נייר חדרה - ברנע 2015 ENG - Hadera Paperen.hadera-paper.co.il/.../pdf/Hadera_Paper_Periodical_Report_2015.pdf · B Management Discussion and Analysis ... "Report date"

Periodical Report2015

Contents

Chapter Subject

A Description of the Corporation's Business

B Management Discussion and Analysis

C Financial Statements as at December 31, 2015

D Additional Details Regarding the Corporation

E Report Regarding Effectiveness of Internal Auditing Over Financial Reporting and Disclosure

Chapter A

Description of the Corporation's Business

Table of Contents

Chapter A - Description of the General Development of the Corporation's Business ....................... 1

1. Introduction ................................................................................................................................... 1

2. Corporate Operations and Description of Its Business Development ...................................... 2

3. Sectors of activity ........................................................................................................................... 5

4. Equity investments in the Company and transactions in its shares .......................................... 6

5. Dividend Distribution .................................................................................................................... 6

Chapter B - Other Information ............................................................................................................... 7

6. Financial Information Regarding the Corporation's Sectors of Operation ............................. 7

Chapter C – Business Description of the Corporation by Sectors ...................................................... 10

7. Packaging Paper Sector .............................................................................................................. 10

7.1. Structure of the packaging paper operating sector and changes thereto .................................... 10

7.2. Limitations, Legislation, Regulations and Special Constraints applicable to the packaging paper operating sector ................................................................................................................ 10

7.3. Changes to volume of operations in the packaging paper sector and its profitability ................ 10

7.4. Developments in the packaging paper sector and changes to its customer profile .................... 12

7.5. Substitutes for products in the sector of operations ................................................................... 12

7.6. Products and services in the packaging paper operating sector ................................................. 12

7.7. Distribution of revenues of products and services in the packaging paper operating sector ...... 12

7.8. Packaging paper sector clients ................................................................................................... 13

7.9. Marketing and distribution in the packaging paper sector ......................................................... 14

7.10. Competition in the packaging paper sector ................................................................................ 14

7.11. Fixed assets and output capacity in the packaging paper sector ................................................ 14

7.12. Research and Development ........................................................................................................ 15

7.13. Raw materials and suppliers in the packaging paper sector ....................................................... 15

7.14. Working capital .......................................................................................................................... 16

7.15. Restrictions on and Supervision of Corporate Operations in the Packaging Paper.................... 16

7.16. Risk factors in the packaging paper operating sector ................................................................. 16

8. Packaging and cardboard products sector ................................................................................ 17

8.1. The packaging and cardboard products operating sector and changes therein .......................... 17

8.2. Changes in the volume of operations and profitability in the packaging and cardboard products operating sector ........................................................................................................... 17


8.4. Products and services in the packaging and cardboard products operating sector ..................... 18

8.5. Distribution of revenues from products and services in the packaging and cardboard products operating sector .......................................................................................................................... 19

8.6. Customers of the packaging and cardboard products segment of activity ................................. 19

8.7. Competition in the packaging and cardboard products operating sector ................................... 19

8.8. Seasonality ................................................................................................................................. 20

8.9. Output capacity in the packaging and cardboard products operating sector .............................. 20

8.10. Fixed assets, real estate and facilities in the packaging and cardboard products operating sector .......................................................................................................................................... 20

8.11. Raw materials and suppliers in the packaging and cardboard products operating sector .......... 21

8.12. Working capital .......................................................................................................................... 21

8.13. Material agreements ................................................................................................................... 22

8.14. Risk factors in the packaging and cardboard products operating sector .................................... 22

9. Sector of collection and processing services .............................................................................. 22

9.1. Structure of the sector of collection and processing services ..................................................... 22

9.2. Limitations, Legislation, Regulations and Special Constraints applicable to the sector of collection and recycling services ................................................................................................ 23

9.3. Changes to volume of operations and profitability in the sector of collection and recycling services ....................................................................................................................................... 23

9.4. Products and Services in the sector of collection and recycling services ................................... 24

9.5. Distribution of revenues from products and services in the sector of collection and recycling services ....................................................................................................................................... 24

9.6. Clients of the sector of collection and processing services ........................................................ 24

9.7. Competition in the sector of collection and processing services ................................................ 25

9.8. Output capacity in the sector of collection and recycling services ............................................ 25

9.9. Fixed assets, real estate and facilities in the sector of collection and recycling services ........... 26

9.10. Raw materials and suppliers in the sector of collection and processing services....................... 26

9.11. Working capital .......................................................................................................................... 27

9.12. Restrictions on and Supervision of Corporate Operations in the sector of collection and processing services ..................................................................................................................... 28

9.13. Risk factors in the sector of collection and processing services ................................................ 28

10. Fine paper sector ......................................................................................................................... 29

10.1. Structure of the fine paper sector ............................................................................................... 29

10.2. Changes to volume of operations in the sector and its profitability ........................................... 29

10.3. Developments in the fine paper sector and changes to its customer profile .............................. 30


10.5. Products and services in the fine paper sector ............................................................................ 30

10.6. Distribution of revenues of products and services in the fine paper sector ................................ 31

10.7. Customers of the fine paper sector ............................................................................................. 31

10.8. Marketing and distribution in the fine paper sector ................................................................... 31

10.9. Competition in the fine paper sector .......................................................................................... 32

10.10. Output capacity in the fine paper sector ..................................................................................... 32

10.11. Fixed assets, real estate and facilities in the fine paper sector ................................................... 32

10.12. Raw materials and suppliers in the fine paper sector ................................................................. 33

10.13. Working capital .......................................................................................................................... 34

10.14. Material agreements in the fine paper sector.............................................................................. 34

10.15. Risk factors in the fine paper sector ........................................................................................... 35

11. Office Supplies Marketing sector ............................................................................................... 35

11.1. Structure of the Office Supplies Marketing sector ..................................................................... 35

11.2. Changes to volume of operations in the sector and its profitability ........................................... 36

11.3. Critical success factors in the sector of operations ..................................................................... 36


11.5. Products and Services in the office supplies marketing sector .................................................. 36

11.6. Customers in the office supplies marketing sector ..................................................................... 36

11.7. Marketing and distribution in the office supplies marketing sector ........................................... 36

11.8. Competition in the office supplies marketing sector .................................................................. 37

11.9. Fixed assets, real estate and facilities in the Office Supplies Marketing sector ......................... 37

11.10. Working capital .......................................................................................................................... 37

11.11. Risk factors in the office supplies marketing sector ................................................................... 38

Chapter D - Additional Information Regarding the Corporation .................................................. 39

12. Critical success factors in the packaging paper sector of operations and changes therein .. 39

13. Major barriers to entry and exit in the Group's activity sectors and changes therein ......... 39

14. Fixed assets, real estate and facilities ......................................................................................... 40

15. Human resources ......................................................................................................................... 40

15.2. Staff employed according to sectors of activity ......................................................................... 41

15.3. Employment agreements ............................................................................................................ 41

15.4. Agreements with senior officers ................................................................................................ 42

16. Restrictions and Supervision of Company Operations ............................................................ 43

16.1. The Natural Gas Market Council’s decision regarding capacity exhaustion events .................. 43

17. Financing - Reportable credit ..................................................................................................... 44

18. Taxation ........................................................................................................................................ 51

19. Environmental Risks and Management thereof ....................................................................... 51

20. Material Agreements ................................................................................................................... 53

21. Legal Proceedings ........................................................................................................................ 55

22. Business objectives & strategy and anticipated development over the next year .................. 55

23. Risk factors .................................................................................................................................. 57

1

Chapter A - Description of the General Development of the Corporation's Business

1. Introduction

The Board of Directors of Hadera Paper Ltd. is honored to hereby present the description of the corporation's business as at December 31, 2015 - a review of the corporate description and development of its business in 2015 (hereafter: "the reported period"). The report was formulated in accordance with the Securities Regulations (Periodic and Immediate Reports), -1970.

