zk1007983.htm


 
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 March 2010
_________________
 
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:
 
oYes    xNo
 
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 March 8, 2010 with respect to the Registrant’s results of operations for the year ended December 31, 2009.
 
        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 year ended December 31, 2009.
 
        Attached hereto as Exhibit 3 and incorporated herein by reference are the Registrant’s unaudited condensed consolidated financial statements for the year ended December 31, 2009.
 
        Attached hereto as Exhibit 4 and incorporated herein by reference is the Registrant’s periodical report for the year ended December 31, 2009.
 
        Attached hereto as Exhibit 5 and incorporated herein by reference are the unaudited condensed interim consolidated financial statements of Mondi Hadera Paper Ltd. and subsidiaries with respect to the year ended December 31, 2009.
 
        Attached hereto as Exhibit 6 and incorporated herein by reference are the unaudited condensed interim consolidated financial statements of Hogla-Kimberly Ltd. and subsidiaries with respect to the year ended December 31, 2009.
 
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  
    Name: Lea Katz  
    Title: Corporate Secretary  
       
 
Dated: March 9, 2010
 
 
 

 
 
EXHIBIT INDEX
 
 
 
Exhibit No.
 
1.
 
2.
 
3.
 
4.
 
5.
 
6.
Description
 
Press release dated March 8, 2010.
 
Registrant's management discussion.
 
Registrant's unaudited condensed consolidated financial statements.
 
Registrant's periodical report.
 
Unaudited condensed interim consolidated financial statements of Mondi Hadera Paper Ltd. and subsidiaries.
 
Unaudited condensed interim consolidated financial statements of Hogla- Kimberly Ltd. and subsidiaries.

 
 
 

 

 
Exhibit 1
 
   NEWS
   For Release:  IMMEDIATE
 
Hadera Paper Ltd.
Reports Financial Results for Fiscal Year Ended December 31, 2009

Hadera, Israel, March 8, 2010 - Hadera Paper Ltd. (AMEX:AIP) (the “Company” or “Hadera Paper”) today reported financial results for the year ended December 31, 2009. The Company, its subsidiaries and associated companies are referred to hereinafter as the "Group".

The Consolidated Data set forth below excluding the results of operation of the associated companies: Mondi Hadera Paper Ltd. ("Mondi Hadera")and Hogla-Kimberly Ltd. ("H-K").

Consolidated sales in 2009 amounted to NIS 892.0 million, as compared with NIS 673.5 million in 2008. The increase is primarily attributed to the first-time consolidation of the data of Carmel and Frenkel-CD in the reported period, in the amount of approximately NIS 477.8 million, as compared with their consolidation for only part of last year, in the sum of NIS 160.9 million.

Operating profit totaled NIS 15.6 million in 2009, as compared with NIS 35.4 million in 2008. The decrease in operating profits originated from the erosion of selling prices coupled with the quantitative erosion of packaging paper and recycling, as a result of the imports of packaging paper at dumping prices that was offset by the recording of non-recurring revenues of NIS 16.4 million on account of a unilateral dividend.

The net profit attributed to the Company's shareholders in 2009 amounted to NIS 91.2 million, as compared with net profit of NIS 69.7 million attributed to the company shareholders in 2008, and was affected by the improvement in operating profitability at some of the groups companies in Israel and in Turkey and by the recording of earnings as a result of the distribution of a unilateral dividend on account of the application of a preferred share by an associated company that generated net revenues of NIS 8.4 million for the company. Moreover, a reduction in the company's share in the losses on account of the operations in Turkey (KCTR) in relation to last year also contributed to the improved profitability.

The net profit attributed to the shareholders of the company in the fourth quarter this year amounted to NIS 21.1 million, as compared with net profit attributed to the company's shareholders of NIS 10.2 million in the corresponding quarter last year, representing an increase of 106.8%.

Basic earnings per share amounted to NIS 18.03 per share ($4.78 per share) in 2009, as compared with basic earnings per share of NIS 13.77 per share ($3.62 per share) in 2008.
 
The US dollar exchange rate was revaluated by 0.7% in 2009, in relation to a revaluation of approximately 1.1% in 2008.

The inflation rate in 2009 amounted to 3.9%, as compared with an inflation rate of 3.8% in 2008.

 
 

 

The weakness in economic activity that characterized the second half of 2008, continued in the first quarter of 2009 as well. Starting in the second quarter of 2009, a certain recovery was observed and then gained momentum in most sectors of the Israeli economy. The prices of traded securities recorded a considerable increase in the Israeli capital market, while in parallel, the corporate debt market began to recover, as the raising of funds by the business sector renewed. Various markets worldwide are experiencing similar developments, as a global trend of recovery in real-term operations is being observed, along with bullish capital markets and an improvement in the stability of financial institutions. The global recovery is largely attributed to a combination of fiscal expansionary plans, along with a continuing expansionary monetary policy, led by the US economy.

The trend of improving paper prices worldwide, that was reflected primarily in the last quarter of the year, is expected to continue throughout 2010
The Group manages a wide and relatively diverse portfolio of companies and businesses. This fact is instrumental in dealing with the local and global crisis. The different Group companies operated in 2009 on the basis of aggressive efficiency and cost-cutting measures across all companies and all sectors of operation. The company's sectors of operation focus on consumer goods and basic inputs that were affected in a relatively limited manner by the repercussions of the global economic and financial crisis.

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.

The implementation of the new recycled packaging paper manufacturing network,(an investment  of  NIS 690 million) is progressing as planned and subsequent to the signing of the central agreements for the acquisition of the principal equipment for production systems last year, the construction of the machine's building is nearing completion in 2009 at the Hadera site, along with the installation of the equipment.

Financial expenses totaled NIS 18.3 million in 2009, as compared with NIS 15.0 million in 2008.
 
The company’s share in the earnings of associated companies totaled NIS 87.4 million in 2009, as compared with NIS 51.3 million in 2008.
 
The following principal changes were recorded in the Company’s share in the earnings of associated companies, in relation to 2008:

 
-
The Company's share in the net profit of Mondi Hadera Paper (49.9%) rose by NIS 4.5 million. The increase in profit originated primarily from an increase in the operating profit of Mondi, that grew from NIS 34.1 million last year, to NIS 40.5 million this year, despite the erosion of prices as a result of imports at dumping prices, in light of the implementation of an aggressive efficiency program in operations and purchasing and a decrease in input prices. The net profit also grew as a result of recording tax revenues as a result of the change in the tax rate, in the sum of NIS 6.4 million, that was offset as a result of the increase in financial expenses during the reported period, as compared with last year, primarily as a result of the influence of the devaluation of the NIS against the US dollar, as an average between the reported periods.

 
-
The company’s share in the net profit of Hogla-Kimberly Israel (49.9%) increased by NIS 21.5 million. Hogla's operating profit grew from NIS 169.0 million to NIS 210.0 million this year. The improved operating profit originated from a quantitative increase in sales, improved selling prices in some of the sectors of operation, innovating products and empowering the Company's brands, a decrease in the prices of certain company inputs in view of the erosion of global commodity prices, continuing efficiency measures across the company and growing savings in procurement that also contributed significantly to the improved profit.
 
 
2

 
 
 
-
The Company's share in the losses of KCTR Turkey (49.9%) was reduced by NIS 8.1 million. The significant decrease in the loss is attributed primarily to the growth in the volumes of operation that led to the continued reduction in the operating loss, from NIS 33.4 million last year to approximately NIS 16.1 million this year. Moreover, due to the increase in the shareholders' equity of KCTR through a financial influx from Hogla-Kimberly last year and during the reported period, and bank loans repayment the financial expenses were reduced, thereby leading to an additional reduction in the net loss.
 
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.

 
3

 

Hadera PAPER LTD.
SUMMARY OF RESULTS
(AUDITED)
except per share amounts
NIS IN THOUSANDS (1)

   
2009
   
2008
 
             
Net sales
    891,995       673,484  
                 
Net earnings attributed to the Company's shareholders
    91,230       69,710  
                 
Basic net earnings per share attributed to the Company's shareholders
     18.03        13.77  
                 
Fully diluted earnings per share attributed to the Company's shareholders
      18.03         13.77  
 
(1)
The representative exchange rate at December 31, 2009 was NIS 3.775=$1.00.
 
Contact:
Lea Katz, Adv.
Corporate Secretary and Chief of Legal Department
Hadera Paper Ltd. Group
Tel:+972-4-6349408
Leak@hadera-paper.co.il
 
 
4

 


Exhibit 2
 


Translation from Hebrew
 
March 7, 2010
MANAGEMENT  DISCUSSION

The Board of Directors of Hadera Paper Ltd. (“Hadera Paper” or "The Company") is hereby honored to present the Management Discussion as at December 31, 2009, reviewing the principal changes in the operations of the company for the months January to December 2009 ("The Period of the Report"). The report was formulated in accordance with the Securities Regulations (Periodic and Immediate Reports), 1970, based on the assumption that the reader is also in possession of full Periodic Report of the company as at December 31, 2009 ("Annual Financial Statements"). The results of the company that are presented in the management discussion relates to the share of the shareholders of the company in the results, unless stated otherwise. The Company, its consolidated subsidiaries and its associated companies – hereinafter: “The Group”.
 
 
A.
UDescription of the Corporation’s Business

 
1.
UCompany Description

Hadera Paper Group deals in the manufacture and sale of packaging paper, corrugated board packaging, consumer goods packaging and unique packaging for industry, recycling of paper and plastic 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.

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

 
2.
UGeneral
 
 
A.
Principal Current Operations

 
1.
UBusiness Environment U

The global financial crisis and the slowdown in the real-term economic activity, that developed in 2008, resulted, inter alia, in severe damage to global capital markets, in a severe downturn and considerable fluctuations in stock markets both in Israel and worldwide, including severe downturns and fluctuations in the prices of the securities of certain investee companies of the company, a deterioration of the credit crunch, a decrease in the value of assets held by the public and a considerable slowdown and uncertainty in economic activity. Consequently, various economies worldwide, including the United States and numerous countries in Europe, slipped into a recession, while indications of a recession were also identified in Israel.
 
 
 
1

 
 
The weakness in economic activity that characterized the second half of 2008, continued in the first quarter of 2009 as well. Starting in the second quarter of 2009, a certain recovery was observed and then gained momentum in most sectors of the Israeli economy. The prices of traded securities recorded a considerable increase in the Israeli capital market, while in parallel, the corporate debt market began to recover, as the raising of funds by the business sector renewed. Various markets worldwide are experiencing similar developments, as a global trend of recovery in real-term operations is being observed, along with bullish capital markets and an improvement in the stability of financial institutions. The global recovery is largely attributed to a combination of fiscal expansionary plans, along with a continuing expansionary monetary policy, led by the US economy.

In the last quarter of 2009, the prices of various products were raised in the global paper industry. In the packaging paper sector in Europe, the cumulative rise in prices since September, totaled 80 per ton (approximately 35%) until the end of 2009.

The trend of improving paper prices worldwide, that was reflected primarily in the last quarter of the year, is expected to continue throughout 2010. These very days, this trend is being reinforced by the declaration of the largest paper companies worldwide, regarding an additional increase in prices that is expected during the second quarter of 2010, by a sum of approximately 60 per ton (approximately 18%). The continuation of this trend, in addition to the sharp increase in prices in the second half of 2009, will support the continued growth and increase in the volume of operations that are expected in 2010.

