, which was a pre-condition for conclusion of the transaction.
Upon conclusion of the transaction, the company holds approximately 89.3% of Carmel shares and as of the transaction closing date, the financial statements of Carmel and those of Frenkel-CD have been consolidated with the Company’s financial statements.

This report contains various forward-looking statements based upon the Board of Directors’ present expectations and estimates regarding the operations and plans of the Group and its business environment. The Company does not guarantee that the future results of operations will coincide with the forward-looking statements and these may in fact differ considerably from the present forecasts as a result of factors that may change in the future, such as changes in costs and market conditions, failure to achieve projected goals, failure to achieve anticipated efficiencies and other factors which lie outside the control of the Company as well as certain other risks detailed from time to time in the Company’s filings with the Securities and Exchange Commission. The Company undertakes no obligation for publicly updating the said forward-looking statements, regardless of whether these updates originate from new information, future events or any other reason.

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Hadera PAPER LTD.
SUMMARY OF RESULTS
(UNAUDITED)
except per share amounts

Nine months ended September 30,
NIS IN THOUSANDS (1)
2008
2007
 
Net sales      447,180    428,784  
   
Net earnings attributed to the Company's shareholders    59,479    14,024  
   
Basic net earnings per share attributed to the Company's shareholders    11.75    3.47  
   
Fully diluted earnings per share attributed to the Company's shareholders    11.73    3.47  


Three months ended September 30,
NIS IN THOUSANDS (1)
2008
2007
 
Net sales      171,394    150,961  
   
Net earnings attributed to the Company's shareholders    20,177    7,682  
   
Basic net earnings per share attributed to the Company's shareholders    3.99    1.90  
   
Fully diluted earnings per share attributed to the Company's shareholders    3.98    1.89  

(1) The representative exchange rate at September 30, 2008 was N.I.S. 3.421=$1.00.

Contact:
Lea Katz, Adv.
Corporate Secretary and Chief of Legal Department
Hadera Paper Ltd. Group
Tel:+972-4-6349408
Leak@aipm.co.il

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Exhibit 2



Hadera Paper Ltd.

Update to Chapter I (Description of the Corporation’s Business) of the
Information Presented in the Company’s Periodical Report
As of December 31, 2007

Details in accordance with Regulation 39a of the Securities Regulations (Periodic and Immediate Reports), 1970.

1. Update to Section 1 Chapter A “Introduction”

  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.

2. Update to Section 5, Chapter A “Equity Investments in the Company”

  Pursuant to the shelf prospectus published by the Company on May 26, , the Company completed the offering – on July 16, 2008 – of two debenture series in the total sum of NIS 308,060 thousands. Net of offering expenses, the Company received net proceeds of approximately NIS 306, 609 thousands. On August 17, 2008 the Company raised in an additional offering a total of NIS 120,000 thousand in return for that allocation of NIS 114,997 thousand par value in bonds (Series 4). Net of issuance expenses, the Company received net proceeds amounting to NIS 119,826 thousand. The Company raised from the two offerings a net proceeds amounting to approximately NIS 426,435 thousand.

3. Update to Section 14 Chapter D “Finance”

  Following Company’s request to raise an additional amount by a shelf offering of debentures in the total amount of NIS 400 million, on July 6, 2008, the Maalot Rating Company (Standard and Poor’s) announced a rating of AA- with Negative Outlook for the Company’s debenture series (Series 3 and Series 4), that applies also to the rest of the Company’s debenture series. On August 14, 2008, Maalot clarified that the rating also applies to an overall issuance of up to NIS 426 million.

4. Update to Section 17, Chapter 4 “Additional Information Regarding the Company”

  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 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 hold an option to extend the lease by an additional 9 years and 11 months. For further details, see the Company’s reports dated September 25, 2008.



5. Update to Section 22.4.1, Chapter D, “Investments in Associated Companies”

  On August 24, 2008, a transaction was completed for the acquisition of shares of Carmel Container Systems Ltd. (“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 in a single installment upon closing of the transaction. The shares were acquired “As Is”. The transaction was concluded after receiving approval from the Antitrust Supervisor, which was a pre-condition for conclusion of the transaction.

  Upon conclusion of the transaction, the company holds approximately 89.3% of Carmel shares and as of the transaction closing date, the financial statements of Carmel and those of Frenkel-CD Ltd. have been consolidated with the Company’s financial statements.

  Regarding the impact of this acquisition on the Company, see Note 5 to the Company’s financial statements as at September 30, 2008.

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Translation from Hebrew

November 10, 2008

MANAGEMENT DISCUSSION

We are honored to present the consolidated financial statements of the Hadera Paper Group Ltd. (“Hadera Paper” or “The Company”) (formerly – American Israeli Paper Mills – “AIPM”) for the first nine months of 2008. The Company, its consolidated subsidiaries and its associated companies – hereinafter: “The Group”.

A. Description of the Company’s Business

  1. Company Description

  Hadera Paper deals in the manufacture and sale of packaging paper, in manufacture of cardboard packaging products, consumer goods packaging, in the recycling of paper waste and in the marketing of office supplies – through subsidiaries. The Company also holds associated companies that deal in the manufacture and marketing of fine paper, in the manufacture and marketing of household paper products, hygiene products, disposable diapers and complementary kitchen products, corrugated board containers and packaging for consumer goods.

  The company’s securities are traded on the Tel Aviv Stock Exchange and on the American Stock Exchange, AMEX.

  2. General

  a. Data Updates to IFRS

  As a result of the transition to reporting according to IFRS, the Company presented its financial statements for the reported period, as well as the comparison figures for the corresponding period last year and for the year ended December 31, 2007 according to IFRS. Accordingly, the data appearing in the Management Discussion and the comparison figures are presented according to IFRS. As to the material impacts regarding the transition to IFRS – see Section H, below.

  b. Principal Current Operations

  1. Business Environment

  A significant additional upheaval took place in global financial markets in September 2008, with the collapse of several very large financial entities in the United States and several other countries, against the background of the severe crisis in the subprime mortgage sector, that affected additional financial sectors. The escalation of the said crisis resulted 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. Subsequent to the said events, several nations have implemented various measures intended to stabilize the financial markets and prevent an additional crash. This was accomplished by an influx of funds to financial institutions and by a lowering of interest rates, although it is unclear whether these measures will suffice to reign in the crisis or prevent a further deterioration. It would appear that the direct economic repercussions of the crisis have yet to run their course, and there exist concerns regarding a recession in the US and global markets.

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  Alongside the said global financial crisis, several events occurred in the Israeli economy over the past several months, including significant fluctuations in the exchange rates of principal currencies vis-à-vis the NIS, as well as high inflation rates in the domestic economy.

  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 raise financing for their current operations and long-term plans, as well as on their financing terms.

  True to 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 soundness 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 series of debentures that render it possible for the company to promote the long-term strategic projects on which the company is focusing. The Company does not currently anticipate difficulties in raising additional financing in case of need.

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

  In parallel, in the course of the reported period, the prices of the following inputs continued to rise: Energy, fibers, chemicals and commodities. These served to accelerated the inflation rate. This trend has currently reversed itself as a result of the global crisis.

  Global paper markets – and primarily those in Europe – are beginning to show a slight slowdown in demand in relation to surplus manufacturing capacity.

  Due to the surplus manufacturing capacity as aforesaid, the import volumes of fine paper and packaging paper from Europe in dumping prices, have recently grown and the company is working to preserve its market share and quantitative sales, that as a result causing to certain erosion of gross margins.

  The sharp change in the currency exchange rates that took place in the reported period – as the shekel grew stronger vis-à-vis the US dollar and the euro – is working in the benefit of the Company in terms of the imported inputs, while also eroding the selling prices in those areas whose prices are denominated in US dollars.

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  The whole business of the Hadera Paper Group – including the associated companies – is relatively balanced and the company’s exposure to sharp fluctuations in exchange rates is therefore low.

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

  The sharp rise in global fuel prices during most of the reported period is not materially affecting the Company due to its transition to the use of natural gas instead of fuel oil in its manufacturing processes, starting with the fourth quarter last year. This fact improved the Group’s competitive capabilities vis-à-vis competition from Europe and offset some of the above-mentioned influences of erosion of selling prices. This trend has reversed itself subsequent to the reported period.

  During the last few months after the reported period, a change occur in market trends, the input prices trend is changing, and shall this trend continues in terms of fibers and chemicals, it shall enable a partial compensation for the prices erosion that is expected if the markets slowdown will continue.

  The inflation rate during the reported period amounted to 4.4%, as compared with an inflation rate of 2.3% in the corresponding period last year.

  The erosion of the US dollar exchange rate vis-à-vis the Israeli shekel (NIS) continued in the reported period, with considerable volatility. The US dollar exchange rate fell by 11.0% during the reported period, in addition to approximately 9% decrease in 2007.

  2. Principal Current Operations

  The aggregate sales turnover continued to grow during the reported period, and was manifested by a raise of approximately 6% , in relation to the aggregate sales turnover in the corresponding period last year.

  Implementation and Assimilation of Organization-Wide Processes

  In the course of the reported period, the Group companies continued to implement and assimilate organization-wide processes that are intended to empower Group operations and support continued growth and increased profitability in organizational development, Group purchasing, B2B marketing, development and innovation.

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  3. The Strategic Plans

  In parallel to the ongoing operations, the Company is working to successfully implement the strategic plans that are intended to lead to continued growth in operations and improved profitability over the coming years:

  1. Expanding the recycled packaging paper manufacturing network

  The investment budget in the project for the construction of the new manufacturing network, totaling NIS 690 million was approved on October 15, 2007 by the Company’s Board of Directors. The Company has selected the most highly advanced technologies in this area, from the leading suppliers in the sector, in order to amplify its competitive advantage and potential for profitability in the long term.

  The implementation of the project is advancing as planned and the Company has completed the signing of central agreements for the purchasing of the main manufacturing equipment. The construction of the structure for the machine is progressing at the site, in anticipation for receiving the manufacturing equipment, expected at the end of the year.

  In parallel, Amnir Recycling Industries Ltd. (“Amnir”), a Company’s subsidiary, is continuing preparations for the expansion of the collection of cardboard and newspaper waste and is continuing to accumulate inventories toward the planned operation of the new machine in the second half of 2009.

  As part of the preparations for financing the project, additional capital of approximately NIS 211 million was raised in November 2007, by way of a private placement of shares to the controlling shareholders and to institutional investors. In the course of July 2008, the Company raised a net sum of approximately NIS 306 million, after deducting the offering expenses, and in August 2008 the Company raised approximately NIS 120 million, after deducting offering expenses, by way of issuing debentures to institutional investors and to the public, to serve for covering the payments to the suppliers of equipment for Machine 8, and is most of the capital required for the financing of the project. In addition to the above measures, the Company is continuing to explore additional ways to complete the rest of the project financing.

  2. New Power Plant

  The project for the new power plant, that is intended to provide steam and electricity for the manufacturing operations in Hadera and to sell surplus electricity to Israel Electric Company and/or private customers, is still in progressive examination stages of configuration and feasibility studies on the basis of the license for a 230 mega-watts (MW) power station, to be constructed on an 80,000 m2 plot of land that was acquired for this purpose, in immediate proximity to the Company’s site in Hadera.

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  The Company plans for the said power plant to consume natural gas that will be provided by EMG, on the basis of the principles agreement that was signed in May last year. The closing of the detailed agreement with EMG in the next several months will render it possible to launch the project.

  c. The Strategic Investment in Turkey

  In the reported period, Kimberly Clark Turkey, KCTR, a wholly-owned Hogla Kimberly subsidiary (49.9% of which is held by the Company) – continued to implement its strategic plan GBP – (Global Business Plan) that was formulated together with the international partner, Kimberly Clark. The plan is intended to introduce Kimberly Clark’s global brands to Turkey, on the basis of local manufacturing. If fully implemented, KCTR will grow to become a company with annual sales in the area of approximately $300 million, by 2015. In the first nine months of the year, KCTR’s sales turnover amounted to approximately $87.9 million, as compared with $42.9 million in the corresponding period last year and $63.0 million in all of 2007.

  In the course of the third quarter of the year, the Company continued to empower its brands, mostly under the Huggies® and KOTEX® brands while preserving a constant growth in market share and in the increasing awareness to company’s products. In parallel, the scope of export to Kimberly Clark grew, to various countries in Europe and to Africa.

  The company’s continuing marketing and advertising operations are being felt in the gradual strengthening of the brands, as expressed by consumer studies that are being conducted regularly, alongside the growth in sales, while curtailing the operating loss and a considerable reduction in the Company’s net loss.

  As part of the strategic plan, the Company intends to continue its marketing and sales promotion efforts, while launching new products that will support the establishment of the brands and the creation of customer loyalty.

  In the course of the reported period, the company continued to promote the collaboration with Unilever and expanded the number of points of sale in the Turkish market that sell KCTR brands.

  The continuing high level of competition in the markets where the company is working to penetrate and empower its brands calls for regular and significant investments in advertising and sales promotion.

  All of the expenses detailed above associated with the penetration of products, advertising, expansion of the distribution network and more – are regularly recorded as an expenditure in the KCTR statements of income. KCTR recorded an operating loss of approximately NIS 29.4 million (approximately $8.4 million) in the reported period, as compared with NIS 61.2 million (approximately $14.6 million) in the corresponding period last year and approximately NIS 74 million (approximately $18 million) in all of 2007.

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  The implementation of the business and strategic plan, while strengthening the brands and recording a gradual growth in the Unilever distribution and sales platforms, in combination with expending export and continuing cost reductions at the plant is rendering it possible to maintain the trend of improving gross profitability – as mentioned above – in the reported period as well.

  The above information pertaining to the KCTR business plans and their implementation constitutes forward-looking information as defined in the securities law, based on the company’s estimates at the date of this report. These estimates may not materialize – in whole or in part – or may materialize in a different manner, inter alia on account of factors that lie outside the control of the company, such as market conditions, legislation and various costs.