1.1. Legend

For the sake of convenience, in this periodical report the following abbreviations shall have the meaning noted adjacent to them:

"Euro" - Euro currency of European Monetary Union;

"Amnir" - Amnir Recycling Industries Ltd.;

"Graffiti" - Graffiti Office Supplies & Paper Marketing Ltd. and its subsidiaries.

"Dollar" - US dollar

"TASE" - The Tel Aviv Stock Exchange Ltd.;

"Financial Statements" - The Company’s financial statements as of report date.

"The Company" or "Hadera Paper" -

Hadera Paper Ltd.

"The Group" - The Company and its subsidiaries, as defined below;

"Subsidiaries" - Companies directly and/or indirectly controlled by the Company1: Hadera Paper - Packaging Paper and Recycling Ltd, Hadera Paper Development and Infrastructures Ltd, Amnir Recycling Industries Ltd, Carmel Frenkel Ind. Ltd, Hadera Paper - Printing and Writing Paper Ltd. (in voluntary liquidation), Graffiti Office Supplies & Paper Marketing Ltd, subsidiaries thereof, and additional companies as detailed in section 2.11 hereafter;

"Hogla-Kimberly" - Hogla-Kimberly Ltd.;

"The Companies Law" - The Companies Law, 1999;

"The Securities Act" - The Securities Act, 1968;

"Carmel" - Carmel Frenkel Ind. Ltd.

"Report date" - December 31, 2015;

1 In respect of this report, "control" - as defined in Section 1 of the Securities Act.

2

"Hadera Paper Packaging" -

Hadera Paper - Packaging Paper and Recycling Ltd.;

"Hadera Paper Printing" - Hadera Paper - Printing and Writing Paper Ltd. (In voluntary liquidation);

"Hadera Paper Infrastructures" -

Hadera Paper Development and Infrastructures Ltd.;

"FIMI" - FIMI Opportunity V (Delaware) LP and FIMI Israel Opportunity V, LP, whereas FIMI V 2012 Ltd. is the general partner of both companies.

1.2. The degree to which information included in this report is material, including description of Group companies and description of their business, is provided from the Company's viewpoint, and in some cases the description has been elaborated to provide a comprehensive view of the topic described.

1.3. Holding stakes in shares of investee companies are rounded to the nearest percentage point, and are current in proximity to the date of this report, unless otherwise indicated. Holding stakes in shares of an investee company are calculated out of total actual issued share capital of said investee, not accounting for potential dilution due to exercise of options and other convertible securities issued by the Company, unless otherwise indicated. In calculating the holding rate in Company shares, fully diluted, the exercise of all options and other convertible securities issued at that date was taken into account, unless stated otherwise. Consequently, holding percentages may change according to the exercise of options granted to the remaining shareholders in the same investee company.

1.4. In the description of investee companies, data that is based on various surveys and studies is occasionally included. The Company is not responsible for the content of such surveys and studies.

1.5. Within the framework of addressing the Company's consolidated financial data, separate financial data of Hogla-Kimberly whose sale was finalized on March 16, 2015 is not included.

1.6. This report refers to both men and women - the occasional use of the masculine form is for purposes of convenience only.

1.7. Chapter A of this annual report should be read along with its other chapters, including the notes to the financial statements.

2. Corporate Operations and Description of Its Business Development

2.1. The Company was incorporated in Israel as a private company in 1951. In 1959, the Company held the initial public offering of its securities, pursuant to the prospectus then published, and as of that date, Company shares were listed for trading on the stock exchange.

2.2. The Company's control holder is FIMI fund, this pursuant to its holdings in approximately 59.19% of issued share capital and voting rights in the Company (approximately 56.78% in full dilution). FIMI fund purchased the control of the Company from Clal Industries Ltd. according to an agreement from June 24, 2015 that was finalized on August 13, 2015. For further details, see section 4.1 hereafter and Company

3

reports dated June 24, 2015 and August 13, 2015 (reference numbers: 2015-01-055860 and -2015-01-096126, respectively).2

2.3. The Company is engaged - directly or through its subsidiaries – in the manufacture and sale of packaging paper, manufacture of corrugated board containers and packaging for consumer goods, collection and processing of paper waste and plastic recycling, manufacture and marketing of fine paper, and in marketing office supplies.

2.4. The Company's activity segments are operating in synergy that reflects the value chain of the paper production sector. Within this framework, the paper waste collected and processed by the Group constitutes as main raw material in the sector of packaging paper production and sale. Furthermore, the packaging paper manufactured by the Group constitutes as main raw material in the Group's activity in the sector of corrugated cardboard packages and consumer goods packaging manufacturing.

2.5. In recent years, the Company is taking efficiency and savings measures for the purpose of addressing the changing business environment of the Company's sectors of operation. Within this framework, during the report period, the Company took actions for reinforcing its financial stability and reducing leverage, inter alia via exercising its holdings in sectors that are not included in its business core, shares issuance, capital raising, and taking measures intended for reducing the Company's fixed costs. In parallel, the Company is examining opportunities for capital investments or purchasing activities that may have potential as growth engines which can be incorporated in its business.

2.6. In parallel, in March 2015, the Company completed the sale of all its holdings in Hogla-Kimberly, this in return for approximately NIS 650 million. A transaction was finalized in August 2015, within the framework of which the Company sold all (100%) holdings (direct and indirect) in Advanced Integrated Energy Ltd. and the Company's existing energy center equipment (including the Company's power station) to ICPower Ltd., this in return for a total of approximately NIS 60 million. For further details, see section 20 below.

Furthermore, during December 2015, the Company issued ordinary shares in return for approximately NIS 150 million. For further details, see section 4 below.

Moreover, the Company has been and is taking measures for increasing the synergy between Group units and streamlining their activities, including by consolidating some production sites and flattening the organizational structure, including workforce reduction along with decrease of Group headquarters and the number of executives.

The Company believes that these proceedings may contribute to the financial improvement presented for most of its business activity sectors as derived from its financial results for 2015.

2 To the Company's best knowledge, based on FIMI fund reports to the Company, FIMI V 2012 Ltd. is the general partner in two limited partnerships which directly hold Company shares: FIMI Opportunity V (Delaware) LP and FIMI Israel Opportunity V, LP. FIMI V 2012 Ltd. is a company under (indirect) control of Mr.Yishay Davidi. For further details see the Company's Immediate Report regarding stakeholder holdings dated March 7, 2016 (reference number: 2016-01-000921).