The above information pertaining to trends in the paper market and input prices 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.

 
2.
Impact of the Business Environment on Company Operations
 
The Hadera Paper Group manages a wide and relatively diverse portfolio of companies and businesses. This fact is instrumental in dealing with the local and global crisis. The different Group companies operated in 2009 on the basis of aggressive efficiency and cost-cutting measures across all companies and all sectors of operation. The company's sectors of operation focus on consumer goods and basic inputs that were affected in a relatively limited manner by the repercussions of the global economic and financial crisis.

The companies principal operation in the area of household paper and absorbent products (through the Hogla Kimberly sector), in light of the economic crisis, was characterized by preserving market share and maintaining the quantitative volumes of operation in view of the acquired consumption habits of customers and consumers in Israel, characterized primarily on the basis of attractive pricing. In the course of 2009,  the company maintained stability in its market shares, thanks to increased marketing activity that served to strengthen its leading brands.
 
In light of the above, the company has successfully managed to continue improving its profits despite the challenging business environment in these areas.
 
 
2

 
 
In the packaging paper and recycling sector, the significant additional rise in prices that is expected globally, as mentioned above, may positively affect the results of this sector of operations, that began the running-in process of Machine 8, the new manufacturing system for packaging paper, in January. (For description of the running in of Machine 8, see Section 4.1, below).

The company estimates that since 2008, packaging paper products have been imported into Israel at dumping prices, primarily from Europe. The company is working to handle this problem opposite the Dumping Supervisor at the Ministry of Employment, Industry and Trade, who has decided to impose a temporary levy on the importing of packaging paper from Europe, at a rate of 52-67 euro per ton. Some of the manufacturers and importers have filed petitions against this decision. On December 3, 2009, the company announced that in a hearing held in court regarding the petitions of five importers/producers that were appealing the decision of the Supervisor, it was agreed between the parties that the decision of the Supervisor would remain in place for the next four months, while the guarantees that were deposited by the petitioners in October and November would be reimbursed to them. This decision received of the validity of a court ruling. The said temporary guarantee, is valid until March 31, 2010.

On January 21, 2010, the Supervisor informed the Dumping Committee of his recommendation to impose a dumping levy of 31-44 per ton, on most different producers from the European Union. The recommendation of the Dumping Supervisor is subject to the approval of the Dumping Committee and the signature of the Minister of Employment Industry and Trade and the Minister of Finance. There is no certainty regarding the approval of the recommendation of the Supervisor and the company cannot estimate this stage the impact of the acceptance of the complaints on its results.

In the fine paper sector, the impact of the global crisis is evident primarily in the advertising industry, as demand for fine paper has decreased by a rate of 11%-14% in 2009 in the global market. Towards the end of 2009, pulp prices started to increase, and are expected to increase even more in the short –term due to the earthquake in Chile, which causes temporary delays in pulp supply to the global market.

The reduced demand is creating surplus supply in Europe and worldwide and the company estimates that fine paper is being imported to Israel at dumping prices since 2008. In this respect, the company is also working with the Dumping Supervisor in order to control imports at these prices. On February 26, 2009, the company announced that the subsidiary Mondi Hadera Paper had filed a complaint to the Supervisor, regarding the dumping imports of fine paper from several European nations to Israel. Upon review of the complaint, the Supervisor decided to launch an investigation of this issue. According to the Company announcement, there is no certainty that the above complaints would be accepted, and the Company is currently unable to estimate the impact of such acceptance on its business results.
 
 
 
3

 
 
A decrease was recorded in 2009 in the prices of inputs, primarily fibers and chemicals, as a result of the global crisis. This trend began to change in the last quarter of 2009, in light of the awakening market activity. These decreases in prices offered partial compensation for the erosion in prices at some of the Group companies. These savings were partially offset as a result of an increase in the prices of water in 2009, by an average rate of 3%, along with an increase in the prices of gas, that constitutes a principal input in the paper production chain. Gas prices rose by approximately 10% in relation to 2008, as a result of the devaluation of the NIS in relation to the US dollar by an average of 9.6% in relation to 2008, this adversely affected the company also in terms of the imported inputs, while serving to improve the selling prices that were eroded, as mentioned above, in the main sectors of operation of the company, where the prices tend to follow the import prices, denominated in US dollars.

As at the date of the report, it is impossible to estimate whether the said crisis in the financial markets has indeed run its course, what are its direct and indirect economic implications globally and in Israel, and how long such implications will last, if at all.

The signs of the said crisis and the recovery therefrom, have affected and may continue to affect the business results of the Company and its investee companies, including an effect on their liquidity, the value of their assets, their ability to divest assets, the state of their business, their financial indicators and covenants, their credit rating, their ability to distribute dividends, ability to raise financing for their current operations and long-term plans, as well as on their financing terms.

All of the above, relation to trends in the global market, in the paper market and in the prices of inputs and their impact on the company, the approval of the company's complaints regarding importing at dumping prices - all constitute 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 the crisis in global banking and credit markets changes in global raw material prices and changes in the supply and demand of global paper products and the decisions of the Dumping Committee and relevant ministers in this respect.

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

The US dollar exchange rate was revaluated by 0.7% in 2009, in relation to a revaluation of approximately 1.1% in 2008.
 
 
 
4

 
 
The company's business portfolio, including its associated companies, is balanced in terms of foreign currency and the level of the company's exposure to sharp fluctuations in currency rates is therefore low.

The inflation rate in 2009 amounted to 3.9%, as compared with an inflation rate of 3.8% in 2008.

 
3.
Promoting 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:

 
a.
Expanding the recycled packaging paper manufacturing network
 
The investment 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 progressing as planned and subsequent to the signing of the central agreements for the acquisition of the principal equipment for production systems last year, the construction of the machine's building is nearing completion in 2009 at the Hadera site, along with the installation of the equipment.

The running-in process of the new manufacturing systems began in January 2010. The running-in of the machine is progressing as planned, despite the complexity of the manufacturing system, and technical problems recognized are taken care of with the suppliers, on current bases. The machine is expected to complete its running-in process and to make the transition to production at full capacity in the next several months. Based on the working assumptions that were defined regarding the learning curve of the machine's operation, the new production system, together with the machines that are currently active, are expected to produce 280,000 tons of paper in 2010, representing a supplement of approximately 70% in relation to the existing output capacity.

In parallel, the subsidiary Amnir Recycling Industries Ltd. ("Amnir"), is continuing to expand the collection of newsprint and cardboard waste, for the purpose of the running-in of the machine and is also continuing to accumulate inventories in preparation for the full operation of the new machine in the coming months. The company is preparing for increasing the proportion of paper recycling in Israel from the currently low 30% up to 45% within several years, as part of the demand for raw materials for the new manufacturing system.

The above information regarding the quantity of paper that will be produced by Machine 8 in 2010 and the increase in the volume of the collection of cardboard and paper waste, as mentioned above, constitute 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 related to the successful completion of the running-in of the machine and the continuing recovery of the global paper market, coupled with factors that lie outside the control of the company.
 
 
5

 

 
b.
Innovative Development of High-Quality Recycled Paper

In 2009, the packaging paper and recycling division launched the rapid development of paper types based on 100% recycled fibers, whose superior quality would allow them to replace pulp-based packaging paper in the corrugated board industry - both in the local market and in overseas markets being developed by the division for all of its products.

The technological and operational development process is currently in advanced stages and is intended to significantly expand the volume of the potential market of the packaging paper division.

The company estimates that the cost of the new paper types will be competitive as compared with the cost of pulp-based paper and will allow for a gradual improvement in the profitability of the sector. The company will be able to capitalize on the successful developments and to market ever-increasing quantities of the new paper products, according to laboratory results and initial reactions from those customers who have already been exposed to the products that were already launched, their commitments to future purchasing volumes upon the operation of Machine 8 in the coming months, leading to an increase in production volumes.

The above information pertaining to the innovative developments 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.

 
c.
Development of Export Markets for Packaging Paper
 
The significant increase in the output capacity of recycled packaging paper by Hadera Paper Group, upon the operation of the new manufacturing system, will allow for an expansion of the Division's operations both in Israel and overseas. The process of developing pulp-replacement packaging paper products on the basis of 100% recycled fibers, as mentioned above, will enable the division to expand the sale of such products for the first time, as a substitute for pulp-based packaging paper in international markets. The new products create an improved profit potential and are planned to be sold at a significant price supplement per ton of exported paper, as compared with the selling prices of basic paper types.
 
 
 
6

 

The development of new paper products, that began in 2008, is enabling the division to create international business relations for the first time with a network of distributors and marketers, while formulating long-term agreements with international clients.

In 2009, the company worked toward the development of export markets and began marketing various types of packaging paper to several agents that operate in several European and other nations. With the initial operation of Machine 8 these very days, this activity is expected to bring about a realization of the anticipated gradual growth in sales. This significant business development and technological move will render it possible to diversify their product portfolio and the markets of the division.

The above information pertaining to the development of innovative products in the paper market and the development of export markets for packaging paper 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.

 
d.
The Strategic Investment in Turkey

In 2009, 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 $300 million, by 2015.

The sales turnover of KCTR totaled NIS 493.6 million ($127.7 million) in 2009, as compared with NIS 412.7 million last year ($116.3 million), representing an increase of 19.6%.

During 2009, KCTR continued to empower its international brands on the local market. This was especially expressed in the power of the Huggies brand in the diaper sector and the Kotex brand in the feminine hygiene sector, while realizing constant growth in market share and rising awareness toward the company's products. In parallel, the volume of exports to Kimberly-Clark in various other countries in Europe and Africa also increased. The Company's advanced manufacturing site in Turkey serves as a regional Kimberly-Clark diaper manufacturing center, whose products are exported to 22 different countries throughout Europe and the Middle East.

In the course of the reported period, the Company continued to promote the collaboration with Unilever (see section D1, below) and expanded the number of points of sale in the Turkish market that carry KCTR brands.
 
 
 
7

 

In parallel, the company is continuing to expand the marketing of its products to BIM, the largest supermarket chain in Turkey.

The continuing high level of competition in the markets where the company is working to introduce and penetrate 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 NIS 14.7 million (approximately $3.7 million) in 2009, as compared with NIS 33.4 million (approximately $9.3 million) last year.

The continued implementation of the strategic business plan, while strengthening the brands and recording a gradual growth in the Unilever distribution and sales platforms, in combination with increased exports and continuing cost reductions at the diaper plant - have rendered it possible to maintain the trend of improving operating profit in 2009, while reducing the operating loss, as mentioned above.
 
It should be noted that in the course of the third quarter of the year, KCTR reached operating profitability for the first time.

in addition, it should be noted that toward the end of 2009, the Turkish tax authorities addressed KCTR as part of the examination of its financial statements for the years 2004-2008, conducted at KCTR on account of the taxation of the influx of capital from Hogla Kimberly Ltd. to KCTR. KCTR estimates, based on the professional opinion of its tax consultants, that the probability that it will be required to make additional tax payments is low, and consequently, no provision was created in its financial statements as at December 31, 2009, to account for this matter. (See note 13.12 the financial statements dated December 31, 2009).