B. Analysis of the Company’s Financial Situation

  The cash and cash equivalents item decreased from NIS 53.8 million on September 30, 2007 to NIS 5.1 million on September 30, 2008. The decrease in the cash balance, together with additional amounts that resulted from the private placement carried out last year and from the issuance of several series of debentures in the third quarter of the year, were deposited in euro-linked deposits in the amount of NIS 96.5 million and in NIS deposits in the amount of 160.6 million, which have been designated for the payment of amounts pertaining to the construction of the packaging paper manufacturing network, and are presented under Designated Cash.

  The balance of trade receivables in respect of packaging paper and recycling increased from NIS 148.9 million as of September 30, 2007 to NIS 300.1 million as of September 30, 2008. This increase is primarily attributed to the consolidation of the trade receivables of Carmel Container Systems Ltd. (“Carmel”) and Frenkel- C.D. Ltd. (“Frenkel- C.D.”) in the amount of NIS 191.0 million, net of the effect of the reduction in prices in NIS terms following the devaluation of the dollar and net of trade receivable of Carmel that were cancelled due to the consolidation under the Company’s reports. The balance of trade receivable for the office supplies marketing activity rose from NIS 44.9 million as at September 30, 2007 to NIS 45.2 million as at September 30, 2008.

  Accounts receivable in the packaging paper and recycling activity increased from NIS 97.2 million as of September 30, 2007 to NIS 107.7 million as of September 30, 2008. This increase is primarily attributed to the consolidation of the accounts receivable of Carmel and Frenkel- C.D. in the amount of NIS 5.9 million. Accounts receivables for the office supplies marketing activity decreased from NIS 11.5 million on September 30, 2007 to NIS 11.1 million on September 30, 2008.

  Inventories in the packaging paper and recycling activity increased from NIS 52.0 million as of September 30, 2007 to NIS 126.3 million as of September 30, 2008. This increase is primarily attributed to the consolidation of the inventories of Carmel and Frenkel- C.D. in the amount of NIS 77.9 million. In the office supplies marketing activity, the Inventories item increased from NIS 15.4 million on September 30, 2007, to NIS 19.8 million on September 30, 2008, primarily as a result of the increase in the proportion of products imported from East Asia so as to improve profitability and from purchased inventory as part of the acquisition of the business activity of the company Yavne- Pitango located at north Israel, at the beginning of August 2008.

8



  Investments in associated companies decreased from NIS 344.6 million on September 30, 2007 to NIS 314.3 million on September 30, 2008. The decrease consists primarily of the write-off of a balance of NIS 49.8 million in respect of Carmel and Frenkel- C.D. from the investments in associated companies and due to the consolidation thereof as of September 1, 2008 following the increase in the percentage of holding and as a result of a change in equity funds net, at a total amount of approximately NIS 15.3 million.

  Short-term credit decreased from NIS 233.7 million as of September 30, 2007 to NIS 36.7 million as of September 30, 2008. The decrease was primarily attributed to the use of part of the proceeds from the private placement to shareholders in November last year and the consideration from the issuance of debentures in July and August 2008 to the repayment of short- term credit.

  Accounts payable and accruals in the packaging paper and recycling activity increased from NIS 70.2 million as of September 30, 2007 to NIS 116.8 million as of September 30, 2008. The increase is primarily attributed to the consolidation of the accounts payable and accruals of Carmel and Frenkel- C.D. in the amount of NIS 24.2 million, the increase in expenses for the payment of debentures interest from the raises during the qurter, and for the reevaluation of fair value of liabilities in respect of futures transactions that are intended to hedge payments to the suppliers of Machine 8 in view of the sharp devaluation of the euro in the reported period. In the marketing of office supplies activity, accounts payable and accruals increased from NIS 2.6 million as of September 30, 2007 to NIS 6.5 million as of September 30, 2008.

  The Company’s shareholders’ equity increased from NIS 422.7 million as of September 30, 2007 to NIS 743.0 million as of September 30, 2008. The change was primarily attributed to the net consideration from the issuance of shares under a private placement to the controlling shareholders and institutional investors in November 2007 in the amount of approximately NIS 211.6 million, the net profit distinguished to the Company’s shareholders, of NIS 77.0 million created between the periods, the positive capital surplus in the amount of NIS 16.3 million from the transition to consolidation, with the addition of the minority interest of approximately NIS 27.0 million, net of the increase in the negative capital surplus from translation differences in respect of an associated company, in the amount of approximately NIS 20.5 million, and net of the company’s share in capital surplus from a cash flow hedge in the amount of NIS 15.5 million.

  1. Investments in Fixed Assets

  Investments in fixed assets amounted to approximately NIS 178.6 million in the reported period, as compared with NIS 61.6 million in the corresponding period last year. The investments this year consisted primarily of payments on account of purchasing from equipment vendors for the new packaging paper manufacturing network (Machine 8), in the sum of approximately NIS 140.9 million. The Company also made current investments in environmental issues (effluent treatment) and current investments in equipment renewal, means of transportation and in the maintenance of buildings at the Hadera site.

  2. Financial Liabilities

  The long-term liabilities (including current maturities) amounted to NIS 828.2 million as at September 30, 2008, as compared with NIS 293.4 million as at September 30, 2007. The long-term liabilities grew in relation to last year primarily as a result of the issuing of two debenture series, series 3 and 4, in the third quarter this year, in the total sum of approximately NIS 427 million, coupled with long-term loans assumed intended for financing payments on account of Machine 8 and the consolidation of the loans of Carmel and Frenkel- C.D., in the total sum of NIS 80.2 million. The long-term liabilities totaled NIS 261.7 million on December 31, 2007.

9



  The long-term liabilities include primarily four series of debentures and the following long-term bank loans:

  Series 1 – NIS 7.5 million, for repayment until 2009.
  Series 2 – NIS 191.2 million, for repayment until 2013.
  Series 3 – NIS 191.4 million, for repayment until 2018.
  Series 4 – NIS 235.6 million, for repayment until 2020.
  Long-term loans – NIS 128.7 million.

  The outstanding short-term credit totaled NIS 36.7 million as at September 30, 2008, as compared with NIS 233.7 million as at September 30, 2007 and NIS 143.0 million as at December 31, 2007.

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

  Put option on 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.

The difference between the value of the liabilities according to the agreement – NIS 54,736 thousand – as compared with the value of the liabilities through fair value – NIS 9,474 thousand – amounts to NIS 45,262 thousand.

  The liability on account of the Put option on the associated company shares as at September 30, 2008, as at September 30, 2007, as at December 31, 2007 and as at January 1, 2007, amounts to NIS 9,474 thousand, NIS 3,169 thousand, NIS 3,901 thousand and NIS 1,612 thousand, respectively.

  Other expenses grew by NIS 5,572 and 4,277 thousand – for the period of nine months and three months ended on September 30, 2008, respectively, and grew by a sum of NIS 1,557 thousand and NIS 1,378 thousand for the period of nine months and three months ended September 30, 2007, respectively, and grew by a sum of NIS 2,289 thousand for the year ended December 31, 2007.

10



  The principal factors responsible for the change in fair value during the reported period 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 the reported period.

C. Results of Operations

  1. Aggregate Data

  Since the Company’s share in the earnings of associated companies constitutes a material component in the company’s statement of income (primarily on account of its share in the earnings of Mondi Hadera PaperLtd. [Mondi Hadera] and Hogla-Kimberly Ltd.), before the presentation of the consolidated data below, the aggregate data which include the results of all the companies in the Hadera Paper Group (including the associated companies whose results appear in the financial statements under “earnings from associated companies”) is being presented, without considering the rate of holding therein and net of mutual sales.

  Regarding the consolidated data, see Section (4) below.

  Aggregate Data

  The aggregate sales amounted to NIS 2,442.5 million during the reported period, as compared with NIS 2,298.2 million in the corresponding period last year, representing growth of 6.3%.

  The aggregate sales in the third quarter this year amounted to NIS 823.9 million, as compared with NIS 805.5 million in the corresponding period last year, representing growth of approximately 2.3% and as compared with NIS 771.0 million in the second quarter of the year.

  The aggregate operating profit totaled NIS 160.5 million during the reported period, as compared with NIS 129.7 million in the corresponding period last year, representing growth of 23.7%. The significant improvement in the aggregate operating profit is attributed to the performance improvement at some of the Israeli companies on the one hand, coupled with the continuing trend of a lower operating loss in Turkey on the other hand.

  The aggregate operating profit totaled NIS 49.2 million in the third quarter of the year, as compared with NIS 59.6 million in the corresponding quarter last year, representing a decrease of 17.4% and as compared with NIS 51.5 million in the second quarter of the year.

  For the operations in Turkey – see Section C7 below – Company’s share in the earnings of associated companies.

11



  2. Net Profit and Earnings Per Share Attributed to the Company’s shareholders

  The net profit attributed to the Company’s shareholders totaled NIS 59.5 million during the reported period, as compared with net profit attributed to the Company’s shareholders of NIS 14.0 million in the corresponding period last year.

  The net profit allocated to the Company’s shareholders during the reported period was affected by the improvement in the Group’s profitability 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 income allocated to the Company’s shareholders amounted to NIS 11.7 million and the significant reduction of the Company’s share in the losses of the operations in Turkey (KCTR), as compared with the corresponding period last year (see Strategic Investment in Turkey, above, and Section C7, below).

  The net profit attributed to the Company’s shareholders for the third quarter this year amounted to NIS 20.2 million, as compared with a net profit attributed to the Company’s shareholders of NIS 7.7 million in the corresponding quarter last year. The net profit attributed to the Company’s shareholders in the third quarter last year appears net of our share (49.9%) in the amortization of the tax asset in Turkey (KCTR) in the sum of NIS 7.4 million.

  Basic earnings per share amounted to NIS 11.75 per share ($3.44 per share) in the reported period, as compared with NIS 3.47 per share ($0.87 per share) in the corresponding period last year.

The diluted earnings per share amounted to NIS 11.73 per share ($3.43 per share) in the reported period, as compared with NIS 3.47 per share ($0.87 per share) in the corresponding period last year.

  Basic earnings per share attributed to the Company’s shareholders amounted to NIS 3.99 per share ($1.17 per share) in the third quarter of the year, as compared with earnings of NIS 1.90 per share ($0.47 per share) in the corresponding quarter last year.

  Diluted earnings per share attributed to the Company’s shareholders amounted to NIS 3.38 per share ($1.16 per share) in the third quarter of the year, as compared with earnings of NIS 1.89 per share ($0.47 per share) in the corresponding quarter last year.

  3. Analysis of Operations and Profitability

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

  1. Sales

  The consolidated sales during the reported period amounted to NIS 447.2 million, as compared with approximately NIS 428.8 million in the corresponding period last year, representing growth of approximately 4.3%.

  Sales of the packaging and recycling activity amounted to NIS 353.4 million in the reported period, as compared with NIS 342.0 million in the corresponding period last year.

12



  The growth in the packaging paper and recycling turnover originated primarily from the consolidation of the Carmel and Frenkel- C.D. sales turnover that were consolidated for the first time in September 2008, in the sum of NIS 41 million on the one hand, and on the other hand from the reduction in sells of packaging paper and recycling as a result of the erosion of the US dollar on selling prices that was not compensated by raising of NIS prices (The activity sales are affected by dollar-denominated import prices).

  The sales of the Office Supplies Marketing activity during the reported period amounted to NIS 93.8 million, as compared with NIS 86.8 million last year, representing growth of 8.1% that originated from the continuing trend of growth in operating volumes in this activity.

  The aggregate sales in the third quarter of the year totaled NIS 171.4 million, as compared with NIS 151.0 million in the corresponding quarter last year, representing growth of approximately 13.5% and as compared with second quarter sales of NIS 133.3 million, representing growth of approximately 28.6%, originating primarily from the inclusion of the Carmel and Frenkel- C.D. data for the first time this quarter, as mentioned above.

  Sales of the packaging and recycling activity amounted to NIS 136.9 million in the third quarter of the year, as compared with NIS 120.7 million in the corresponding quarter last year, representing growth of 13.4%, originating primarily from the initial consolidation of Carmel and Frenkel- C.D., net of the impact of exchange rate differentials and the cold spell that affected the agricultural sector and harmed the volumes of agricultural exports during the reported period.

Sales of the office supplies marketing activity amounted to NIS 34.5 million in the third quarter of the year, as compared with NIS 30.3 million in the corresponding quarter last year, representing growth of 13.9% originating from the larger volumes of operation this year, in relation to last year.

  2. Cost of Sales

  The cost of sales amounted to NIS 351.3 million – or 78.6% of sales – during the reported period, as compared with NIS 324.9 million – or 75.8% of sales – in the corresponding period last year.

  The gross profit totaled NIS 95.9 million during the reported period (approximately 21.4% of sales), as compared with NIS 103.9 million (24.2% of sales) in the corresponding period last year, representing a decrease of approximately 7.7% in relation to the corresponding period last year.

  The decrease in the gross profit and gross margin in relation to the corresponding period last year is attributed primarily to the erosion of dollar-linked prices in packaging paper and the sales turnover 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 23% 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 NIS 4 million in excess cost, as a result of excess cost recorded from the sale of Carmel and Frenkel CD.

13



  Labor Wages

  The labor wages within the cost of sales amounted to NIS 102.6 million during the reported period (approximately 22.9% of sales), as compared with NIS 85.9 million last year (approximately 20.0% of sales).

  The labor wages within the general and administrative expenses amounted to NIS 51.8 million during the reported period (approximately 11.6% of sales), as compared with the sum of NIS 44.5 million last year (approximately 10.4% of sales).

