Edgar Filing: Hadera Paper Ltd

zk1110619.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 November 2011

_________________

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:

Form 20-F x Form 40-F o

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:

Yes o No x

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

Attached hereto as Exhibit 1 and incorporated herein by reference is the Registrant’s press release dated November 16, 2011 with respect to the Registrant’s results of operations for the quarter ended September 30, 2011.

Attached hereto as Exhibit 2 and incorporated herein by reference is the Registrant’s Management Discussion with respect to the Registrant’s results of operations for the quarter ended September 30, 2011.

Attached hereto as Exhibit 3 and incorporated herein by reference are the Registrant’s unaudited condensed consolidated financial statements for the quarter ended September 30, 2011.

Attached hereto as Exhibit 5 and incorporated herein by reference are the unaudited condensed interim consolidated financial statements of Hogla-Kimberly Ltd. and subsidiaries with respect to the quarter ended September 30, 2011.

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/ Yael Nevo
	Name: Yael Nevo
	Title: Corporate Secretary

Dated: November 16, 2011.

EXHIBIT INDEX

Exhibit No.

Description

Press release dated November 16, 2011.

Registrant's management discussion.

Registrant's unaudited condensed consolidated financial statements.

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 the Third Quarter and Nine Months Ended

September 30, 2011

Hadera, Israel, November 16, 2011 - Hadera Paper Ltd. (AMEX:AIP) (the “Company”) today reported financial results for the third quarter (the "Third Quarter")and first nine months ended September 30, 2011 (the "Reported Period"). The Company, its subsidiaries and associated company – are referred to hereinafter as the "Group".

The Consolidated Data set forth below excludes the results of operation of the associated company Hogla-Kimberly Ltd. ("H-K").

Consolidated sales during the Reported Period amounted to NIS 1,541.7 million, as compared with NIS 784.6 million last year, representing an increase of 96.5%, originating primarily from growth in the sales of the packaging paper and recycling sector as compared with the corresponding period last year, coupled with the consolidation of the sales of Hadera Paper - Writing and Printing Ltd ("Hadera Paper Printing"), starting January 1, 2011, in the total sum of NIS 554.0 million, net of inter-company sales totaling NIS 526.3 million.

The consolidated sales in the Third Quarter of the year totaled NIS 519.5 million, as compared with NIS 295.4 million in the corresponding quarter last year, representing growth of approximately 75.9%, originating primarily as a result of the consolidation of the sales of Hadera Paper Printing, in the amount of NIS 184.7 million, coupled with growth in the sales of the packaging paper and recycling sector in relation to the corresponding quarter last year and as compared with second quarter sales this year of NIS 504.6 million, representing growth of approximately 2.96%.

The operating profit totaled NIS 45.8 million during the Reported Period, 3.0% of sales, as compared with NIS 32.7 million, 4.2% of sales, in the corresponding period last year. Net of non-recurring revenues and expenditures during the Reported Period and the corresponding period last year, the operating profit decreased from NIS 19.1 million to NIS 16.4 million. The decrease in the operating profit from current operations during the Reported Period, as compared with the corresponding period last year, originates primarily from the consolidation of the results of the Hadera Paper Printing segment since January 1, 2011, following an operating loss of NIS 13.1 million in this segment. This decrease was offset as a result of a rise in the gross profit of the various segments, in view of the increase in sales.

Operating loss amounted to NIS 9.5 million in the Third Quarter of the year, as compared with operating profit of NIS 20.2 million in the corresponding quarter last year. The transition to a loss in the Third Quarter originated primarily as a result of recording a provision for impairment on account of a cash-generating unit, coupled with the consolidation of the operating loss of Hadera Paper Printing, in the amount of NIS 3.2 million, as a result of a sharp rise in raw material prices, coupled with specific inefficiency in the manufacture of fine paper.

The net loss attributed to the Company's shareholders amounted to NIS 35.7 million in the Reported Period, as compared with net profit attributed to the Company's shareholders of NIS 65.4 million in the corresponding period last year. The net profit, net of non-recurring revenues and expenditures during the Reported Period, amounted to NIS 6.3 million, as compared with NIS 55.8 million in the corresponding period last year, representing a decrease of 88.8%.

The lower net profit attributed to the company shareholders during the Reported Period, was primarily affected by a non-recurring provision of NIS 58.8 million, recorded by the company following the decisions of the Court in Turkey concerning appeals filed by KCTR Turkey (49.9%) ("KCTR") pertaining to a demand for tax payment in Turkey, coupled with the recording of a provision for impairment on account of the Carmel cash-generating unit in the amount of NIS 7.0 million (net of taxes), that was offset from non-recurring revenues from the sale of real estate on Totzeret Ha'Aretz Street in Tel Aviv, the valuation of a Put option, as well as the improved operating profitability of the packaging paper and recycling segment. Moreover, the net profit was adversely affected by the rise in financial expenses during the Reported Period, in relation to the corresponding period last year, following the operation of Machine 8.

Basic loss per share amounted to NIS -7.02 per share ($-1.89 per share) in the Reported Period, as compared with basic earnings per share of NIS 12.88 per share ($3.51 per share) in the corresponding period last year.

Basic loss per share amounted to NIS -8.56 per share ($-2.31 per share) in the Third Quarter of the year, as compared with earnings of NIS 4.53 per share ($1.24 per share) in the corresponding quarter last year.

The exchange rate of the NIS in relation to the US dollar was devaluated by approximately 4.6% during the Reported Period, as compared with a revaluation of approximately 2.9% during the reported period last year (the average exchange rate of the NIS vis-à-vis the dollar was revaluated during the Reported Period by a rate of approximately 6.4% in relation to the corresponding period last year). The changes in exchange rates as mentioned above, affected the results of the various sectors, although the Group's business portfolio, including the associated companies, is practically at equilibrium in terms of foreign currency and consequently, the exposure of the Group to sharp fluctuations in currency exchange rates is low.

The inflation rate during the Reported Period amounted to 2.2%, as compared with an inflation rate of 1.9% in the corresponding period last year.

The Company estimates that the demand for recycled packaging paper, as a replacement for virgin packaging paper, is continuing in global paper markets. Following a slowdown in the global packaging paper market, in terms of virgin products in the Third Quarter, a decrease was recorded in the prices of recycled products. The trend of decreasing recycled product prices in the global packaging paper market - that began in the Third Quarter - amounted to approximately 4% in relation to the second quarter. The Company estimates that this trend will continue in the near future as well.

The Group manages a wide and diverse portfolio of companies and businesses focused on consumer goods and basic commodities. As part of the trend of consumption in the Israeli economy during the Reported Period, this trend led to an increase in demand at most Group companies for a wide range of products, while continuing to place a special emphasis on the implementation of efficiency and cost-cutting measures across all sectors of operation, including an employee retirement agreement, as part of a collective agreement.

On May 15, 2011, the Company signed an extension of the agreement for the purchase of natural gas with the partners in the Yam Tethys Project. The overall financial volume of the agreement is estimated at approximately $63 million (according to the calculation of the formula at the date of signing the agreement). The new gas agreement will enter into effect on July 1, 2011, for a period of two years. Following the new gas contract, an increase of 190% was recorded in the average price of gas, starting with the first day of the agreement. During the Reported Period water and electricity prices rose by an average rate of 21% and 4.4%, respectively, as compared with the corresponding period last year. In addition, a sharp rise was recorded in the price of paper waste, by an average rate of approximately 35%, in relation to last year. These price increases were offset by a revaluation of the NIS vis-à-vis the US dollar, during the Reported Period compared to last year, by a rate of approximately 6.4%. This revaluation brought about savings in the inputs and imported products denominated in this currency.

The financial expenses during the Reported Period amounted to NIS 61.7 million, as compared with NIS 28.4 million in the corresponding period last year. The growth in financial expenses originated as a result of the capitalization of some of the financing costs of Machine 8 during the corresponding period last year, along with the expansion of Bond Series 5 at the beginning of the Third Quarter that served to increase the financial expenses by approximately NIS 3.1 million. Moreover, an increase of NIS 2.6 million was recorded in financial expenses in relation to the corresponding period last year, as a result of the higher inflation rate during the Reported Period (Known Index) by approximately 2.7%, as compared with a lower increase of 1.6% in the inflation rate during the corresponding period last year, coupled with the consolidation of the financial expenses of Hadera Paper Printing, starting January 1, 2011, in the sum of NIS 9.1 million, following the entry of Hadera Paper Printing into the consolidated statements.

The Company’s share in the losses of associated companies (H-K) totaled NIS 29.1 million during the Reported Period, as compared with a share in profits of NIS 58.5 million in the corresponding period last year. The transition to a loss in the Company's share in the earnings of associated companies, as compared with the corresponding period last year, originates primarily as a result of the Company's share in a provision in the amount of NIS 58.8 million, created by H-K following the rulings by the court in Turkey regarding appeals filed by KCTR, concerning a demand for tax payments in Turkey, coupled with the Company's share in the earnings of Hadera Paper Printing (consolidated in the company's financial statements since January 1, 2011), that were included during the corresponding period last year in the amount of approximately NIS 10.4 million and that were not included in this period (The Hadera Paper Printing results were consolidated within the consolidated financial statements of Hadera Paper in this period).

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

The Company's share in the net profit of H-K in Israel (49.9%) during the Reported Period amounted to NIS 35.2 million, as compared with NIS 56.0 million in the corresponding period last year. The decrease in the sum of NIS 20.8 million, originated primarily from the decrease in operating profit that fell from NIS 147.3 million to NIS 93.1 million this year. The sharp decrease in the operating profit is primarily attributed to the erosion of selling prices in certain segments of operation as a result of escalating competition in the market, that grew even worse towards the end of the second quarter as a result of the parallel import of Huggies diapers, coupled with non-recurring expenditures associated with compensation of consumers on account of complaints related to leaks in a new brand of diapers in the first quarter of the year, coupled with a rise in the prices of principal raw materials. These were offset by efficiency measures that were implemented across the company and the lowering of purchasing expenditures in view of the decrease in the average dollar exchange rate by approximately 6.4%. These factors served to reduce the erosion in profit during the Reported Period.

The Company's share in the losses of KCTR Turkey (49.9%) during the Reported Period amounted to NIS 65.9 million, as compared with NIS 5.5 million in the corresponding period last year, representing an increase of approximately NIS 60.4 million. The greater loss, originated primarily as a result of a NIS 58.8 million provision recorded by the company following the decisions of the Court in Turkey concerning appeals filed by KCTR pertaining to a demand for tax payment in Turkey, coupled with an increase in the operating loss, from NIS 10.5 million in the corresponding period last year, to NIS 12.5 million during the Reported Period.

KCTR has informed the Company that it has appealed some of the court decisions in Turkey, while it intends to appeal other court decisions, based on the expert opinion of its legal consultants. However, according to the accounting policy of the company, the actual handing down of the court ruling, even if this can be appealed with high chances of success, creates a presumption whereby it is "more likely than not" that certain sums will be paid on account of these tax requirements. The company has consequently created a provision during the Reported Period on account of its share in these sums.

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.

Hadera PAPER LTD.

SUMMARY OF RESULTS

(UNAUDITED)

except per share amounts

Nine months ended September 30,

NIS IN THOUSANDS (1)

	2011			2010

Net sales		1,541,733			784,626

Net earnings (loss) attributed to the Company's shareholders		(35,704	)		65,354

Basic net earnings(loss) per share attributed to the Company's shareholders		(7.02	)		12.88

Fully diluted earnings(loss)per share attributed to the Company's shareholders		(7.02	)		12.77

Three months ended September 30,

NIS IN THOUSANDS (1)

	2011			2010

Net sales		519,491			295,435

Net earnings(loss) attributed to the Company's shareholders		(43,560	)		23,026

Basic net earnings (loss)per share attributed to the Company's shareholders		(8.56	)		4.53

Fully diluted earnings(loss)per share attributed to the Company's shareholders		(8.56	)		4.5

(1)	The representative exchange rate at September 30, 2011 was N.I.S. 3.712=$1.00.

Contact:

Yael Nevo, Adv.

Corporate Secretary and Chief of Legal Department

Hadera Paper Ltd. Group

Yaeln@hadera-paper.co.il

Exhibit 2

Hadera Paper Ltd.

Update to Chapter I (Description of the Corporation's Business) of the

Information Presented in the Company's Periodical Report

As at September 30, 2011

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

1.	Update to Chapter A, Section 5: "Equity investments in the Company and transactions in its shares"

In the course of the reported period, 26,560 option warrants granted as part of the senior executive option plan were exercised, and 3,624 option warrants expired, out of the said option plan. 4,930 shares of the company were issued as a result of the exercise.

2.	Update to Chapter B, Section 7 "The General Environment and Impact of External Factors on the Company"

Pursuant to the establishment of a Committee for Increase of Market Competitiveness ("The Committee"), in October 2011, the Committee published its draft recommendations, that include the following recommendations, inter alia: Imposing limitations on the control or holding of a material real corporation and its controlling shareholders over a material financial entity (as these terms are defined in the recommendations), imposing difficulties on the ability to control publicly traded companies possessing a pyramid form, meeting the definition of a "gap company" in the report of the committee, up to the potential loss of control, in parallel to reinforcing the strength of the public shareholders, imposing an obligation on the controlling shareholder to propose a complete tender offer under certain conditions in the said companies, the recommendation to examine the need to expand the limitations on the exposure of an institutional entity to a single corporation and a group of corporations, a recommendation that financing expenses in a corporation would initially be attributed to revenues from dividends obtained from another corporation, where the receiving party is a "material shareholder" in a manner whereby such expenses will not be eligible to be deducted from other revenues in the corporation, along with a recommendation that those bodies responsible for the allocation of public rights and assets will be obligated - under certain circumstances - to take into consideration such matters as competition and centralization of control over crucial infrastructures.