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.

 
e.
New Power Plant

The new power plant project, intended to supply steam and electricity to the production system in Hadera and to sell surplus electricity to Israel Electric Company (IEC) and/or to private consumers, is on hold, awaiting the business stabilization of potential gas sources in order to conclude the contract to acquire the required gas at a price range that would allow the Company to be competitive with expected IEC rates. Due to the delay in finalizing the engagement for the purchase of gas as mentioned above, is not possible to meet the milestones set in the contingent production license held by the company. During this waiting stage, the company has decided not to request an extension of the license and will instead act to renew the license once progress is made regarding the purchase of gas and a decision is made regarding the construction of the power plant.
 
 
 
8

 

The discovery of natural gas at the Tamar 1 site off the coast of Hadera, along with the progress being made with the Egyptian gas franchise holder (EMG) and with the additional franchise holder Yam-Tethys - all serve to increase the probability of the signing of a gas supply agreement and the reawakening of the project.

The company is conducting negotiations with the gas suppliers in order to reach a long-term agreement at competitive prices. The company estimates that the said gas agreements will be signed in 2010.

The above information pertaining to trends in the energy sector, based on natural gas, 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 the size of the actual gas reservoir, as well as changes in gas prices worldwide.

 
B.
An Explanation of the Results of Operation

 
1.
Analysis of Operations and Profitability

Commencing January 1, 2009, the company applies International Financial Reporting Standard (IFRS) No. 8, “Operating Segments”, and has accordingly recognized the packaging products and board segment, which includes the operations of Carmel Container Systems and Frenkel C.D., as a separate segment. The associated companies Hogla-Kimberly and Mondi Hadera were also recognized as independent segments (for further details, see Note 19 to the financial statements). Please note that the following analysis of financial results relates to the companies that are consolidated in the results of Hadera Paper and is affected by the adoption of the Standard mentioned above.

Starting September 1, 2008, the financial statements of Carmel and Frenkel-CD Ltd. (an associated company of Carmel's and of the Company), are being consolidated within the Company's financial statements, as a result of the fact that the holding rate in Carmel has increased from 36.2% to 89.3%, and in Frenkel-CD, indirectly, from 37.93% to 54.74% (for details see Note 15 to the annual financial statements as at December 31, 2008).
 
 
 
9

 
 
 
a.
Sales
 
 
Consolidated sales in 2009 amounted to NIS 892.0 million, as compared with NIS 673.5 million last year, representing an increase of 32.4%, that is primarily attributed to the first-time consolidation of the data of Carmel and Frenkel-CD in the reported period, in the amount of approximately NIS 477.8 million, as compared with their consolidation for only part of last year, in the sum of NIS 160.9 million.

 
Sales of the packaging paper and recycling sector amounted to NIS 263.2 million in the reported period, as compared with NIS 381.5 million in the corresponding period last year.
 
 
The decrease in the sales turnover in the packaging paper and recycling sector originated both from the decrease in the sale of packaging and recycling as a result of the impact of the erosion of selling prices (sales in the sector are affected by dollar-denominated import prices), coupled with the quantitative decrease in sales originating from the importing of packaging paper at dumping prices from Europe, along with the erosion in demand from the local market and Israeli export operations, during the year.
 
 
The sales of the packaging products and board sector in 2009 amounted to NIS 477.8 million, as compared with their consolidation for part of the reported period last year, in the amount of NIS 160.9 million.
 
 
Sales in the marketing of office supplies segment amounted to NIS 151.0 million in 2009, as compared with NIS 131.1 million in the corresponding period last year, representing an increase of 15.2%, that originated from the continued implementation of the segment’s strategic growth plan by way of expanding the customer base.
 
 
The consolidated sales in the fourth quarter amounted to NIS 237.6 million, as compared with NIS 226.3 million in the corresponding quarter last year, representing an increase of approximately 5.0%, that originates primarily from the growth in sales of the packaging paper and recycling sector in view of the higher prices as mentioned above, coupled with the growth in the sales of the office supplies marketing sector, in relation to the corresponding quarter last year and as compared with the sales in the third quarter of the year, in the amount of NIS 220.4 million, representing an increase of approximately 7.8%.
 
 
b.
Cost of Sales

 
The cost of sales amounted to NIS 765.7 million – or 85.8% of sales – in 2009, as compared with NIS 542.4 million – or 80.5% of sales – last year. The increase in the cost of sales originates primarily from the consolidation of the results of Carmel and Frenkel in 2009, as compared with their partial consolidation last year.

 
The gross profit totaled NIS 126.3 million in 2009, representing approximately 14.2% of sales, as compared with NIS 131.1 million, representing 19.5% of sales, last year, representing a decrease of 3.2% in relation to the corresponding period last year.

 
The decrease in gross profit in relation to the corresponding year originates primarily from the erosion of the prices of packaging paper as well as a result of the slowdown in the markets that led to a decrease in quantitative sales, coupled with a 3% increase in the price of water, that was offset by the lowering of paper collection costs and the procurement of raw materials, along with a 5% decrease in electricity prices. Additionally, the cost of sales included part of an amortization of NIS 4.3 million in excess cost, as a result of excess cost recorded from the acquisition of Carmel and Frenkel-CD in 2008.

 
 
10

 
 
 
Labor Wages
 
 
The labor wages within the cost of sales amounted to NIS 206.9 million in 2009, representing approximately 23.2% of sales, as compared with NIS 149.2 million last year, representing approximately 22.2% of sales.
 
 
The labor wages within the Selling, General and Administrative expenses amounted to NIS 85.3 million during the reported period (approximately 9.6% of sales), as compared with the sum of NIS 73.9 million last year (approximately 11.0% of sales).
 
 
The increase in the cost of labor wages in relation to last year originates primarily from supplemental labor wages in the sum of NIS 105.2 million, stemming from the consolidation of Carmel and Frenkel-CD, as compared with NIS 34.4 million from their partial consolidation in the corresponding period last year. Net of labor expenses on account of Carmel and Frenkel, the labor expenses decreased by a rate of 0.9%.
 
 
Moreover, the cost of labor includes the labor costs derived from the issue of options to executives and the allocation of the expenditure thereupon, at a cumulative rate of NIS 3.8 million in 2009, an expenditure not involving cash flows.
 
 
As part of the alignment with the global economic crisis, the Company's management adopted a policy of mutually-agreed pay cuts for executives.
 
 
In this capacity, senior executives and managers have voluntarily agreed to cut their wages by 8%-10% in 2009, while senior employees have agreed that their wages be cut by 5%. The company also decided to freeze any raises in labor wages for employees under a personal employment contract in 2009.
 
 
c.
Selling, General, Administrative and other Expenses

 
The selling, general and administrative (including wages) and other expenses amounted to NIS 110.7 million in 2009 – or 12.4% of sales – as compared with NIS 95.7 million – or 14.2% of sales – last year. When neutralizing revenues, as a result of the distribution of a unilateral dividend on account of a preferred share that was allocated by an associated company in the sum of NIS 16.4 million, the selling general, administrative and other expenses amounted to NIS 127.1 million.

 
The increase in selling, general and other expenses originated primarily from the consolidation of the expenses of Carmel and Frenkel-CD in the company's financial statements, in the sum of NIS 54.0 million, as compared with their consolidation during the part of last year, in the sum of NIS 17.3 million. The general and administrative expenses also included an amortization of excess cost in the sum of NIS 2.9 million, on account of excess cost recorded during the acquisition of Carmel and Frenkel CD in 2008. Net of the expenses of Carmel and Frenkel-CD, and net of non-recurring income, the Selling General and Administrative expenses decreased by approximately NIS 5.3 million.

 
 
11

 

 
d.
Operating Profit

 
The operating profit totaled NIS 15.6 million in 2009 (1.7% of sales), as compared with NIS 35.4 million (5.2% of sales) last year. The decrease in operating profits originated from the erosion of selling prices coupled with the quantitative erosion of packaging paper and recycling, as a result of the imports of packaging paper at dumping prices that was offset by the recording of non-recurring revenues of NIS 16.4 million on account of a unilateral dividend.
 
 
The operating loss of the paper and recycling sector amounted to NIS 2.8 million in 2009, as compared with operating profit of NIS 38.7 million last year, primarily as a result of dumping prices of competing imports, that served to erode the prices and quantities as mentioned above.

 
The operating profit of the packaging products and board segment amounted to NIS 14.7 million in 2009, as compared with an operating loss of NIS 6.2 million last year. The improvement in the operating profit in the sector is primarily due to the erosion in input prices and the implementation of an aggressive efficiency program that compensated for the erosion in the quantities sold and in the selling prices.

 
The operating profit of the office supplies sector amounted to NIS 4.0 million in 2009, as compared with NIS 3.2 million last year.

 
The operating profit in the fourth quarter of the year amounted to NIS 0.4 million in relation to an operating loss of NIS 2.6 million in the corresponding quarter last year and as compared with operating profit of NIS 1.2 million in the third quarter of the year. The change in the operating profit for the quarter, in relation to the loss last year, originates primarily from the transition from an operating loss at the packaging products and cardboard sector in the fourth quarter last year, that originated from inventory hedging transactions, to an operating profit in the fourth quarter this year as a result of the utilization of the erosion of raw material prices in the sector and the continued implementation of the efficiency program. The increase in operating profits in the fourth quarter was offset due to the transition to an operating loss of the paper and recycling sector, in relation to the corresponding quarter last year, as a result of dumping prices, as mentioned above.
 
 
e.
Financial Expenses
 
 
The financial expenses totaled NIS 18.3 million in 2009, as compared with NIS 15.0 million in 2008, representing growth of 22.0%.

 
The total average of net interest-bearing liabilities, charged to the Company's financial expenses, decreased by an average of NIS 3 million, between 2008 and 2009. This decrease originated primarily from the positive cash flows from operating activities between the periods, net of the current investments in fixed assets.

 
The interest on the short-term credit decreased by approximately NIS 0.8 million, both as a result of the decrease in the average 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) decreased by NIS 4.3 million as compared with the corresponding period last year, as a result of both the decrease in the balance of debentures following redemptions made to the holders of the debentures, coupled with hedging transactions on the CPI-linked debentures against the increase in the CPI, whose costs amounted to 0.3% per annum in 2009, as compared with 2.6% in 2008, and as a result of the valuation of the hedging transactions to their fair value, in accordance with international standards. The actual CPI rose by 3.9% in 2009.

 
Furthermore, financial revenues of NIS 5.2 million were included last year on account of a currency transaction on the dollar, and were not included this year.
 
 
 
12

 
 
 
f.
Taxes on Income
 
 
Revenues from taxes on income amounted to NIS 7.1 million in 2009, as compared with tax expenses of NIS 3.7 million in 2008. The tax revenues originated primarily from the decrease in pretax profits in the amount of NIS 23.0 million, coupled with the change in the tax rates the following years, that generated deferred tax revenues in the amount of NIS 8.6 million, that were offset as a result of recording a provision for taxes on account of events that were included in the reported period.
 
 
g.
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.

 
The company’s share  in the earnings of associated companies totaled NIS 87.4 million in 2009, as compared with NIS 51.3 million in 2008.