4

2.7. The following diagram illustrates the Company's holdings in major Group companies as at December 31, 2015:

(1) Within the framework of an internal reorganization process for Company holdings, it was decided upon the transfer and sale of Hadera Paper Printing to Hadera Paper as of December 31, 2015, and voluntary liquidation of Hadera Paper Printing. Within this framework, all holdings in Hadera Paper - Printing and Writing Paper Marketing Ltd. were transferred to Hadera Paper.

Hadera Paper ‐ Printing and

Writing Paper Ltd. (1)

Graffiti Office Supplies & Paper Marketing Ltd.

Hadera Paper ‐ Packaging Paper and Recycling

Hadera Paper Ltd.

Amnir Recycling Industries Ltd.

Carmel Frenkel Ind. Ltd.

100% 100% 100% 94% 100%

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2.8. Changes in corporation investments in subsidiaries and corporate business during the report period

2.8.1. Within the framework of a transaction which was finalized in March 2015, the Company sold its entire holdings - direct and indirect (49.9%) - in Hogla-Kimberly to Kimberly-Clark, that held approximately 50.1% of Hogla-Kimberly’s share capital prior to the transaction, in consideration of the total sum of approximately NIS 650 million, partly due to the sale of Hogla-Kimberly shares and partly on account of the companies undertaking a non-competition agreement with Hogla-Kimberly operations. For further details, see section 20.1 below.

2.8.2. Within the framework of a transaction which was finalized in August 2015, the Company sold all its (100%) holdings (direct and indirect) in Advanced Integrated Energy Ltd. and the Company's existing energy center equipment (including the Company's power station) to ICPower Ltd., this in return for a total of approximately NIS 60 million. For further details, see section 20.2 below.

3. Sectors of activity

As at report date, the Group (directly and via subsidiaries) has five sectors of activity:

3.1. Packaging paper - the Group's activity in this sector includes the manufacture and sale of packaging paper produced from 100% cardboard and newspaper waste which is collected mainly by Amnir. The recycled packaging paper is primarily utilized as raw material for the corrugating industry (hereafter: "the corrugators"). Most of the Group’s manufacturing consists of fluting paper (paper that serves as raw material for production of corrugated board packages, serving as a separation between the external layer of the box and its internal side). Moreover, Hadera Packaging Paper manufactures recycled paper types that are utilized as an alternative for pulp-based packaging paper. For further details regarding this operating sector, see Section 7 elow.

3.2. Packaging and Cardboard Products - Group operations in this activity segment, which are executed by Carmel, include production and sale of cardboard products intended primarily for customers in the industry and agriculture sectors, and cardboard shelf packaging for consumer goods, mostly used in industry, agriculture, food, beverages, pharmaceutics and cosmetics. Packaging and cardboard are also produced from recycled paper produced by Hadera Paper Packaging, inter alia. For further details regarding this activity sector, see Section 8 below.

3.3. Collection and recycling services - This activity sector includes the system of cardboard and paper waste collection which is carried out by Amnir and its subcontractors, and its processing for the purpose of waste recycling and utilization for packaging paper production. Paper waste is mainly collected from various sources around the country by Amnir, and is processed at its plants. As part of paper production processes, some of the Group's companies, specifically Hadera Paper Printing, are utilizing paper waste as key raw material. As part of Group activity in this sector, Amnir also collects and processes plastic waste. For further details regarding this operating sector, see Section 9 below.

3.4. Fine Printing Paper - The Group's operations in this sector consist of the manufacture and marketing of fine paper, marketing of imported paper, such as coated paper and special paper, complementary to its product range. For further details regarding this operating sector, see Section 10 below.

3.5. Office supplies marketing - Group operations in this sector are carried out via Graffiti, and include marketing office and paper supplies, primarily to the institutional and business markets, which include, inter alia: government offices, banks, HMOs and other businesses, as well as

6

distribution to wholesalers and retailers. For further details regarding this operating sector, see Section 11 below.

4. Equity investments in the Company and transactions in its shares

4.1. In August 2015, FIMI fund purchased all holdings of Clal Industries Ltd. via the Company's ordinary shares (3,007,621 ordinary shares) which constituted approximately 59.09% of the Company's issued share capital at that time, in return for a total of approximately NIS 354,546 thousand (which reflects a sum of approximately 117.88 NIS per sold share). For further details, see Company reports dated June 24, 2015 and August 13, 2015 (reference numbers: 2015-01-055860 and -2015-01-096126, respectively).

4.2. On May 26, 2013, the Company issued a shelf prospectus, as amended on June 20, 2013, which includes, inter alia, up to 1,000,000 company ordinary shares registered in the owner's name, of NIS 0.01 par value each (hereinafter: "the shelf prospectus"). On May 3, 2015, the Israeli Securities Authority approved the extension of shelf prospectus validity until May 27, 2016. For details, see the Company’s Immediate Report dated May 4, 2015 (reference number: 2015-01-011802).

4.3. During January and February 2014, the Company issued 190,362 option notes (Series A)., registered by name, which can be actualized until January 18, 2017 in a manner where each option note (Series A) can be actualized into one regular Company share. For further details, see the Company's Immediate Report dated January 30, 2014 and February 03, 2014 (reference numbers: 2014-01-027292 and 2014-01-029554, respectively).

4.4. On December 10, 2015, the Company published a shelf prospectus for issuance and listing of ordinary shares for trade according to the shelf prospectus. Within this framework, the Company issued 1,295,220 ordinary shares in return for approximately NIS 150 million. For further details regarding the shelf prospectus and public offering results, see Immediate Reports dated December 10, 2015 and December 31, 2015 (reference numbers: 2015-01-177222 and -2015-01-177945, respectively).

5. Dividend Distribution

5.1. The Company did not distribute any dividends to its shareholders during the past two years. As of December 31, 2015, the Company possesses retained earnings that are eligible for distribution, in the sum of approximately NIS 372 millions.

5.2. We note that, as of the report date, the Company has yet to adopt a dividend distribution policy.

5.3. According to the debentures' (Series 6) deed of trust, the Company committed to not distribute dividend and/or self-purchase its shares in case its equity according to the Company's reviewed or audited consolidated financial statements, as the case may be, will be reduced to less than NIS 500 (five hundred) million after dividend distribution and/or self-purchase, as the case may be. For further details see section 5.6 to the debentures' (Series 6) deed of trust, as included in the Company's Immediate Report dated January 28, 2014 (reference number: 2014-01-027292).