  The Increase in salary costs as compared to the corresponding period last year is attributed to additional salary expenses of approximately NIS 9.2 million resulting from the consolidation of Carmel and Frenkel- C.D. and the increase in personnel, primarily at Amnir and in the packaging paper activity, 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 average 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 4.4 million for the period – an expenditure that does not involve cash flows.

  3. Selling, General and Administrative and Others

  The selling, general and administrative (including wages) and others amounted to NIS 57.9 million in the reported period – or 13.0% of sales – as compared with NIS 50.9 million – or 11.9% of sales – in the corresponding period last year. Net of the effect of income from the allocation of the negative excess of cost in a subsidiary and non-recurring expenses as detailed below, selling, general and administrative and others amounted to NIS 57.7 million.

  The increase in selling, general and administrative and others was primarily attributed to the consolidation of the expenses of Carmel and Frenkel- C.D. in the financial statements of the Company amount of NIS 4.5 million, the increase in wages expenses as a result of NIS 4.4 million in salary expenses recorded in respect of the option plan for executives approved in January this year, as well as the increase in other expenses following the revaluation of a Mondi Put option in the amount of NIS 5.7 million pursuant to IFRS.

  4. Operating Profit

  The operating profit totaled NIS 38.0 million during the reported period (8.5% of sales), as compared with NIS 53.0 million (12.4% of sales) in the corresponding period last year. Most of the erosion in profit is attributed to the change in the dollar exchange rate that negatively influenced the selling prices in the packaging paper and recycling activity.

  The operating profit of the paper and recycling activity amounted to approximately NIS 35.3 million, as compared to NIS 53.8 million in the corresponding period last year, primarily due to the aforesaid effect of the exchange rate in which the sales in the activity are denominated and the effect of the cold spell on the demand for agricultural exports.

14



  The operating profit of the office supplies activity amounted to NIS 2.7 million, as compared with a loss of NIS -0.8 million in the corresponding period last year.

  The operating profit in the third quarter this year amounted to NIS 7.9 million, as compared with NIS 22.6 million in the corresponding quarter last year and as compared with operating profit of NIS 12.6 million in the second quarter this year. As mentioned above, this is attributed mostly to the erosion of the dollar exchange rate in an average rate of approximately 20% as compared with the corresponding quarter last year.

  The operating profit of the paper and recycling activity amounted to NIS 6.5 million in the third quarter of the year, as compared with NIS 22.3 million in the corresponding quarter last year.

  The operating profit of the office supplies activity amounted to approximately NIS 1.3 million, as compared with an operating profit of NIS 0.3 million in the corresponding quarter last year.

  5. Financial Expenses

  The financial expenses during the reported period amounted to NIS 11.9 million, as compared with NIS 19.8 million in the corresponding period last year, representing a decrease of 40%.

  The total average of interest bearing liabilities, net, carried to the company’s financial expenses, decreased by approximately NIS 96 million between the periods 2007-2008. The decrease is primarily attributed to the proceeds from the private placement last year and the positive cash flows from operating activities between the periods, net of investments in fixed assets.

  The interest on the short-term credit decreased by approximately NIS 4.3 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) remained unchanged as compared to the corresponding period last year, 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 amounted to an annual rate of 2.6% in 2008 as compared to 1.3% in 2007, and as a result of the revaluation of the hedging transactions to their fair value in accordance with international standards.

  In addition, financial expenses in the amount of NIS 1.5 million were recorded, primarily in respect of the effect of the 11% revaluation against the dollar during the year, as compared to a revaluation of 5.0% in the corresponding period last year, on the balances of dollar-denominated assets in the amount of NIS 5.2 million, which had been setoff against financial income, in respect of a dollar currency transaction carried out in the third quarter of the year.

15



  6. Taxes on Income

  Taxes on income amounted to NIS 4.2 million in the reported period, as compared with NIS 12.2 million in the corresponding period last year. The sharp decrease of approximately NIS 8.0 million is primarily attributed to the sharp drop in taxable income (pre-tax income net of a 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 to the previous 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 (until August 31, 2008, on which Carmel’s reports were consolidated for the first time).

  The company’s share in the earnings (losses) of associated companies totaled NIS 36.6 million during the reported period, as compared with a loss of NIS (7.0) million in the corresponding period last year.

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

  The Company’s share in the net profit of Mondi Hadera (49.9%) increased by approximately NIS 1.8 million. Most of the change in profit originated primarily from Mondi’s highly improved operation profit, which recorded an increase from operating profit of NIS 25.9 million last year to an operating profit of NIS 27.4 million this year – primarily as a result of the raising of quantitative sales, the operating efficiency and the decrease in energy prices as a result of the transition to the use of netural 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 10.9 million. Hogla’s operating profit grew from NIS 100.9 million to NIS 126.6 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 and from currency exchange rates causing to decrease Company’s expenses that are mostly dollar dominated.

  The Company’s share in the losses of KCTR Turkey (formerly Ovisan) (49.9%) was reduced by NIS 39.9 million. The significant reduction in loss originated primarily from to the growth in the volume of operations (see above chapter on strategic investment in Turkey), that resulted in a significant reduction in the operating loss, from NIS 61.2 million last year to approximately NIS 29.4 million this year. In the corresponding period last year, a non-recurring loss of approximately NIS 6 million ($1.5 million) was included on account of the termination of trade agreements with distributors due to the transition to distribution by Unilever, of which our share was approximately NIS 3 million. Moreover, the tax asset that was recorded in previous years in Turkey, in the sum of approximately 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 Kimberly, the bank loans were repaid, while significantly reducing the financial expenses, thereby leading to an additional reduction in the net loss.

16



  The Company’s share in the loss of Carmel (36.21% as at August 31, 2008 – the date of consolidation), increased by NIS 4.8 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 the exchange rate.

  The Company’s share in the earnings of associated companies from current operations in Israel (excluding Turkey) grew by approximately NIS 3.8 million this year and amounted to approximately NIS 51.2 million.

D. Liquidity

  Cash Flows

  The cash flows from operating activities totaled NIS 50.9 million during the reported period, as compared with NIS 32.5 million in the corresponding period last year. The significant change in the cash flows from operating activities during the reported period, originated primarily from the sharp improvement in net profit, coupled with the reduction in working capital in the reported period, that amounted to approximately NIS 1.9 million, as compared with growth of approximately NIS 23.4 million last year. The decrease in working capital during the reported period 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 activity.

E. Sources of Finance

  See Section B2 - Financial Liabilities.

F. Exposure and Management of Market Risks

  1. General

  The Company conducts periodical discussions regarding market risks and exposure to exchange rate and interest rate fluctuations, with the participation of the relevant factors, so as to reach decisions in this matter. The individual responsible for the implementation of market risk management policy at the Company is Israel Eldar, the Company’s Comptroller.

17



  2. Market Risks to which the Company is Exposed

  Description of Market Risks

  The market risks reflect the risk of changes in the value of financial instruments affected by changes in the interest rate, in the Consumer Price Index and in foreign currency exchange rates.

  Exchange Rate Risks

  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 fluctuations in the exchange rate of the NIS vis-à-vis the US dollar. This exposure includes economic exposure (on account of surplus proceeds on payments in foreign currency or linked thereto) and accounting exposure (on account of a surplus of dollar-linked assets over foreign-currency-denominated liabilities).

  The Company periodically reexamines the need for hedging on account of this exposure. True to September 30, 2008, the Company entered into hedging transactions in the sum of 34 million euro, in order to hedge the cash flows for the acquisition of fixed assets from equipment vendors for Machine 8.

  Consumer Price Index Risks

  The Company is exposed to changes in the Consumer Price Index, pertaining to the debentures issued by the Company, in the total sum of NIS 390.1 million.

  In early 2008, 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 190 million, pursuant to previous transactions that were made in December 2006 and January 2007 and terminated at the end of 2007.

  In August this year, the Company entered into hedging transactions for a period of five months, to protect itself against a rise in the CPI, in the amount of NIS 187.5 million.

  Credit Risks

  Most of the Group’s sales are made in Israel to a large number of customers and the exposure to customer-related credit risks is consequently generally limited. The Group regularly analyzes – through credit committees that operate within the various companies – the quality of the customers, their credit limits and the relevant collateral required, as the case may be.

  The financial statements include provisions for doubtful debts, based on the existing risks on the date of the statements.

18



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

Sensitivity of €-linked instruments to changes in the € exchange rate
Sensitive Instruments
Profit (loss) from changes
Fair value
As at
Sept-30-08

Profit (loss) from changes
Revaluation
of € 10%

Revaluation
€ 5%

Devaluation
of € 5%

Devaluation
of € 10%

In NIS thousands
 
Transaction with supplier - Alstom      (130 )  (65 )  (1,305 )  65    130  
Designated deposits    9,651    4,826    96,511    (4,826 )  (9,651 )



Sensitivity to interest rate
Sensitive Instruments
Profit (loss) from changes
Fair value
As at
Sept-30-08

Profit (loss) from changes
Increase in
interest rate
of 10%

Increase in
interest rate of
5%

Decrease in
interest rate
of 5%

Decrease in
interest rate
of 10%

In NIS thousands
 
Debenture series 3      4,454    2,247    (190,092 )  (2,287 )  (4,614 )
Debenture series 4    4,533    2,282    (261,453 )  (2,313 )  (4,656 )

19



  Linkage Base Report

Below are the balance sheet items, according to linkage bases, as at September 30, 2008:

NIS millions
Unlinked
CPI-linked
In foreign
currency, or
linked thereto

Non-Monetary
Items

Total
 
Assets                        
   
Cash and cash equivalents     2.6         2.5         5.1  
Short-term deposits and investments               257.1         257.1  
Other Accounts Receivable     438.4    1.1    17.3    7.2    464.0  
Inventories                    146.1    146.1  
Current tax assets     16.3                   16.3  
Investments in Associated Companies     52.8         2.8    258.7    314.3  
Deferred taxes on income                    19.6    19.6  
Fixed assets, net                    714.6    714.6  
Other assets                    69.9    69.9  
Assets on account of employee benefits     15.8                   15.8  
Total Assets     525.9    1.1    279.7    1,216.1    2,022.8  





   
Liabilities   
Short-term credit from banks     3.8    32.9              36.7  
Other Accounts Payable     264.0         36.8         300.8  
Deferred taxes on income                    71.4    71.4  
Long-term loans, including current maturities     130.7    38.3              169.0  
Notes (debentures) - including current maturities     238.8    388.1              626.9  
Liabilities on account of employee benefits     42.6                   42.6  
Other Liabilities     32.4                   32.4  
Equity, funds and reserves                    743.0    743.0  
Total liabilities and equity     712.3    459.3    36.8    814.4    2,022.8  





   
Surplus financial assets (liabilities) as at    
September 30, 2008       (186. 4)   (458.2 )   242.9     401.7        
   
Surplus financial assets (liabilities) as at    
December 31, 2007       (80.9 )   (195.1 )   170.0     106.0        

  * As to hedging transactions associated with surplus CPI-linked liabilities, see Section F(2), above.

  Associated Companies

  Hadera Paper is exposed to various risks associated with operations in Turkey, where Hogla-Kimberly is active through its subsidiary, KCTR. These risks originate from concerns regarding the economic instability, high devaluation and elevated inflation rates that have characterized the Turkish economy in the past and that may recur and harm the KCTR operations.

G. Forward-Looking Statements

  This report contains various forecasts that constitute forward-looking statements, as defined in the Securities Law, based upon the Board of Directors’ present expectations and estimates regarding the operations of the Group and its business environment. The Company does not guarantee that the future results of operations will coincide with the forward-looking statements and these may in fact differ considerably from the present forecasts as a result of factors that may change in the future, such as changes in costs and market conditions, failure to achieve projected goals, failure to achieve anticipated efficiencies and other factors which lie outside the control of the Company. The Company undertakes no obligation to publicly update such forward-looking statements, regardless of whether these updates originate from new information, future events or any other reason.

20



H. Significant Influences as a Result of the Transition to IFRS

  As at September 30, 2008, no significant impact was recorded on the financial situation, results of operations, liquidity and sources of finance of the company as a result of the transition to IFRS, except for that stated in the update to Chapter A (Description of the Company’s Business) of the Company’s Periodical Report dated December 31, 2007 and that stated below. As to the overall accounting implications and adjustments as a result of the transition to IFRS, see Note 11 to the Company’s financial statements as at September 30, 2008.

  1. Put option on 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, MBP can exercise the option only in the most exceptional circumstances, 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 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 as part of the transition to IFRS. According to Israeli GAAP, it is not necessary to valuate a PUT 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.

  As at January 1, 2007, the liability on account of the Put option on the associated company shares is presented in the sum of approximately NIS 1,612 thousand.

  As at September 30, 2007, the liability on account of the Put option on the subsidiary company shares is presented in the sum of approximately NIS 3,169 thousand.

  As at December 31, 2007, the liability on account of the Put option on the subsidiary company shares is presented in the sum of approximately NIS 3,901 thousand.

  As a result of the valuation of the options, other expenses grew by approximately approximately NIS 1,557 and NIS 1,378 thousand – for the period of nine months and three months that ended on September 30, 2007, respectively, and grew by a sum of approximately NIS 2,289 thousand for the year ended December 31, 2007.

21



  2. Employee benefits

  In accordance with generally accepted accounting principles in Israel, the company’s liability for severance pay is calculated based on the last salary of the employee multiplied by the number of years of employment.

  Pursuant to International Standards, the provision for severance pay is calculated according to an actuarial basis taking into account the anticipated duration of employment, the value of time, the expected salary increases until retirement and the possible retirement under conditions not entitling severance pay.

  In addition, under Israeli GAAP, deposits made with regular policies or directors’insurance policies which are not in the employee’s name, but in the name of the employer, were also deducted from the company’s liability.