To the best of the Company's knowledge, the Committee intends, subsequent to hearing the reactions of various market players, to publish the final report of its recommendations during December 2011.

The adoption and implementation of the Committee recommendations, and especially those dealing with companies incorporated in a pyramid structure, to the extent that such recommendations are issued, may materially affect the company itself, given the limitations on the structure of its holdings, the limitations imposed on the companies holding it, (inter alia, their ability to acquire or realize holdings in publicly-traded companies and on the value of their holdings in such companies), the limitations imposed on the profitability of distributing dividends from investee companies, including such aspects as taxation aspects, on the economic sectors in which it will operate and so on.

3.	Update to Chapter B, Section 7 "The General Environment and Impact of External Factors on the Company"

Pursuant to the eruption of social protests on background of housing prices and the cost of living, and pursuant to the appointment of the Committee for Social Economic Change, headed by Prof. Manuel Trachtenberg, we note that the said committee has submitted its recommendations to the government in September 2011. These include, inter alia: Discontinuing the lowering of the corporate tax rate that was determined in the past, raising the corporate tax rate to a level of 25% starting in 2012 and a recommendation to examine its possible increase to 26% in 2013; an increase in capital gains tax (including taxes on interest and dividends) starting in 2012; cancellation and lowering of customs tariffs; and reinforcing the regulatory instruments that lie at the disposal of the governing authorities in terms of overseeing and supervising monopolies and other powerful players in certain economic sectors.

In October 2011, the government adopted the principal recommendations outlined in the Committee report, decided to work toward their implementation and also approved some of the recommendations concerning taxation, including the raising of the corporate tax rate to 25%, as well as the raising of the capital gains tax starting in 2012. A memorandum of law implementing the principle recommendation concerning taxation, mentioned above, was published in November.

True to the date of the report, there exists no certainty as to which of the Committee's recommendations will be implemented, in what manner and under what schedules and it is consequently not possible to estimate the degree of influence of the aforesaid on the business operations of the Group. Nevertheless, the implementation of the recommendations, if and when this occurs, may materially affect the Company.

4.	Update to Chapter D, Section 12 - Fixed Assets, Real Estate and Facilities

On March 15, 2011, the company entered into an engagement with Clal P.V. Ltd., a company indirectly held and controlled by the controlling shareholder of the Company, for the rental of rooftop areas located at the company's Hadera plant, for the purpose of establishing facilities for the generation of electricity using photovoltaic technology. On April 21, 2011, the general meeting of company shareholders approved the said engagement.

5.	Update to Chapter D, Section 17: "Environmental Protection"

Pursuant to the immediate report of the company dated April 12, , and dated April 20, 2011, the company announced on July 12, 2011 (, that it had received a permit for discharging wastewater to the Hadera stream. The permit is valid until July 31, 2012, and pursuant to the directives set forth in the permit, including such matters as reporting duties and discharge conditions. In addition, the company was required to provide a document of alternatives regarding the discharging of wastewater into the stream.

6.	Update to Chapter D, Section 12 - Fixed Assets, Real Estate and Facilities

Pursuant to the immediate ports of the Company dated May 16, 2010 dated June 2, 2010 dated June 13, 2010 dated July 11, 2010 and dated July 27, 2010 the Company announced on March 27, 2011, that the Company's engagement with Gev-Yam Land Corporation Ltd. and with Amot Investments Ltd. regarding an agreement for the sale of an asset on Totzeret Ha'Aretz Street in Tel Aviv, has been finalized. Pursuant to the finalization of the transaction, the Company has recognized net capital gain of NIS 28 million.

7.	Update to Chapter D, Section 13: "Human Resources"

On March 21, 2011, the general meeting of the shareholders of the Company approved the appointment of Ms. Aliza Rotbard as an external director at the company and has approved a letter of indemnity for Ms. Aliza Rotbard, according to the arrangement existing at the company, as may be ratified from time to time for the company's executives.

8.	Update to Chapter D, Section 13: "Human Resources"

On July 7, 2011, the general meeting of the shareholders of the Company approved the extension of the appointment of Ms. Atalia Arad, as an external director of the company, for an additional period of three years, commencing July 10, 2011 and terminating July 9, 2014.

9.	Update to Chapter D, Section 13: "Human Resources"

On November 1, 2011, the Company announced the appointment of Mr. Doron Zilcer as CEO of the subsidiary Carmel Container Systems Ltd., replacing the retiring CEO, Mr. Doron Kempler.

On November 13, 2011, the Company announced the retirement of Ms. Noga Alon, from her position as Director of Organizational Development at the Group.

10.	Update to Chapter D, Section 13: "Human Resources"

On November 10, 2011, the Company announced that pursuant to the efficiency and cost-cutting measures implemented by the Company (as stated in the Company's press release dated May 16, 2011), and as part thereof, the Company signed an agreement on November 10, 2011, with the union of company employees and with the New General Histadrut Union in the Hadera region, within whose framework it was agreed, inter alia, to update the employment agreements of the Company employees who work under collective agreements, along with an early retirement of 70 employees (hereinafter: “The Agreement”).

Subsequent to the assimilation of all of the items detailed in the agreement, the Company estimates that the assimilation should generate annual savings of approximately NIS 17 million in labor expenses for the Company, starting in 2012.

Furthermore, the Company estimates that the cost of the assimilation of the said agreements, and especially the cost of the early-retirement agreement, is expected to amount to the sum of approximately NIS 42 million, on aggregate bases. The Company is expected to make a non-recurring provision amounting to approximately NIS 36 million that will be expressed in the financial statements of the Company for the fourth quarter of 2011.

The Company's estimations regarding the financial data (including data relating to the provision in the financial statements) 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 an essentially different manner, then expected. The major factors that may influence the above-mentioned materialization are, inter alia, changes in wages costs in the market and change in the number of retiring employees.

11.	Update to Chapter D, Section 15: "Finance"

Pursuant to the shelf prospectus published by the Company on May 27, 2011 and its amendment dated June 19, 2011, the Company completed on July 4, 2011 an issue of debentures (extension of bond series 5) at a volume of approximately NIS 218 million. Net of issuing expenses, the Company received net proceeds of approximately NIS 216.3 million. For additional details, see Note 8a to the financial statements of the company dated June 30, 2011. The said bonds were rated by Maalot Standard & Poor’s (hereinafter: "Maalot"), while receiving a rating of ilA+. or the rating report, see the company's immediate report dated July 3, 2011.

On October 5, 2011 and on November 6, 2011, Maalot ratified the rating of the Company as "ilA+/Stable". For the Maalot announcement, see the immediate reports of the company dated October 5, 2011 and dated November 6, 2011.

12.	Update to Chapter D, Section 19: "Legal Proceedings"

On May 2, 2011, the company announced that Hogla Kimberly Ltd. ("Hogla"), an associated company in which 49.9% are held, had announced to the company that on May 2, 2011, a lawsuit was filed against it, along with a request for the said lawsuit to be recognized as a class action. The plaintiff alleges that Huggies diapers, manufactured by Hogla, that she had purchased, failed to absorb properly due to a malfunction that occurred on the diaper production line. The plaintiff estimates the volume of the lawsuit - in the event that it is approved as a representative class action - at approximately NIS 1.2 billion. At this preliminary stage, is not yet possible to estimate the chances of the request and its impact, although the legal consultants of the company estimate that the chances of rejection of the request to be recognized as a class action are higher than the chances of approval.

13.	Update to Chapter D, Section 19: "Material Agreements"

Pursuant to the information provided by the company in the periodical report for the year 2010, regarding negotiations being conducted by the company concerning an agreement for the purchase of natural gas, the company announced that an agreement was signed on May 15, 2011, between the company and the partners in the Yam Tethys projects ("The Agreement"). Pursuant to the agreement, the term of the agreement signed between the parties on July 29, 2005, for the purchase of natural gas ("The Original Agreement") (regarding which the company issued an immediate report on July 31, 2005), will be extended by an additional two years, until June 30, 2013.

The formula for the price of gas set in the agreement is based on the price of petroleum (Brent barrel) and includes a minimum price for the price of gas. It should be noted, that following the sharp rise in fuel prices that took place since the signing of the original agreement, the price of gas in the agreement is significantly higher than the maximum price that was set in the original agreement. This fact could potentially have an impact on the cost of gas for the company, as compared with the cost according to the original agreement, by an additional sum of approximately $19.4 million per annum (according to the calculation of the formula at the date of signing the agreement, in terms of gross cost, prior to tax shield). The company is accordingly preparing efficiency and cost-cutting measures. The actual cost of the gas is dependent upon numerous factors, primarily changes in global petroleum prices. The remaining terms of the original agreement would remain in force, with the necessary changes.

The overall financial volume of the agreement is currently estimated at approximately $63 million (according to the calculation of the formula at the date of signing the agreement). It should be clarified that the actual volume may change over time as a result of changes in global petroleum prices.

In parallel, as stated in previous reports of the company, the company is continuing to evaluate a project for building a new power station at the Hadera site. On August 7, 2011, the Board of Directors of the company was presented with several alternatives regarding the size of the proposed power station. The Board of Directors formed an opinion regarding the alternative that seems to be the most profitable one economically, according to the needs of the company. It was decided that the company would continue to evaluate the project, within whose framework the power station will provide steam and electricity that will serve the manufacturing systems of the company at Hadera, while the surplus electricity will be sold to Israel Electric Company and/or to private customers.

14.	Update to Chapter D, Section 24: " Investments in Associated Companies"

On November 2, 2011, the Company announced that pursuant to the company report dated February 18, 2010, regarding a report from the Turkish tax authorities that was received by KCTR, Hogla Kimberly's Turkish subsidiary, and pursuant to the appeals submitted by KCTR regarding the said tax claim, and pursuant to the company reports dated August 1, 2011 and dated August 17, 2011, regarding the resolutions of the court in Turkey regarding some of these appeals (hereinafter: "The Previous Resolutions"), the Company was informed, on November 2, 2011, of the decision of the lower court in Turkey concerning several additional appeals filed by KCTR in objection of the said tax claim, pursuant to which KCTR is required to pay the tax authorities an additional sum of approximately YTL 5.4 million (approx. $2.9 million), amounting to YTL 20.6 million (approx. $11.1 million) with interest and fines and prior to offsetting a VAT asset - all on account of the matters discussed in the appeals covered by the decision.

KCTR has informed the Company that it has appealed to a higher court and has filed a request for a stay of execution also in respect of this current resolution of the court, as was done regarding previous decisions, on the basis of the professional opinion of the KCTR legal consultants.

The total sums that KCTR is required to pay according to all of the decisions of the court in Turkey handed down thus far, amount to YTL 14.5 million (approximately USD 8.1 million), and sum up to a total amount of approximately YTL 58.2 million, including interest and fines and prior to offsetting a VAT asset (approximately USD 31.4 million). These decisions relate to appeals representing approximately 43.9% of the overall principal sum of the tax claim. In its financial statements as at September 30, 2011, the company included a provision on account of its share in the sum determined above, amounting to approximately NIS 58.8 million.

It should be noted that the lower court in Turkey is still discussing several additional appeals regarding the outstanding tax demand, concerning which no decision has yet been made. The principal on account of those appeals that have yet to be discussed by the court amounts to YTL 18.5 million (approximately USD 10.0 million) and sums up to approximately YTL 82.9 million, including interest and fines (approximately USD 44.6 million) (without offsetting a VAT refund).

-Translation from Hebrew-

November 15, 2011

MANAGEMENT DISCUSSION

The Board of Directors of Hadera Paper Ltd. ("The Company" or "Hadera Paper") is hereby honored to present the Management Discussion as at September 30, 2011, reviewing the principal changes in the operations of the company for the months January through September 2011 ("The Period of the Report" or "The Reported Period"). 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 the full Periodic Report of the company as at December 31, 2010 ("Annual Financial Statements"). The results of the company that are presented in the management discussion relate to the share of the shareholders of the company in the results, unless stated otherwise.

Description of the Corporation’s Business

Company Description

Hadera Paper Group deals in the manufacture and sale of packaging paper, corrugated board packaging, consumer product packaging and unique packaging for industry, recycling of paper and plastic waste, manufacture and marketing of fine paper and in the marketing of office supplies – through subsidiaries. The Company also holds associated companies that deal 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 New York Stock Exchange (NYSE).

General

Principal Current Operations

2.1.

Business Environment

Since the beginning of 2011, the level of uncertainty in global financial markets has been increasing. At the beginning of the year, the global economy was affected by the significant damage to industrial manufacture in Japan (as a result of the natural disaster) coupled with the rise in oil and commodity prices. Markets responded with a decline in prices, against the background of the disappointing economic figures in the United States, that were expressed, inter alia, by weak private consumption, negligible growth in the number of jobs and by the lowering of the US credit rating. In parallel, internal European disagreements regarding the handling of the debts of the Southern-European nations, initially regarding Greece and then regarding larger nations (Italy and Spain) resulted in a persistent slump in the capital markets during the past several months, in addition to expectations of a slowdown in global growth, including emerging markets in general and China in particular. A comprehensive plan that was announced in late October by European leaders for handling the debt crisis, includes a write-off of 50% of the Greek debt, increasing the relief fund to one trillion euro and an increase in the capital adequacy rate among European banks. Although these measures did have a positive impact on the markets, the implementation of the declared measures still needs to be proven.