7

Chapter B - Other Information

6. Financial Information Regarding the Corporation's Sectors of Operation

6.1. Below is data regarding financial information about the Company's sectors of operation in the years 2015, 2014 and 2013 (in NIS thousands):

Year ended December 31, 2015

Packaging paper & recycling

sector

Packaging and

Cardboard Products

sector

Sector of collection

and processing

services

Fine paper sector

Office Supplies

Marketing sector

Adjustments to

consolidated*Consolidated

1. Revenue

a. External sector revenues 428,439 469,458 143,203 527,255 173,087 - 1,741,442

b. Revenues from other operating sectors 101,804 5,975 138,900 28,269 718 )275,666( -

c. Total 530,243 475,433 282,103 555,524 173,805 )275,666( 1,741,442

2. Costs*

a. Costs that constitute revenues of another sector of the corporation 142,477 102,220 629 5,642 24,698 )275,666( -

b. Other Costs 357,340 366,820 277,813 639,638 151,091 )438,133( 1,354,569

c. Total 499,817 469,040 278,442 645,280 175,789 )713,799( 1,354,569

d. Fixed costs 75,075* 169,919 129,132 122,960 47,953 )438,133( 152,138

e. Variable costs 424,742 299,121 149,310 522,320 127,836 )275,666( 1,202,431

3. Profit (loss) from ordinary operations 30,426 30,426 6,393 3,661 )89,756( )1,984( 438,133

a. Operating income (loss) attributed to the owners of the parent company 30,426 6,009 3,661 )89,756( )1,984( 438,133 386,489

b. Operating income (loss) attributed to rights that do not offer control - 384 - - - - 384

4. Total assets as at 31.12.2015 1,651,475 290,370 221,565 309,142 73,035 47,711 2,557,298

5. Total liabilities as at 31.12.2015 57,654 70,719 58,309 60,277 38,627 1,289,987 1,575,573

8

Year ended December 31, 2014 *


sector

Packaging and

Cardboard Products

sector


and processing

services

Fine paper sector

Office Supplies

Marketing sector

Adjustments to


1. Revenue


b. Revenues from other operating sectors 89,241 6,061 151,172 23,710 1,310 )271,494( -

c. Total 532,727 482,230 308,332 521,778 183,789 )271,494( 1,757,362

2. Costs*

a. Costs that constitute revenues of another sector of the corporation 151,155 89,354 1,999 5,576 23,410 )271,494( -

b. Other Costs 304,590 416,699 311,314 678,920 157,689 426 1,869,638

c. Total 455,745 506,053 313,313 684,496 181,099 )271,068( 1,869,638

d. Fixed costs 123,031 141,997 116,153 136,358 48,285 )72,686( 493,138

e. Variable costs 332,714 364,056 197,160 548,138 132,814 )198,382( 1,376,500

3. Profit (loss) from ordinary operations 55,527 76,982 )23,823( )4,981( )162,718( 2,690 )426(

a. Operating income (loss) attributed to the owners of the parent company 76,982 )22,394( )4,981( )162,718( 2,690 )426( )110,847(

b. Operating income (loss) attributed to rights that do not offer control - )1,429( - - - - )1,429(

4. Total assets as at 31.12.2014 1,554,923 351,058 272,399 289,908 102,440 )137,093( 2,433,635

5. Total liabilities as at 31.12.2014 67,955 69,017 59,997 74,791 33,694 1,542,339 1,847,793

* Adjustments are primarily for general assets not assigned to a specific operating sector.

9

Year ended December 31, 2013 *


sector

Packaging and

Cardboard Products

sector


and processing

services

Fine paper sector

Office Supplies

Marketing sector

Adjustments to


1. Revenue


b. Revenues from other operating sectors 106,517 6,378 168,835 28,650 1,054 )311,434( -

c. Total 536,860 518,764 315,614 557,422 205,868 )311,434( 1,823,094

2. Costs*

a. Costs that constitute revenues of another sector of the corporation 168,950 108,590 755 5,867 27,272 )311,434( -

b. Other Costs 371,183 406,107 312,197 615,528 180,141 238 1,885,394

c. Total 540,133 514,697 312,952 621,395 207,413 )311,196( 1,885,394

d. Fixed costs 126,180 147,747 115,941 159,698 33,030 )269,389( 313,207

e. Variable costs 413,953 366,950 197,011 461,697 174,383 )41,807( 1,572,187

3. Profit (loss) from ordinary operations (3,273) )3,273( 4,067 2,662 )63,973( )1,545( )238(

a. Operating income (loss) attributed to the owners of the parent company )3,273( 3,823 2,662 )63,973( )1,545( )238( )62,544(

b. Operating income (loss) attributed to rights that do not offer control - 244 - - - - 244

4. Total assets as at December 31, 2013 1,336,987 358,210 228,395 376,913 109,966 )30,266( 2,380,205

5. Total liabilities as at December 31, 2013 62,327 84,498 72,129 51,581 42,316 1,335,131 1,647,982

* Adjustments are primarily for general assets not assigned to a specific operating sector.

6.2. Developments in the Past Three Years, the General Environment and the Impact of External Factors on the Company

For a description of the developments that took place in the past three years and of the general environment and the impact of external factors on the Company, see Section A2 of the Company’s Management Discussion.

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Chapter C – Business Description of the Corporation by Sectors

7. Packaging Paper Sector

7.1. Structure of the packaging paper operating sector and changes thereto

7.1.1. The packaging paper operations focus primarily on the manufacture and sale of packaging paper, and are conducted by the Group via its subsidiary, Hadera Paper Packaging.

7.1.2. Packaging paper is intended, as mentioned, primarily for the corrugated cardboard industry, as raw material intended for the manufacture of cardboard containers used as product packaging. The corrugated cardboard industry serves the following sectors: industry, agriculture and the food and beverages. Consequently, economic activity and export levels have significant impact on demand for packaging paper. In this context, it should be noted that the increase in e-commerce which led to an increase in the volume of international and local deliveries and had a positive impact on demand for packaging products, and subsequently also on demand for the packaging paper manufactured by the Company.

7.1.3. The majority of production conducted by the Group in this sector consists of fluting paper (incorporated in corrugated board boxes as a wavy layer) and liner paper which form the box walls. All of the packaging paper produced by Hadera Paper Packaging, is made of recycled paper waste. Globally, packaging paper is also produced from virgin fibers (produced by pulp). In this sector of operations, the Group also produces additional paper types made of 100% recycled fibers that constitute a replacement for the pulp-based packaging paper.

7.2. Limitations, Legislation, Regulations and Special Constraints applicable to the packaging paper operating sector

Considering the nature of this operating sector, Group activity in the packaging paper segment are subject to regulation in different aspects, including: environmental protection provisions (such as: Maintaining Cleanliness Law, Hazard Prevention Law, Hazardous Materials Law, Clean Air Law), permits and licenses (such as: Business Licensing Law), Anti-Trust (such as: Anti-Trust Law, Consensus Ordinances), Natural Gas Sector Law, etc.

For further details regarding the regulation that applies to Group’s activities in the packaging paper sector, including restrictions that apply to the Company under the Anti-Trust Law, 5748 – 1988, and the Company’s declaration as a monopoly in the packaging paper sector, see Section 7.16 below.

7.3. Changes to volume of operations in the packaging paper sector and its profitability

7.3.1. Based on internal Company estimates, the consumption of packaging paper in Israel in recent years did not change significantly, and averaged at 365 thousand tons per year. The Company believes that in recent years, the share of recycled packaging paper out of total packaging paper consumed in Israel has increased and constituted approximately 63% in proximity to the report date. According to Company estimates that are based on industry publications, the rate of recycled packaging paper from total packaging paper consumed in Europe averages at approximately 70%.

7.3.2. The Company believes that there is potential for increasing the volume of marketing packaging paper manufactured by the Group in Israel. Said increase is achievable, inter alia, via the encouragement of consuming recycled packaging paper on account of pulp-based packaging paper and import of both recycled paper and pulp-based paper by foreign Company clients.