  Most of the Group’s employees are covered according to Section 14 of the Compensation Law. Employee deposits are not reflected in the company’s financial statements and accordingly, no provision is necessary in the books.

  However, the Company is required to pay employees differences for pension and unutilized vacation pay. These liabilities are computed in accordance with the actuary’s assessment based on an estimate of their utilization and redemption, respectively.

  In addition, net liabilities in respect of post-retirement employee benefits, which relate to defined benefit plans, are measured based on actuarial estimates and discounted amounts.

  Under IFRS, regular policies or directors’ insurance policies as aforesaid, which do not meet the definition of plan assets under IAS 19, will be presented in the balance sheet under a separate item and will not be deducted from the employer’s liability.

  According to the Company’s adopted policy, actuarial earnings are allocated to retained earnings, although on account of immateriality, they were allocated fully to the statements of income.

  Consequently, as at January 1, 2007, a net increase of approximately NIS 5,563 thousand was created in liabilities on account of employee benefit plans, in addition to an increase of approximately NIS 1,391 thousand in deferred tax assets.

  As at September 30, 2007, a net increase of approximately NIS 5,527 thousand was created in liabilities on account of employee benefit plans, in addition to an increase of approximately NIS 1,381 thousand in deferred tax assets.

  As at December 31, 2007, a net increase of approximately NIS 5,762 thousand was created in liabilities on account of employee benefit plans, in addition to an increase of approximately NIS 1,436 thousand in deferred tax assets.

22



  Labor wages expenses decreased by approximately NIS 859 thousand and approximately NIS 525 thousand for the 9-month and 3-month periods ended September 30, 2007, respectively, and increased by approximately NIS 199 thousand for the year ended December 31, 2007. Furthermore, tax expenses decreased by approximately NIS 30 thousand and increased by approximately NIS 22 thousand for the 9-month and 3-month periods ended September 30, 2007, respectively, and decreased by approximately NIS 46 thousand for the year ended December 31, 2007.

  Furthermore, assets in respect of employee benefits were reclassified from other accounts payable to non-current assets, in the amount of approximately NIS 1,132 thousand, approximately NIS 1,128 thousand and approximately NIS 1,179 thousand as at January 1, 2007, September 30, 2007 and December 31, 2007, respectively.

I. Detailed processes undertaken by the Company’s supreme supervisors, prior to the approval of the financial statements

  The Company’s Board of Directors has appointed the Company’s Audit Committee to serve as a Balance Sheet Committee and 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. The Committee consists of three directors, of which two possess accounting and financial expertise. The meetings of the Balance Sheet Committee, as well as the board meetings during which the financial statements are discussed and approved, are attended by the company’s auditing CPAs, who are instructed to present the principal findings – if there are any – that surfaced during the audit or review process, as well as by the Internal Auditor.

  The Committee conducts its examination via detailed presentations from company executives and others, including: General Manager – Avi Brenner, and CFO – Shaul Glicksberg. The material issues in the financial reports, including any extraordinary transactions – if any, the material assessments and critical estimates implemented in the financial statements, the reasonability of the data, the financial policy implemented and the changes therein, as well as the implementation of proper disclosure in the financial statements and the accompanying information. The Committee examines various aspects of risk assessment and control, as reflected in the financial statements (such as reporting of financial risks), as well as those affecting the reliability of the financial statements. In case necessary, the Committee demands to receive comprehensive reviews of matters with especially relevant impact, such as the implementation of international standards.

  The approval of the financial statements involves several meetings, as necessary: The first is held by the Audit Committee to discuss the material reporting issues in depth and at great length, whereas the second is held by the Board of Directors to discuss the actual results. Both meetings are held in proximity to the approval date of the financial statements. As to the supreme supervision regarding the impact of the transition to international financial reporting standards, the Committee held a detailed discussion regarding the said disclosure and the accounting policy implemented in its respect.


——————————————
Tzvika Livnat
Chairman of the Board of Directors

——————————————
Avi Brenner
General Manager

23



Exhibit 3

HADERA PAPER LTD
UNAUDITED CONDENSED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS
AS OF SEPTEMBER 30 , 2008



HADERA PAPER LTD

UNAUDITED CONDENSED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 2008

TABLE OF CONTENTS

Page
Condensed Consolidated Financial Statements (unaudited)  
 
    Condensed Consolidated Balance Sheets F-2
 
    Condensed Interim Consolidated Income Statements F-3
 
    Condensed Consolidated Statements of Recognized Income and expenses F-4
 
    Condensed Consolidated Statements of Cash Flows F-5-F-6
 
    Notes to the Condensed Consolidated Financial Statements F-7-F-61
 
    Schedule - Details Of Subsidiaries And Associated Companies F-62

F - 1



HADERA PAPER LTD

CONDENSED INTERIM CONSOLIDATED BALANCE SHEETS
(NIS in thousands)

September 30,
December 31,
2 0 0 8
2 0 0 7
2 0 0 7
(Unaudited)
 
Current Assets                
    Cash and cash equivalents    5,075    53,784    167,745  
    Designated deposits    257,118    -    -  
    Trade receivables    345,279    193,756    178,553  
    Other receivables    118,760    108,701    94,415  
    Current tax assets    16,262    -    -  
    Inventories    146,104    67,408    69,607  



        888,598     423,649     510,320  



Non-Current Assets    
    Property plant and equipment, net    714,605    398,047    405,231  
    Investments in associated companies    314,309    344,636    346,403  
    Deferred tax assets    19,623    21,239    20,622  
    Deferred expenses    35,538    34,107    34,900  
    Other intangible assets    32,569    1,749    1,578  
    Other assets    1,755    -    -  
    Employee benefit assets    15,841    1,128    1,179  



        1,134,240     800,906     809,913  



        2,022,838     1,224,555     1,320,233  



Current Liabilities    
    Credit from banks and others    36,735    233,685    143,015  
    Current maturities of long-term notes and long term loans    79,554    42,730    42,775  
    Trade payables    168,008    108,697    108,409  
    Other payables and accrued expenses    123,341    72,784    73,230  
    Other financial liabilities    32,380    -    -  
    Financial liabilities at fair value through profit and loss    9,474    3,169    3,901  
    Current tax liabilities    -    9,897    908  



        449,492     470,962     372,238  



Non-Current Liabilities    
    Loans from banks and others    128,725    29,490    28,127  
    Notes    587,592    188,436    158,134  
    Other financial liabilities    -    32,380    31,210  
    Deferred tax liabilities    71,452    40,840    40,515  
    Employee benefit liabilities    42,605    19,699    20,038  



        830,374     310,845     278,024  



Capital and reserves    
   Issued capital    125,267    125,257    125,267  
   Reserves    294,417    98,565    308,267  
   Retained earnings    296,308    218,926    236,437  



   capital and reserves attributed to shareholders       715,992     442,748     669,971  
   Minority Interests    26,980    -    -  



   Total capital and reserves       742,972     442,748     669,971  



        2,022,838     1,224,555     1,320,233  







Z. Livnat A. Brener S. Gliksberg
Chairman of the Board of Directors Chief Executive Officer Chief Financial and Business
Development Officer

Approval date of the interim financial statements: November 10, 2008.

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

F - 2



HADERA PAPER LTD

CONDENSED INTERIM CONSOLIDATED INCOME STATEMENTS
(NIS in thousands)

Nine months ended
September 30,

Three months ended
September 30,

Year ended
December 31,

2 0 0 8
2 0 0 7
2 0 0 8
2 0 0 7
2 0 0 7
(Unaudited)
(Unaudited)
 
Revenue      447,180    428,784    171,394    150,961    583,650  
Cost of sales    351,287    324,869    142,350    110,720    441,381  





   
Gross profit       95,893     103,915     29,044     40,241     142,269  





   
Selling and marketing expenses    28,147    23,108    12,494    8,255    31,367  
   
General and administrative expenses    38,542    26,230    18,872    7,998    36,377  
   
Other (income) expenses, net    (8,768 )  1,557    (10,213 )  1,378    4,467  





   
Total expenses       57,921     50,895     21,153     17,631     72,211  





   
Profit from ordinary operations       37,972     53,020     7,891     22,610     70,058  





   
Finance income    9,017    5,413    5,487    921    10,648  
Finance expenses    20,928    25,198    6,268    8,961    31,766  





   
Finance expenses, net       11,911     19,785     781     8,040     21,118  





Profit after financial expenses       26,061     33,235     7,110     14,570     48,940  
   
Share in profit (loss) of associated   
companies, net    36,644    (7,009 )  10,873    (1,893 )  856  





Profit before taxes on income       62,705     26,226     17,983     12,677     49,796  
   
Taxes on income    4,189    12,202    (1,231 )  4,995    18,261  





   
Profit for the period       58,516     14,024     19,214     7,682     31,535  
   
Attributed to:    
Company shareholders    59,479    14,024    20,177    7,682    31,535  
Minority interests    (963 )  -    (963 )  -    -  
   
        58,516     14,024     19,214     7,682     31,535  





   
Earning for share:   
Primary attributed to Company shareholders    11.75    3.47    3.99    1.90    7.63  





   
Fully diluted attributed to company shareholders    11.73    3.47    3.98    1.89    7.62  





   
Number of share used to compute the primary  
earnings per share    5,060,774    4,037,439    5,060,774    4,048,087    4,132,728  





   
Number of share used to compute the fully  
diluted earnings per share    5,068,780    4,044,212    5,070,134    4,054,860    4,139,533  






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

F - 3



HADERA PAPER LTD

CONDENSED INTERIM CONSOLIDATED STATEMENT
OF RECOGNIZED INCOME AND EXPENSES

(NIS in thousands)

Nine months ended
Three months ended
Year ended
September 30,
September 30,
December 31,
2 0 0 8
2 0 0 7
2 0 0 8
2 0 0 7
2 0 0 7
(Unaudited)
(Unaudited)
 
Exchange differences arising on translation of                        
foreign operations    (19,185 )  5,163    (1,240 )  801    3,810  
Profit (loss) on cash flow hedges    (17,157 )  (149 )  (12,973 )  (348 )  (652 )
Actuarial profit (loss) and defined  
 benefit plans    (600 )  -    (450 )  -    -  
Reevaluation from step acquisition    17,288    -    17,288    -    -  





Net income recognized directly in equity       (19,654 )   5,014     2,625     453     3,158  





Transfer to profit or loss from equity on cash  
flow hedges, net    1,672    94    584    20    17  
Profit for the period    58,516    14,024    19,214    7,682    31,535  





Total recognized income and expense for the period       40,534     19,132     22,423     8,155     34,710  





   
Attributed to:   
Company shareholders    41,638    19,132    23,527    8,155    34,710  
Minority interests    (1,104 )  -    (1,104 )  -    -  





        40,534     19,132     22,423     8,155     34,710  






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

F - 4



HADERA PAPER LTD

CONDENSED INTERIM CONSOLIDATED CASH FLOWS STATEMENTS
(NIS in thousands)

Nine months ended
Three months ended
Year ended
September 30,
September 30,
December 31,
2 0 0 8
2 0 0 7
2 0 0 8
2 0 0 7
2 0 0 7
(Unaudited)
(Unaudited)
 
Cash flows - operating activities                        
   Operating profit for the period    58,516    14,024    19,214    7,682    31,535  
   Taxes on income recognized in profit  
   and loss    4,189    12,202    (1,231 )  4,995    18,261  
   Finance expenses recognized in profit  
   and loss    11,911    19,785    781    8,040    21,118  
   Capital loss on disposal of property,  
   plant and equipment    (269 )  (81 )  (419 )  45    1,403  
   Capital loss on sale of investment in  
   associated company    -    28    -    -    28  
   Share in loss (profit) of associated  
     companies, net    (36,644 )  7,009    (10,873 )  1,893    (856 )
   Depreciation and amortization    39,409    26,231    17,136    8,850    36,138  
   Share based payments expense    3,455    -    1,458    -    -  
   Gain from negative goodwill    (14,664 )  -    (14,664 )  -    -  





        65,903     79,198     11,402     31,505     107,627  





   
Changes in assets and liabilities:    
   Decrease (Increase) in trade and other  
   receivables    21,944    (35,594 )  4,748    (16,798 )  (5,416 )
   Decrease (Increase) in inventories    2,783    (5,299 )  2,377    (2,726 )  (7,498 )
   Increase (Decrease) in trade payables  
   and other payables    (24,664 )  17,536    (18,372 )  8,095    24,631  
   Increase (decrease) in other long term  
   liabilities    (5,159 )  486    (5,512 )  (837 )  268  





        (5,096 )   (22,871 )   (16,759 )   (12,266 )   11,985  





   
        Tax Payments    (9,927 )  (23,855 )  (427 )  (4,196 )  (27,755 )





   Net cash generated by    
     (used in) operating activities       50,880     32,472     (5,784 )   15,043     91,857  






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

F - 5



HADERA PAPER LTD

CONDENSED INTERIM CONSOLIDATED CASH FLOWS STATEMENTS
(NIS in thousands)

Nine months ended
September 30,

Three months ended
September 30,

Year ended
December 31,

Note
2 0 0 8
2 0 0 7
2 0 0 8
2 0 0 7
2 0 0 7
(Unaudited)
(Unaudited)
 
Cash flows - investing activities                            
   Acquisition of property plant and equipment    6    (178,633 )  (61,598 )  (50,445 )  (19,487 )  (83,363 )
   Acquisition of subsidiaries    5    (70,167 )  -    (70,167 )  -    -  
   Proceeds from disposal of Property  
   plant and equipment         719    30,811    535    -    31,415  
   Investment in designated deposits, net         (261,529 )  -    (188,503 )  -    -  
   Interest received         4,935    1,416    2,511    900    1,716  
   Prepaid leasing expenses         (1,421 )  (1,637 )  (24 )  (1,637 )  (2,596 )
   Acquisition of other assets         (1,750 )  -    (1,750 )  -    -  
   Associated companies:  
    Granting of loans         (422 )  -    (422 )  -    (318 )
   Collection of loans         -    -    -    -    2,893  
   Proceeds from sale of investment of  
   associated companies         -    27,277    -    -    27,277  





   Net cash used in investing activities             (508,268 )   (3,731 )   (308,265 )   (20,224 )   (22,976 )





   
Cash flows - financing activities    
   Proceeds from private share allocating         -    -    -    -    211,645  
   Proceeds from issuing notes         424,728    -    424,728    -    -  
   Short-term bank credit - net         (152,364 )  30,682    (115,625 )  8,483    (59,988 )
   Borrowings received from banks         55,000    -    20,000    -    -  
   Repayment of borrowings from banks         (17,761 )  (3,894 )  (12,845 )  (1,308 )  (5,212 )
   Deferred issuance expenses         -    -    247    -    -  
   Interest Paid         (7,381 )  (10,023 )  (2,622 )  (3,015 )  (24,994 )
   Redemption of notes         (7,192 )  (6,825 )  -    (2,297 )  (37,167 )





   Net cash generated by financing    
       activities             295,030     9,940     313,883     1,863     84,284  





   Increase in cash and cash equivalents             (162,358 )   38,681     (166 )   (3,318 )   153,165  
   Cash and cash equivalents - beginning of  
   period         167,745    13,621    5,553    57,426    13,621  
   Net foreign exchange difference         (312 )  1,482    (312 )  (324 )  959  





   Cash and cash equivalents - end of period             5,075     53,784     5,075     53,784     167,745  






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

F - 6



HADERA PAPER LTD

NOTES TO UNAUDITED CONDENSED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 2008

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 9.