Most of the growth in the Israeli economy was recorded during the first half of the year. The economy remains quite close to full employment, the level of consumer confidence is relatively high and is also supported by growth in investments (primarily residential construction), coupled with moderate growth in private consumption. Industrial exports decreased by 4.3% in the third quarter. In parallel, the stock markets in Israel fell sharply in the third quarter (and in 2011 in general), against the background of the global developments, the growth in geopolitical uncertainty, the deterioration of relations with Turkey and fears concerning an escalation due to the potential recognition of a Palestinian state by the United Nations. The social protests that created pressure on the food companies and retail marketing chains to lower prices and improve the level of competition in the economy, also contributed to a decrease in share prices.

Following the raising of the interest rate from 2% to 3.25% in the first half of 2011, the Bank of Israel once again lowered the prime lending rate to 3% in late September, due to fears of a global slowdown. The Bank of Israel even lowered the growth forecast for the State of Israel to 3.2% in 2012 (down from 3.9%) and presented a second forecast (pessimistic outlook) of more moderate growth of 2.7%, in the event that the global slowdown will be sharper.

In addition, during the reported period there has been a great awakening of the social protest, due to high price levels, including the housing and food sectors which led to changes in the social agenda and creating a committee headed by Prof. Manuel Trachtenberg, that issued recommendations for various reforms in the economy, in the areas of housing, cost of living, social services and taxation. On October 30, the government approved the taxation chapter in the committee recommendations. This chapter will enter into effect starting January 1, 2012, if ratified by the Knesset by the end of 2011. We further note that the social protests, that erupted due to housing prices and the high cost of living, is expected to lead to government reforms that will influence the Israeli economy. For further details, see Section 3 to the Update to Chapter A of the Periodical Report, regarding the recommendations of the Committee for Social Economic Change.

The said social protest has a significant impact on the Company's and its subsidiaries and associated companies' ability to raise prices especially in the household products sector.

Pursuant to Section 2 to the Update to Chapter A of the Periodical Report, regarding the Committee for Increase of Market Competitiveness ("The Committee"), in October 2011, the Committee published its draft recommendations, that include the following recommendations, inter alia: Imposing limitations on the control or holding of a material real corporation and its controlling shareholders over a material financial entity (as these terms are defined in the recommendations), imposing difficulties on the ability to control publicly traded companies possessing a pyramid form, meeting the definition of a "gap company" in the report of the committee, up to the potential loss of control, in parallel to reinforcing the strength of the public shareholders, imposing an obligation on the controlling shareholder to propose a complete tender offer under certain conditions in the said companies, the recommendation to examine the need to expand the limitations on the exposure of an institutional entity to a single corporation and a group of corporations, a recommendation that financing expenses in a corporation would initially be attributed to revenues from dividends obtained from another corporation, where the receiving party is a "material shareholder" in a manner whereby such expenses will not be eligible to be deducted from other revenues in the corporation, along with a recommendation that those bodies responsible for the allocation of public rights and assets will be obligated - under certain circumstances - to take into consideration such matters as competition and centralization of control over crucial infrastructures.

To the best of the Company's knowledge, the Committee intends, subsequent to hearing the reactions of various market players, to publish the final report of its recommendations during December 2011.

The adoption and implementation of the Committee recommendations, and especially those dealing with companies incorporated in a pyramid structure, to the extent that such recommendations are issued, may materially affect the company itself, given the limitations on the structure of its holdings, the limitations imposed on the companies holding it, (inter alia, their ability to acquire or realize holdings in publicly-traded companies and on the value of its holdings in such companies), the limitations imposed on the profitability of distributing dividends from investee companies, including such aspects as taxation aspects, on the economic sectors in which it will operate and so on.

The company estimates that the demand for recycled packaging paper, as a replacement for virgin packaging paper, is continuing in global paper markets. Following a slowdown in the global packaging paper market, in terms of virgin products in the third quarter, a decrease was recorded in the prices of recycled products.

The trend of decreasing recycled product prices in the global packaging paper market - that began in the third quarter - amounted to approximately 4% in relation to the second quarter. The company estimates that this trend will continue in the near future as well.

The above information pertaining to the geopolitical uncertainty, economic changes in the economy, the social protest and future 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 business opportunities that may be offered at the company, dependence upon external factors, development and changes in regulation, the implementation of the Trachtenberg Committee recommendations, changes in global raw material prices, changes in the prices of gas, fuel and energy and changes in the supply and demand of global paper products as well as changes in the geopolitical situation in the Middle East.

2.2.

Impact of the Business Environment on Company Operations

General

The Hadera Paper Group manages a wide and diverse portfolio of companies and businesses focused on consumer goods and basic commodities. As part of the trend of consumption in the Israeli economy during the reported period, this trend led to an increase in demand at most Group companies for a wide range of products, while continuing to place a special emphasis on the implementation of efficiency and cost-cutting measures across all sectors of operation, including an employee retirement agreement, as part of a collective agreement, See collective labor agreement, below.

Sector Operations

In the packaging paper and recycling sector, Machine 8 (the new packaging paper manufacturing array)operated at full capacity during the reported period, as compared with its operation in full capacity in the corresponding period last year, starting in June 2010. This manufacturing array has led to the doubling of operations in the sector. The operation of the new manufacturing array and the growth in the volume of operations have also led to an increase in the sales of new paper types that were developed, such as recycled paper replacing paper based on virgin pulp. Selling prices in the packaging paper sector experienced an upward trend during the first half of the year in Israel, in line with the rise in product prices and paper waste prices globally. In the third quarter of the year however, this trend reversed itself - both globally and locally - as prices started to decline moderately. At the present time, this trend of decreasing prices continued in the fourth quarter of the year, although prices remain high in relation to the prices in 2010. The quantitative growth and the rise in selling prices during the reported period have resulted in a significant improvement in the operating results of the sector, as compared with the corresponding period last year.

Amnir collects paper and cardboard waste, that constitutes the main raw material for the manufacture of packaging paper, from various sources throughout Israel. On March 1, 2011 the Packaging Law entered into effect, and certain provisions regarding the start of collection by the recognized body entered into effect on July 1, 2011. Given the directives of the Packaging Law, the Company cannot at this point assess the impact of the law on its activities, and this depends, among other things, on arrangements to be set by virtue of the law regarding separation at source, and in the matter of collection and removal of waste, and on the method by which the recognized body, established by power of the law, operates. The company is examining the situation and is working toward adapting its paper collection operations. For additional details regarding the packaging law, see the detailed explanation in the periodical report dated December 31, 2010, in Section 24.1.24.5.

It should be noted that to this date, there has been a trend of declining prices in cardboard newspaper waste in the world by approximately 30%, which may partially impact the cost of cardboard newspaper waste procurement.

The impact of the packaging law and the price trend of the paper cardboard newspaper waste on the company 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 arrangements that will be determined by virtue of the law, changes in global raw material prices and changes in the supply and demand of global paper products.

Competition in the Hadera Paper Printing segment escalated during the reported period, as a result of rising imports at low prices. Consequently, the trend of declining selling prices grew stronger, along with the eroded profitability of products in the sector, which began in the fourth quarter of 2010. This trend has actually grown worse as a result of the continuing revaluation of the shekel vis-à-vis the US dollar. The prices of pulp (the principal raw material in this sector) continued to soar during the reported period in relation to the corresponding period last year. In order to contend with this business environment, the Hadera Paper Printing sector continued to expand its export operations, including penetration into newer markets in the United States, along with widespread efficiency measures. These measures have contributed to reducing the erosion in the profitability of the sector. Furthermore, during the reported period, the sector began to fully operate from the new logistics center in Modi'in, while improving the level of customer service as compared with the period prior to the relocation. This relocation serves to improve the logistic capabilities of the company and is expected to support the continuing growth and expansion of the company.

In the Hogla Kimberly sector (associated company), a decrease was recorded in the level of profitability, along with a transition to a net loss, primarily due to the tax event as detailed in section 1.7 below in relation to the corresponding period last year. In addition, this decrease is primarily attributed to the erosion of prices as a result of escalating competition in some of the segments of operation and in the diaper segment in particular, due to parallel imports and the consumers' pressure resulting from the social protest as detailed above. Moreover, the profit was eroded as a result of non-recurring costs associated with compensating consumers for complaints concerning a new brand of diapers. In parallel, raw material prices increased. Given the challenging environment wherein the sector operates, the company continued to promote sales campaigns in order to preserve customers and market share. Decisions were handed down by the court in Turkey on July 28, 2011, August 4, 2011 and on November 2, 2011, adversely affecting the company, regarding some of the appeals filed by KCTR (the Turkish subsidiary of the investee company) regarding the demand by the Turkish tax authorities for additional tax payments. Pursuant to the said decisions of the Lower Court for Taxation Matters, as mentioned above, the company created an accounting provision during the reported period that negatively affected the net income of the segment. The company is filing an appeal to the Supreme Court of Taxation regarding the said issues. For further details, see Section 1.7 and Section E (Associated Companies), below.

Collective Labor Agreement

On November 10, 2011, the Board of Directors of the company, pursuant to the efficiency and cost-cutting measures initiated by the company and as part thereof, approved the agreement signed by the company on November 10, 2011, with the union of company employees and with the New General Histadrut Labor Union in the Hadera region, in which it was agreed, inter alia, to update the employment agreements of the company employees who are employed under collective agreements, along with the early retirement arrangement of approximately 70 company employees (hereinafter: “The Agreement”).

Subsequent to the assimilation of all of the items detailed in the agreement, the company estimates that the assimilation should generate annual savings of approximately NIS 17 million in labor expenses for the company, starting in 2012.

Furthermore, the company estimates that following the assimilation of the said agreements, and especially the early-retirement agreement, the company is expected to make a non-recurring provision amounting to approximately NIS 35.1 million, that will be expressed, for the most part, in the annual financial statements of the company for the fourth quarter of 2011.

The company estimates outlined above are based on various assumptions on the basis of information available to the company at this date and that may potentially change in the future.

The company estimates that this agreement will lead the company and its employees - who constitute a major resource of the company - towards greater savings and cost-cutting in labor expenses, which constitute a principal component out of the total operating costs of the company.

Raw Materials

On May 15, 2011, the company signed an extension of the agreement for the purchase of natural gas with the partners in the Yam Tethys Project. The overall financial volume of the agreement is estimated at approximately $63 million (according to the calculation of the formula at the date of signing the agreement). For further details, see Note .4m to the financial statements dated September 30, 2011. The new gas agreement will enter into effect on July 1, 2011, for a period of two years. Following the new gas contract, an increase of 190% was recorded in the average price of gas, starting with the first day of the agreement. During the reported period water and electricity prices rose by an average rate of 21% and 4.4%, respectively, as compared with the corresponding period last year. In addition, a sharp rise was recorded in the price of paper waste, by an average rate of approximately 35%, in relation to last year. These price increases were offset by a revaluation of the NIS vis-à-vis the US dollar, during the reported period compared to last year, by a rate of approximately 6.4%. This revaluation brought about savings in the inputs and imported products denominated in this currency.

In parallel, the company is continuing to evaluate a project for building a new power station at the Hadera site. On August 7, 2011, several alternatives regarding the size of the said power station were presented to the Board of Directors of the company. The Board of Directors formed an opinion regarding the alternative that seems to be the most profitable one economically, according to the needs of the company. It was decided that the company would continue to evaluate the project, within whose framework the power station will provide steam and electricity that will serve the manufacturing systems of the company at Hadera, while the surplus electricity will be sold to Israel Electric Company and/or to private customers.

Impact of Developments in Financial Markets

The developments in global markets, and especially in the euro bloc and in the United States, and the local development described above, that also include volatility in stock prices and in exchange rates in Israel and worldwide, have and may continue to affect the business results of the Company and its investees, their liquidity, shareholders' equity, the value of assets and the ability to realize these assets, the state of their business (including the demand for the products of the Company's investees), their financial benchmarks and covenants, credit ratings, ability to distribute dividends and even their actual ability to raise financing for operating activities and long-term activities the allocation of their resources as well as the availability and financing terms of financial institutions and banks.

The above information - pertaining to the impact of global trends in the paper industry, selling prices and input prices - on the company 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 crisis in global credit and banking markets, changes in global raw material and energy prices and changes in the supply and demand of global paper products.

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

The exchange rate of the NIS in relation to the US dollar was devaluated by approximately 4.6% during the reported period, as compared with a revaluation of approximately 2.9% during the reported period last year (the average exchange rate of the NIS vis-à-vis the dollar was revaluated during the reported period by a rate of approximately 6.4% in relation to the corresponding period last year).

The changes in exchange rates as mentioned above, affected the results of the various sectors, although the group's business portfolio, including the associated companies, is practically at equilibrium in terms of foreign currency and consequently, the exposure of the group to sharp fluctuations in currency exchange rates is low.

The inflation rate during the reported period amounted to 2.2%, as compared with an inflation rate of 1.9% in the corresponding period last year.