 
The following principal changes were recorded in the Company’s share in the earnings of associated companies, in relation to 2008:
 
 
-
The Company's share in the net profit of Mondi Hadera Paper (49.9%) rose by NIS 4.5 million. The increase in profit originated primarily from an increase in the operating profit of Mondi, that grew from NIS 34.1 million last year, to NIS 40.5 million this year, despite the erosion of prices as a result of imports at dumping prices, in light of the implementation of an aggressive efficiency program in operations and purchasing and a decrease in input prices. The net profit also grew as a result of recording  tax revenues as a result of the change in the tax rate, in the sum of NIS 6.4 million, that was offset as a result of the increase in financial expenses during the reported period, as compared with last year, primarily as a result of the influence of the devaluation of the NIS against the US dollar, as an average between the reported periods.

 
-
The company’s share in the net profit of Hogla-Kimberly Israel (49.9%) increased by NIS 21.5 million. Hogla's operating profit grew from NIS 169.0 million to NIS 210.0 million this year. The improved operating profit originated from a quantitative increase in sales, improved selling prices in some of the sectors of operation, innovating products and empowering the Company's brands, a decrease in the prices of certain company inputs in view of the erosion of global commodity prices, continuing efficiency measures across the company and growing savings in procurement that also contributed significantly to the improved profit.

 
-
The Company's share in the losses of KCTR Turkey (49.9%) was reduced by NIS 8.1 million. The significant decrease in the loss is attributed primarily to the growth in the volumes of operation (see above - "Strategic Investment in Turkey") that led to the continued reduction in the operating loss, from NIS 33.4 million last year to approximately NIS 16.1 million this year. Moreover, due to the increase in the shareholders' equity of KCTR through a financial influx from Hogla-Kimberly last year and during the reported period, and bank loans repayment the financial expenses were reduced, thereby leading to an additional reduction in the net loss.
 
 
 
13

 

 
 
h.
The net Profit and the Earnings per share Attributed to the Company's Shareholders

The net profit attributed to the Company's shareholders in 2009 amounted to NIS 91.2 million, as compared with net profit of NIS 69.7 million attributed to the company shareholders in 2008, representing an increase of 30.8%.

The net profit attributed to the company shareholders in 2009 was affected by the improvement in operating profitability at some of the groups companies in Israel and in Turkey and by the recording of earnings as a result of the distribution of a unilateral dividend on account of the application of a preferred share by an associated company that generated net revenues of NIS 8.4 million for the company. Moreover, a reduction in the company's share in the losses on account of the operations in Turkey (KCTR) in relation to last year (see above, Strategic Investment in Turkey, as well as chapter C7, below) also contributed to the improved profitability.

The net profit attributed to the shareholders of the company in the fourth quarter this year amounted to NIS 21.1 million, as compared with net profit attributed to the company's shareholders of NIS 10.2 million in the corresponding quarter last year, representing an increase of 106.8%.
 
Basic earnings per share amounted to NIS 18.03 per share ($4.78 per share) in 2009, as compared with basic earnings per share of NIS 13.77 per share ($3.62 per share) in 2008.

Diluted earnings per share amounted to NIS 18.03 per share ($4.78 per share) in 2009, as compared with diluted earnings per share of NIS 13.77 per share ($3.62 per share) in 2008.

 
2.
Analysis of the Company’s Financial Situation

 
·
The cash and cash equivalents item rose from NIS 13.1 million on December 31, 2008, to NIS 26.3 million on December 31, 2009.

 
·
Designated Deposits decreased from NIS 249.6 million as at December 31, 2008, to NIS 127.6 million as at December 31, 2009. The decrease in deposits stems from the company’s purchase of equipment and fixed assets for the Machine 8 Project.

 
·
Trade receivables relating to the packaging paper and recycling sector decreased from NIS 87.7 million as at December 31, 2008, to NIS 81.2 million as at in December 31, 2009. This decrease is due to the erosion of prices as a result of paper imported at dumping prices, a quantitative decrease and the change in the composition of markets in which the company sells its products. In the packaging products and cardboard sector, an increase was recorded in trade receivables from NIS 186.1 million on December 31, 2008, to NIS 189.6 million on December 31, 2009, as a result of an improvement in operations in the sector. Accounts receivable for the office supplies marketing sector rose from NIS 45.1 million as at December 31, 2008 to NIS 53.1 million, as at December 31, 2009, as a result of growth in the volume of operations.

 
 
14

 
 
 
·
Other receivables relating to the packaging paper and recycling segment decreased slightly from NIS 92.5 million as at December 31, 2008 to NIS 92.0 million as at December 31, 2009. Other receivables relating to the packaging products and board sector decreased from NIS 5.8 million as at December 31, 2008, to NIS 5.2 million. Other receivables relating to the marketing of office supplies segment decreased from NIS 2.6 million as at December 31, 2008 to NIS 1.7 million as at December 31, 2009.

 
·
Inventories in the packaging paper and recycling sector increased from NIS 59.1 million as at December 31, 2008, to NIS 86.8 million as at December 31, 2009. This increase is primarily attributed to the continuing increase in the inventories of wastepaper as part of Amnir’s preparation for the transition to the new packaging paper machine, the development of export markets and the securing of paper availability for overseas shipment. Inventories of the packaging products and board sector decreased from NIS 87.2 million as at December 31, 2008, to NIS 68.5 million as at December 31, 2009. This decrease originated primarily as a result of the decrease in paper prices and the opening of the local warehouse of a foreign supplier in the marketing of office supplies. A decrease was recorded in the inventories item from NIS 22.5 million on December 31, 2008, to NIS 20.6 million on December 31, 2009, primarily as a result of the wider deployment of inventory entrances imported from the Far East.

 
·
The investment in associated companies increased from NIS 318.1 million as at December 31, 2008 to NIS 341.0 million as at December 31, 2009. The principal components of the said increase consist primarily of the company's share in the earnings of associated companies in the amount of NIS 87.4 million between the reported periods, offset by the company's share in distributed dividend in the sum of NIS 46.6 million from an associated company and the company's share in the declared dividend of NIS 20.0 million by an associated company, that led to a change in the total investment between the reported periods.

 
·
Short-term credit increased from NIS 77.7 million as at December 31, 2008 to NIS 131.6 million as at December 31, 2009. The increase in short-term credit is primarily attributed to the credit in the amount of NIS 40 million raised from institutional investors in 2009 and the assuming of short-term bank credit.

 
·
In the other accounts payable item in the packaging paper and recycling sector, an increase was recorded from NIS 81.2 million on December 31, 2008, to NIS 91.1 million due to an increase in the wage provisions coupled with an increase in interest to be paid as a result of additional long-term loans that were assumed by the sector in 2009 for the purpose of financing Machine 8. On December 31, 2009, in the packaging products and cardboard sector, a decrease was recorded in accounts payable from NIS 18.1 million to NIS 15.8 million, as a result of a decrease in the provisions for government institutions, coupled with a decrease in the interest to be paid as a result of the decrease in long-term loans. In the office supplies marketing segment, the Other Accounts Payable item increased from NIS 5.6 million on December 31, 2008, to NIS 5.8 million on December 31, 2009.
 
 
·
The company’s shareholders' equity increased from NIS 757.6 million as at December 31, 2008, to NIS 858.4 as at December 31, 2009. This change originated primarily from the net profit attributed to the company's shareholders between the periods, in the sum of NIS 91.2 million.
 
 
15

 
 
 
3.
Investments in Fixed Assets

 
Investments in fixed assets amounted to NIS 350.7 million in 2009, as compared with NIS 230.1 million in 2008. 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 NIS 333 million (NIS 56 million net of supplier credit). Additional investments included were related to environmental protection (wastewater treatment) and current investments in equipment renewal, means of transportation and building maintenance at the Hadera site.
 
 
Regarding the examination of the need for impairment of fixed assets, see note 3.62 the financial statements dated September 30, 2009, along with note 4.3.5 the financial statements dated December 31, 2009.

 
4.
Financial Liabilities

The long-term liabilities (including current maturities) amounted to NIS 847.6 million as at December 31, 2009, as compared with NIS 785.3 million as at December 31, 2008. The long-term liabilities increased in relation to last year, primarily as a result of long-term loans that were assumed, designated for the financing of payments on account of Machine 8. This increase was offset as a result of the repayment of the old debenture series, coupled with the repayment of a capital note to an associated company and the cash flows from operating activities.

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

Series 2 – NIS 131.7 million, for repayment until 2013.

Series 3 – NIS 197.8 million, for repayment until 2018.

Series 4 – NIS 235.6 million, for repayment until 2015.

Long-term loans – NIS 281.6 million.

The balance of short-term credit, as at December 31, 2009, amounted to NIS 131.6 million, as compared with NIS 77.7 million at December 31, 2008.
 
Subsequent to the balance sheet date, the company assumed a long-term loan denominated in NIS, from a bank, in the sum of NIS 70 million.

 
5.
Financial liabilities at fair value through the statement of income

Put Option to a Shareholder at an Associated Company

For information pertaining to the Put option see note 5.2.3 to the annual financial statements dated December 31, 2009.

The difference between the value of the liabilities according to the agreement - NIS 64.0 million - as compared with the value of the liabilities through fair value - NIS 12.0 million - amounts to NIS 52.0 million.
 
 
 
16

 

Liability on account of the Put option to a shareholder at an associated company, as at December 31, 2009 in December 31, 2008, is presented in the sum of NIS 12.0 million, and NIS 13.9 million, respectively.

On account of the Put option, other incomes of NIS 1.9 million were recorded in 2009, as compared with other expenses of NIS 10.0 million in 2008.

The principal factors behind the change in the 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 the calculation of the value of the option.
 
 
C.
Liquidity

 
Cash Flows

 
The cash flows from operating activities in 2009 amounted to NIS 179.2 million, as compared with NIS 113.9 million in 2008. The increase in the cash flows from operating activities in 2009 in relation to 2008, originated primarily from the reduced working capital in the reported period, that amounted to NIS 39.6 million, as compared with a decrease of NIS 30.0 million last year. The decrease in working capital in 2009 originated primarily from the decrease in inventory balances, an increase in accounts payable balances as mentioned above as well as from dividends net of income from the repayment of capital note, received from an associated company in the sum of NIS 45.4 million.

 
D.
Details of the Various Operations

 
1.
Hogla-Kimberly (Household Products)

The sales turnover of Hogla-Kimberly Israel amounted to approximately NIS 1,237.6 million in 2009, as compared with approximately NIS 1,208.7 million last year, representing an increase of 2.4%. The sales turnover of Hogla Kimberly Israel amounted to NIS 312.9 million in the fourth quarter this year, as compared with NIS 293.9 million in the corresponding quarter last year, representing an increase of 6.5% and as compared with NIS 298.7 million in the third quarter this year.

The increase in sales in relation to last year originated primarily as a result of the quantitative growth, alongside the growth of the market and in certain categories, even a growth in market share. Growth was also recorded in the share of premium products in some of the categories.

The operating profit of Hogla-Kimberly Israel amounted to approximately NIS 210.0 million in 2009, as compared with approximately NIS 169.0 million in 2008, representing an increase of 24.3%. In the fourth quarter of 2009, the operating profit amounted to NIS 55.0 million, as compared with an operating profit of NIS 42.4 million in the corresponding quarter last year and as compared with NIS 52.7 million in the third quarter this year.