  B. Definitions:

The Company - Hadera Paper Limited.
 
The Group - the Company and its Subsidiaries.
 
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.
 
Affiliated 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.
 
Related Parties - as defined by IAS 24.
 
Interested Parties - as defined in the Israeli Securities Regulations (Presentation of
    Financial Statements), 1993.
 
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.

NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

  A. Applying International Accounting Standards (IFRS)

  (1) Basis of preparation

  The condensed interim financial statements have been prepared using accounting policies consistent with International Financial Reporting Standards and in accordance with International Accounting Standard (IAS) 34 – “Interim Financial Reporting”.

  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 condensed interim financial statements and in accordance to the opening balance sheet.

F - 7



HADERA PAPER LTD

NOTES TO UNAUDITED CONDENSED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 2008

NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont.)

  A. Applying International Accounting Standards (IFRS) (Cont.)

  (1) Basis of preparation (Cont.)

  The unaudited condensed interim consolidated financial statements as of September 30, 2008 and for the nine and three months then ended (“interim financial statements”) of the Company and subsidiaries should be read in conjunction with the audited consolidated financial statements of the Company and subsidiaries as of December 31, 2007 and for the year then ended, including the notes thereto including the note regarding the adoption of IFRS.

  (2) First term 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 abovementioned, the condensed interim financial statements, as of March 31, 2008 and for the three months then ended, including all previous reporting periods have been prepared under accounting policies consistent with International Financial Reporting Standards and interpretations published by the International Accounting Standard Board (IASB) and in accordance with International Accounting Standard (IAS) 34 Interim Financial Reporting.

  In these condensed interim 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 condensed interim financial statements. The Company implemented the IFRS standards which have been published as of the preparation date of the condensed interim 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 capital instruments 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.

F - 8



HADERA PAPER LTD

NOTES TO UNAUDITED CONDENSED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 2008

NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont.)

  A. Applying International Accounting Standards (IFRS) (Cont.)

  (2) First term IFRS standards adoption (cont.)

  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 cost or undepreciated cost according to the IFRS, adjusted for changes such as changes in the index of prices.

  Through December 31, 2007, 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.

  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 11 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.

  B. The condensed Financial Statements were prepared in accordance with section D of the Israeli Securities Regulations (Periodic and Immediate Reports), 1970.

  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 on 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 edited 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 and intangibles assets are presented at the lower of the cost less accumulated amortizations and the recoverable amount.

  Liabilities to employees as described in note 2V below.

F - 9



HADERA PAPER LTD

NOTES TO UNAUDITED CONDENSED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 2008

NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont.)

  D. Foreign currencies

  The individual financial statements of each Group entity 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 2X (3) as follows with regard to the exchange rate and the changes in them during the reported period.

  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 retranslated at the rates prevailing at the balance sheet date. Non-monetary items carried at fair value that are denominated in foreign currencies are retranslated 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 2P below.

  For the purpose of presenting consolidated financial statements, the assets and liabilities of the Group’s foreign operations of affiliated 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.

  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. 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 2Y below.

F - 10



HADERA PAPER LTD

NOTES TO UNAUDITED CONDENSED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 2008

NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont.)

  E. 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 capital 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.

  F. 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 capital 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 step acquisition”, 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(e)2 above.

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

F - 11



HADERA PAPER LTD

NOTES TO UNAUDITED CONDENSED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 2008

NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont.)

  G. 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 is not control or joint control over those policies.

  The financial statements of the consolidated companies adopted to the accounting policies of 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. With regard to the group’s examination for impairment in the investment in affiliated companies in accordance to IAS 36 see note 2K below.

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

  H. Goodwill

  Goodwill arising on the acquisition of a subsidiary or a jointly controlled entity 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 or jointly controlled entity 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, the remaining impairment loss is allocated 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 or a jointly controlled entity, the attributable amount of goodwill is included in the determination of the profit or loss on disposal.

F - 12



HADERA PAPER LTD

NOTES TO UNAUDITED CONDENSED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 2008

NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont.)

  I. Property, plant and equipment

  Property, plant and equipments are tangible items, which are held for use in the manufacture or supply of goods or services, or leased 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 – a 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.

  Spare parts which are not used on a current basis are designated for use in the context of specific items of fixed assets, where necessary. The reason for holding them 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 the light of this, spare parts that are not being used currently are presented with fixed assets and are depreciated beginning from 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 lives. The depreciation starts once the asset is ready for use and takes into consideration of the anticipated scrap value at the end of the asset’s useful lives.

The annual depreciation and amortization rates are:
Years
 
   Buildings 10-50
   Machinery and equipment 7-20
   Motor vehicles 5-7
   Office furniture and equipment 3-17

  Scrap value, depreciation method and the assets useful lives are being reviewed by management 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.

F - 13



HADERA PAPER LTD

NOTES TO UNAUDITED CONDENSED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 2008

NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont.)

  J. Intangible assets

  (1) Intangible assets, except for goodwill

  Intangible assets are defined as identifiable, non-monetary assets without physical substance.

  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 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 2h.

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

Customer relations 10 years

  (2) Intangible assets acquired under a business combination

  Intangible assets acquired under a business combination are identified and recognized separately from goodwill when the 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 2Y.

F - 14



HADERA PAPER LTD

NOTES TO UNAUDITED CONDENSED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 2008

NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont.)

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

  At each balance sheet date, the Group examines the book value 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 loss from impairment of value that was created, if at all. If it is not possible to estimate the recoverable value of an individual asset, the Group estimates the recoverable value 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 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 to as an expense in the statement of income.

  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 the estimate of the up to date 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 2h. As to the impairment of investment in an affiliate company, see note 2g

  L. 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 assed to the costs of those assets, until such time as 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 2Y below.

F - 15



HADERA PAPER LTD

NOTES TO UNAUDITED CONDENSED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 2008

NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont.)

  M. 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 Based on overhead absorption costing.
 
Products Based on weighted-average basis.

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

  N. 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 this category arises from the reason of the financial assets holding and it is determined at its initial recognition.

F - 16



HADERA PAPER LTD

NOTES TO UNAUDITED CONDENSED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 2008

NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont.)

  N. 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 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 - 17



HADERA PAPER LTD

NOTES TO UNAUDITED CONDENSED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 2008

NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont.)

  O. 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 2Y (2) as follows.

  (2) Options to sell sales of an investee

  The company has an obligation that is derived from an option that it gave for the sale of shares of an investee, which provide the holder thereof with the right to sell its holdings in the investee 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 11 F (4) below for further details on the conditions of the option.

  (3) Other financial liabilities

  Other financial liabilities (capital note issued to an investee), 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.

  For the treatment at CPI-linked other financial liabilities see note 2O (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 under the statement of income. 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. This is also the approach used under generally accepted accounting principles in Israel.

F - 18



HADERA PAPER LTD

NOTES TO UNAUDITED CONDENSED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 2008

NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont.)

  P. 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 Group implements cash flow hedge accounting both in respect of future transactions, foreign currency deposits and options transactions that are designed to secure payments for the acquisition of fixed assets in foreign currency and 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.

  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.

F - 19



HADERA PAPER LTD

NOTES TO UNAUDITED CONDENSED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 2008

NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont.)

  P. 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 transaction 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.

  Q. 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 - 20



HADERA PAPER LTD

NOTES TO UNAUDITED CONDENSED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 2008

NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont.)

  R. Leasing

  Leases are classified as finance leases whenever the term of the lease transfer substantially all the risks and rewands 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 with “long term receivables”, 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, and, pursuant to IAS 40, have been classified as operating leases and not as investment real estate.

  S. 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.

  T. 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 7.

  The fair value determined at the grant date of the equity-settled share-based payments is expensed on a straight-line basis over the vesting period, based on the Group’s estimate of equity instruments that will eventually vest. At each balance sheet date, the Group revises its estimate of the number of equity instruments expected to vest. The impact of the revision of the original estimates, if any, is recognized in profit or loss over the remaining vesting period, with a corresponding adjustment to the equity-settled employee benefits reserve.

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

F - 21



HADERA PAPER LTD

NOTES TO UNAUDITED CONDENSED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 2008

NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont.)

  U. Taxation

  (1) General

  Income tax expense represents the sum of the tax currently payable and change in deferred tax excluding deferred tax as result of transaction that was attribute directly to the equity.

  (2) Current tax

  The tax currently payable is based on taxable profit for the year. Taxable profit differs from profit as reported in the income statement 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. The Group’s liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the balance sheet date.

  (3) Deferred tax

  Deferred tax is recognised on differences between the carrying amounts of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of taxable profit, and is accounted for using the balance sheet liability method. 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. Such assets and liabilities are not recognised if the temporary difference arises from goodwill or from the initial recognition (other than in a business combination) of other assets and liabilities in a transaction that affects neither the taxable profit nor the accounting profit.

  The carrying amount of deferred tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered.

  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 the manner in which the Group expects, at the reporting date, to recover or settle the carrying amount of its assets and liabilities.

  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 - 22



HADERA PAPER LTD

NOTES TO UNAUDITED CONDENSED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 2008

NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont.)

  V. Employee benefits

  (1) Post-Employment Benefits

  The Group’s post-employment benefits include: benefits to retirees and liabilities for severance benefits. The Group’s post-employment benefits are classified as either defined contribution plans or defined benefit plans. Most of the Group’s employees are covered by Article 14 to the Severance Law and therefore the Group’s companies makes regular deposits (contributions) in the name of their employees and do not have an obligation to pay further contributions. 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 - 23



HADERA PAPER LTD

NOTES TO UNAUDITED CONDENSED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 2008

NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont.)

  V. 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.

  W. 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).

  X. 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”):

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

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

CPI
"in respect of"
(in points)

 
September 30, 2008      3.421    5.000    199.54  
September 30, 2007    4.013    5.690    189.1  
December 31, 2007    3.846    5.659    191.15  

Increase (decrease) during the:
%
%
%
 
Three months ended September 30, 2008      (2.1 )  (5.4 )  2.0  
Three months ended September 30, 2007    (5.6 )  (0.4 )  1.3  
Nine months ended September 30, 2008    (11.1 )  (12.1 )  4.4  
Nine months ended September 30, 2007    (5.0 )  2.3    2.3  
Year ended December 31, 2007    (9.0 )  1.7    3.4  

F - 24



HADERA PAPER LTD

NOTES TO UNAUDITED CONDENSED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 2008

NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont.)

  Y. Adoption of new and revised Standards and interpretations

  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 will be effective for reporting periods beginning from January 1, 2009. The standard permits earlier application.

  The effect of adopting IAS 1 (amended) on the Group’s financial statements is in presenting the structure of the financial statements in accordance with the requirements of the standard.

  IAS 23 (Amended) “Borrowing Costs”

  The standard stipulates the accounting treatment of borrowing costs. In the context of the amendment to this standard, the possibility of immediately recognizing borrowing costs related to assets with an uncommon period of eligibility or construction in the statement of operations was cancelled. The standard will apply to borrowing costs that relate to eligible assets as to which the capitalization period began from January 1, 2009. The standard permits earlier implementation.

  The company’s management estimates that the implementation of the Standard is not expected to have a material effect on the Company’s financial statements.

  IFRS 8, Operating Segments

  The standard, which replaces IAS 14, details how an entity must report on data according to segments in the annual financial statements. The standard, among other things, stipulates that segmental reporting of the company will be based on the information that management of the company uses for purposes of evaluating performance of the segments, and for purposes of allocating resources to the various operating segments. The standard will apply to annual reporting periods commencing on January 1, 2009, with restatement of comparative figures for prior reporting periods. The standard permits earlier adoption.

  At this stage, the management of the Group is unable to assess the effect of the standard on its financial condition and operating results.

F - 25



HADERA PAPER LTD

NOTES TO UNAUDITED CONDENSED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 2008

NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont.)

  Y. Adoption of new and revised Standards and interpretations (cont.)

  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 (cont.)