Explanation of the Results of Operation

Analysis of Operations and Profitability

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 CD, as a separate segment. The Hadera Paper - Writing and Printing Paper segment ("Hadera Paper Printing") - formerly Mondi Hadera Paper was also recognized as an independent segment (starting December 31, 2010 - a consolidated subsidiary). The associated company Hogla Kimberly was also identified as an independent segment (for details, see Note 21 to the financial statements dated December 31, 2010). 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.

1.1.

Sales

Consolidated sales during the reported period amounted to NIS 1,541.7 million, as compared with NIS 784.6 million last year, representing an increase of 96.5%, originating primarily from growth in the sales of the packaging paper and recycling sector as compared with the corresponding period last year, coupled with the consolidation of the sales of Hadera Paper Printing, starting January 1, 2011, in the total sum of NIS 554.0 million, net of inter-company sales totaling NIS 526.3 million.

The sales of the packaging paper and recycling sector amounted to NIS 552.6 million during the reported period, or NIS 476.0 million net of inter-company sales, as compared with NIS 341.5 million, or NIS 299.3 million net of inter-company sales in the corresponding period last year, representing an increase of 59.0%.

The growth in the sales turnover of the packaging paper and recycling sector originates from quantitative growth in the sales of packaging paper and recycling as a result of the operation of Machine 8, as mentioned above. The growth in the output of Machine 8 provided an appropriate response for the growth in demand in the domestic market and for continued export sales to Europe. The growth in sales is also attributed to the rise in selling prices in relation to the corresponding period last year.

The sales of the packaging products and cardboard sector during the reported period amounted to NIS 412.4 million, or NIS 400.7 million net of inter-company sales, as compared with NIS 365.1 million, or NIS 359.1 million net of inter-company sales, in the corresponding period last year, representing an increase of approximately 11.6%, originating primarily as a result of the increase in selling prices in relation to the corresponding period last year, coupled with the growth in the volume of operations of the companies in this sector.

The sales of the office supplies marketing sector during the reported period, amounted to NIS 139.7 million, or NIS 138.8 million net of inter-company sales, as compared with NIS 127.2 million last year, or NIS 126.3 million net of inter-company sales, in the corresponding period last year, representing an increase of 9.9% that originated from the quantitative growth in sales, primarily due to increased marketing efforts that have expanded the volume of customers and activity in this sector, coupled with the securing of tenders in the institutional sector.

The consolidated sales in the third quarter of the year totaled NIS 519.5 million, as compared with NIS 295.4 million in the corresponding quarter last year, representing growth of approximately 75.9%, originating primarily as a result of the consolidation of the sales of Hadera Paper Printing, in the amount of NIS 184.7 million, coupled with growth in the sales of the packaging paper and recycling sector in relation to the corresponding quarter last year and as compared with second quarter sales this year of NIS 504.6 million, representing growth of approximately 2.96%.

The sales of the packaging paper and recycling sector, net of inter-company sales, amounted to NIS 167.7 million in the third quarter this year, as compared with NIS 131.1 million in the corresponding quarter last year, both as a result of higher selling prices, as well as due to the quantitative increase in sales as a result of the continued growth in demand on the local market.

The sales of the packaging and cardboard products sector, net of inter-company sales, amounted to NIS 128.1 million in the third quarter of the year, as compared with NIS 120.9 million in the corresponding quarter last year. This growth is attributed primarily to the rise in selling prices as mentioned above.

Sales of the office supplies marketing sector amounted to NIS 48.5 million in the third quarter of the year, as compared with NIS 43.4 million in the corresponding quarter last year.

1.2.

Cost of Sales

The cost of sales amounted to NIS 1,361.3 million – or 88.3% of sales – during the reported period, as compared with NIS 661.0 million – or 84.2% of sales – in the corresponding period last year. The growth in the cost of sales originated primarily as a result of the consolidation of costs of Hadera Paper Printing, in the amount of NIS 524.9 million, starting January 1, 2011, coupled with the sharp rise in the prices of paper waste by a rate of 35%, as a result of the importing of paper waste, in order to meet the growth in demand. Moreover, an increase was recorded in the manufacturing expenses (primarily energy costs including gas and electricity) as well as in the use of raw materials, as a result of the operation of Machine 8.

The gross profit totaled NIS 180.4 million during the reported period, 11.7% of sales, as compared with NIS 123.6 million, 15.8% of sales, last year, representing growth of 46.0% in relation to the corresponding period last year.

The growth in gross profit in relation to the corresponding period last year is primarily attributed to the growth in sales following the initial recognition of revenues from the sales of Machine 8 throughout the entire reported period last year, as expressed only since June, coupled with a rise in selling prices as mentioned above, as well as the consolidation of the results of Hadera Paper Printing, starting January 1, 2011, that contributed approximately NIS 29.0 million to the gross profit. This growth was offset as a result of a sharp rise in the prices of raw materials and inputs.

Labor Wages

The labor wages within the cost of sales amounted to NIS 217.1 million during the reported period (14.1% of sales), as compared with NIS 153.8 million last year (19.6% of sales). The increase in labor expenses in relation to last year originates primarily from the growth in the number of employees as a result of the higher volume of operations, both in the office supplies segment and in the packaging paper and recycling segment, coupled with the consolidation of labor expenses of Hadera Paper Printing, in the amount of approximately NIS 37.2 million, starting January 1, 2011.

The labor wages within the Selling, General and Administrative expenses amounted to NIS 94.4 million during the reported period (approximately 6.1% of sales), as compared with a sum of NIS 71.1 million last year (approximately 9.1% of sales).

The increase in the cost of labor in relation to the corresponding period last year, originated primarily as a result of the consolidation of the labor expenses of Hadera Paper Printing, in the sum of approximately NIS 18.8 million, starting January 1, 2011.

The sharp drop in the proportion of labor expenses as a percentage of sales is attributed to the significant increase in the volume of operations and sales, primarily at the packaging paper and recycling sector.

1.3.

Selling, General and Administrative and Other Expenses

The selling, general and administrative (including wages) and other expenses and other expenses amounted to NIS 134.6 million in the reported period – or 8.7% of sales – as compared with NIS 90.8 million – or 11.6% of sales – in the corresponding period last year. Net of nonrecurring revenues during the reported period, as a result of the sale of real estate in the amount of approximately NIS 35.8 million and the valuation of a put option in the amount of NIS 2.4 million and net of a provision for impairment at the Carmel cash-generating unit, in the amount of approximately NIS 8.8 million, the selling, general and administrative expenses amounted to NIS 164.0 million, representing approximately 10.6% of sales, as compared with expenses during the corresponding period last year, net of nonrecurring revenues from the sale of real estate in the amount of NIS 18.6 million and a bonus to the retiring general manager, amounting to NIS 104.4 million. The increase in the selling, general and administrative expenses, totaling NIS 59.6 million, in relation to the corresponding period last year, originates primarily from the consolidation of the expenses of Hadera Paper Printing, starting January 1, 2011, in the sum of approximately NIS 42.2 million, coupled with an increase in the selling and transportation expenses as a result of the growth in the volumes of operation on the local market in various sectors as well as opposite export markets of the packaging paper and recycling sector, along with double storage expenses of the office supplies marketing sector, due to preparations for the relocation to the logistics center in Modi'in.

1.4.

Operating Profit

The operating profit totaled NIS 45.8 million during the reported period (3.0% of sales), as compared with NIS 32.7 million (4.2% of sales) in the corresponding period last year. Net of non-recurring revenues and expenditures during the reported period and the corresponding period last year, as mentioned in Section 1.3 above, the operating profit decreased from NIS 19.1 million to NIS 16.4 million. The decrease in the operating profit from current operations during the reported period, as compared with the corresponding period last year, originates primarily from the consolidation of the results of the Hadera Paper Printing segment since January 1, 2011, following an operating loss of NIS 13.1 million in this segment. This decrease was offset as a result of a rise in the gross profit of the various segments, in view of the increase in sales.

The operating profit of the packaging paper and recycling segment amounted to NIS 60.4 million in the reported period, as compared with an operating profit of NIS 26.8 million in the corresponding period last year. The results in the reported period included non-recurring revenues and expenses of NIS 29.4 million, as compared with non-recurring revenues of NIS 18.6 million in the corresponding period last year, as mentioned above. The growth in operating profit from current operations is attributed to the continuing increase in the sales of this segment as a result of the operation of Machine 8, on the one hand, coupled with the improved operational efficiency on the other hand, in relation to the corresponding period last year, when the machine was undergoing its running-in process and its expenditures were capitalized to the machine until June.

The operating profit of the packaging and board products segment amounted to NIS 2.0 million in the reported period, as compared with an operating profit of NIS 3.9 million in the corresponding period last year. The decrease in the operating profit of the segment originates primarily from the rise in raw material prices, that was by the growth in sales, coupled with the decrease in general and administrative expenses in relation to the corresponding period last year.

The operating loss of the office supplies marketing segment amounted to NIS 2.5 million in the reported period, as compared with an operating profit of NIS 2.4 million in the corresponding period last year. Part of this loss consists of non-recurring expenditures related to double rental fees and storage expenses, associated with the relocation of the company to the logistics center in Modi'in, see Section D(5), below.

The Company's operating loss amounted to NIS 9.5 million in the third quarter of the year, as compared with operating profit of NIS 20.2 million in the corresponding quarter last year. The transition to a loss in the third quarter originated primarily as a result of recording a provision for impairment on account of a cash-generating unit, as mentioned in Section 1.3 above, coupled with the consolidation of the operating loss of Hadera Paper Printing, in the amount of NIS 3.2 million, as a result of a sharp rise in raw material prices, coupled with specific inefficiency in the manufacture of fine paper.

The operating loss of the packaging paper and recycling sector in the third quarter of the year amounted to NIS 5.2 million, as compared with an operating profit of NIS 18.8 million in the corresponding quarter last year, as a result of the higher raw material costs and inputs - primarily paper waste, electricity and gas, that served to offset the rise in sales as well as from provision for impairment in the amount of approximately NIS 8.8 million as mentioned in section 1.3 above.

The operating loss of the packaging and board products sector amounted to NIS 1.7 million in the third quarter of the year, as compared with operating profit of NIS 1.0 million in the corresponding quarter last year.

The operating profit of the office supplies marketing sector amounted to NIS 0.2 million in the third quarter of the year, as compared with operating profit of NIS 0.3 million in the corresponding quarter last year.

1.5.

Financial expenses

The financial expenses during the reported period amounted to NIS 61.7 million, as compared with NIS 28.4 million in the corresponding period last year.

The growth in financial expenses originated as a result of the capitalization of some of the financing costs of Machine 8 during the corresponding period last year, along with the expansion of Bond Series 5 at the beginning of the third quarter, that served to increase the financial expenses by approximately NIS 3.1 million. Moreover, an increase of NIS 2.6 million was recorded in financial expenses in relation to the corresponding period last year, as a result of the higher inflation rate during the reported period (Known Index) by approximately 2.7%, as compared with a lower increase of 1.6% in the inflation rate during the corresponding period last year, coupled with the consolidation of the financial expenses of Hadera Paper Printing, starting January 1, 2011, in the sum of NIS 9.1 million, following the entry of Hadera Paper Printing into the consolidated statements.

1.6.

Taxes on Income

Tax revenues of NIS 4.6 million were recorded during the reported period, as compared with tax revenues totaling NIS 2.5 million in the corresponding period last year. The growth in tax revenues during the reported period, as compared with the corresponding period last year, originates primarily from the recording of tax revenues on the difference between the expected tax rates on the realization of current losses and the expected tax rates for reversing the deferred tax liabilities, on account of the accelerated depreciation of Machine 8, that were offset as a result of recording tax expenses in the amount of NIS 7.7 million on account of the sale of real estate, as mentioned in Section 1.3, above.

1.7.

Company’s Share in Profits of Associated Companies

The company whose earnings are reported under this item (according to Hadera Paper’s holdings therein), is primarily Hogla Kimberly.

The company’s share in the losses of associated companies totaled NIS 29.1 million during the reported period, as compared with a share in profits of NIS 58.5 million in the corresponding period last year. The transition to a loss in the company's share in the earnings of associated companies, as compared with the corresponding period last year, originates primarily as a result of the Company's share in a provision in the amount of NIS 58.8 million, created by Hogla Kimberly following the rulings by the court in Turkey regarding appeals filed by KCTR, concerning a demand for tax payments in Turkey. (For additional details, see Section E below - Associated Companies), coupled with the company's share in the earnings of Hadera Paper Printing (consolidated in the company's financial statements since January 1, 2011), that were included during the corresponding period last year in the amount of approximately NIS 10.4 million and that were not included in this period. (The Hadera Paper Printing results were consolidated within the consolidated financial statements of Hadera Paper in this period).