7.3.3. In light of stated trends and Company efforts for increasing its sales in Israel, the Company increased the quantity of packaging paper sold by it by approximately 20% in 2015, compared

11

with the quantity sold by the Company in 2014. Said quantitative increase was accompanied by a slight erosion of sale prices, this inter alia in light of the increase in quantities and granted discount for encouraging such increase, and subsequently, NIS increase versus the Euro, while considering the fact that some of the competition for Company products is import from Eurozone countries.

7.3.4. Below is a graphical depiction of developments in prices of main paper produce - fluting (according to PPI (RSSI) data) in Europe, in €/ton:

As evident from the graph above, the selling prices of fluting-type paper have increased in Europe in 2013. A price decrease was recorded in the first half of 2014, whereas a slight increase was recorded in the second half, after which the price remained stable for three quarters. Another slight price increase was recorded in the third quarter of 2014. As at report date, the Company does not expect a significant change in price trends.

7.3.5. Paper waste, which is the Group’s main raw material in this sector, is purchased from Amnir. For details regarding trends of global paper waste prices, see section 9.10.5 below.

7.3.6. The Company's operating profit has improved in 2015, this inter alia in light of decrease in the cost of raw materials and operational streamlining. It should be noted that the improvement in said operating profit was partially offset in light of finalizing the sale of the energy array as detailed in section 20.3 hereafter, and attributing the relative share from the non-recurring loss in the amount of approximately NIS 16.8 million due to the sale transaction to the activity sector.

7.3.7. Information concerning the potential for an increase in the volume of recycled packaging paper marketing in Israel at the expense of paper imports and further price trends in the sector constitute as forward-looking information, as defined in the Securities Act, and merely consist of forecasts and estimates by the Company which are not certain to materialize and are based on information available to the Company as of the report date. The aforementioned Company forecasts and estimates may not materialize, in whole or in part, or may differ from current forecasts and estimates, due to multiple factors, including changes in demand in markets in which the Group operates, global supply and cost of paper products, developments and changes to regulation of the operating sector and/or materialization of any of the risk factors set forth in section 24 hereafter.

200

250

300

350

400

450

500

550

600

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7.4. Developments in the packaging paper sector and changes to its customer profile

In recent years, clients in Israel (and worldwide) seem to be transitioning to using paper made of recycled fiber rather than paper made of pulp-based virgin fiber (imported), due to, inter alia, higher cost of virgin fiber compared to recycled fibers, which impacts the paper price. It should be noted that in recent years, the gap between the cost of virgin fiber and recycled fiber has been closing, inter alia in light of decrease in virgin fiber prices, although there is no certainty that this trend will continue. The transition to recycled paper was made possible, inter alia, by technological developments in this field, allowing recycled fiber to be used to produce paper with strength and other qualities similar to those of pulp-based paper. Furthermore, in recent years awareness of environmental protection issues has grown, which may assist the growth of penetration rate of paper made of recycled fiber.

7.5. Substitutes for products in the sector of operations

Hadera Paper Printing is the only producer of packaging paper in Israel, although the sector is competitive due to importers operating on it. Group products in the sector have substitutes from competitors, and substitutes from virgin paper.

7.6. Products and services in the packaging paper operating sector

The Group's operations in this operating segment involve the production and sale of packaging paper from recycled fiber (i.e. from paper waste collected for recycling). As aforementioned, this paper is used as raw material for production of cardboard packaging by the corrugated cardboard industry. Most of the manufacturing performed by the Group consists of fluting paper (paper integrated into corrugated cardboard packages), and liner paper (package sides). For further details, see Sections 7.1.2-7.1.3 below.

It should be noted that in recent years, the Company is engaged in developing paper types based on 100% recycled fibers, whose high quality allows replacing packaging paper based on pulp in the corrugated board industry in Israel and overseas (hereinafter: "pulp replacements"). In recent years, the Company took action for increasing the sales of pulp replacements in the local market on account of pulp-based paper. The development of pulp replacements is based on fiber characterization, the development and implementation of various chemical additives and the use of advanced manufacturing technologies. The Group continues to take actions towards development and enhancement of pulp replacement characteristics, while focusing on further development of strength and durability to moistness and cooling of papers from recycled materials, this for the purpose of expanding the range of products marketed by the Group so that these can replace a larger share of the imported pulp-based packaging paper, thus increasing the Group's profitability.

7.7. Distribution of revenues of products and services in the packaging paper operating sector

Most of the revenues in this sector of operations originate from the sale of packaging paper.

Below is information regarding the composition of revenues from products in the packaging products and cardboard operating sector, where revenues exceed 10% of total Company revenues on consolidated basis, based on its financial statements (NIS in millions)3:

3 It should be noted that sector revenue (including due to inter-company sales) was taken into account in the calculation of total Company revenue, and total Company revenue, consolidated (net of inter-company sales).

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Product

2015 2014 2013

Revenue

Percentage of total

Company revenues,

consolidated

Quantity sold

(thousand tons)

Revenue

Percentage of total Company

revenues, consolidated

Quantity sold

(thousand tons)

Revenue

Percentage of total

Company revenues,

consolidated

Quantity sold

(thousand tons)

Sale of packaging paper

530.2 30% 289 532.7 30% 283.8 536.9 29% 280.7

7.8. Packaging paper sector clients

7.8.1. As of the report date, the sector is dependent on four key clients that produce corrugated board and cardboard packaging (corrugators), including Carmel, a subsidiary of the Company (hereinafter jointly in this section: “the clients”). Company revenues from sales to Carmel in each of the years 2015 and 2014 accounted for 6% and 5% of total Company revenues in its consolidated financial statements, respectively. Rate of revenue from sales to each of the three other material customers in 2015 and 2014 accounted for: (a) 5% and 6% of total sales revenues for the Company on its consolidated financial statements, respectively; (b) 5% and 4% of total sales revenues for the Company on its consolidated financial statements, respectively; (c) 3% and 2% of total sales revenues for the Company on its consolidated financial statements, respectively. The Company has no long-term agreements with the aforementioned clients. To the best of the Company's knowledge, the same applies to agreements between these clients and Company competitors. Contracting with each customer refers to an annual volume of packaging paper to be delivered to the customer, whereas price is usually set in advance every period, and is derived, inter alia, from the purchase volumes of each client.

7.8.2. Due to the industry structure (one local producer and a limited number of customers), the sector is dependent on each of the aforementioned clients, and termination of the contract with any one of them may have a material adverse effect on Company results. The aforementioned clients are long-standing customers of the Group, and have been in business with the Company for many years; in practice, the Group has been successfully maintaining contracts with the clients for years by ensuring current delivery and service with a short lead time, which allows it to enjoy the benefit of a local supplier.

7.8.3. Sales to the local market amounted to approximately 219 thousands of tons in 2015, and approximately 177 thousands of tons in 2014. In 2016, the Company is working towards maintaining the same volumes of quantities sold by it in 2015.