The improvement in the operating profit in relation to last year is attributed to the said improvement in the quantities sold and in the selling prices of some of the range of products, along with improved efficiency, while recording growth in the output capacity of certain manufacturing facilities. This improvement is partially attributed to the global decrease in input prices - primarily those of pulp and imported waste. On the other hand, Hogla Kimberly took a hit in 2009, as an importer of inputs and finished products, due to a devaluation averaging 9.6% between the exchange rate of the NIS vis-à-vis the dollar between the years. It should be noted that in 2008, Hogla Kimberly received compensation of NIS 4.5 million related to damages caused during the Lebanon war, included in operating profit.
 
 
 
17

 

The sales turnover of KCTR, Hogla-Kimberly’s subsidiary operating in Turkey, amounted to approximately NIS 493.6 million (approximately $127.7 million) in 2009, as compared with approximately NIS 412.7 million (approximately $116.3 million) last year, representing an increase of 19.6%. The sales turnover of KCTR amounted to NIS 113.3 million in the fourth quarter this year, as compared with NIS 99.1 million in the corresponding quarter last year, representing an increase of 14.3% and as compared with NIS 117.5 million in the third quarter this year.

KCTR’s strategic cooperation agreement with Unilever, under which Unilever carries out the selling, distribution and collection activities nationwide, with the exception of retail chains to which KCTR continues to sell independently, continues to expand the customer base and to bring about the resulting increase in sales and enhancement of the Huggies® and Kotex® brands.

See also section A(2)a(3.4) above with respect to the strategic investment in Turkey.

In 2009, KCTR recorded an operating loss of NIS 16.1 million, as compared with an operating loss of approximately NIS 33.4 million last year. In the fourth quarter of 2009, the operating loss amounted to NIS 2.4 million, as compared with an operating loss of NIS 4.0 million in the corresponding quarter last year and as compared with operating profit of NIS 0.5 million in the third quarter this year.

The necessary funds for financing the strategic program in Turkey and for financing the current operations and investments, originates primarily from internal resources of Hogla Kimberly (Approximately $15.0 million in 2009). In early 2008, KCTR repaid the balance of outstanding loans that it still had with the banks, amounting to $25 million. Consequently, KCTR incurred no financial expenses this year, leading to an additional reduction of the net loss. This financing was made by way of a shareholder investment in the shareholders' equity of KCTR, as part of the operations for expanding the equity base.

 
2.
Mondi Hadera Paper (Mondi Hadera – Fine Paper)

The sales of fine paper amounted to 181.1 thousand tons in 2009, as compared with 178.8 thousand tons in 2008.

The sales turnover of fine paper amounted to NIS 669.2 million in 2009, as compared with NIS 732.3 million in 2008, representing a decrease of 8.6%. The sales turnover of fine paper amounted to NIS 157.4 million in the fourth quarter of the year, as compared with NIS 159.1 million in 2008, representing a decrease of 1.1%.
 
 
 
18

 
 
The operating profit of Mondi Hadera amounted to NIS 40.5 million in 2009, as compared with an operating profit of NIS 34.1 million in 2008, representing an increase of 18.8%. The operating profit in the fourth quarter of 2009 amounted to NIS 11.6 million, as compared with an operating profit of NIS 6.7 million in the corresponding quarter in 2008 and as compared with operating profit of NIS 13.0 million in the third quarter this year.

The trend of decreasing selling prices continued in 2009. Prices in the local market fell by 10% in relation to last year, when and export markets prices fell by 8% in NIS terms. In 2009, the company began selling paper to the United States and to Europe at prices that were higher than the selling prices in the Middle East, a fact that serve to moderate the decrease in the selling prices of export markets.

Mondi Hadera is expanding its export operations to include penetration into new and more profitable markets in the eastern United States. This will render it possible to increase the margin of the future export mix, to compensate for the rise in pulp prices in the second half of 2009.

The increase in operating profit this year in relation to 2008, despite the decrease in prices mentioned above, originated primarily as a result of the decrease in the average pulp prices in 2009 in relation to 2008, in NIS terms, by a rate of approximately 26%. The rise in the operating profit in the fourth quarter of 2009, in relation to the fourth quarter of 2008, originated from the decrease in the average pulp prices as mentioned above, coupled with an improvement in the gross margin of the sale of purchased paper by Mondi (15.2% in the fourth quarter as compared with 11.6% in the corresponding quarter last year).

In the fourth quarter of 2009, an increase was recorded in pulp prices, as average pulp prices rose by 11.5% in NIS terms in the fourth quarter of the year, as compared with the third quarter of the year. This increase was led to a slight drop in the operating profit in the fourth quarter of 2009 in relation to the third quarter of the year.

 
3.
Carmel Container Systems - Packaging and Board Products

The aggregate sales turnover of Carmel (including Frenkel-CD) amounted to NIS 484.3 million in 2009, as compared with NIS 512.6 million last year (a decrease of 5.5%).

In 2009, the consolidated sales turnover of Carmel Container Systems Ltd. amounted to NIS 383.0 million, as compared with NIS 417.7 million last year (a decrease of 8.3%). The consolidated sales turnover of Carmel Container Systems Ltd. amounted to NIS 99.6 million in the fourth quarter this year, as compared with NIS 101.2 million in the corresponding quarter last year, representing a decrease of 1.6% and as compared with NIS 87.3 million in the third quarter this year.

Carmel maintained relative stability in the quantities sold in the corrugated board market, despite the drop that was recorded in 2009 in the high-tech market and its influence upon demand for high-tech products packaging, due to the global crisis. Despite the relative stability in the quantitative volumes as mentioned above, the decrease in selling prices across all sectors led to a reduction in the sales turnover in 2009.
 
 
 
19

 

The consolidated operating profit of Carmel amounted to NIS 12.8 million in 2009, as compared with an operating loss of NIS 6.8 million last year.

The improvement in the operating profit of Carmel, despite the quantitative stability in sales originated primarily from the decrease in input prices, coupled with the implementation of an aggressive efficiency program that served to compensate for the erosion in selling prices. Moreover, Carmel recorded an expenditure of NIS 13.5 million in 2008 on account of hedging transactions to peg the US dollar exchange rate.

The consolidated operating profit of Carmel in the fourth quarter of 2009 amounted to NIS 5.9 million, as compared with an operating loss of NIS 0.9 million in the corresponding quarter in 2008 and as compared with operating profit of NIS 2.2 million in the third quarter this year. The improvement in the operating profit in the fourth quarter in relation to the loss last year originates primarily from the quantitative increase in sales in relation to the corresponding quarter, coupled with the sharp decrease in input prices in relation to the corresponding quarter last year. Moreover, Carmel recorded an expenditure of NIS 0.6 million in the fourth quarter last year, on account of hedging transactions to peg the US dollar exchange rate. The aggregate operating profit of Carmel (including Frenkel-CD) amounted to NIS 14.3 million in 2009, as compared with an operating loss of NIS 6.5 million last year.

 
4.
Packaging Paper and Recycling

The sales turnover of the Packaging Paper and Recycling Division amounted to NIS 339.2 million in the reported year, as compared with NIS 407.3 million last year, representing a decrease of 16.6%. The division’s sales turnover in the fourth quarter totaled NIS 88.3 million, as compared with NIS 85.2 million in the corresponding quarter last year and NIS 88.7 million in the third quarter of the year.

The quantitative sales of packaging paper amounted to 142.9 thousand tons in 2009, as compared with 146.1 thousand tons last year.
 
The sales of paper and cardboard waste by Amnir amounted to 194.2 thousand tons in 2009, as compared with 204.7 thousand tons last year.

The decrease in the sales turnover originated partially from the quantitative decrease in sales, that was caused by the slowdown in the local market coupled with preparations for the development of new markets overseas, that led to the channeling of sales toward exports along with a decrease in selling prices at Amnir and in packaging paper and as a result of the impact of dumping prices due to imports from Europe (see reference to dumping and actions initiated in this respect in section A 2 (a) 2, above).

The division concluded 2009 with an operating loss of approximately NIS 20.9 million, as compared with an operating profit of NIS 34.8 million last year. The division’s operating loss in the fourth quarter of the year amounted to NIS 6.4 million, as compared with an operating loss of NIS 1.2 million in the corresponding quarter last year and an operating loss of NIS 6.6 million in the third quarter this year.
 
 
 
20

 

The deterioration in the operating profit in the reported period in relation to the preceding year, is primarily attributed to the aforesaid decrease in selling prices, that also originated from dumping prices, coupled with a decrease in the quantities sold. Consequently, extensive efficiency measures have been implemented at Amnir, both at the packaging paper plant and at the plastic recycling plant, which helped to significantly offset the substantial loss incurred by the packaging paper segment and will lend support to the expected continued improvement over the next several months, following the operation of Machine 8.

This trend began to change in the fourth quarter of the year, primarily as a result of an improvement in the quantities sold and in the selling prices. The impact of this improvement is not evident in the reported results primarily due to the continuing acceleration in the export of packaging paper (so as to build a customer base), at the expense of the local market.

The above information pertaining to the expected the selling prices 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 paper markets as well as changes in the supply and demand for paper products worldwide.

 
5.
Graffiti - Office Supplies Marketing

Graffiti's sales turnover in 2009 amounted to NIS 151.0 million as compared with NIS 131.1 million last year, representing an increase of 15.2%. The sales turnover of Graffiti amounted to NIS 42.1 million in the fourth quarter this year, as compared with NIS 34.7 million last year, representing an increase of 21.3% and as compared with NIS 39.7 million in the third quarter this year.

In 2009, Graffiti recorded an operating profit of NIS 4.0 million, as compared with an operating profit of NIS 3.2 million last year, representing an increase of 25%. Graffiti's operating profit in the fourth quarter of 2009 amounted to NIS 1.2 million, as compared with operating profit of NIS 0.8 million in the fourth quarter last year. The increase in operating profit in 2009 originated primarily from the increase in sales as a result of the acquisition of the Yavne - Pitango client portfolio last year, coupled with a decrease in general and administrative expenses, along with efficiency measures and savings in purchasing.

At the beginning of August 2008, Graffiti purchased the operations of Yavne Pitango 2000 (1994) Ltd., which was also engaged in the marketing of office equipment and supplies to businesses and institutions in Northern Israel. The sales turnover of Yavne Pitango shortly before the execution of the transaction was estimated at NIS 20 million. The additional sales by Graffiti resulting from the operations of Yavne Pitango in 2009 amounted to approximately NIS 19.8 million.

Graffiti continues to implement its plan for growth in the marketing of office supplies to businesses market and is taking several courses of action in order to establish its position as a leader in this market:
 
 
 
21

 

Graffiti is constantly working to improve the procurement network, with an emphasis on imports from the Far-East that will serve to significantly reduce purchasing costs, aiming to improve the gross and operating profitability.

In 2010, Graffiti, together with other companies in the group, is scheduled to relocate to a modern and efficient distribution center in Modiin, that would allow to significantly cut operating costs, while enabling continued growth in sales and profit.

In the reported period, Graffiti continued the development of the IT platform that will enable the acceleration of growth and profit alongside the improvement of customer service, in complement to the modern setup at the new distribution site.