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

The Company's share in the net profit of Hogla Kimberly in Israel (49.9%) during the reported period amounted to NIS 35.2 million, as compared with NIS 56.0 million in the corresponding period last year. The decrease in the sum of NIS 20.8 million, originated primarily from the decrease in operating profit that fell from NIS 147.3 million to NIS 93.1 million this year. The sharp decrease in the operating profit is primarily attributed to the erosion of selling prices in certain segments of operation as a result of escalating competition in the market, that grew even worse towards the end of the second quarter as a result of the parallel import of Huggies diapers, coupled with non-recurring expenditures associated with compensation of consumers on account of complaints related to leaks in a new brand of diapers in the first quarter of the year, coupled with a rise in the prices of principal raw materials. These were offset by efficiency measures that were implemented across the company and the lowering of purchasing expenditures in view of the decrease in the average dollar exchange rate by approximately 6.4%. These factors served to reduce the erosion in profit during the reported period. See also the social protest impact, section 2.1 above

The Company's share in the losses of KCTR Turkey (49.9%) during the reported period amounted to NIS 65.9 million, as compared with NIS 5.5 million in the corresponding period last year, representing an increase of approximately NIS 60.4 million. The greater loss, originated primarily - as mentioned above - as a result of a NIS 58.8 million provision recorded by the company following the decisions of the Court in Turkey concerning appeals filed by KCTR pertaining to a demand for tax payment in Turkey. For additional details, see Section E below - Associated Companies, as well as Note 4k to the financial statements dated September 30, 2011, coupled with an increase in the operating loss, from NIS 10.5 million in the corresponding period last year, to NIS 12.5 million during the reported period.

KCTR has informed the Company that it has appealed the court decisions in Turkey, based on the expert opinion of its legal consultants. However, according to the accounting policy of the Company, the actual handing down of the court ruling, even if this can be appealed with high chances of success, creates a presumption whereby it is "more likely than not" that certain sums will be paid on account of these tax requirements. The company has consequently created a provision during the reported period on account of its share in these sums.

1.8.

The Net Profit and the Earnings Per Share Attributed to the Company's Shareholders

The net loss attributed to the Company's shareholders amounted to NIS 35.7 million in the reported period, as compared with net profit attributed to the Company's shareholders of NIS 65.4 million in the corresponding period last year. The net profit, net of non-recurring revenues and expenditures during the reported period, amounted to NIS 6.3 million, as compared with NIS 55.8 million in the corresponding period last year, representing a decrease of 88.8%.

The lower net profit attributed to the Company shareholders during the reported period, was primarily affected by a non-recurring provision of NIS 58.8 million, recorded by the Company following the decisions of the Court in Turkey concerning appeals filed by KCTR pertaining to a demand for tax payment in Turkey. For additional details, see Section 1.7 below, as well as Section E - Associated Companies, as well as Note 4.k to the financial statements dated September 30, 2011, coupled with the recording of a provision for impairment on account of the Carmel cash-generating unit in the amount of NIS 7.0 million (net of taxes), that was offset from non-recurring revenues from the sale of real estate on Totzeret Ha'Aretz Street in Tel Aviv, the valuation of a Put option, as well as the improved operating profitability of the packaging paper and recycling segment. Moreover, the net profit was adversely affected by the rise in financial expenses during the reported period, in relation to the corresponding period last year, following the operation of Machine 8.

Basic loss per share amounted to NIS -7.02 per share ($-1.89 per share) in the reported period, as compared with basic earnings per share of NIS 12.88 per share ($3.51 per share) in the corresponding period last year.

Diluted loss per share amounted to NIS -7.02 per share ($-1.89 per share) in the reported period, as compared with diluted earnings per share of NIS 12.77 per share ($3.49 per share) in the corresponding period last year.

Basic loss per share amounted to NIS -8.56 per share ($-2.31 per share) in the third quarter of the year, as compared with earnings of NIS 4.53 per share ($1.24 per share) in the corresponding quarter last year.

Diluted loss per share amounted to NIS -8.56 per share ($-2.31 per share) in the third quarter of the year, as compared with earnings of NIS 4.50 per share ($1.23 per share) in the corresponding quarter last year.

Analysis of the Company’s Financial Situation

The cash and cash equivalents item rose from NIS 161.8 million on September 30, 2010, to NIS 161.9 million on September 30, 2011. The cash and cash equivalents balance originates primarily from funds that were raised at the beginning of the third quarter as an expansion of bond series 5, for the repayment of bank loans and bond series that were raised in order to finance Machine 8, as well as to acquire control over Hadera Paper Printing. The cash balance includes the cash consolidated during the reported period from Hadera Paper Printing, in the sum of NIS 7.8 million.

The designated deposits in the sum of NIS 9.0 million on September 30, 2010, were utilized entirely in the course of 2010 for payments on account of the construction of Machine 8.

The increase in the accounts receivable item is primarily attributed to the consolidation of the accounts receivable balances of the Hadera Paper Printing segment, that amounted to approximately NIS 215.6 million as at September 30, 2011. In the packaging paper and recycling sector, an increase was recorded from NIS 108.3 million on September 30, 2010, to NIS 154.4 million on September 30, 2011. This increase is attributed both to quantitative growth in activity while recording a change in the distribution of sales in the form of an expansion in the local market at the expense of export markets, that led to an increase in the days of credit, coupled with an increase in selling prices between the two periods. In the packaging and cardboard products sector, an increase was recorded in the accounts receivable item, from NIS 186.2 million on September 30, 2010, to NIS 194.0 million on September 30, 2011, as a result of growth in the sales of the sector in light of the increase in the selling prices. Accounts receivable for the office supplies marketing sector rose from NIS 63.4 million as at September 30, 2010, to NIS 66.3 million, as at September 30, 2011, as a result of the continuing growth in the volume of operations.

Other receivables relating to the packaging paper and recycling segment decreased from NIS 114.6 million as at September 30, 2010, to NIS 65.8 million as at September 30, 2011. This decrease is primarily attributed to the lower credit/debit balances of group companies, as a result of the consolidation of the Hadera Paper Printing segment on December 31, 2010. An additional factor was the other receivables balance that was consolidated on September 30, 2011 and amounted to NIS 1.6 million. Additionally, the decrease was also attributed to revenues to collect that were recorded last year on account of the sale of real estate in Bnei-Brak. Other receivables relating to the packaging products and board sector increased from NIS 4.4 million as at September 30, 2010, to NIS 4.5 million as at September 30, 2011. Other receivables relating to the marketing of office supplies segment decreased from NIS 5.2 million as at September 30, 2010 to NIS 4.1 million as at September 30, 2011.

The increase in the inventories item originates from the consolidation of the Hadera Paper Printing inventories in the amount of approximately NIS 138.5 million, as at September 30, 2011. In the packaging paper and recycling sector a decrease was recorded from NIS 80.8 million as at September 30, 2010, to NIS 78.0 million as at September 30, 2011. This decrease is primarily attributed to the consumption of paper waste inventories in light of the full operation of the new packaging paper machine in June last year, that was offset as a result of the growth in packaging paper inventories in order to meet the growth in the volume of operations. Inventories of the packaging products and board sector increased from NIS 85.9 million as at September 30, 2010, to NIS 92.9 million as at September 30, 2011. The increase is primarily attributable to an increase in raw material prices, coupled with forecasts in the sector regarding higher demand in the fourth quarter from agriculture, as compared with the corresponding period last year. Inventories in the office supplies marketing segment increased from NIS 25.7 million as at September 30, 2010, to NIS 36.5 million as at September 30, 2011, primarily on account of the continued growth in operations, coupled with the need to manage inventories in two warehouses, in light of the relocation of the company to the logistic center in Modi'in.

The investment in associated companies decreased from NIS 349.3 million on September 30, 2010, to a sum of NIS 167.1 million on September 30, 2011. The principal components of the decrease in investment between the reported periods, include the consolidation of Hadera Paper Printing for the first time on December 31, 2010, which led to a decrease in investments of NIS 117.6 million, coupled with the company share in the dividend distributed in the amount of NIS 29.9 million from associated companies, as well as the company share in the losses of associated companies in the sum of NIS 29.1 million, that is primarily attributed to a provision for taxes in Turkey, as mentioned in Section 1.7, above.

Short-term credit increased from NIS 73.8 million on September 30, 2010, to NIS 195.8 million on September 30, 2011. The growth in this item originates primarily as a result of the consolidation of the credit balances of Hadera Paper Printing, in the amount of NIS 136.4 million as at September 30, 2011, that were offset as a result of the repayment of credit.

The decrease in the other payables item was recorded despite the consolidation of the Hadera Paper Printing balances, in the amount of NIS 5.6 million, as at September 30, 2011. The packaging paper and recycling sector recorded a decrease from NIS 98.1 million as at September 30, 2010, to NIS 87.0 million as at September 30, 2011. The decrease is primarily attributed to a decrease in expenses payable and employee institutions, coupled with a decrease in the recording of advanced revenues from the sale of real estate and expenses payable between the reported periods. Other accounts payable of the packaging products and board sector increased from NIS 12.1 million as at September 30, 2010, to NIS 12.7 million as at September 30, 2011. The other payables item at the office supplies marketing segment decreased from NIS 5.0 million on September 30, 2010, to NIS 3.9 million on September 30, 2011. This decrease is primarily attributed to the decrease in expenses to pay.

The company’s shareholders' equity decreased from NIS 931.9 million as at September 30, 2010, to NIS 903.3 million as at September 30, 2011. This change is primarily attributed to an increase in a capital reserve from translation differences, in the amount of approximately NIS 24.5 million, between the reported periods.

Investments in Fixed Assets

The investments in fixed assets amounted to NIS 59.2 million during the reported period, as compared with NIS 175.4 million in the corresponding period last year. The investments in the reported period included primarily payments on account of investments in environmental compliance (sewage treatment) along with current investments in the renovation of equipment, means of transport and building maintenance at the Hadera site.

Financial Liabilities

The long-term liabilities (including current maturities) amounted to NIS 1,020.4 million as at September 30, 2011, as compared with NIS 1,011.2 million as at September 30, 2010 and as compared with NIS 989.6 million as at December 31, 2010. The long-term liabilities grew in relation to last year primarily as a result of the expansion of Series 5 during the reported period, by a sum of approximately NIS 218 million, coupled with the consolidation of the long-term loans of Hadera Paper Printing in the amount of NIS 10.0 million, that were offset by the repayment of bond series (Series 2, Series 3, and Series 4) and long-term loans, as well as the cash flows from operating activities.

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

Series 2 – NIS 103.8 million, for repayment until 2013.

Series 3 – NIS 161.0 million, for repayment until 2018.

Series 4 – NIS 158.3 million, for repayment until 2015.

Series 5 – NIS 396.7 million, for repayment until 2017.

Long-term loans – NIS 200.7 million.

The balance of short-term credit, as at September 30, 2011, amounted to NIS 195.8 million, as compared with NIS 73.8 million as at September 30, 2010. Most of the growth originates from the consolidation of the Hadera Paper Printing balances in the amount of NIS 136.4 million, that were offset as a result of the repayment of credit.

The net debt as at September 30, 2011, net of the balance of deposits and cash, amounted to NIS 1,054.3 million. Net of the net debt originating from the consolidation of Hadera Paper Printing, in the amount of NIS 138.6 million, the net debt totals a sum of NIS 915.7 million, as compared with net debt of NIS 914.1 million as at September 30, 2010.

On July 4, 2011, the company expanded bond series 5 and raised a gross sum of NIS 218 million from institutional investors and from the public. Part of the proceeds will serve the company primarily for reinforcing its liquidity and for the recycling of the debt.

In July 2010, the Supervisor of the Capital Market, Insurance and Savings at the Ministry of Finance ("the Supervisor") published a circular which sets forth the Committee's recommendations for establishing parameters for institutional bodies' investments in non-government bonds. The circular, inter alia, includes provisions regarding the formulation of internal policies by institutional bodies prior to investing in bonds, the information required by such bodies to review and monitor investment in bonds, the mechanisms for cooperation between institutional bodies on certain matters relating to investment in bonds, the provisions that should be included in the bond documents as a condition for institutional bodies' investment therein and the requirement of institutional bodies to establish an investment policy (including with respect to rights to call in loans which would be included in the bonds), which addresses contractual criteria for the bonds and their various issuers. Most of the directives of the circular entered into force in October 2010.

The memorandum of the Supervisor and the manner by which the recommendations are adopted as they appear in the report of the Committee, may hold implications on the ability to raise capital from institutional entities by way of bonds, including the terms and the price of raising such capital. As at the date of the reports the Company is yet unable to identify these influences.

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 17a to the consolidated financial statements dated December 31, 2010.

Liabilities on account of the Put option to a shareholder at an associated company (investee until December 31, 2010), as at September 30, 2011 and as at September 30, 2010 and as at December 31, 2010, is presented in the sum of NIS 29.1 million, NIS 13.7 million and NIS 31.5 million, respectively.

On account of the Put option, an associated company recorded other revenues of NIS 2.4 million during the reported period, as compared with other expenses of NIS 1.7 million in the corresponding period last year.

The principal factors responsible for the change originated as a result of an agreement signed by the company for the acquisition of 25.1% of the shares of the associated company ("Acquisition Agreement") determining the economic calculation of the value of the option and its blocking for three years (as at September 30, 2011, the option is blocked for two and a quarter years). Regarding additional agreements arising from the transaction agreement and their potential impact on the terms of the option, see Note 17 to the financial statements dated December 31, 2010.

Liquidity

Cash Flows

The cash flows from operating activities totaled NIS 68.0 million during the reported period, as compared with NIS 126.8 million in the corresponding period last year. The decrease in cash flows from operating activities during the reported period, as compared with the corresponding period last year, originated primarily from the growth in working capital, that amounted to NIS 44.1 million during the reported period, as compared with growth of NIS 3.3 million in the corresponding period last year, coupled with a decrease in profit from current operations and a decrease in the company share in dividends from associated companies. The increase in working capital during the reported period originated primarily from the growth in accounts receivable balances as a result of the growth in the volume of operations. This growth was partially offset by the growth in accounts payable balances.