  IAS 27 (Amended) “Consolidated and Separate Financial Statements “

  The standard prescribes the rules for the accounting treatment of consolidated and separate financial statements. Among other things, the standard stipulates that transactions with minority shareholders, in the context of which the company holds control of the subsidiary before and after the transaction, will be treated as capital transactions. In the context of transactions, subsequent to which the company loses control in the subsidiary, the remaining investment is to be measured as of the date that control is lost, at fair value, with the difference as compared to book value to be recorded to the statement of operations. The minority interest in the losses of a subsidiary, which exceed its share in shareholders’ equity, will be allocated to it in every case, while ignoring its obligations and ability to make additional investments in the subsidiary.

  The provisions of the standard apply to annual financial reporting periods which start on January 1, 2010 and thereafter. Earlier adoption is permitted, on the condition that it will be done simultaneous with early adoption of IFRS 3 (amended). The standard will be implemented retrospectively, excluding a number of exceptions, as to which the provisions of the standard will be implemented prospectively

The company’s management estimates that the implementation of the Standard is not expected to have a material effect on the Company’s financial statements.

  IFRS 3 (Amended) “Business Combinations”

  The new standard stipulates the rules for the accounting treatment of business combinations. Among other things, the standard determines measurement rules for contingent consideration in business combinations which is to be measured as a derivative financial instrument. The transaction costs directly connected with the business combination will be recorded to the statement of operations when incurred. Minority interests will be measured at the time of the business combination to the extent of their share in the fair value of the assets, including goodwill, liabilities and contingent liabilities of the acquired entity, or to the extent of their share in the fair value of the net assets, as aforementioned, but excluding their share in goodwill.

  As for business combinations where control is achieved after a number of acquisitions (acquisition in stages), the earlier purchases of the acquired company will be measured at the time that control is achieved at their fair value, while recording the difference to the statement of operations.

  The standard will apply to business combinations that take place from January 1, 2010 and thereafter. Earlier adoption is possible, on the condition that it will be simultaneous with early adoption of IAS 27 (amended).

  The company’s management estimates that the implementation of the Standard is not expected to have a material effect on the Company’s financial statements.

F - 26



HADERA PAPER LTD

NOTES TO UNAUDITED CONDENSED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 2008

NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont.)

  Y. Adoption of new and revised Standards and interpretations (cont.)

  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 (cont.)

  IFRIC 13, Customer Loyalty Programs

  The clarification stipulates that transactions for the sale of goods and services, for which the company confers reward grants to its customers, will be treated as multiple component transactions and the payment received from the customer will be allocated between the different components, based upon the fair value of the reward grants. The consideration attributed to the grant will be recognized as revenue when the reward grants are redeemed and the company has made a commitment to provide the grants.

  The directives of the clarification apply to annual reporting periods commencing on January 1, 2009. Earlier implementation is permissible.

  At this stage, the management of the Group is unable to assess the effect of the standard on its financial condition and operating results.

  Amendment to IFRS 2, Share Based Payment- Vesting and Revocation Conditions

  The amendment to the standard stipulates the conditions under which the measurement of fair value must be considered on the date of the grant of a share based payment and explains the accounting treatment of instruments without terms of vesting and revocation. The provisions of the standard apply to annual financial reporting periods which start on January 1, 2009 and thereafter. Earlier adoption is permitted.

  At this stage, the management of the Group is unable to assess the effect of the standard on its financial condition and operating results.

  Amendment to IAS 32, Financial Instruments: Presentation, and IAS 1, Presentation of Financial Statements

  The amendment to IAS 32 changes the definition of a financial liability, financial asset and capital instrument and determines that certain financial instruments, which are exercisable by their holder, will be classified as capital instruments.

  The provisions of the standard apply to annual financial reporting periods which start on January 1, 2009 and thereafter. Earlier adoption is permitted.

  At this stage, the management of the Group is unable to assess the effect of the standard on its financial condition and operating results.

F - 27



HADERA PAPER LTD

NOTES TO UNAUDITED CONDENSED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 2008

NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont.)

  Y. Adoption of new and revised Standards and interpretations (cont.)

  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 (cont.)

  Improvement to International Financial Reporting Standards (IFRS) 2008

  In May 2008 the IASB published a series of improvements for IFRS:

  Improvements include amendments to some of the standards, which change the manner of presentation, recognition and measurement of different items in the financial statements.

  In addition, amendments have been made to terms that have a negligible impact, if any, on the financial statements.

  Most of the amendments will become effective as of the annual reporting period commencing January 1, 2009 or thereafter, with an option for early adoption. The implementation of most amendments will be carried out by retrospective adjustment of comparative figures.

  Some of the amendments to the standards are expected, under relevant circumstances, to have a material impact on the financial statements. The prominent amendments are the new or amended requirements with respect to the following:

  Amendment to IAS 28 “Investments in Associated Companies”, which stipulates that the impairment of investment in an associated company shall be treated as an impairment of a single asset and that the amount of impairment can be cancelled in subsequent periods.

  The amendment will apply to annual periods commencing on January 1, 2009. This amendment allows for the early implementation while implementing the amendments relating to Section 4 in IAS 32 “Financial Instruments: Presentation”, Section 1 in IAS 21 “Rights in Joint Transactions” and Section 3 in IFRS 7 “Financial Instruments: Disclosure”. The amendments can be applied retrospectively.

  At this stage the Group’s management cannot assess the effect of implementation of the amendment on its financial statements.

  Amendment IAS 38 “Intangible Assets”, which stipulates that payments in respect of advertising and sales promotion activities will be recognized as an asset until the date in which the entity has the right to access the acquired goods or in the event of a receipt of services,the date of receipt of the services.

  The amendment will apply to annual periods commencing on January 1, 2009 and shall be carried out retroactively. The amendment allow for early adoption.

  The Group’s management estimates that the effect of implementing the amendment on the Group’s financial statements is immaterial.

F - 28



HADERA PAPER LTD

NOTES TO UNAUDITED CONDENSED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 2008

NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont.)

  Y. Adoption of new and revised Standards and interpretations (cont.)

  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 (cont.)

  Improvement to International Financial Reporting Standards (IFRS) 2008 (Cont.)

  Amendment to IAS 19 – Employee Benefits

  a. Curtailments and negative past service costs

  Pursuant to the current version of the standard, defined benefit plan amendments, which reduce existing benefits, meet the definitions of both “curtailments” and “negative past service costs”.

  IAS 19 requires recognition of curtailments when they occur, together with any related actuarial gains and losses that the entity had not previously recognized. An entity recognizes negative past service costs over the average period until the reduced portion of the benefits becomes vested.

  In view of the aforesaid, there are different practices for the accounting treatment of plan amendments that reduce existing benefits.

  The amendment changes the definitions in the Standard and makes the following distinction: curtailments may be created when reducing the degree of link between future wage increases and benefits to be paid in respect of past services. In contrast, when the plan amendment relates to past services and leads to a reduction in the present value of defined plan obligation, the amendment will meet the definition of negative past service cost. That is, the amendment stipulates that when a plan amendment reduces the benefits to which the employee is entitled, the effect of the reduction in respect of future services falls under the definition of curtailment, whereas the reduction in benefits to which the employee is entitled in respect of past services constitutes negative past service costs.

  The amendments will apply on changes in benefits that occurred as of January 1, 2009 and are to be applied prospectively. Early implementation is permitted.

  b. Plan management costs

  The amendment cancels the existing inconsistency and changes the definition of “Return on Plan Assets”.

  The defined was amended so as to clarify that plan management costs should be deducted from the calculation of the return on plan assets only to the extent that they are not included in the actuarial assumptions used to measure the liabilities in respect of a defined benefit.

  The amendment shall apply to annual reporting periods commencing on January 1, 2009 and shall be applied prospectively. Early implementation is permitted.

F - 29



HADERA PAPER LTD

NOTES TO UNAUDITED CONDENSED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 2008

NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont.)

  Y. Adoption of new and revised Standards and interpretations (cont.)

  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 (cont.)

  Improvement to International Financial Reporting Standards (IFRS) 2008 (Cont.)

  Amendment to IAS 19 – Employee Benefits (Cont,)

  c. Amendments to the definitions of Short-term Employee Benefits and Other Long-term Employee Benefits

  Short-term employee benefits are employee benefits which fall due wholly within twelve months after the end of the period in which the employees render the related service.

  Other long-term employee benefits are employee benefits which do not fall due wholly within twelve months after the end of the period in which the employees render the related service.

  As a result, there was a lack of clarity regarding the method of classification of employee benefits, such as absence of payment to which the employee is entitled, but which is not expected to be used within 12 months of the end of the period.

  Under the amendment, the definitions of short-term employee benefits and “long-term employee benefits” were changed so as to determine that for the purpose of establishing whether the employee benefit is short term or long term, the expected date of using the benefit should be examined. As a result, entities will have to examine the need to bifurcate employee benefits, such as entitlement to compensation in respect of short-term absences, into the aforementioned two categories.

  The amendment shall apply to annual reporting periods commencing on January 1, 2009 and shall be applied prospectively. Early implementation is permitted.

  IFRIC 15 "Agreements for the Construction of Real Estate"

  The interpretation establishes the accounting treatment of revenues and related expenses of entities that build real estate independently or through subcontractors, and the provision of goods or services that are included under agreements for the construction of real estate.

  The interpretation deals with the question: is an agreement for the construction of real estate covered by IAS 11 “construction contracts” or by IAS 18 “revenue”. Revenues from agreements, which, in accordance with the provisions of the interpretation, are covered by IAS 11, shall be recognized in accordance with the percentage of completion method of accounting. Revenues from agreements which, in accordance with the provisions of the interpretation, constitute agreements for the sale of goods will be recognized on the date of transfer of the risks and benefits to the buyer, while revenues from agreements for the rendering of services will be recognized by reference to the stage of completion of the transaction at the balance sheet date.

  The provisions of the interpretation apply to annual reporting periods commencing on January 1, 2009. An early adoption is permitted.

  The Group’s management estimates that the implementation of the interpretation will not have any impact on the financial statements of the Group.

F - 30



HADERA PAPER LTD

NOTES TO UNAUDITED CONDENSED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 2008

NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont.)

  Y. Adoption of new and revised Standards and interpretations (cont.)

  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 (cont.)

  Improvement to International Financial Reporting Standards (IFRS) 2008 (Cont.)

  IFRIC 16 "Hedges of a Net Investment in a Foreign Operation"

  This interpretation establishes the nature of the hedged risk and the amount of the hedged item under the hedges of a net investment in a foreign operation. In addition, the interpretation stipulates that the hedging instrument may be held by any entity within the group, and the amount to be reclassified from equity to profit or loess when the entity disposes of the foreign operation, for which the accounting method of hedges of a net investment in a foreign operation has been implemented.

  The provisions of the interpretation apply to annual reporting periods commencing on January 1, 2009. An early adoption is permitted.

  The Group’s management estimates that the implementation of the interpretation will not have any impact on the financial statements of the Group.

  Amendment of IFRS 1 “First-time adoption of International Financial Reporting Standards” and IAS 27 “Consolidated and Separate Financial Statements

  This amendment stipulates, inter alia, the method of measurement of investments in subsidiaries, companies under joint control and associated companies on the date of the first-time adoption of IFRS and the method of recognition of revenue from dividends received from said companies. The provisions of the amendment apply to the separate financial statements of the entity.

The provisions of the amendment apply to annual reporting periods commencing on January 1, 2009. An early adoption is permitted.

  At this stage the Group’s management cannot assess the effect of implementation of the amendment on its financial position and operating results.

  Amendment of IAS 39 “Financial instruments: Recognition and Measurement” and IFRS 7 “Financial Instruments: Disclosure”

  The standard prescribes that certain financial assets do not qualify for designation as “Fair Value through Profit or Loss” under certain circumstances, and when there is a change in the manner in which the entity manages and evaluates the performance of a group of assets. The amendment further stipulates that certain financial assets that are presented as available-for-sale financial assets can be designated as loans and receivables and when there is a change in the manner in which the entity manages and evaluates the performance of a group of assets. The provisions of the amendment were applied prospectively.

  The provisions of the amendment were applied to reclassifications that were made on July 1, 2008 or thereafter. The Company’s management estimates that the implementation of the Standard will not have any effect on the Group’s financial statements.

F - 31



HADERA PAPER LTD

NOTES TO UNAUDITED CONDENSED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 2008

NOTE 3 CRITICAL ACCOUNTING JUDGEMENTS AND KEY SOURCES OF ESTIMATION UNCERTAINTY

  A. General

  In the application of the Group’s accounting policies, which are described in Note 2 above, 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.

  B. Critical judgments in applying accounting policies

  The following are the critical judgments, apart from those involving estimations (see below), that the management have made in the process of applying the entity’s accounting policies and that have the most significant effect on the amounts recognized in 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.

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

  Measuring provisions and contingent liabilities and contingent liabilities- see C(1) below.

  Measuring obligation for defined benefits and employee benefits- see C(2) below.

  Measuring share based payments- see NOTE 7 below.

  Measuring the fair value of financial instruments – see C(3) below.

  Measuring the fair value of an option to sell shares of an associated company – see C (4) below.

  Measuring the fair value on account of the allocation of the cost of acquisition – see C(5) below.

  C. Key sources of estimation uncertainty.

  1. Provisions for legal proceeding

  Against the company and its subsidiaries there are 5 claims pending and open in a total amount of approximately NIS 7,980 thousands (September 30, 2007: NIS 23,124 thousands, December 31, 2007: NIS 23,124 thousands), in respect of them a provision was credited in a sum of NIS 28 thousands (September 30, 2007: NIS 300 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 expound their legal position and the probabilities of the company as regards the subject of the claim, 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.

F - 32



HADERA PAPER LTD

NOTES TO UNAUDITED CONDENSED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 2008

NOTE 3 CRITICAL ACCOUNTING JUDGEMENTS AND KEY SOURCES OF ESTIMATION UNCERTAINTY (Cont.)