 
E.
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 elements, so as to reach decisions in this matter. The individual responsible for the implementation of market risk management policy at the Company is Shaul Glicksberg, the Group's VP of Finance and Business Development.

 
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 these exposures. True to December 31, 2009, the Company entered into hedging transactions in the sum of 11.5 million euro, in order to hedge the cash flows for the acquisition of fixed assets from equipment vendors for Machine 8.

It should be noted that on the aggregate level that includes associated companies, the currency exposure is limited.
 
 
 
22

 
 
Consumer Price Index Risks

The Company is exposed to changes in the Consumer Price Index, pertaining to the debentures issued by the Company and to long-term loans, in the total sum of NIS 356.2 million.

In early 2010, 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 30 million, pursuant to previous transactions that were made in early 2009 and terminated at the end of 2009.

The company continues to regularly monitor hedging prices for covering its exposure and in the event that these will be reasonable, the company will enter into the relevant hedging transactions.

The company also enjoys natural hedging due to the current debt of an associated company that is linked to the consumer price index.

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 Group also makes use of credits insurance services at some of the Group companies, as needed.
 
The financial statements include provisions for doubtful debts, based on the existing risks on the date of the statements.

Sensitivity Analysis Tables for Sensitive Instruments, According to Changes in Market Elements as at December 31, 2009:
 
Sensitivity to Interest Rates
 
Sensitive Instruments
 
Profit (loss) from changes
   
Fair value as at Dec-31-09
   
Profit (loss) from changes
 
   
Interest rise
10%
   
Interest rise
5%
   
Interest decrease
5%
   
Interest decrease
10%
 
In NIS thousands
 
Series 2 Debentures
    1,247       626       (136,715 )     (631 )     (1,266 )
Series 3 Debentures
    3,160       1,590       (207,266 )     (1,611 )     (3,442 )
Series 4 Debentures
    2,729       1,371       (266,721 )     (1,383 )     (2,779 )
Loan A - fixed interest
    148       74       (23,350 )     (75 )     (150 )
Loan B - fixed interest
    1,500       754       (111,745 )     (763 )     (1,534 )
Loan C
    135       68       (24,119 )     (68 )     (136 )
Long-term loans and capital notes – granted
    (195 )     (98 )     50,980       98       197  
 
The fair value of the loans is based on a calculation of the present value of the cash flows, according to the generally-accepted interest rate on loans with similar characteristics (4% in 2009).
 
Regarding the terms of the debentures and other liabilities – See Note 9 to the annual financial statements dated December 31, 2009.
 
Regarding long-term loans and capital notes granted - See Note 5 to the annual financial statements dated December 31, 2009.
 
 
 
23

 
 
U
Sensitivity of euro-linked instruments to changes in the euro exchange rate
 
Sensitive Instruments
 
Profit (loss) from changes
   
Fair value as at Dec-31-09
   
Profit (loss) from changes
 
   
Rise in
10%
   
Rise in
5%
   
Decrease in
5%
   
Decrease in
10%
 
In NIS thousands
 
Cash and cash equivalents
    203       101       2,027       (101 )     (203 )
Designated deposits
    2,395       1,197       23,949       (1,197 )     (2,395 )
Other Accounts Receivable
    508       254       5,075       (254 )     (508 )
Other Accounts Payable
    (7,258 )     (3,629 )     (72,583 )     3,629       7,258  
NIS- forward transaction
    5,123       1,994       (1,114 )     (4,264 )     (7,393 )
 
 
Sensitivity to the US Dollar Exchange Rate
 
Sensitive Instruments
 
Profit (loss) from changes
   
Fair value as at Dec-31-09
   
Profit (loss) from changes
 
   
Revaluation of $
10%
   
Revaluation of $
5%
   
Devaluation of $
5%
   
Devaluation of $
10%
 
In NIS thousands
 
Cash and cash equivalents
    495       247       4,945       (247 )     (495 )
Other Accounts Receivable
    1,271       635       12,707       (635 )     (1,271 )
Other Accounts Payable
    (4,082 )     (2,041 )     (40,820 )     2,041       4,082  
Liabilities at fair value through the statement of income
    (1,198 )     (599 )     (11,982 )     599       1,198  

Other accounts receivable reflect primarily short-term customer debts
 
Capital note – See Note 5 to the financial statements
 
 
 
24

 
 
Sensitivity to the Consumer Price Index
 
Sensitive Instruments
 
Profit (loss) from changes
   
Fair value as at Dec-31-09
   
Profit (loss) from changes
 
   
Revaluation of $
10%
   
Revaluation of $
5%
   
Devaluation of $
5%
   
Devaluation of $
10%
 
In NIS thousands
 
NIS-CPI forward transactions
    2,000       1,000       3,052       (1,000 )     (2,000 )
Bonds 2
    (4,145 )     (2,073 )     (207,266 )     2,073       4,145  
Bonds 3
    (2,734 )     (1,367 )     (136,715 )     1,367       2,734  
 
See Note 17c to the financial statements
 


Sensitivity to the exchange rate of the yen
 
Sensitive Instruments
 
Profit (loss) from changes
   
Fair value as at Dec-31-09
   
Profit (loss) from changes
 
   
Revaluation of Yen
10%
   
Revaluation of Yen
5%
   
Devaluation of Yen
5%
   
Devaluation of Yen
10%
 
In NIS thousands
 
 Accounts Payable
    260       130       2,605       (130 )     (260 )
 
 
Sensitivity Analysis Tables for Sensitive Instruments, According to Changes in Market Elements as at December 31, 2008:
 
Sensitivity to Interest Rates
 
Sensitive Instruments
 
Profit (loss) from changes
   
Fair value
As at Dec-31-08
   
Profit (loss) from changes
 
   
Interest rise
10%
   
Interest rise
5%
   
Interest decrease
5%
   
Interest decrease
10%
 
In NIS thousands
 
Series 1 Debentures
    (16     (8     (7,537     8       16  
Series 2 Debentures
    (1,866 )     (937 )     (155,637     947       1,903  
Series 3 Debentures
    (3,979 )     (2,005 )     (195,959     2,037       4,105  
Series 4 Debentures
    (3,956 )     (1,990 )     (269,078     2,013       4,050  
Other liabilities
    (134 )     (57 )     (31,359 )     68       136  
Long-term loans and capital notes - granted
    212       106       49,355       (106     (213

The fair value of the loans is based on a calculation of the present value of the cash flows, according to the generally-accepted interest rate on loans with similar characteristics (4.5% in 2008).
 
Regarding the terms of the debentures and other liabilities – See Note 9 to the financial statements
 
Regarding long-term loans and capital notes granted - See Note 5 to the financial statements
U
 
 
 
25

 
 
Sensitivity of euro-linked instruments to changes in the euro exchange rate
 
Sensitive Instruments
 
Profit (loss) from changes
   
Fair value as at Dec-31-08
   
Profit (loss) from changes
 
   
Rise in
10%
   
Rise in
5%
   
Decrease in
5%
   
Decrease in
10%
 
In NIS thousands
 
Cash and cash equivalents
    268       134       2,681       (134     (268)  
Designated deposits
    12,575       6,287       125,747       (6,287     (12,575
Other Accounts Receivable
    321       160       3,206       (160     (321
 Supplier engagement transaction - Alstom
    (92     (46     (922     46       92  
Other Accounts Payable
    (2,397     (1,198     (23,969     1,198       2,397  
PUT options
    -       -       (836     (2,088     (3,412
NIS- forward transaction
    12,293       6,996       1,304       (3,599     8,896

Sensitivity to the US Dollar Exchange Rate
 
Sensitive Instruments
 
Profit (loss) from changes
   
Fair value as at Dec-31-08
   
Profit (loss) from changes
 
   
Revaluation of $
10%
   
Revaluation of $
5%
   
Devaluation of $
10%
   
Devaluation of $
5%
 
In NIS thousands
 
Cash and cash equivalents
    233       116       2,327       (116  )     (233  )
Other Accounts Receivable
    1,472       736       14,722       (736  )     (1,472  )
 Accounts Payable
    (3,246  )     (1,623  )     (32,549  )     1,623       3,246  

Other accounts receivable reflect primarily short-term customer debts.
 
Capital note – See Note 5d to the financial statements
 
Accounts payable reflect primarily short-term liabilities to suppliers.

Sensitivity to Interest Rates
 
Sensitive Instruments
 
Profit (loss) from changes
   
Fair value
As at Dec-31-08
   
Profit (loss) from changes
 
   
2% increase in CPI
   
1% increase in CPI
   
1%
Decrease in CPI
   
2% Decrease in CPI
 
In NIS thousands
 
NIS-CPI forward transaction
    1,800       900       1,649       (900)       (1,800)  
 
 
 
26

 
 
 
Linkage Base Report
 
 Below are the balance sheet items, according to linkage bases, as at December 31, 2009:
 
In NIS millions
 
Unlinked
   
CPI-linked
   
In foreign currency, or linked thereto (primarily US$)
   
-linked
   
Non-Monetary Items
   
Total
 
Assets
                                   
Cash and cash equivalents
    19.3             5.0       2.0             26.3  
Short-term deposits and investments
    103.7                     23.9             127.6  
Other Accounts Receivable
    398.7       1.1       13.3       5.1       4.6       422.8  
Inventories
                                    175.9       175.9  
Investments in Associated Companies
    17.8       36.7                       286.5       341.0  
Deferred taxes on income
                                    29.7       29.7  
Fixed assets, net
                                    1,126.4       1,126.4  
Intangible Assets
                                    27.1       27.1  
Land under lease
                                    37.6       37.6  
Other assets
                                    1.3       1.3  
Assets on account of employee benefits
                                            0.6  
Total Assets
    540.1       37.8       18.3       31.0       1,689.1       2,316.3  
Liabilities
                                               
Short-term credit from banks
    131.6                                       131.6  
Other Accounts Payable
    252.6               43.4       72.6               368.6  
Current tax liabilities
    2.7                                       2.7  
Deferred taxes on income
                                    58.1       58.1  
Long-Term Loans
    253.5       28.1                               281.6  
Notes (debentures) – including current maturities
    237.9       328.1                               566.0  
Liabilities on account of employee benefits
    37.3                                       37.3  
Liabilities at fair value through the statement of income
                    12.0                       12.0  
Shareholders’ equity, reserves and retained earnings
                                    858.4       858.4  
Total liabilities and equity
    915.6       356.2       55.4       72.6       916.5       2,316.3  
Surplus financial assets (liabilities) as at Dec-31-2009
    (375.5 )     (318.4 )     (37.1 )     (41.6 )     772.6       0.0  
 
 
* As to hedging transactions associated with surplus CPI-linked liabilities, see Section F(2), above.
 