Details of Operations in the Various Sectors

Hogla-Kimberly (Household Products)

The sales turnover of Hogla-Kimberly Israel amounted to approximately NIS 909.5 million in the reported period, as compared with approximately NIS 917.0 million in the corresponding period last year, representing a decrease of 0.8%.

The ability to relatively preserve the level of sales during the reported period, despite the erosion of prices in light of the continuing escalation of competition in the market - primarily in the baby and infant sector - originated primarily from the increase in quantitative sales in other sectors, that served to reduce the impact of competition on sales.

The operating profit of Hogla-Kimberly Israel amounted to approximately NIS 93.1 million in the reported period, as compared with approximately NIS 147.3 million in the corresponding period last year, representing a decrease of approximately 36.9%.

The decrease in the operating profit in relation to the preceding year is attributed to the erosion of prices as a result of the escalating competition in the market, as mentioned above, that grew more fierce in the past several months, primarily in the diaper segment, coupled with the rise in the prices of the principal raw materials, that was partially offset by efficiency measures that were implemented by the company, the raising of prices in the household paper segment, as well as the decrease in the average US dollar exchange rate vis-à-vis the NIS, by a rate of approximately 6.4%, in relation to the corresponding period last year, that served to lower the raw material costs and some of the products. Moreover, the decrease in the operating profit during the reported period, in relation to the corresponding period last year, was also attributed to expenditures associated with compensation provided to consumers, on account of complaints regarding leaks in a new brand of diapers.

The operating profit in the third quarter of the year amounted to NIS 29.8 million, as compared with NIS 47.1 million in the corresponding quarter last year and as compared with NIS 34.1 million in the second quarter of the year, as a result of the escalating competition in the second and third quarters that led to an erosion of prices, as mentioned above. In addition it should be noted that the increase in social protest has an impact on the change in selling prices, see section 2.1 above.

The sales turnover of KCTR, Hogla-Kimberly’s subsidiary operating in Turkey, amounted to approximately NIS 310.6 million (approximately $88.1 million) in the reported period, as compared with approximately NIS 375.4 million (approximately $99.2 million) in the corresponding period last 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 in the reported period and to bring about the enhancement of the Huggies and Kotex brands.

The operating loss of KCTR in the reported period amounted to NIS 12.5 million, as compared with NIS 10.5 million in the corresponding period last year. KCTR enjoys positive cash flows from operating activities.

Hadera Paper - Printing and Writing Paper (Formerly Mondi Hadera Paper)

The sales of Hadera Paper Printing amounted to 141.3 thousand tons in the reported period, as compared with 133.3 thousand tons in the corresponding period last year, representing an increase of 6.0%. Sales amounted to 46.8 thousand tons in the third quarter, as compared with 45.0 thousand tons in the third quarter last year and as compared with 49.3 thousand tons in the second quarter of 2011.

The sales turnover of fine paper amounted to NIS 554.0 million in the reported period, as compared with NIS 553.5 million in the corresponding period last year, representing an increase of 0.1%. The sales turnover of fine paper in the third quarter of 2011 amounted to NIS 184.7 million, as compared with NIS 196.0 million in the corresponding period last year, representing a decrease of 5.8%, and as compared with NIS 187.1 million in the second quarter of 2011, representing a decrease of 1.3%.

The preservation of the sales level during the reported period originated primarily from the quantitative increase in sales to export markets, an increase that amounted to approximately 17.6%. This growth was offset as a result of the decrease in average selling prices by a rate of approximately 5.7%, originating both from a lower level of prices and from the revaluation of the shekel vis-à-vis the US dollar. The revaluation of the shekel also led to escalating competition from low-priced imports and to a lowering of selling prices on the local market during the reported period.

Moreover, the prices of pulp (a principal raw material traded in US dollars), that decreased by 3.3% in the third quarter, in relation to the second quarter, served to reduce the rise in prices during the reporting period to 0.4% (in NIS terms), as compared with the corresponding period last year. The above adversely affected the business results of Hadera Paper Printing during the reported period, despite the strengthening of the NIS vis-à-vis the US dollar by 4.6% during the reported period.

The operating loss of Hadera Paper Printing amounted to NIS 13.1 million in the reported period, as compared with operating profit of NIS 30.4 million in the corresponding period last year, representing a decrease of 143.1%. In the third quarter of 2011, the company’s operating loss amounted to NIS 3.2 million, as compared with an operating profit of NIS 7.2 million in the corresponding quarter last year and as compared with an operating loss of NIS 6.9 million in the second quarter of 2011.

The transition to an operating loss in relation to the corresponding period last year, is attributed to the trend of prices described above, the global surplus in paper that led to the lowering of import prices to Israel, the lower efficiency of the manufacture of paper during the reported period that was caused by several factors related to the quality of raw materials and other technical malfunctions, as well as a result of non-recurring expenditures associated with the relocation to the new logistics center - with the aim of providing optimal customer service during the transition period and to shorten the learning curve. True to the date of publication of this report, a significant improvement was recorded in manufacturing efficiency. Moreover, the logistics center has started to service customers at a level that exceeds the level of service provided prior to the relocation.

The following are principal data regarding a highly material valuation that is attached to the financial statements as at September 30, 2011: The net operating assets of Hadera Paper Printing in the company books, as at September 30, 2011, amounted to NIS 325 million. The valuation was performed by the valuator Vadim Portnoy, of Vadim Portnoy Business Consulting Ltd. (Vadim Portnoy possesses 13 years of professional experience as an employee of the Securities Authority and Swary Eichman Ltd. and since 2004 - as an independent consultant. Vadim Portnoy Business Consulting Ltd. specializes in valuations, transaction consulting, preparation of economic and financial expert opinions, mergers and acquisitions and additional diverse economic projects) who estimated the derived utilization value of Hadera Paper Printing at approximately NIS 369.0 million, as at this date. The valuator employed the DCF model in its valuation. The valuator used a discount rate of 9.5% and a permanent growth rate of 1.5%. The residual value as a percentage of the total value set in the valuation is equal to 66.4%.

The above information pertaining to the output capacity and improved profitability of Hadera Paper Printing 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 local and global raw material prices, selling prices and changes in the supply and demand of fine paper in Israel and more.

Carmel Container Systems - Packaging and Board Products

The aggregate sales turnover of Carmel Container Systems, including the sales of Frenkel CD, amounted to NIS 412.4 million during the reported period, as compared with NIS 365.1 million last year, representing an increase of 13.0%.

During the reported period, the consolidated sales turnover of Carmel Container Systems Ltd. amounted to NIS 323.3 million, as compared with NIS 283.4 million in the corresponding period last year, representing an increase of 14.1%.

The increase in the sales turnover is attributed to a slight quantitative growth, coupled with an increase in selling prices. Furthermore, growth was recorded in the sales turnover of the Triwall subsidiary.

The consolidated operating loss of Carmel Container Systems amounted to NIS 0.9 million in the reported period, as compared with an operating profit of NIS 1.2 million in the corresponding period last year. The decrease in the operating profit at Carmel is primarily attributed to the sharp rise in input prices, by a rate of 24%, an increase that was compensated for only partially by the said rise in selling prices.

The aggregate operating profit of Carmel (including Frenkel CD) amounted to NIS 2.0 million in the reported period, as compared with an operating profit of NIS 3.9 million in the corresponding period last year.

The following are principal data regarding a highly material valuation that is attached to the financial statements as at September 30, 2011: The net operating assets of Carmel in the company books, as at September 30, 2011, amounted to NIS 237.8 million. The valuation was performed by the valuator Fahn Kanne Consulting Ltd. (Fahn Kanne Consulting Ltd. is a subsidiary of CPA firm Fahn Kanne & Associates, one of the six leading CPA firms in Israel. Fahn Kanne Consulting Ltd. specializes in valuations, due diligence examinations, transaction consulting, preparation of economic and financial expert opinions, mergers and acquisitions and other diverse economic projects, through its economic and financial consulting services department, that provides consulting services in a wide range of economic topics, to large private and public companies in the market, as well as to the government and institutional sector), that valuated the derived utilization value of Carmel at this date at the sum of NIS 229.1 million. Stemming from the fact that the value of Carmel is lower than its book value, the company has recorded a provision for impairment on account of the Carmel cash generating unit in the amount of NIS 8.8 million. This stems primarily from the fact that as part of the valuation, the valuator relied on the tax rates as determined in the government ratification, dated October 30, 2011, of the recommendations of the Taxation Chapter by the Trachtenberg Committee, where it was resolved to cease the lowering of income tax rates for individuals and for corporate taxes, as determined in the Law for Economic Encouragement of 2009. Starting with the tax year 2012, the corporate tax rate would be increased to 25%. Accordingly, the valuator utilized a tax rate of 25%. The valuator employed the DCF model in its valuation. The valuator used a discount rate of 9.5% and a permanent growth rate of 2.0%. The residual value as a percentage of the total value set in the valuation is equal to 69.2%.

The above information in the valuation pertaining to the output capacity and improved profitability of Carmel 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 local and global raw material prices and changes in the supply and demand of local and global cardboard packaging products.

Packaging Paper and Recycling

The sales turnover of the Packaging Paper and Recycling Division amounted to NIS 552.6 million in the reported period, as compared with NIS 341.5 million in the corresponding period last year, representing an increase of approximately 61.8%. (The sales in the corresponding period last year appear subsequent to the discounting of sales in the sum of approximately NIS 70 million, as part of the running in process of Machine 8. The running in of the machine was completed on May 31, 2010).

The quantitative sales of packaging paper amounted to 224.9 thousand tons during the reported period, as compared with 189.1 thousand tons in the corresponding period last year. Out of the said sales last year, approximately 49.8 thousand tons were discounted toward the running in of Machine 8, as mentioned above.

The sharp increase in the sales turnover originated for the most part from the quantitative increase in sales of packaging paper (including the influence of the discounting last year), coupled with an increase in selling prices between the reported periods. This increase was offset by the lower average dollar exchange rate between the two reported periods, by a rate of approximately 6.4%, that tends to affect a large part of the export sales.

The operating profit of the division amounted to NIS 29.3 million during the reported period, as compared with NIS 31.8 million in the corresponding period last year. Net of non-recurring profit from the sale of real estate in the sum of NIS 17.2 million, the operating profit from current operations amounted to NIS 14.6 million in the corresponding period last year, representing an increase of approximately 100.7%. The cost of operating Machine 8, up to May 31, 2010, were discounted as part of the running-in expenses during the corresponding period last year. In the third quarter of 2011, the operating profit amounted to NIS 6.3 million, as compared with an operating profit of NIS 21.1 million and net of the said non-recurring profit, the operating profit from current operations amounted to NIS 3.9 million in the corresponding quarter last year and as compared with operating profit of NIS 8.6 million in the second quarter of 2011.

The increase in the operating profit during the reported period, as compared with the corresponding period last year, originated primarily from the quantitative increase in sales, coupled with the improved selling prices as mentioned above. Moreover, the improvement in the operating efficiency of Machine 8, as evident in the improved efficiency of the various manufacturing indexes of the division, also contributed to the greater profit. This growth was offset as a result of the rise in the various input prices.

The decrease in operating profit in the third quarter of the year originated primarily from the rise in energy prices, due to the rise in natural gas prices at the beginning of the third quarter, coupled with the rise in electricity prices, that are seasonally higher.

Graffiti - Office Supplies Marketing

Graffiti's sales turnover during the reported period amounted to NIS 139.7 million, as compared with NIS 127.2 million in the corresponding period last year, representing an increase of 9.8%.

In the reported period, Graffiti recorded an operating loss of NIS 2.5 million, as compared with an operating profit of NIS 2.4 million in the corresponding period last year.

The decrease in the operating profit during the reported period is primarily attributed to the eroded profitability as a result of a significant rise in commodity prices, accompanied by a delay in adjusting customer selling prices, coupled with the sharp rise in transportation costs as a result of the rise in fuel prices between the reported periods. Moreover, labor expenses increased by a sum of approximately NIS 2.2 million during the reported period, due to the growth in the sales turnover that was accompanied by a parallel increase in variable expenses, along with a significant increase in personnel due to the company's preparations for the relocation to the logistics center in Modi'in. Furthermore, double expenses of NIS 2.9 million were recorded during the reported period on account of rental fees and maintenance expenses associated with the company's preparations for the relocation to the logistics center in Modi'in.

Graffiti intends to relocate to the Logistics Center in Modi'in in the course of the fourth quarter of 2011. Graffiti is currently testing the logistic systems and supporting information systems (WMS), that will serve as a platform for accelerating growth and profit, while improving customer service.

Exposure and Management of Market Risks

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 Gliksberg, the Group's VP of Finance and Business Development.

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

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 net long-term loans and CPI-linked balances, in the total sum of NIS 279.2 million.

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

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 credit insurance services at some of the Group companies, as needed.

The financial statements include provisions for doubtful debts based on a risk analysis as at the date of the report, as well as on company procedures regarding provisions for doubtful debts in case of arrears.