7.8.4. Furthermore, the packaging paper sector exports to various clients abroad (Turkey, US, Europe, Egypt, and more). In 2015, sales of packaging paper to overseas customers amounted to 70 thousand tons and 107 thousand tons, accounting for 6% and 9% of Group sales turnover on a consolidated basis for the same years, respectively. Hadera Packaging Paper intends to maintain sales to export markets in 2016, with preference to sales on the domestic market, while considering, inter alia, the shipping cost of its products to other countries. In general, the mix of countries to which the Group exports is determined based on Group profitability considerations, and changes from time to time. In light of increasing competition in some key export Company marketers, in recent years the Company increased export to additional markets. The Company believes it can discontinue operations in any of the countries to which it exports, although such change may impact export profitability.

7.8.5. Aforementioned information regarding trends in Company sales constitutes forward-looking information as defined in the Securities Law, and only constitutes as forecasts and assessments on behalf of the Company, the realization of which is not certain and is based on information existing in the Company as of the date of the report. Company forecasts and estimates may not materialize, in whole or in part, or may significantly differ from estimates due to multiple factors, including business opportunities available to the Group, changes in demand in markets

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wherein the Group operates, global supply and cost of paper products and/or materialization of any of the risk factors set forth in Section 24 hereafter.

7.8.6. Customer attributes

Below is a distribution of major sales in this sector (packaging paper) by customer attributes:

20142015Revenues In NIS Millions

368427Domestic clients

165103Export customers

7.9. Marketing and distribution in the packaging paper sector

7.9.1. Marketing and distribution of products in the local market are conducted directly by sector employees opposite the customers.

7.9.2. Marketing and distribution to export markets are conducted through local agents or through international marketing and sales companies that purchase the paper from Hadera Paper Packaging and sell it to their own customers overseas. Although in some countries to which the operating sector exports goods there is a sole agent for the country or region, the Company believes that should this agent discontinue working with the Group, an alternate agent or local customer could be located within a relatively short time, although such change may affect the profitability of export operations. The Company therefore estimates that it has no dependence upon any of the agents.

7.9.3. Shipping to customers, to the extent that it is carried out by the Group, is carried out mainly by external shippers. Marine shipping companies are engaged for export. The Company has no exclusive agreements with any of the aforementioned shipping companies. The Company also has no dependency on any of these shipping companies.

7.10. Competition in the packaging paper sector

7.10.1. As mentioned above, Hadera Paper Packaging is the sole producer in Israel of packaging paper, hence the competition in the packaging paper business is against direct imports by customers. There are no import limitations as of report date. Imports into Israel include all paper types produced in Israel at different paper qualities.

7.10.2. To the best of the Company's knowledge, the Group's major competitors in Israel are the following foreign vendors: Varel - Germany, Kipas-Turkey, Modern Carton - Turkey, Propapier - Germany, Schollershammer - Germany, Mondi - Hungary and Hamburger - Austria.

7.10.3. Based on Company internal estimates, the Group's market share in sales of packaging paper used as raw material for the corrugating industry in Israel has increased to approximately 57% in 2015 (data representing annual average).

7.10.4. The Group competes in this operating sector by providing high-quality products, as well as by ensuring a high level of on-going delivery and service with a short lead time compared to other vendors, which affords it the benefit of local supplier.

7.11. Fixed assets and output capacity in the packaging paper sector

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7.11.1. The Group's packaging paper manufacturing plant in Hadera houses two paper machines (Machine 2 and Machine 8) whose total annual production capacity is 320 thousand tons for both machines. The machines possess the potential for operating at nearly full capacity, and normally operate 24 hours a day in 3 shifts (except for planned maintenance stops).

7.11.2. Below is machine production data (in thousands of tons) for 2015 and 2014:

2014 2015 Potential output

capacity (as at report date)

82 82 Approx. 90 Machine 2

205 210 Approx. 230 Machine 8

287 292 About 320 Total

7.12. Research and Development

As stated, in recent years, the sector engages in the development of papers from pulp replacements, which are paper types based on 100% recycled fibers whose high quality allows substituting pulp based packaging paper in the corrugated cardboard industry in Israel and overseas. The Group continues to take actions for the development and enhancement of paper replacement attributes. Development costs are not material for the Group.

The activity sector engages in research and development of several technologies intended for improving the quality of paper for corrugators, for the purpose of achieving higher level of imported paper alternatives:

Nano-fiber research with Melodea research company that operates on the campus of the Agricultural Faculty in Rehovot.

Cellulose glue research with researchers from the Chemical Engineering Faculty, Technion.

Adjusting the green technology of the Swedish company Organoklick to the packaging paper properties required to the Company.

7.13. Raw materials and suppliers in the packaging paper sector

7.13.1. Paper waste - Paper waste constitutes as the main raw material for the packaging paper operating sector. The main source of paper waste is the Group's collection and recycling activity that is conducted by Amnir. Hadera packaging Paper is purchasing paper waste from Amnir. An additional part of the waste that is consumed by the paper machines is the waste purchased from corrugated board packaging producers (waste created in the process of creating the packages for corrugator clients that is sold to the Group).

7.13.2. Starch – The Group purchases starch from Galam Ltd. (hereinafter: “Galam”), used by the Company for paper production. Galam is the sole manufacturer of starch in Israel, but there is competing starch import at competitive prices, therefore the Company believes it is not dependent on Galam as starch supplier. However, should Hadera Paper Printing discontinue doing business with Galam, a short-term damage will be incurred and short term acquisition expenses might increase, while production shutdown in Galam might cause delay in the short term, also on the Group's production.

7.13.3. It should be noted that in the packaging paper sector, the Group has additional purchasing contracts with suppliers for the purchase of auxiliary materials such as chemicals, adhesives,

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felt, screens, machine spare parts, etc.

7.14. Working capital

7.14.1. Below is data from the financial statements regarding sector activities:

The amount included in the financial statements as at 2015 (NIS thousands)

Current assets 1,149,039

Current liabilities 669,390

Surplus of assets over current liabilities

479,649

7.14.2. Average credit duration

Below is data regarding average credit duration and amount for suppliers and customers in 2014 and 2015 (in NIS millions):

2015 Average 2014 Average

Average credit volume

Average credit days


Average credit days

Customers 129 89 120 94 Suppliers 98 92 95 89

In the area of operation, the average number of inventory days in 2015 was 38 days (including inventory of raw materials and maintenance materials).

7.15. Restrictions on and Supervision of Corporate Operations in the Packaging Paper

7.15.1. Antitrust

In December 1988, Hadera Paper was declared a monopoly in the production and marketing of paper in rolls and sheets - by the Israel Antitrust Authority, by virtue of its authority pursuant to the Antitrust Act. In July 1998 this declaration was partially rescinded with regard to fine paper in rolls and sheets. The declaration has not been rescinded for packaging paper in rolls and sheets. Other than directives related to the Anti-Trust Law, the Company received no special instructions from the Anti-Trust Commissioner regarding its declaration as a monopoly. As of report date, Company declaration as a monopoly had no material impact on its operations, profitability or financial standing. The Company cannot assess the future implications of this declaration.

7.15.2. For information regarding other regulatory provisions applicable to companies in this sector and to other Group companies, see Section 16 below.

7.16. Risk factors in the packaging paper operating sector

7.16.1. For details regarding additional risk factors, see section 24 hereafter.

Special Risk Factors

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7.16.2. Customers – Because of the small number of customers in Israel for packaging paper finished products, there is a dependency on customers in Israel, and decrease in the number of customers impair activity results. However, due to the advantages of being a local producer, this risk is estimated as medium by the Company. Regarding export customers, sales are conducted through foreign sales agents. In the export activity, the Company is working towards diversifying the markets to which it exports its products and operates on these markets via local agents. The Company believes that it is not dependent on those local agents.