 
 
27

 
 
 
Linkage Base Report
 
Below are the balance sheet items, according to linkage bases, as at December 31, 2008:
 
In NIS millions
 
Unlinked
   
CPI-linked
   
In foreign currency, or linked thereto (primarily US$)
   
-linked
   
Non-Monetary Items
   
Total
 
Assets
                                   
Cash and cash equivalents
    8.1             2.3       2.7             13.1  
Short-term deposits and investments
    123.9                     125.7             249.6  
Other Accounts Receivable
    396.0       0.9       15.8       3.2       3.9       419.8  
Inventories
                                    168.8       168.8  
Current tax assets
    6.3                                       6.3  
Investments in Associated Companies
    53.0                               265.1       318.1  
Deferred taxes on income
                                    29.8       29.8  
Fixed assets, net
                                    767.6       767.6  
Intangible Assets
                                    31.5       31.5  
Other assets
                                    38.9       38.9  
Assets on account of employee benefits
    0.6                                       0.6  
Total Assets
    587.9       0.9       18.1       131.6       1,305.6       2,044.1  
Liabilities
                                               
Short-term credit from banks
    77.7                                       77.7  
Other Accounts Payable
    240.3               36.8       24.0               301.1  
Financial liability at fair value through the statement of income
                    13.9                       13.9  
Deferred taxes on income
                                    76.6       76.6  
Long-term loans, including current maturities
    124.0       35.2                               159.2  
Notes (debentures) – including current maturities
    238.6       354.7                               593.3  
Liabilities on account of employee benefits
    31.9                                       31.9  
Other Liabilities
    32.8                                       32.8  
Shareholders’ equity, reserves and retained earnings
                                    757.6       757.6  
Total liabilities and equity
    745.3       389.9       50.7       24.0       834.2       2,044.1  
Surplus financial assets (liabilities) as at Dec-31-08
    (157.4 )     (389.0 )     (12.6 )     107.6       471.4          
 
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 economic and political 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.
 
Hadera Paper is also exposed to tax related issues at KCTR, as detailed in Note 12j to the financial statements dated December 31, 2009.
 
 
 
28

 

 
F.
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.

 
G.
Corporate Governance Issues

 
1.
Donations and Contributions

Hadera Paper Group has continued to implement its policy for corporate and social responsibility and has continued to invest both efforts and resources in matters related to community involvement and contribution. The company's employees and managers at the various sites are all taking an active part in community involvement, in supporting teenagers and primarily in working toward reducing social inequalities and in providing equal opportunity for education and for personal accomplishments within the framework of the company and the community.
 
As part of this policy, the company makes contributions to various institutions active in the said areas. The Group's contributions amounted to NIS 448 thousand in 2009.

In parallel, through its employees, the Company also participates in volunteer activity in the community, for promoting these same objectives.

This year the company focused on donations to youth clubs, community centers operating in the afternoons - with the intention of fortifying and enriching teenagers while granting them a proper opportunity.

Moreover the company is active in the granting of student scholarships, through the Shenkar Foundation, that was established by the company together with its Austrian strategic partner in Mondi Hadera. Assistance was also provided to two projects: A women's club in Um-el-Fahem and a children's club in the Eastern Worker neighborhood of Hadera, as well as for the purchase of computers for the youth center in Hadera. The total contributions of the company through the Shenkar Foundation amounted to NIS 101 thousand.
 
 
2.
Members of the Board of Directors Possessing Financial Skills and Qualifications
 
The minimum number of company directors possessing accounting and financial qualifications and skills was determined to be two for the company, in consideration of the nature of the accounting and financial issues that are raised in the preparation of the company’s financial statements, in view of the company’s areas of operation and in consideration of the composition of the board of directors as a whole, that includes individuals possessing business, management and professional experience that enables them to deal effectively with the tasks of managing the company, including reporting duties
 
 
 
29

 
 
The members of the company’s board of directors who possess accounting and financial qualifications and skills are:
 
Avi Yehezkel -
Holds a degree in Economics from Tel Aviv University and a Masters' degree in Law from Bar-Ilan University. External director at Bank Yahav. Served as a Knesset member between 1992-2003, intermittently as Chairman of the Economics Committee, Chairman of the Defense Budget Committee, Chairman of the Capital Market Sub-Committee, Chairman of the Banking Sub-Committee and member of the Finance Committee.
 
Itzhak Manor -
Holds an MBA from Hebrew University. Serves as director at various publicly-traded and privately-held companies within the IDB Group; Chairman of companies in the David Lubinsky Group Ltd.
 
Amos Mar-Haim -
Holds a BA in economics and an MBA from Hebrew University. Formerly served and currently serves as Chairman or Deputy Chairman at publicly-traded or privately-held companies. Member of the Israeli Accounting Standards Board.
 
Amir Makov -
Holds a Law degree from Hebrew University and a Chemical Engineering degree (BSc) from the Haifa Technion. Serves as Chairman of the Israel Petroleum and Gas Institute, served as CEO of Haifa Chemicals Ltd., Sonol Israel Ltd..  Served and serves as a director of various publicly-traded and privately-held companies including Leumi Card Ltd., Dead Sea Works Ltd., Dead Sea Bromine Ltd. and more.
 
 
3.
The Company’s Internal Auditor
 
 
a.
Auditor’s Name: Eli Greenbaum
In the position since: July 16, 2006
Credentials: CPA
 
 
b.
The Auditor is employed by the Company.

 
c.
The Company’s Audit Committee has approved the appointment of the Auditor on March 7, 2006. The Auditor is a CPA by training and has dealt in Treasury positions at the Company for 20 years and consequently possesses the necessary skills for the job.

 
d.
The Internal Auditor is supervised by the General Manager.

 
e.
The work plan for internal auditing is annual. The work plan is determined on the basis of: A five-year plan, covering numerous issues that were approved by the Audit Committee according to the auditing needs of the Company and covers issues that the Internal Auditor believes warrant his examination and consideration in the course of the current year. The work plan is determined by the Internal Auditor and the Audit Committee. The work plan is approved by the Audit Committee. The judgment of the Internal Auditor in terms of deviations from the audit program, subject to the approval of the Company’s Audit Committee.
 
 
 
30

 
 
 
f.
The Internal Auditing program includes auditing topics in corporations that constitute significant holdings of the Company.

 
g.
Volume of employment in 2009: Full-time job as Auditor, plus a part-time assistant. The auditing hours number a total of 250 average monthly hours, totaling 3,000 hours annually, divided equally between the corporation and its investee companies:
 
 
Audited body
Estimated hours of audit annually
Internal auditing at the Company
370 hours
Auditing at investee companies
2,630 hours
Total hours
3,000 hours
 
 
 
During 2009 a certain decrease in the auditing hours occur, originated primarily from the retirement of one of the employees of the Auditing Department. The company did not allocate another employee to replace the one that retired, since there exists a team dealing in the execution and implementation of internal auditing processes as part of the SOX procedures, to which the company is committed since it is traded on AMEX. The company believes that these procedures are complementary to the internal auditing work. The internal auditor conducts his audit in accordance with acceptable professional standards for internal audit in Israel and overseas, and according to the Company's Board of Directors, based on the assessment of the Company's Audit Committee, the internal auditor complies with the requirements set forth in those standards.

 
h.
The Company declares that it has granted the Internal Auditor free, constant and direct access to all the information at the disposal of the Company and the investee companies.

 
i.
Audit reports were submitted in writing and discussed on the following dates:

 Submitted
 
   Discussed
4.3.09
 
8.3.09
6.5.09
 
10.5.09
5.8.09
 
9.8.09
4.11.09
 
8.11.09

 
j.
The scope of employment of the Internal Auditor is determined according to a cycle that renders it possible to audit all the significant topics at the Company, once every few years.
 
This scope of activity, the nature, the continuity of operation and the work plan of the Internal Auditor – are reasonable – according to the estimation of the Company’s Audit Committee, while rendering it possible to realize the Internal Audit objectives of the organization.
 
 
 
31

 

 
k.
The Auditor is employed by the Company. The Board of Directors believes that the compensation received by the Internal Auditor does not influence his professional judgment.

 
4.
Senior Employee Compensation

In determining the compensation and bonuses of senior employees, the directors and Compensation Committee took into consideration the position and standing of each executive and his contribution to the operations and business of the Company. The labor wage expenses and benefits granted to senior executives and position holders are reasonable and reflect the company's accomplishments and are comparable with market standards.

In January 2008, the board of directors decided to adopt a senior employee stock option plan. In the first quarter of 2008, a sum of 250,500 stock options were allocated to senior employees at associated and consolidated companies, and on January 8, 2009 - a sum of 34,000 options were granted, out of the 35,250 allocated to the trustee, for future granting. Total general expenses for this program are estimated at NIS 15.5 million, as at the date they were granted. The plan's impact on the consolidated financial statements is estimated at NIS 13.8 million.

In November 2009, the Group's CEO announced that he was resigning his position, effective December 31, 2009. For details regarding payments to the retiring Group CEO, see regulation 21- Remuneration of Senior Officers, Appendix D to the Company's Periodical Report for 2009.
 
As part of the alignment with the global economic crisis, the Company's management adopted a policy of mutually-agreed pay cuts for executives. In this framework, the senior executives and position holders mutually consent to waiving between 8% and 10% of their wages in 2009.

 
5.
Auditing CPA Fees

Current Fees
 
In 2009, fees paid to the Company's auditing CPA, inclusive of audit services - including audits of internal auditing for financial reporting - amounted to $220 thousand, as compared with $326 thousand in 2008. The hours invested by the auditing CPAs on account of these services amounted to 6,267 and 7,190 hours in the years 2009 and 2008, respectively.
 
 
 
32

 

Below are details of the total fee payable to the auditing CPA of the Company and its subsidiaries in the reported year and in the preceding year:

   
2009
   
2008
 
   
Thousands of $
   
Hours
   
Thousands of $
   
Hours
 
Corporate auditing and auditing of tax reports for the company (including shelf prospectus in 2008).
    135,000       4,506       206,000       5,140  
Auditing of internal auditors
    65,700       1,100       73,000       1,200  
Miscellaneous
    19,700       421       46,800       850  
Total
    220,400       6,027       325,800       7,190  

 
6.
External Directors

The Company chose not to include in its articles of association the provision with regard to the percentage of external board members.

 
7.
Internal Auditing - SOX
 
By virtue of being a company whose shares are publicly traded in the United States, the company is subject to "Sarbanes Oxley" (SOX) in its entirety, including Section 302 (proper disclosure and evaluation of controls in the organization), Section 404 (Management Assessment of Internal Controls) and Section 906 (Criminal responsibility for breach of this section). The main points of the law have to do with increasing reporting and disclosure, the authorities and duties of the Audit Committee, manager responsibilities, enforcement, sanctions and penalties and increasing the independence from external accountants. The controls instigated by the company for the implementation of the law are regularly inspected by the company's auditing team and by the external accountant. Since 2007, with the introduction of the directives of the said law in the United States, the company is complying with the demands of the law.

We note that on February 16, 2010, the Securities and Exchange Commission (SEC) authorized the company's requests that its reports regarding the effectiveness of internal control be made in the format prescribed by law, by virtue of its being listed for trade on AMEX, i.e.- the SOX regulations in the United States that apply to the company as mentioned above, subject to the company having undertaken to examine, once every quarter, its compliance with the terms described in its application to the SEC, including any change in the directives of the law in Israel and in the United States, in the status of the company as it relates to these laws, changes in the implementation of the SOX regulations and any other change that may affect the disclosure provided by the company.

 
8.
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.
 
 
 
33

 

 The Committee conducts its examination via detailed presentations from company executives and others, including: CEO - Ofer Bloch, 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.
 