Sensitivity Analysis Tables for Sensitive Instruments, According to Changes in Market Elements as at September 30, 2011:

Sensitivity to Interest Rates
Sensitive Instruments	Profit (loss) from changes				Fair value as at Sept-30-11			Profit (loss) from changes
	Interest rise 10%		Interest rise 5%		Fair value as at Sept-30-11			Interest decrease 5%			Interest decrease 10%
In NIS thousands
Debentures - Series 2		502		252		(110,199	)		(253	)		(507	)
Debentures - Series 3		2,200		1,106		(166,927	)		(1,118	)		(2,248	)
Debentures - Series 4		1,380		693		(171,355	)		(698	)		(1,400	)
Debentures - Series 5		6,160		3,096		(437,994	)		(3,129	)		(6,290	)
Loan A - fixed interest		35		17		(10,642	)		(17	)		(35	)
Loan B - fixed interest		939		472		(86,190	)		(476	)		(957	)
Loan C - fixed interest		132		66		(22,328	)		(66	)		(133	)

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 2011).

Regarding the terms of the debentures and other liabilities – See Note 10 to the annual financial statements dated December 31, 2010.

Sensitivity to the Consumer Price Index
Sensitive Instruments	Profit (loss) from changes						Fair value as at Sept-30-11			Profit (loss) from changes
	Rise in CPI 2%			Rise in CPI 1%			Fair value as at Sept-30-11			Decrease in CPI 1%			Decrease in CPI 2%
In NIS thousands
Debentures - Series 2		(2,204	)		(1,102	)		(110,199	)		1,102			2,204
Debentures - Series 3		(3,339	)		(1,669	)		(166,927	)		1,669			3,339
Other accounts receivable		23			12			1,162			(12	)		(23	)
Accounts Payable		(145	)		(73	)		(7,270	)		73			145
Linked loans		(238	)		(119	)		(11,911	)		119			238
See Note 19 d to the financial statements dated December 31, 2010.

Sensitivity to the Euro Exchange Rate
Sensitive Instruments	Profit (loss) from changes						Fair value as at Sept-30-11			Profit (loss) from changes
	Rise in € 10%			Rise in € 5%			Fair value as at Sept-30-11			Decrease in € 5%			Decrease in € 10%
In NIS thousands
Cash and cash equivalents		391			195			3,907			(195	)		(391	)
Other accounts receivable		1,352			676			13,522			(676	)		(1,352	)
NIS-€options		62			25			-			-			-
Accounts Payable		(3,846	)		(1,923	)		(38,460	)		1,923			3,846

Sensitivity Analysis Tables for Sensitive Instruments, According to Changes in Market Elements as at September 30, 2011:

Sensitivity to the US Dollar Exchange Rate
Sensitive Instruments	Profit (loss) from changes						Fair value as at Sept-30-11			Profit (loss) from changes
	Revaluation of $ 10%			Revaluation of $ 5%			Fair value as at Sept-30-11			Devaluation of $ 5%			Devaluation of $ 10%
In NIS thousands
Cash and cash equivalents		2,527			1,263			25,267			(1,263	)		(2,527	)
Other accounts receivable		4,655			2,328			46,555			(2,328	)		(4,655	)
Accounts Payable		(14,084	)		(7,042	)		(140,844	)		7,042			14,084
NIS/US$ forward transaction		118			62			(7	)		(49	)		(105	)
NIS- US$ option		140			85			29			-			-
Loans from others		(63	)		(31	)		(626	)		31			63

Other accounts receivable reflect primarily short-term customer debts

Sensitivity to the exchange rate of the yen
Sensitive Instruments	Profit (loss) from changes						Fair value as at Sept-30-11			Profit (loss) from changes
	Rise in the yen 10%			Rise in the yen 5%			Fair value as at Sept-30-11			Decrease in the yen 5%		Decrease in the yen 10%
In NIS thousands
Accounts Payable		(183	)		(92	)		(1,832	)		92		183

Sensitivity to other currencies (GBP)

Sensitive Instruments

Profit (loss) from changes

Fair value as at Sept-30-11

Profit (loss) from changes

Rise of

10%

Rise of

Decrease of

10%

In NIS thousands

Other accounts receivable

507

(25

)

(51

)

Linkage Base Report

Below are the balance sheet items, according to linkage bases, as at Sept-30-11:

In NIS millions	Unlinked			CPI-linked			In foreign currency, or linked thereto (primarily US$)			€-linked			Non- Monetary Items		Total
Assets
Cash and cash equivalents		132.7						25.3			3.9					161.9
Other accounts receivable		633.6			1.2			47.1			13.5			10.9		706.3
Inventories														345.9		345.9
Investments in associated companies		19.2												147.9		167.1
Deferred taxes on income														2.9		2.9
Fixed assets, net														1,328.3		1,328.3
Investment property (real estate)														26.3		26.3
Intangible Assets														24.6		24.6
Financial assets available for sale														2.7		2.7
Other assets														1.1		1.1
Assets on account of employee benefits		0.7														0.7
Total Assets		786.2			1.2			72.4			17.4			1,890.6		2,767.8

Liabilities
Short-term credit from banks		195.8														195.8
Accounts Payable		328.8			7.3			142.7			38.5			0.1		517.4
Current tax liabilities		13.7														13.7
Deferred taxes on income														42.5		42.5
Long-Term Loans		188.1			12.0			0.6								200.7
Notes (debentures) – including current maturities		558.5			261.1											819.6
Liabilities on account of employee benefits		45.7														45.7
Put option to holders of non-controlling interests		29.1														29.1
Shareholders’ equity, reserves and retained earnings														903.3		903.3
Total liabilities and equity		1,359.7			280.4			143.3			38.5			945.9		2,767.8
Surplus financial assets (liabilities) as at Sept-30-11		(573.5	)		(279.2	)		(70.9	)		(21.1	)		944.7		0.0
Surplus financial assets (liabilities) as at Dec-31-10		(624.4	)		(296.1	)		(45.4	)		(48.2	)		1,014.1		0.0

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

Associated Companies

Hadera Paper is exposed to various risks associated with operations in Turkey, where Hogla-Kimberly is active through its subsidiary, KCTR. These risks originate from concerns regarding 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 material tax related issues at KCTR, as detailed in Note 4k to the financial statements dated September 30, 2011. On July 28, 2011, August 4, 2011 and November 1, 2011, decisions were handed down by the court in Turkey as part of the cases under discussion (approximately 43.9% of the principal of the claim), pertaining to the appeals concerning the demand of the tax authorities. The decisions are to the detriment of the company. KCTR has informed the company that it has appealed the decisions of the court to a higher instance, based on the expert opinion of its legal consultants, who maintain that the chances of success in the appeal are higher than 50%. The accounting policy of the company holds that the mere decision of the court creates a situation where it is more likely than not that the company would be obligated to make payments on account of these tax requirements. Consequently, it has created a provision of NIS 58.8 million during the reported period on account of its share in the sums detailed in the said court decision.

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.

Corporate Governance Issues

External Directors

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

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.

Detailed processes undertaken by the company's supreme supervisors, prior to the approval of the financial statements

On February 8, 2011, the Board of Directors of the company authorized the Audit Committee to also serve as a committee for the examination of the financial statements. It was resolved that it would be called the balance sheet and audit committee and would be charged - on behalf of the Board of Directors - to oversee the completeness of the financial statements and the work of the auditing CPAs and to make recommendations regarding the ratification of the financial statements and a discussion thereof prior to such ratification.

The members of the committee are as follows:

Name	External / independent director	Possessing accounting and financial expertise / able to read financial statements	Skills, education and experience	Provided an affidavit
Atalia Arad	External Director	Capable of reading and understanding financial statements	Her education and professional experience (see chapter D, Appendix G of the 2010 periodical report).	P
Aliza Rotbard	External Director	Possesses accounting and financial qualifications	Holds a Bachelor's degree (BSC) in Mathematics and Physics, from the Hebrew University in Jerusalem. Director at several different companies.	P
Amos Mar-Haim		Possesses accounting and financial qualifications	His education and professional experience (see chapter D, Appendix G of the 2010 periodical report).	P

Ms. Atalia Arad serves as chairperson of the committee

On November 10, 2011, the Balance Sheet and Audit Committee met to discuss the financial statements of the company for the third quarter of 2011 ("The Financial Statements") and for the purpose of formulating recommendations for the Board of Directors of the company.

4.	The position holders, interested parties, family members and/or anyone on their behalf present in the meeting of the committee, include:

Ofer Bloch - CEO, Shaul Glicksberg - VP Finance and Business Development, Yael Nevo - legal counsel, Shmuel Molad - Treasurer, Boaz Simons - Senior VP of Clal Industries and Investments Ltd. (CII) - controlling shareholder of the company, Yehuda Ben-Ezra, VP Finance & Treasurer of CII, Dror Dotan - Assistant to the CII CEO.

It should be noted that the auditing CPA also attended the meeting and presented the audit and review process that he performed in relation to the financial statements.

In the course of the meeting, the committee examined the material issues related to the financial statements, the crucial estimates and critical valuations implemented in the financial statements, the plausibility of the data, the accounting policy that was implemented and changes therein, and the implementation of the proper disclosure principal in the financial statements and regarding any accompanying information.

The Committee also examined various aspects of control and risk assessment reflected in the financial statements (such as reporting of financial risks).

Upon completing the discussion of the data that was presented, the committee formulated its recommendations to the Board of Directors of the company regarding the ratification of the financial statements, with one specific accounting issue remaining open and subject to holding an additional discussion.

The said recommendations were forwarded to the members of the Board of Directors approximately 5 days before the date that was set for the discussion and ratification of the financial statements, excluding one issue that remained open for examination and further discussion, the recommendation of which was handed by the committee during the Board of Directors' meeting.

The Board of Directors of the company believes that the recommendations of the committee were transferred to it within a reasonable time, prior to the discussion by the Board of Directors, taking into consideration the scope and complexity of the issues to be discussed in the recommendations. The Board of Directors of the company has accepted the recommendations of the Balance Sheet and Audit Committee regarding the approval of the financial statements.

Procedure for classifying transactions as negligible

On March 8, 2009, the Company's Board of Directors resolved to adopt rules and guidelines for categorizing a transaction of the Company or of one of its consolidated subsidiaries - with an interested party - as a negligible transaction as set forth in Regulation 41(a)(6) of the Securities Regulations (Preparation of Annual Financial Statements), 2010 ("Financial Statements Regulations"). These rules and guidelines shall also serve to examine the extent of disclosure in the periodical report and the prospectus (including shelf prospectus reports) regarding a transaction of the company, Corporation under its control and any related company, with a controlling shareholder, or in whose approval a controlling shareholder possesses a personal interest, as set forth in Regulation 22 of the Securities Regulations (Periodic and Immediate Reports) -1970 ("Periodic Report Regulations") and in Regulation 54 of the Securities Regulations (Prospectus Details and Prospectus Draft - Form and Shape) - 1969, as well as for the purpose of submitting an immediate report regarding a said transaction of the company, as stipulated in Regulation 37(a)(6) of the Periodic Report Regulations (the types of transactions determined in the Financial Statements Regulations, Periodical Statements Regulations and in the Prospectus Details Regulations mentioned above, hereinafter: "Related Party Transactions"). On August 8, 2010 and November 15, 2011, the Company's Board of Directors decided to update the rules and guidelines for the classification of an interested party transaction as a negligible transaction for the purposes described above, as follows:

The Company and its consolidated and related companies, are conducting or may conduct interested-party transactions in the course of their normal state of affairs, and they possess or may possess undertakings to conduct such transactions, including transactions of the type and possessing the characteristics outlined below: Obtaining banking, financial and/or economic services (such as: portfolio management, investment consulting, managing funds provided for the employees, deposits) from a banking corporation and financial institutions; purchasing insurance policies (such as: Managers liability insurance, property insurance and managers insurance); sale and purchase of products and services (such as: Communication products and services, including cellular communication services and international long-distance services, Call Center services, fuel, pipes, food products, office supplies, paper and cardboard products, clothing, textile, hygiene products, complementary products for cleaning and kitchen use and pesticides); sale and purchase of gifts and gift certificates; purchase and/or rental and/or operational leasing of vehicles; purchase of commercial vehicles, trucks and generators; purchase of travel, flights and tourism services in Israel and overseas and conference and event planning services; legal services; purchasing; rental of real estate property; property management services; vehicle repair services; transportation and courier services, packaging and export services; archive services, warehouse management services and logistic services; administrative services; underwriting engagements; irrigation and pest control services, shredding and waste treatment and removal; rental of advertising space; supply of newspapers, magazines and periodicals.

In the absence of any special qualitative considerations arising from the circumstances, a transaction with an interested party shall be deemed negligible if it is not an exceptional transaction (as defined in the Companies Law) for the purposes outlined above, if the applicable benchmark calculated for the transaction is less than 0.5% and the volume of the transaction does not exceed NIS 8 million (with this sum being adjusted according to the rise, from time to time, in the consumer price index, in relation to the Known Index starting at the beginning of 2010).