7.16.3. Paper waste - Failure to locate sufficient quantity of paper waste, which is a key raw material for manufacturing activities in the sector, will impair the Group’s ability to realize its manufacturing potential in packaging paper.

7.16.4. Monopoly - The Company has been declared a monopoly in the packaging paper sector in rolls and sheets, as the term is defined in the Antitrust Law, and is subject to the laws applicable to a monopoly in Israel. Statutory means set forth in the Antitrust Act confer on the Supervisor, inter alia, the right to intervene on matters which may impact the public, including setting business restrictions on the corporation, such as price supervision. In case such restrictions are enforced, these may adversely impact operating sector results.

7.16.5. Extent of risk factor impacts

Following below is a list of risk factors and their degree of impact on the sector of operations:

Risk factors Level of Impact

Major Impact Medium Impact Minor Impact

Special Factors Paper waste

Customers

Monopoly

8. Packaging and cardboard products sector

8.1. The packaging and cardboard products operating sector and changes therein

8.1.1. Group's activity in the sector is conducted by the subsidiary Carmel. The Company's holding rate of Carmel is approximately 94%.

8.1.2. The packaging products and cardboard operating sector focuses primarily on the manufacture and sale of cardboard packaging that serve primarily customers in industry and agriculture sectors, and on the manufacture and sale of cardboard shelf packaging for consumer goods that serve primarily industry, agriculture, pharmaceuticals, food, cosmetics, and high-technology industries. Carmel offers unique packaging solutions that are tailored to the needs of its various customers. Furthermore, sector activity also includes digital printing which is mainly utilized for the manufacture and sale of display stands and other cardboard advertising means at points of sale.

8.2. Changes in the volume of operations and profitability in the packaging and cardboard products operating sector

8.2.1. The packaging paper (both the paper recycled by the Group and pulp-based paper purchased from abroad) is the main raw material used for the sector's activity, and thus price fluctuations impact the activity sector.

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8.2.2. In the Company’s opinion, demands for packaging and board market products in Israel remained relatively stable in recent years.

8.2.3. The cardboard industry primarily serves clients from industry, agriculture, food and beverages, cosmetics, pharmaceuticals, and high-technology industries. Therefore, economic activity and export levels significantly impact demand for packaging and cardboard products.

8.2.4. In 2015, the prices of raw materials utilized by the sector decreased moderately, this inter alia in light of NIS strengthening versus the Euro. In light of increasing competition during 2015, sale prices of sector products slightly decreased. It should be noted that raw material prices are also affected by exchange rate fluctuations. The Company does not expect significant changes in sales prices of sector products.

8.2.5. In light of global trends pertaining to packaging and transportation of goods and Company efforts for increasing its sales, in 2015, the Company increased the number of products sold by it although the stated quantitative increase was accompanied by a slight price erosion for some products. It should be noted that the sector's profitability has improved compared to 2014, this mainly due to operational streamlining measures taken during the year.

8.2.6. Company estimates regarding trends in the price of raw materials and packaging products at the sector constitute forward-looking information as defined in the Securities Law, and constitute as only forecasts and assessments on the part of the Company, the realization of which is not certain and is based on information existing in the Company as at report date. Company forecasts and estimates may not materialize, in whole or in part. Furthermore, actual results may differ from current forecasts and estimates, due to multiple factors, including business opportunities available to the Group, changes in markets in which the Group operates, global demand, supply and cost of paper products, developments and changes to regulation of the operating sector and/or materialization of any of the risk factors set forth in section 24 hereafter.

8.2.7. For further details regarding the paper industry, see section 7.3 above.


Packaging products produced by the Group have substitutes, mainly in the sector of plastic packaging.

8.4. Products and services in the packaging and cardboard products operating sector

The main products of the activity sector are corrugated cardboard products that constitute an essential part of this sector of operations are manufactured and processed in line with the customers' specific requirements, which are determined according to the type of stored goods, type of packaging, expected weight loads on packaging during transportation, temperature and humidity conditions during storage and transportation, graphic design of the packaging, etc. Manufactured and processed corrugated cardboard products include: (1) "standard" corrugated cardboard containers - boxes manufactured in different sizes that are closed by sealing the upper flaps and the bottom of the box; (2) containers and boxes in different geometric shapes that can be "positioned" by manually folding the cardboard plate without sealing or mechanically folding the flaps using warm glue. These products are primarily sold to machinery-intensive industries that operate at high rates, such as the soft beverage industry; (3) cardboard crates for agriculture: trays that are formed only by using tray forming machines with matching molds in geographic proximity to the final customers; (4) corrugated cardboard sheets - sheets marketed to corrugated cardboard processors that utilize them for manufacture of packaging.

It should be noted that within the activity sector, the Group also manufactures cardboard shelf packaging and produces digital printing products for advertising. These products are characterized with high level finish and production in relatively small batches. Carmel is working towards increasing its activity in the sector of digital printing products.

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8.5. Distribution of revenues from products and services in the packaging and cardboard products operating sector

Below is information about composition of revenues from products in the packaging and cardboard products operating sector, where revenues exceed 10% of total Company revenues on consolidated basis, based on its financial statements (NIS in millions): 4

Product

2015 2014 2013

Revenue (NIS million)

Percentage of total Company revenues, consolidated

Quantity sold (thousand tons)*



Quantity sold (thousand tons)*



Quantity sold (thousand of tons)*

Sales of packaging and cardboard products

475.4 27.2% 86 482.6 27.4% 84 518.8 29.6% 97.3

8.6. Customers of the packaging and cardboard products segment of activity

8.6.1. Most sales of cardboard products are directed to industry and agriculture clients on the local market. As at December 31, 2015, the sector has hundreds of active clients for cardboard products. As of December 31, 2015, the sector’s 20 largest customers that purchase cardboard products constituted 54% of their total revenues. Most Group clients in the sector have been permanent Group clients for many years.

8.6.2. The sector has no dependency on any client or a limited number of cardboard clients, although termination of agreement with one of the largest clients may adversely affect sector results in the short term. The sector does not have a client due to which revenue increased by more than 10% of total Company revenue as stated in the financial statements.

8.6.3. Following is the distribution of revenue from clients in the cardboard sector by segments:

Segment % of total revenue

Packaging 16%

Agriculture 22%

Industry 62%

Total 100%

8.6.4. Carmel conducts direct marketing activity with it clients, along with maintaining ongoing contact. Product distribution is conducted by external transportation contractors.

8.7. Competition in the packaging and cardboard products operating sector

8.7.1. The corrugated cardboard industry is capital-intensive, which constitutes a natural entry and exit barrier for competitors. The main substitute for corrugated cardboard products is primarily plastic packaging products.


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8.7.2. High competition level continued in 2015 in a manner which led to price erosion of some products. To the best of the Company's knowledge and based on its internal information and assessment, the cardboard packaging market in Israel is dominated by four principal companies: Carmel, Cargal Ltd, YMA 1990 Packaging Product Manufacturing (a partnership between Kibbutz En HaMifratz and Kibbutz Ge'aton) and Best Cardboard Ltd. According to Carmel estimates, its total sales in each year (2015 and 2014) constitutes for approximately 27% of total market sales.