  C. Key sources of estimation uncertainty (Cont.)

  1. Provisions for legal proceeding (Cont.)

  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 affect the company’s financial condition and operating results.

  2. Employee benefits

  The present value of the company’s obligation for the payment of benefits to pensioners and severance pay to employees that are not covered under Section 14 to the Severance Pay Law is based upon a great amount of data, which are determined on the basis of an actuarial estimation, through the utilization of a large number of assumptions, including the capitalization rate. Changes in the actuarial assumptions could affect the book value of the obligation of the company for employees’ benefits. 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.

  3. Fair value of financial instruments

  The company’s management exercised discretion in the selection of proper valuation techniques for financial instruments, which do not have a quoted market price in an active market. The valuation techniques used by the company’s management are those implemented by market participants. The fair value of other financial instruments is established based on he discounted cash flows expected to flow from them, based on assumptions supported by anticipated market prices and rates. The estimated fair value of financial instruments not listed for trading in an active market includes several assumptions that are not supported by anticipated market prices and rates. The book value of the financial instruments that are estimated through valuation techniques as of September 30, 2008 amounts to obligation in a sum of NIS 11,822 thousand and as of December 31, 2007 amounts to asset in a sum of NIS 4,412 thousand.

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

  As stated in note 2O (2), 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 objective 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.

F - 33



HADERA PAPER LTD

NOTES TO UNAUDITED CONDENSED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 2008

NOTE 3 CRITICAL ACCOUNTING JUDGEMENTS AND KEY SOURCES OF ESTIMATION UNCERTAINTY (Cont.)

  C. Key sources of estimation uncertainty (Cont.)

  5. Measurement at fair value on account of the allocation of the cost of acquisition

  For the purpose of allocating the cost of acquisition and determining the fair value of the tangible and intangible assets and the liabilities of the consolidated subsidiaries at the date of consolidation, the Company’s management based itself primarily on valuations prepared by external and independent real-estate appraisers and assessors, possessing the required know-how, 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 employed, 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 employing 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 fair value on account of the allocation of cost of acquisition, see Note 5.

NOTE 4 SEGNIFICANT TRANSACTIONS AND EVENTS

  During the first quarter of the year, the company signed material agreements with various suppliers in connection with the construction of a new production system for packaging paper (Machine 8).

  On January 14, 2008, the Board of Directors of the company decided to approve the issuance of options to executive employees, see NOTE 7 below.

  On May 20, 2008 an affiliated company, Hogla-Kimberly Ltd received from the Israeli tax authority compensation in the amount of about NIS 4,500 thousands. The compensation is due to loss of earnings during a security situation that occurred in July 2006 in northern Israel and caused the affiliated company to partially stop its manufacturing activity in its Naharia plant. The affiliated company will record a pre tax income for the second quarter of 2008. The Company’s share in the compensation mention above is approximately NIS 2,250 thousands.

F - 34



HADERA PAPER LTD

NOTES TO UNAUDITED CONDENSED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 2008

NOTE 4 SEGNIFICANT TRANSACTIONS AND EVENTS (Cont.)

  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 (Series 3 – CPI linked) debentures issued in return for approximately NIS 187,500 thousands bearing an interest rate of 4.65%. 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%. 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.

F - 35



HADERA PAPER LTD

NOTES TO UNAUDITED CONDENSED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 2008

NOTE 5 ACQUISITION OF SUBSIDIARIES

  a. Acquisition of Subsidiaries and Associated Companies

  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 Authority at 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).

  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.

Main Activity
Acquisition Date
Rate of regular
shares purchase

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

                  74,695  


  * NIS 400 thousands from this amount haven’t been paid, as for September 30, 2008.

F - 36



HADERA PAPER LTD

NOTES TO UNAUDITED CONDENSED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 2008

NOTE 5 ACQUISITION OF SUBSIDIARIES (Cont.)

  b. Analysis of the assets and liabilities were acquired

Carmel Container Systems
Frenkel C.D.
Total fair value
in acquisition of
consolidated
companies

Book Value
Adjustments
to fair value

Fair value at
acquisition

Book Value
Adjustments to
fair value

Fair value at
acquisition

NIS in
thousands

NIS in
thousands

NIS in
thousands

NIS in
thousands

NIS in
thousands

NIS in
thousands

NIS in
thousands

 
Current Assets                                
Cash and cash equivalents    4,028    -    4,028    100    -    100    4,128  
Trade receivables    164,106    -    164,106    41,406    -    41,406    205,512  
Other receivables    3,512    -    3,512    4,785    -    4,785    8,297  
Inventories    54,078    743    54,821    24,201    258    24,459    79,280  
Non-Current Assets   
Property plant and equipment    64,627    38,862    103,489    45,405    3,697    49,102    152,591  
Intangibles assets    -    31,917    31,917    9,194    (8,482 )  712    32,629  
Other assets    1,755    -    1,755    -    -    -    1,755  
Employee benefit assets    14,610    -    14,610    879    -    879    15,489  
Current Liabilities   
Credit from banks and others    (14,771 )  -    (14,771 )  (31,313 )  -    (31,313 )  (46,084 )
Current maturities to long term loans    (21,347 )  -    (21,347 )  (4,154 )  -    (4,154 )  (25,501 )
Trade payables    (59,082 )  -    (59,082 )  (30,993 )  -    (30,993 )  (90,075 )
Other payables and accrued expenses    (14,287 )  -    (14,287 )  (8,566 )  -    (8,566 )  (22,853 )
Non-Current Liabilities   
Long-term liabilities from banks    (56,214 )  -    (56,214 )  (16,338 )  -    (16,338 )  (72,552 )
Deferred tax assets    (8,204 )  (17,953 )  (26,157 )  (3,473 )  (1,064 )  (4,537 )  (30,694 )
Employee benefit liabilities    (25,418 )  -    (25,418 )  (2,534 )  -    (2,534 )  (27,952 )







     107,393    53,569    160,962    28,599    (5,591 )  23,008    183,970  
Minority interest in acquisition    (11,474 )  (5,732 )  (17,206 )  (13,521 )  2,643  (10,878 )  (28,084 )
Capital reserve from reevaluation from step  
Acquisition    -    (19,408 )  (19,408 )  -    2,120    2,120    (17,288 )
Negative goodwill carried to the income statement    -    (14,664 )  (14,664 )  -    -    -    (14,664 )
Goodwill create at acquisition    -    -    -    599    599    599  
Investment at affiliated companies before acquisition  
of control    -    (41,755 )  (41,755 )  -    (8,083 )  (8,083 )  (49,838 )







Cost of acquisition    95,919    (27,990 )  67,929    15,078    (8,312 )  6,766    74,695  








F - 37



HADERA PAPER LTD

NOTES TO UNAUDITED CONDENSED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 2008

NOTE 5 ACQUISITION OF SUBSIDIARIES (Cont.)

  c. Net cash flow upon acquisition

For the period ended
August 31

2008
NIS in thousands
 
Total cost of acquisition      74,695  
Net of non-cash consideration for Carmel (*)    (400 )

Consideration paid in cash    74,295  
Net of cash and cash equivalents acquired    (4,128 )

     70,167  


  (*) commission was paid after the financial statements period

  d. Goodwill in the acquisition of subsidiaries

  Upon increasing the percentage of holding in Frenkel CD and the consolidation thereof, the Company recognized goodwill in the amount of NIS 599 thousands after allocating the excess cost to tangible and intangible assets, as specified in section b. above.

  e. The impact of the acquisition on the Group’s results

  The profit for the reported period included a loss of NIS 2,150 thousands, which is attributed to Carmel and Frenkel CD from the date of acquisition.

  If the business combination of company would have taken place on January 1, 2008 the Group’s revenue would have been NIS 763,706 thousands and the Group’s profit for the reported period would have been NIS 52,024 thousands.

  For the purpose of determining the pro forma revenue and profit (loss), the following assumptions were made:

  The amortization of excess cost was included at fair value of the excess cost as it was estimated on the date of the business combination.

  f. The excess fair value of the assets, liabilities and contingent liabilities of the acquired company over the cost of acquisition

  In respect of the acquisition of Carmel, the Company recognized a profit of NIS 11,750 thousands. The components of the profit are as follow: NIS 14,664 because of negative goodwill which was measured as the difference between the fair value of the assets, liabilities and contingent liabilities of Carmel on the date of acquisition and the cost of acquisition. This profit was presented in the statement of income under “other expenses (income)". The amortization of excess cost from the date of acquisition as of the reporting date in the amount of NIS 4,438 thousands in respect of the order backlog and excess cost of fixed assets, were recorded in the cost of sale and a sum of NIS 242 in respect of customers’ portfolio was included in selling and marketing expenses. Record of income deferred taxes in the amount of NIS 1,252 thousands and minority interest at the depreciations in the amount of 514 thousands.

F - 38



HADERA PAPER LTD

NOTES TO UNAUDITED CONDENSED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 2008

NOTE 6 FIXED ASSETS

  Acquisition of items of fixed assets

  During the period of Nine months and three months ended September 30, 2008 the company became committed in agreements to purchase fixed assets at a cost of approximately NIS 178,633 thousands and NIS 50,445 thousands, respectively.

  During the period of nine months and three months ended September 30, 2007 the company became committed in agreements to purchase fixed assets at a cost of approximately NIS 61,598 thousands and NIS 19,487 thousands, respectively.

  Most of the acquisitions of the fixed assets during the first half of the year in sum of NIS 140,863 thousand were made for Machine 8- a machine for the new packaging paper system. The total fixed assets acquired for suppliers’ credit amounted to NIS 5,967 thousands as of September 30, 2008 (and NIS 3,965 thousands as of September 30, 2008 as of December 31, 2007).

  During June 2008, the Company agreed with the tax authorities for payment of a betterment levy in the amount of NIS 3,782 thousands in respect of change of land use, which is designed for the construction of a new production line for the manufacture of packaging papers. This cost was added to the land cost of machine 8 project.

NOTE 7 SHARE BASED PAYMENT

  In January 2008, the Board of Directors of the Company approved a program for the allotment, for no consideration, of non marketable options to the CEO of the company, to employees and officers of the company and investees. In the context of the program, an allotment of 285,750 options was approved, of which 40,250 options were to the CEO of the company, 135,500 to management of the subsidiaries and 74,750 to management of the affiliates.

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

  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. The options will vest in installments as follows: 25% of the total options will be exercisable from January 14, 2009; 25% of the total options will be exercisable from January 14, 2010; 25% of the total options will be exercisable from January 14, 2011; and 25% of the total options will be exercisable from January 14, 2012. The vested options are exercisable through January 14, 2012, 2013, 2014 for the first and second, third and fourth portions, respectively.

  The cost of the benefit embedded in the allotted options as above, on the basis of the fair value as of the date they are granted, was approximated to be the amount of approximately NIS 13.5 million. This amount was 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.

F - 39



HADERA PAPER LTD

NOTES TO UNAUDITED CONDENSED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 2008

NOTE 7 SHARE BASED PAYMENT (Cont.)

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

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

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

NOTE 8 INCOME TAX CHARGE

  On February 26, 2008, the Knesset ratified the third reading of the Income Tax Law (“Inflation Adjustments”) (Amendment 20) (Limitation of Term of Validity) – 2008 (hereinafter: “The Amendment”), pursuant to which the application of the inflationary adjustment law will terminate in tax year 2007 and as of tax year 2008, the law will no longer apply, other than transition regulations whose intention it is to prevent distortions in tax calculations.

  According to the amendment, in tax year 2008 and thereafter, the adjustment of revenues for tax purposes will no longer be considered a real-term basis for measurement. Moreover, the linkage to the CPI of the depreciated sums of fixed assets and carryover losses for tax purposes will be discontinued, in a manner whereby these sums will be adjusted until the CPI at the end of 2007 and their linkage to the CPI will end as of that date.

F - 40



HADERA PAPER LTD

NOTES TO UNAUDITED CONDENSED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 2008

NOTE 9 SEGMENT INFORMATION

Nine months
(Unaudited)
Paper and recycling
Marketing of office supplies
Total
Jan- Sep
Jan- Sep
Jan- Sep
Jan- Sep
Jan- Sep
Jan- Sep
2008
2007
2007
2007
2008
2007
 
Revenue      353,382    342,021    93,798    86,763    447,180    428,784  






Segment results    35,264    53,798    2,708    (778 )  37,972    53,020  







Three months
(Unaudited)
Paper and recycling
Marketing of office supplies
Total
July - Sep
July - Sep
July - Sep
July - Sep
July - Sep
July - Sep
2008
2007
2008
2007
2008
2007
 
Revenue      136,912    120,665    34,482    30,296    171,394    150,961  






Segment results    6,547    22,300    1,344    310    7,891    22,610  







  Year ended December 31, 2007
Paper and recycling
Marketing of office supplies
Total
 
Revenue      464,653    118,997    583,650  



Segment results    69,594    464    70,058  




F - 41



HADERA PAPER LTD

NOTES TO UNAUDITED CONDENSED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 2008

NOTE 10 CHANGES IN EQUITY

Share
capital

Capital
reserves

Share based
payments
reserves

Capital reserves
resulting from tax
benefit on exercise of
employee options

Capital
reserve from
revaluation
from step
acquisition

Hedging
reserves

Foreign
currency
translation
reserves

Retained
earnings

Total for
Company
shareholders

Minority
Interests

Total
NIS in thousands
 
Nine months ended                                                
September 30, 2008 (unaudited)   
   
Balance - January 1, 2008       125,267     301,695     -     3,397     -     (635 )   3,810     236,437     669,971     -     669,971  
Exchange differences arising on  
translation of foreign operations    -    -    -    -    -    -    (19,185 )  -    (19,185 )  -    (19,185 )
Cash flow hedges    -    -    -    -    -    (15,392 )  -    -    (15,392 )  (93 )  (15,485 )
First transfer to consolidation    -    -    -    -    17,288    -    -    -    17,288    28,084    45,372  
Depreciation of capital from  
revaluation from step acquisition to  
retained earnings    -    -    -    -    (944 )  -    -    944    -    -    -  
Actuarial profits and losses recorded  
in retained earnings    -    -    -    -    -    -    -    (552 )  (552 )  (48 )  (600 )
Share based payment    -    -    4,383    -    -    -    -    -    4,383    -    4,383  
Profit for the period    -    -    -    -    -    -    -    59,479    59,479    (963 )  58,516  











Balance - September 30, 2008       125,267     301,695     4,383     3,397     16,344     (16,027 )   (15,375 )   296,308     715,992     26,980     742,972  












F - 42



HADERA PAPER LTD

NOTES TO UNAUDITED CONDENSED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 2008

NOTE 10 CHANGES IN EQUITY (Cont.)