 
H.
Disclosure Directives Related to the Financial Reporting of the Corporation
 
 
1.
Events Subsequent to the Balance Sheet Date
 
For details regarding events that occurred subsequent to the balance sheet date, see Note 20 to the financial statements dated December 31, 2009.

 
2.
Critical Accounting Estimates
 
Regarding critical accounting estimates, see Note 4 of the financial statements dated December 31, 2009.
 
 
 
34

 

 
I.
Dedicated Disclosure to Debenture Holders

For details regarding the rating of debentures, see Note 15 the  attached periodical report for the year 2009.
 
 
1.
Sources of Finance

See Section B2 - Financial Liabilities and further details in the table below.
 
 
2.
Debentures for institutional investors and the public

Series
Issue Date
Name of Rating Company
Rating at time of issue and at report date
Total stated value at issue date
Interest type
Stated Interest
Registered for trade on stock exchange (Yes/No)
Interest payment dates
Nominal par value as at Dec-31-09
Book value of debenture balances as at Dec-31-09
Book value of interest to be paid as at Dec-31-09
Market value as at Dec-31-09
In NIS millions
Series 2
Dec 2003
Maalot
A+
200,000,000
Fixed
5.65%
No
Annual interest
On December 21
In the years 2004-2013
114.3
131.7
0.2
136.7
Series 3
Jul 2008
Maalot
A+
187,500,000
Fixed
4.65%
Yes
Annual interest
On July 10
In the years 2009-2018
187.5
197.8
4.5
207.3
Series 4
Jul-Aug 2008
Maalot
A+
235,557,000
Fixed
7.45%
Yes
Semi-annual interest
On January 10 and July 10
In the years 2009-2015
235.6
235.6
8.3
266.7
 
Comments:
 
 
1.
Series 2 - Linked to the Consumer Price Index (CPI). Principal repaid in 7 annual installments, between Dec-21-2007 and Dec-21-2013.
 
2.
Series 3 - Linked to the Consumer Price Index (CPI). Principal repaid in 9 annual installments, between July 2010 and July 2018.
 
3.
Series 4 - Principal repaid in 6 annual installments, between July 2010 and July 2015.
 
4.
The trustee of the debentures (Series 2) is Bank Leumi Le-Israel Trust Corporation Ltd. The responsible contact person on behalf of Bank Leumi Le-Israel Trust Corporation Ltd. is Ms. Idit Teuzer (telephone: 972-3-5170777).
 
5.
The trustee of the public debentures (Series 3, 4) is Hermetic Trust Corporation (1975) Ltd. The responsible contact people on behalf of Hermetic Trust Corporation (1975) Ltd. are Mr. Dan Avnon and /or Ms. Merav Ofer-Oren (telephone: 972-3-5272272).
 
6.
As at the date of the report, the Company has met all of the terms and undertakings of the trust notes and there exist no terms that constitute just cause for demanding the immediate repayment of the debentures.
 
         
 
Zvika Livnat
Chairman of the Board of Directors
 
Ofer Bloch
CEO
 

 
35

 
 
 
Exhibit 3
 
HADERA PAPER LTD

CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2009

 
 

 
 
HADERA PAPER LTD
 
CONSOLIDATED FINANCIAL STATEMENTS
 AS OF DECEMBER 31, 2009
 
TABLE OF CONTENTS
 
 
Page
F-1
Consolidated Financial Statements
F-1
F-2 - F-3
F-4
F-5
F-6 - F-7
F-8 - F-9
F-10 - F-94

 
 

 
 
HADERA PAPER LTD
 
  Brightman Almagor Zohar
Haifa office
5 Ma’aleh Hashichrur Street
P.O.B. 5648, Haifa 31055
Israel

Tel: +972 (4) 860 7333
Fax: +972 (4) 867 2528
info-haifa@deloitte.co.il
www.deloitte.co.il
 
Report of Independent Registered Public Accounting Firm

To the shareholders of
Hadera Paper ltd.

We have audited the accompanying consolidated statements of financial position of Hadera Paper Ltd. (“the Company”) as of December 31, 2009 and 2008, and the related consolidated Income Statements, consolidated statements of comprehensive income and consolidated statements of changes in shareholders' equity and consolidated Statements of cash flows of the Company for each of the three years in the period ended December 31, 2009. These financial statements are the responsibility of the Company's board of directors and management. Our responsibility is to express an opinion on these financial statements based on our audit.

We did not audit the financial statements of certain subsidiaries, whose assets constitute approximately 17% and 20% of total consolidated assets as of December 31, 2009 and 2008, respectively, and whose revenues constitute approximately 54% and 25% of total consolidated revenues for the year ended December 31, 2009 and 2008, respectively.
 
Likewise we did not audit the financial statements of certain associated companies, in which the Company's share in their profits or losses is a net amount of 1,440 and 7,267 Thousands NIS, for the years ended December 31, 2008 and 2007 respectively. The financial statements of those companies were audited by other Independent registered Public Accounting Firms whose reports have been furnished to us, and our opinion, insofar as it relates to amounts included for those companies, is based solely on the reports of the other independent auditors.

We conducted our audits in accordance with generally accepted auditing standards in Israel, including those prescribed under the Auditors' Regulations (Auditor's Mode of Performance), 1973 This standard require that we plan and perform the audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by the Board of Directors and management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, based on our audit and the reports of other independent auditors, the financial statements referred to above present fairly, in all material respects, the financial position of the Company and her subsidiaries basis as of December 31, 2009 and 2008, and the results of operations, changes in shareholders’ equity and cash flows of the Company on consolidated basis, for each of the three years in the period ended December 31, 2009, in conformity with international financial reporting standards (IFRS) and in accordance with the Israeli Securities Regulations (Annual Financial Statements), 2010.

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

 
Israel
 
March 7, 2010
 
 
F - 1

 
 
HADERA PAPER LTD

CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
 
         
December 31
 
   
Note
   
2 0 0 9
   
2 0 0 8
 
         
NIS in thousands
 
                   
Assets
                 
Current Assets
                 
Cash and cash equivalents
    2f       26,261       13,128  
Designated deposits
    2f       127,600       249,599  
Accounts receivable:
    14a                  
   Trade receivables
            323,882       318,926  
   Other receivables
            98,897       100,888  
Current tax assets
            -       6,271  
Inventories
    14b       175,944       168,755  
Total Current Assets
            752,584       857,567  
                         
Non-Current Assets
                       
Fixed assets
    6       1,126,360       767,542  
Investments in associated companies
    5       340,975       318,101  
Deferred tax assets
    12       29,745       29,848  
Deferred lease expenses
    7       37,630       36,344  
Other intangible assets
    8       27,084       31,519  
Other assets
            1,298       2,549  
Employee benefit assets
    10       649       624  
Total Non-Current Assets
            1,563,741       1,186,527  
                         
Total Assets
            2,316,325       2,044,094  
 
         
Z. Livnat
 
O. Bloch
 
S. Gliksberg
Chairman of the Board of Directors
 
Chief Executive Officer
 
Chief Financial and Business
Development Officer
 
Approval date of the financial statements: March 7, 2010
 
The accompanying notes are an integral part of the consolidated financial statements.

 
F - 2

 
 
HADERA PAPER LTD

CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
 
         
December 31
 
   
Note
   
2 0 0 9
   
2 0 0 8
 
         
NIS in thousands
 
                   
Liabilities and Equity
                 
Current Liabilities
                 
Credit from banks and others
    9b, 14c       131,572       77,655  
Current maturities of long-term notes and long term loans
    9a, b       149,940       76,469  
Trade payables
    14d       255,895       195,020  
Other payables and accrued expenses
    14d       112,745       * 104,943  
Short term employee benefit liabilities
    10a       22,421       * 17,478  
Other financial liabilities
    9d       -       32,770  
Financial liabilities at fair value through profit and loss
    2q(2)       11,982       13,904  
Current tax liabilities
            2,760       -  
Total Current Liabilities
            687,315       518,239  
                         
Non-Current Liabilities
                       
Loans from banks and others
    9b       225,802       121,910  
Notes
    9a       471,815       554,124  
Deferred tax liabilities
    12       58,053       76,641  
Employee benefit liabilities
    10a       14,911       * 15,551  
Total Non-Current Liabilities
            770,581       768,226  
                         
Capital and reserves
    11                  
Issued capital
            125,267       125,267  
Reserves
            307,432       299,949  
Retained earnings
            399,346       306,097  
capital and reserves attributed to shareholders
            832,045       731,313  
                         
Minority Interests
            26,384       26,316  
                         
Total capital and reserves
            858,429       757,629  
                         
Total Liabilities and Equity
            2,316,325       2,044,094  
 
* Reclassified.
 
The accompanying notes are an integral part of the consolidated financial statements.
 
 
F - 3

 
 
HADERA PAPER LTD
 
CONSOLIDATED INCOME STATEMENTS
 
         
Year ended December 31
 
   
Note
   
2 0 0 9
   
2 0 0 8
   
2 0 0 7
 
         
NIS in thousands
 
                         
Revenue
    14e       891,995       673,484       583,650  
Cost of sales
    14f       765,677       542,387       440,739  
                                 
Gross profit
            126,318       131,097       142,911  
                                 
Selling, marketing, general and administrative expenses
    14g                          
Selling and marketing expenses
            71,998       45,674       31,344  
                                 
General and administrative expenses
            58,967       54,970       35,991  
                                 
Other (income) expenses, net
    14l       (20,234 )     (4,898 )     4,467  
                                 
Total expenses
            110,731       95,746       71,802  
                                 
Profit from ordinary operations
            15,587       35,351       71,109  
                                 
Finance income
    14j       4,727       12,069       10,648  
Finance expenses
    14k       22,992       27,112       32,817  
                                 
Finance expenses, net
            18,265       15,043       22,169  
Profit (loss) after financial expenses
            (2,678 )     20,308       48,940  
                                 
Share in profit of associated companies, net
    5b       87,359       51,315       856  
Profit before taxes on income
            84,681       71,623       49,796  
                                 
Taxes on income
    12e       (7,067 )     3,663       18,261  
                                 
Profit for the year
            91,748       67,960       31,535  
                                 
Attributed to:                                
Company shareholders
            91,230       69,710       31,535  
Minority interests
            518       (1,750 )     -  
                                 
              91,748       67,960       31,535  
                                 
Earning for regular share of NIS 0.01 par value (see note 15):
         
NIS
 
Primary attributed to Company shareholders
            18.03       13.77       7.63  
                                 
Fully diluted attributed to company shareholders
            18.03       13.77       7.62  
                                 
Number of share used to compute the primary earnings per share
            5,060,788       5,060,774       4,132,728  
                                 
Number of share used to compute the fully diluted earnings per share
            5,060,788       5,060,774       4,139,533  
 
The accompanying notes are an integral part of the consolidated financial statements.
 
 
F - 4

 
 
HADERA PAPER LTD
 
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME


   
Year ended
 
   
December 31
 
   
2 0 0 9
   
2 0 0 8
   
2 0 0 7
 
   
NIS in thousands
 
Comprehensive Income
    91,748       67,960       31,535  
                         
Other Comprehensive Income
                       
Profit (loss) on cash flow hedges, net