In any interested party transaction classified as a negligible transaction, one or more of the criteria relevant to the specific transaction will be calculated based on the consolidated audited or reviewed financial statements of the Company: (a) Upon the acquisition of a fixed asset ("non-current asset") - The volume of the transaction in relation to the total assets (in the report of the financial situation that is included in the company's last consolidated financial statements); (b) Upon the sale of a fixed asset ("non-current asset") - The profit/loss from the transaction in relation to the average annual earnings (i.e.- for four quarters) in the report of the financial situation that is included in the company's last consolidated financial statements), according to the last 12 quarters from which consolidated financial statements of the company have been published. In this respect, the profit/loss from the transaction and the profit/loss in any quarter will be calculated at their absolute value; (c) Upon assuming a monetary liability - The volume of the transaction in relation to the total liabilities in the report of the financial situation that is included in the last consolidated financial statements; (d) Upon the sale of products (excluding fixed assets) or services - The volume of the transaction in relation to the total revenues from sales and services over the last four quarters for which consolidated financial statements of the company have been published; (e) Upon the acquisition of products (excluding fixed assets) or services - The volume of the transaction in relation to the total operating expenses and costs over the last four quarters for which consolidated financial statements of the company have been published; (f) Regarding multi-annual interested party transactions, the volume of the transaction will be calculated on an annual basis. Thus, for example, in an insurance transaction for several years, the paid annual insurance premiums shall be considered as the volume of the transaction.

In cases where, at the Company's discretion, all the aforementioned quantitative benchmarks are not applicable for evaluation of the negligibility of the transaction with an interested party, the transaction shall be deemed negligible, in accordance with another applicable benchmark to be determined by the Company, provided that the applicable benchmark calculated for said transaction is less than 0.5% and that the volume of the transaction shall not exceed NIS 8 million (with this sum being adjusted according to the rise, from time to time, of the consumer price index in relation to the Known Index since the beginning of 2010).

The consideration of the quantitative benchmarks of an interested-party transaction may lead to the classification of the transaction as a transaction that is not negligible despite the aforesaid. Thus - and only as an example - a transaction with an interested party shall not usually be deemed negligible if it is conceived as a significant event by the Company's management, and if it serves as a basis for making managerial decisions, or if in the course of the transaction with an interested party, the latter is expected to receive benefits which are important to disclose publicly.

Separate interested-party transactions that are in fact interconnected and that are in fact part of the same engagement (for example: conducting negotiations regarding the entirety of the transactions), shall be examined as a single transaction.

An interested-party transaction that was classified as negligible by an investee company of the Company, shall also be considered negligible at the parent company level. A transaction that was classified by the investee company as a transaction that is not negligible, shall be examined against the relevant benchmarks at the parent company level.

The Audit Committee of the Company shall annually review the manner of implementation of the instructions in this procedure by the Company, and will conduct sample examinations of interested-party transactions to which the company is a party directly, that were classified as negligible transactions according to the procedural instructions. As part of the sample examinations of the said transactions, the Audit Committee shall examine, inter alia, the manner by which the prices and other terms of the transaction were determined, as the circumstances may be, and shall analyze the impact of the transaction on the business situation of the company and the results of its operations. The operations of the Audit Committee as stated in this section, including the sample examination mentioned above, the manner of its implementation and the summarized results and conclusions shall be disclosed in the periodical report of the company.

The Company's Board of Directors shall examine the need to update the instructions of this procedure from time to time, while taking into consideration the interest-party transactions undertaken by the company and the relevant changes in the legislation.

The examination of the classification of an interested party transaction as a negligible transaction, as regards the examination of the quantitative threshold, will be performed by the Treasury Department and as regards the examination of the quantitative threshold and for the purpose of immediate reports, by the Secretary of the company in collaboration with legal consulting, as necessary. The Legal Department shall be responsible for documenting the examination and decision-making process.

Disclosure Directives Related to the Financial Reporting of the Corporation

Events Subsequent to the Balance Sheet Date

For details regarding events that occurred subsequent to the balance sheet date, see Note 8 to the financial statements dated September 30, 2011.

Dedicated Disclosure to Debenture Holders

For details regarding the rating of debentures, see Note 15 to the periodical report for the year 2010.

On July 3, 2011, Standard & Poor's Maalot granted a rating of ilA+ to the expansion of Bond Series 5 of the company (ilA+/Stable) in the amount of up to NIS 220 million. The said rating report was attached as an appendix to the management discussion dated June 30, 2011.

On October 5, 2011, Standard & Poor's Maalot determined that no immediate change would be made to the company's ilA+/Stable rating, following the lowering of the rating for the IDB Group. The said rating report is attached as an appendix to the management discussion dated September 30, 2011.

On November 6, 2011, Standard & Poor's Maalot determined that no change would be made to the company's ilA+/Stable rating, following the ruling of the lower court in Turkey regarding the tax claim at KCTR, operating in Turkey. The said rating report is attached as an appendix to the management discussion dated September 30, 2011.

Financing Sources

See Section B4 - Financial Liabilities and further details in the table below.

Dedicated Disclosure to Debenture Holders - Continued

Debentures for institutional investors and the public

Series

Issue Date

Name of Rating Company

Rating at time of issue and at report date

Total par value at issue date

Interest type

Stated Interest

Registered for trade on stock exchange (Yes/No)

Interest payment dates

Par value Nominal as at Sept-30-11

Book value of bond balances as at

Sept-30-11

Book value of interest payable as at Sept-30-11

Fair value as at Sept-30-11

Material series

In NIS millions

Series 2

12.2003

Maalot

A+

200,000,000

Fixed

5.65%

Annual interest

December 21

In the years 2004-2013

85.7

103.8

4.6

110.2

Yes

Series 3

7.2008

Maalot

A+

187,500,000

Fixed

4.65%

Yes

Annual interest

On July 10

In the years 2009-2018

145.8

161.0

1.7

166.9

Yes

Series 4

7-8.2008

Maalot

A+

235,557,000

Fixed

7.45%

Yes

Semi-annual interest

On January 10 and July 10

In the years 2009-2015

157.0

158.3

2.7

171.3

Yes

Series 5

5.2010

& 7.2011

Maalot

A+

401,519,000

Fixed

5.85%

Yes

Semi-annual interest

On November 30 and May 31 of the years 2010-2017

401.5

396.7

8.0

438.0

Yes

Comments:

Series 2 - Linked to the Consumer Price Index (CPI). Principal repaid in 7 annual installments, between Dec-21-2007 and Dec-21-2013.

Series 3 - Linked to the Consumer Price Index (CPI). Principal repaid in 9 annual installments, between July 2010 and July 2018.

Series 4 - Principal repaid in 6 annual installments, between July 2010 and July 2015.

Series 5 - Principal repaid in 5 annual installments, between November 2013 and November 2017.

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: 03-5170777).

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: 03-5272272).

The trustee of the public debentures (Series 5) is Strauss Lazar Trust Corporation (1992) Ltd. The responsible contact person at Strauss Lazar Trust Corporation (1992) Ltd. in the matter of the public debentures is Mr. Uri Lazar (telephone: 03-6237777).

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

Exhibit 3

HADERA PAPER LTD

UNAUDITED CONDENSED INTERIM CONSOLIDATED

FINANCIAL STATEMENTS

AS OF SEPTEMBER 30, 2011

HADERA PAPER LTD

TABLE OF CONTENTS

	Page

Condensed Interim Consolidated Financial Statements (unaudited)
Condensed Consolidated statements of financial position	F-2-F-3
Condensed Consolidated Income Statements	F-4
Condensed Consolidated Statements of comprehensive income	F-5
Condensed Consolidated Statements of changes in equity	F-6-F-10
Condensed Consolidated Statements of Cash Flows	F-11-F-12
Notes to the Condensed Consolidated Financial Statements	F-13-F-28

HADERA PAPER LTD

CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

(NIS in thousands)

			September 30				December 31
	Note		2011		2010		2010
			(Unaudited)
Assets
Current Assets
Cash and cash equivalents				161,885		161,826		120,992
Designated deposits				-		9,022		-
Trade receivables				630,320		357,947		564,929
Account receivables				76,033		124,180		57,059
Inventory				345,872		192,419		343,519
Total Current Assets				1,214,110		845,394		1,086,499

Non-Current Assets
Fixed assets, net		5		1,328,273		1,207,822		1,358,619
Investments in associated companies				167,079		349,346		237,498
Deferred tax assets				2,913		* 2,008		2,165
Prepaid expenses in respect of an operating lease		4j		-		24,964		24,836
Other intangible assets				24,619		24,266		35,714
Investment property		2c		26,300		24,500		24,500
Financial assets - available for sale				2,726		-		1,646
Other assets				1,054		2,158		1,364
Employee benefit assets				725		730		793
Total Non-Current Assets				1,553,689		1,635,794		1,687,135

Total Assets				2,767,799		2,481,188		2,773,634

* Reclassified, see note 9.

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

F-2

HADERA PAPER LTD

CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

(NIS in thousands)

			September 30				December 31
	Note		2011		2010		2010
			(Unaudited)
Liabilities and Equity
Current Liabilities
Credit from banks and others				195,770		73,752		144,622
Current maturities of long-term bonds and long term loans				158,019		165,917		175,936
Trade payables				408,208		267,426		370,065
Account payables				109,180		115,214		172,295
Employee benefit liabilities				28,019		20,494		27,586
Financial liability at fair value through profit and loss		2d		-		13,700		-
Current tax liabilities				13,694		6,617		19,951
Total Current Liabilities				912,890		663,120		910,455

Non-Current Liabilities
Loans from banks and others				139,673		250,932		251,283
Bonds				722,673		594,372		562,348
Deferred tax liabilities				42,474		* 26,057		45,302
Employee benefit liabilities				17,639		14,829		19,132
Financial liability with respect to Put option granted to the non-controlling interests		2d		29,137		-		31,512
Total Non-Current Liabilities				951,596		886,190		909,577

Capital and reserves
Issued capital				125,267		125,267		125,267
Reserves				287,213		310,621		298,258
Retained earnings				471,835		469,627		506,445

Capital and reserves attributed to shareholders				884,315		905,515		929,970

Non-controlling interests				18,998		26,363		23,632
Total capital and reserves				903,313		931,878		953,602

Total Liabilities and Equity				2,767,799		2,481,188		2,773,634

* Reclassified, see note 9.


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 interim financial statements: November 15, 2011.

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

F-3

HADERA PAPER LTD

CONDENSED CONSOLIDATED INCOME STATEMENTS

(NIS in thousands)

	Note		Nine months ended September 30						Three months ended September 30						Year ended December 31
			2011			2010			2011			2010			2010
			(Unaudited)						(Unaudited)
Revenues				1,541,733			784,626			519,491			295,435			1,121,008
Cost of sales				1,361,315			661,045			463,665			254,697			945,422
Gross profit				180,418			123,581			55,826			40,738			175,586

Selling, marketing, general and administrative expenses
Selling and marketing expenses				112,457			63,532			38,388			22,878			87,201
General and administrative expenses				53,879			43,897			18,510			14,922			59,603
Other expenses (income), net		4h		(31,756	)		(16,584	)		8,430			(17,226	)		(32,513	)
Total expenses				134,580			90,845			65,328			20,574			114,291

Profit from ordinary operations				45,838			32,736			(9,502	)		20,164			61,295

Finance income				7,168			5,231			915			2,611			9,314
Finance expenses				68,840			33,662			26,451			20,263			54,079
Finance expenses, net				61,672			28,431			25,536			17,652			44,765

Profit (Loss) after financial expenses				(15,834	)		4,305			(35,038	)		2,512			16,530

Share in profit (loss) of associated companies, net				(29,100	)		58,546			(16,384	)		18,490			81,132

Profit (Loss) before taxes on income				(44,934	)		62,851			(51,422	)		21,002			97,662
Taxes on income		6		(4,605	)		(2,461	)		(6,028	)		(2,085	)		(2,950	)

Profit (loss) for the period				(40,329	)		65,312			(45,394	)		23,087			100,612

Attributed to:
Company shareholders				(35,704	)		65,354			(43,560	)		23,026			100,728
Non-controlling interests				(4,625	)		(42	)		(1,834	)		61			(116	)

				(40,329	)		65,312			(45,394	)		23,087			100,612

	NIS
Earnings (loss) for regular share of NIS 0.01 par value

Primary earnings (loss) per share attributed to Company shareholders		(7.02	)	12.88	(8.56	)	4.53	19.84

Fully diluted earnings (loss) per share attributed to company shareholders		(7.02	)	12.77	(8.56	)	4.50	19.68

Weighted average number of share used to compute the earning per share
Primary		5,089,272		5,075,922	5,089,811		5,082,028	5,078,156
Fully diluted		5,089,272		5,116,355	5,089,811		5,114,456	5,118,416

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

F-4

HADERA PAPER LTD

CONDENSED CONSOLIDATED STATEMENT

OF COMPREHENSIVE INCOME

(NIS in thousands)

	Nine months ended					Three months ended					Year ended
	September 30					September 30					December 31
	2011			2010		2011			2010		2010
	(Unaudited)					(Unaudited)
Profit (Loss) for the period		(40,329	)		65,312		(45,394	)		23,087		100,612

Other Comprehensive Income (loss), net
Profit (loss) on cash flow hedges, net		-			1,213		-			2,184		1,044
Actuarial profit in respect of defined benefit plan, net		(223	)		32		(79	)		111		115
Profit from fair value adjustment of financial asset available for sale, net		864			-		174			-		-
Share in Other Comprehensive Income (loss) of associated companies, net		(11,726	)		964		(3,757	)		4,203		(11,711	)
Share in Other Comprehensive Income of associated companies, which allocated to the income statements, net		347			315		347			8		446
Total Other Comprehensive Income (loss) for the period, net		(10,738	)		2,524		(3,315	)		6,506		(10,106	)

Total Comprehensive Income (loss) for the period		(51,067	)		67,836		(48,709	)		29,593		90,506

Attributed to: Company shareholders		(46,433	)		67,857		(46,866	)		29,470