Share capital
Capital
reserves

Capital reserves
resulting from tax
benefit on
exercise of
employee options

Hedging
reserves

Foreign
currency
translation
reserves

Retained
earnings

Total for
Company
shareholders

Minority
Interests

Total
NIS in thousands
 
Nine months ended                                        
September 30, 2007 (unaudited)   
   
Balance - January 1, 2007       125,257     90,060     2,414     -     -     204,902     422,633     -     422,633  
Exchange differences arising on  
  translation of foreign operations    -    -    -    -    5,163    -    5,163    -    5,163  
Cash flow hedges    -    -    -    (55 )  -    -    (55 )  -    (55 )
Exercise of employee option into shares    *    -    983    -    -    -    983    -    983  
Profit for the period    -    -    -    -    -    14,024    14,024    -    14,024  









Balance - September 30, 2007       125,257     90,060     3,397     (55 )   5,163     218,926     442,748     -     442,748  










* Represents amount less of NIS 1,000

F - 43



HADERA PAPER LTD

NOTES TO UNAUDITED CONDENSED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 2008

NOTE 10 CHANGES IN EQUITY (Cont.)

Share
capital

Capital
reserves

Share based
payments
reserves

Capital reserves
resulting from tax
benefit on exercise
of employee options

Capital
reserve from
revaluation
from step
acquisition

Hedging
reserves

Foreign
currency
translation
reserves

Retained
earnings

Total for
Company
shareholders

Minority
Interests

Total
NIS in thousands
 
Nine months ended                                                
September 30, 2008 (unaudited)   
   
Balance - July 1, 2008       125,267     301,695     2,461     3,397     -     (3,731 )   (14,135 )   275,589     690,543     -     690,543  
Exchange differences arising on  
translation of foreign operations    -    -    -    -    -    -    (1,240 )  -    (1,240 )  -    (1,240 )
Cash flow hedges    -    -    -    -    -    (12,296 )  -    -    (12,296 )  (93 )  (12,389 )
First transfer to consolidation    -    -    -    -    17,288    -    -    -    17,288    28,084    45,372  
Depreciation of capital from  
revaluation from step acquisition to  
retained earnings    -    -    -    -    (944 )  -    -    944    -    -    -  
Actuarial profits and losses recorded  
in retained earnings    -    -    -    -    -    -    -    (402 )  (402 )  (48 )  (450 )
Share based payment    -    -    1,922    -    -    -    -    -    1,922    -    1,922  
Profit for the period    -    -    -    -    -    -    -    20,177    20,177    (963 )  19,214  











Balance - September 30, 2008       125,267     301,695     4,383     3,397     16,344     (16,027 )   (15,375 )   296,308     715,992     26,980     742,972  












F - 44



HADERA PAPER LTD

NOTES TO UNAUDITED CONDENSED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 2008

NOTE 10 CHANGES IN EQUITY (Cont.)

Share capital
Capital
reserves

Capital reserves
resulting from tax
benefit on exercise
of employee options

Hedging
reserves

Foreign
currency
translation
reserves

Retained
earnings

Total for
Company
shareholders

Minority
Interests

Total
NIS in thousands
 
 
Nine months ended                                        
September 30, 2007 (unaudited)   
Balance - July 1, 2007       125,257     90,060     3,374     273     4,362     211,244     434,570     -     434,570  
Exchange differences arising on  
translation of foreign operations    -    -    -    -    801    -    801    -    801  
Cash flow hedges    -    -    -    (328 )  -    -    (328 )  -    (328 )
Exercise of employee option into shares    -    -    23    -    -    -    23    -    23  
Profit for the period    -    -    -    -    -    7,682    7,682    -    7,682  









Balance -September 30, 2007       125,257     90,060     3,397     (55 )   5,163     218,926     442,748     -     442,748  










F - 45



HADERA PAPER LTD

NOTES TO UNAUDITED CONDENSED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 2008

NOTE 10 CHANGES IN EQUITY (Cont.)

Share
capital

Capital
reserves

Foreign
currency
translation
reserves

Capital reserves
resulting from tax
benefit on exercise of
employee options

Hedging
reserves

Retained
earnings

Total for
Company
shareholders

Minority
Interests

Total
NIS in thousands
 
Year ended December 31, 2007                                        
   
Balance - January 1, 2007       125,257     90,060     -     2,414     -     204,902     422,633     -     422,633  
Issuance of shares (deduction of cost issuance
in the amount of NIS 1,581 thousands)
    10    211,635    -    -    -    -    211,645    -    211,645  
Exchange differences arising on translation
of foreign operations
    -    -    3,810    -    -    -    3,810    -    3,810  
Cash flow hedges    -    -    -    -    (635 )  -    (635 )  -    (635 )
Exercise of employee options into shares    -    -    -    983    -    -    983    -    983  
Profit for the year    -    -    -    -    -    31,535    31,535    -    31,535  









   
Balance - December 31, 2007       125,267     301,695     3,810     3,397     (635 )   236,437     669,971     -     669,971  










F - 46



HADERA PAPER LTD

NOTES TO UNAUDITED CONDENSED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 2008

NOTE 11 DISCLOSURE REGARDING THE ADOPTION OF IFRS

  A. General

  Following the publication of Accounting Standard No. 29, “the Adoption of International Financial Reporting Standards (IFRS)” in July 2006, the Company adopted IFRS starting January 1, 2008.

  Pursuant to the provisions of IFRS1, which deals with the first-time adoption of IFRS, and considering the date in which the Company elected to adopt these standards for the first time, the financial statements which the Company must draw up in accordance with IFRS rules, are the consolidated financial statement as of December 31, 2008, and for the year ended on that date. The date of transition of the Company to reporting under IFRS, as it is defined in IFRS 1, is January 1, 2007 (hereinafter: “the transition date”), with an opening balance sheet as of January 1, 2007 (hereinafter: “Opening Balance”). The Company’s interim financial statements for 2008 will also be drawn up in accordance with IFRS, and shall include comparative figures for the year.

  Under the opening balance sheet, the Company performed the following reconciliations:

  Recognition of all assets and liabilities whose recognition is required by IFRS.
  De-recognition of assets and liabilities if IFRS do not permit such recognition.
  Classification of assets, liabilities and components of equity according to IFRS.
  Application of IFRS in the measurement of all recognized assets and liabilities.

  IFRS 1 states that all IFRS shall be adopted retroactively for the opening balance sheet. At the same time, IFRS 1 includes 14 reliefs, in respect of which the mandatory retroactive implementation does not apply. As to the reliefs implemented by the Company, see section F below.

  Changes in the accounting policy which the Company implemented retroactively in the opening balance sheet under IFRS, compared to the accounting policy in accordance with Generally Accepted Accounting Principles in Israel, were recognized directly under Retained Earnings or another item of Shareholders’ Equity, as the case may be.

  This note is formulated on the basis of International Financial Reporting Standards and the notes thereto as they stand today, that have been published and shall enter into force or that may be adopted earlier as at the Group’s first annual reporting date according to IFRS, December 31, 2008. Pursuant to the above, the Company’s management has made assumptions regarding the anticipated financial reporting regulations that are expected to be implemented when the first annual financial statements are prepared according to IFRS, for the year ended December 31, 2008.

  The IFRS standards that will be in force or that may be adopted in the financial statements for the year ended December 31, 2008 are subject to changes and the publication of additional clarifications. Consequently, the financial reporting standards that shall be applied to the represented periods will be determined finally only upon preparation of the first financial statements according to IFRS, as at December 31, 2008.

  Listed below are the Company’s consolidated balance sheets as of January 1, 2007, September 30, 2007 and December 31, 2007, the consolidated statement of income and the shareholders’ equity for the year ended on December 31, 2007 and the nine months ended September 30, 2007 prepared in accordance with International Accounting Standards. In addition, the table presents the material reconciliations required for the transition from reporting under Israeli GAAP to reporting under IFRS.

F - 47



HADERA PAPER LTD

NOTES TO UNAUDITED CONDENSED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 2008

NOTE 11 DISCLOSURE REGARDING THE ADOPTION OF IFRS (Cont.)

  B. Reconciliation of balance sheets from Israeli GAAP to IFRS:

September 30, 2007
Israeli GAAP
Effect of
Transition to
IFRS

IFRS
Note
NIS in thousands
 
Current Assets                    
    Cash and cash equivalents         53,784    -    53,784  
    Trade receivables         193,985    (229 )  193,756  
    Other current assets    F1    120,106    (11,405 )  108,701  
    Inventories         67,408    -    67,408  



                  435,283     (11,634 )   423,649  



Non-Current Assets   
    Property, plant and equipment    F2    437,457    (39,410 )  398,047  
    Investment in associated companies    F8    342,995    1,641    344,636  
    Deferred tax assets    F1    6,490    14,749    21,239  
    Lease receivables    F2    -    34,107    34,107  
    Other assets         -    1,749    1,749  
    Employee benefit assets         -    1,128    1,128  



                  786,942     13,964     800,906  



                  1,222,225     2,330     1,224,555  



Current Liabilities   
    Credit from banks and others         233,685    -    233,685  
    Current maturities to long term notes  
      and term loans         42,730    -    42,730  
    Trade payables         108,697    -    108,697  
    Other payables and accrued expenses    F4, F3    95,725    (22,941 )  72,784  
    Financial liabilities at fair value through  
      Profit and loss    F4    -    3,169    3,169  
    Current tax liabilities    F7    -    9,897    9,897  



                  480,837     (9,875 )   470,962  



Non-Current Liabilities   
    Loans from banks and others         29,490    -    29,490  
    Notes         188,436    -    188,436  
    Other non-current liabilities         32,770    (390 )  32,380  
    Deferred tax liabilities    F1    40,840    -    40,840  
    Employee benefit liabilities    F3    -    19,699    19,699  



                  291,536     19,309     310,845  



 
   Capital and reserves             449,852     (7,104 )   442,748  



                 1,222,225     2,330     1,224,555  




F - 48



HADERA PAPER LTD

NOTES TO UNAUDITED CONDENSED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 2008

NOTE 11 DISCLOSURE REGARDING THE ADOPTION OF IFRS (Cont.)

  B. Reconciliation of balance sheets from Israeli GAAP to IFRS (Cont.)

December 31, 2007
Israeli GAAP
Effect of
Transition to
IFRS

IFRS
Note
NIS in thousands
 
Current Assets                    
    Cash and cash equivalents         167,745    -    167,745  
    Trade receivables         178,771    (218 )  178,553  
    Other current assets    F1    105,109    (10,694 )  94,415  
    Inventories         69,607    -    69,607  



                  521,232     (10,912 )   510,320  



Non-Current Assets   
    Property, plant and equipment    F2    445,566    (40,335 )  * 405,231  
    Investment in associated companies    F8    346,186    217    346,403  
    Deferred tax assets    F1    6,083    14,539    20,622  
    Lease receivables    F2    -    34,900    * 34,900  
    Other assets         -    1,578    1,578  
    Employee benefit assets         -    1,179    1,179  



                 797,835     12,078     809,913  



                 1,319,067     1,166     1,320,233  



Current Liabilities   
    Credit from banks and others         143,015    -    143,015  
    Current maturities to long term notes  
      and term loans         42,775    -    42,775  
    Trade payables         108,409    -    108,409  
    Other payables and accrued expenses    F4, F3    87,235    (14,005 )  73,230  
    Financial liabilities at fair value through  
      Profit and loss    F4    -    3,901    3,901  
    Current tax liabilities         -    908    908  



                  381,434     (9,196 )   372,238  



Non-Current Liabilities   
    Loans from banks and others         28,127    -    28,127  
    Notes         158,134    -    158,134  
    Other non-current liabilities         32,770    (1,560 )  31,210  
    Deferred tax liabilities    F1    40,515    -    40,515  
    Employee benefit liabilities    F3    -    20,038    20,038  



                 259,546     18,478     278,024  



 
   Capital and reserves             678,087     (8,116 )   669,971  



                 1,319,067     1,166     1,320,233  




* Amount of NIS 5,609 thousands reclassified from fixed assets to lease receivables.

F - 49



HADERA PAPER LTD

NOTES TO UNAUDITED CONDENSED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 2008

NOTE 11 DISCLOSURE REGARDING THE ADOPTION OF IFRS (Cont.)

  C. Reconciliation of Income Statements from Israeli GAAP to IFRS

Nine months ended
September 30, 2007

Three months ended
September 30, 2007

Year ended
December 31, 2007

Note
Israeli GAAP
Effect of
Transition to
IFRS

IFRS
Israeli GAAP
Effect of
Transition to
IFRS

IFRS
Israeli GAAP
Effect of
Transition to
IFRS

IFRS
NIS in thousands
NIS in thousands
NIS in thousands
(Unaudited)
(Unaudited)
 
Revenue           428,784    -    428,784    150,961    -    150,961    583,650    -    583,650  
Cost of sales         324,947    (78 )  324,869    110,776    (56 )  110,720    440,854    527    441,381  









Gross profit             103,837