8.7.3. In addition, there are 15 cardboard packaging manufacturers with small market shares, which perform the processing activity but not the manufacturing of corrugated cardboard. These manufacturers produce small series of packaging with less advanced machinery compared to those used by Carmel. Carmel estimates that in 2015 and 2014, the total annual volume of the corrugated board industry amounted to 320 and 325 thousand tons, respectively, while the estimated sales in these years amounted to NIS 1,500 million.

8.7.4. Carmel handles existing competition in the activity sector as follows: ensuring high product quality, the advantage of a major market player in terms of size and seniority, efficiency in production and supply, the level and quality of service to the customer and competitive prices, and offering a comprehensive basket of products and services. Within this framework, all activities conducted by the sectors were consolidated in order to offer a comprehensive product basket to the clients.

8.8. Seasonality

As a rule, most of the demand for cardboard packaging products is in the winter months, primarily November - March (Q1 and Q4), due to the dynamic demand ensuing from agricultural crops. Sales of cardboard packaging products during the first and fourth quarters of the year are higher by an average of approximately 10% compared to sales during the second and third quarters.

8.9. Output capacity in the packaging and cardboard products operating sector

8.9.1. The manufacturing activities in the corrugated cardboard sector of Carmel are carried out at the Company site in Caesarea (the facility operates some of the manufacturing lines 24 hours a day and includes 11 processing machines). As of December 31, 2015, Carmel's production capacity for corrugated cardboards in its Caesarea plant is estimated at 95,000 tons. Actual production utilizes 90% of the output capacity at the Caesarea plant.

8.9.2. The sector has another production site at Caesarea for manufacture of shelf and digital printing products, which is operated 24 hours a day, in three shifts. As of December 31, 2015, the plant's annual production capacity is estimated at 12 thousand tons. Actual production utilizes 90% of the output capacity.

8.10. Fixed assets, real estate and facilities in the packaging and cardboard products operating sector

As stated, the sector has two main production sites in Caesarea: (a) a production site located on an area of approximately 90,000 dunam, where corrugated board manufacturing operations are concentrated (the site's lease term is until 2029), and (b) a production site located on an area of approximately 21 dunam, where shelf product manufacturing and digital printing operations are concentrated. The site's lease term is until 2020.

Fixed Assets

The sector's fixed assets primarily include machinery and manufacturing equipment for paper corrugation and processing machines, which perform cutting, printing, gluing and folding actions required for to completing the final product. The sector owns two corrugators and 11 processing

21

machines. Carmel also owns a digital printing machine capable of high quality printing on corrugated board and other rigid materials, a range of sales promotion applications, display stands and billboards.

8.11. Raw materials and suppliers in the packaging and cardboard products operating sector

8.11.1. The main raw material in the production of corrugated board is packaging paper (recycled and pulp-based). This raw material forms the central component of the cost of sales.

Carmel has two central suppliers in the packaging paper sector: (1) Hadera Paper Packaging, that supplies recycled paper. Purchasing from Hadera Paper in 2015 and 2014 amounted to NIS 119 million and NIS 89 million, respectively, representing 56% and 40% of the sector's total annual paper consumption both of these years, respectively; and (2) International Forest Products, a member of the Kraft group, provider of virgin paper (produced from pulp). Purchasing from the Company in 2015 and 2014 amounted to NIS 46 million and NIS 36 million, respectively, that represented 21% and 15% of the sector's total annual paper consumption during those years, respectively.

During 2015 there was a moderate decrease of raw material prices in the sector. For additional details regarding paper price trends, see section 7.3 above.

8.11.2. Moreover, in the packaging products and cardboard products sector there are purchasing contracts with suppliers for the purchase of auxiliary materials such as chemicals, adhesives and various packaging materials. Prices are determined by negotiation with suppliers, every period, accounting for market conditions and prices of competing imports.

8.11.3. Additional main raw materials used for the manufacture of corrugated board include starch and fuel oil. Starch constitutes as the main component in the adhesive which glues the paper sheets. Galam is the sole manufacturer of starch in Israel, but there is competing starch import at competitive prices. Therefore, the Company believes it is not dependent on Galam as a starch supplier. However, should Hadera Paper Printing discontinue doing business with Galam, short term acquisition expenses might increase, while production shutdown in Galam might cause similar delay in the Group's production. In addition, Carmel uses molds, blocks and wooden pallets that are purchased from a number of local suppliers.

8.11.4. The sector is not dependent on any of the suppliers outside Hadera Paper Group. It should be noted that Group operations in the sector are dependent on regular availability of raw materials, and therefore, purchasing expenses may rise in the short term.



The amount included in the financial statements as at 2015 (NIS millions)

Current assets 215

Current liabilities 206


9

8.12.2. Raw material and finished goods inventory - The Company maintains operating inventory of finished goods for several days and an inventory of raw materials - primarily paper at consumption level of 2 months. The average days of inventory in this sector in 2015 was 52

22

days.


Below is data regarding average credit duration and amount for suppliers and customers in 2015 and 2014 (in NIS millions):



Average credit days


Average credit days

Customers 158 121 162 127

Suppliers 106 110 102 110

8.13. Material agreements

Agreement with Frenkel family - in November 2013, Carmel purchased the remainder of holdings in Frenkel CD Ltd. from the Company and Frenkel family, this in return for allocation of Carmel shares. Following transaction completion, as at report date, the Company holds 94% of Carmel's issued share capital (under discount of dormant shares), and Frenkel family holds 6% of Carmel issued share capital (under discount of dormant shares). In accordance with agreement provisions, the parties agreed upon limitations to transfer of shares to a third party, including: a lock-in period that will apply to the sale of Carmel shares held by Frenkel family, right of refusal in case of sale of Carmel shares held by Frenkel family, a drag along right in case of Frenkel family sale to a third party, and a tag along right to the Frenkel family in case of sale of Carmel shares held by Hadera Paper. The agreement includes the Company's right to obligate Frenkel family to sell its Carmel holdings to the Company (Call option), and Frenkel family right to obligate the Company to sell its Carmel holdings to the Frenkel family (Put option). Furthermore, the Frenkel family was granted with a right of minority interest in Carmel. For further details, see Note 5a(3) to the Company's financial statements.

Agreement for the lease of Caeserea production sites - for details regarding the lease, see Note 8.10 above.

8.14. Risk factors in the packaging and cardboard products operating sector

For details regarding the risk factors relevant to this operating sector, see Section 24 below.

9. Sector of collection and processing services

9.1. Structure of the sector of collection and processing services

9.1.1. The main activity within this sector is collection and processing (sorting and compressing) of paper and cardboard waste for recycling purpose, which is carried out by Amnir.

9.1.2. Paper waste is the Group's key raw material in its activity within the packaging sector, and it is essential for the continuity of paper production by Hadera Paper Printing. Amnir’s operations in waste collection and processing constitute a crucial step in the packaging paper production process and the Group's activity.

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9.1.3. Amnir is the largest paper collection and processing company in Israel. Amnir collects paper waste from different sources in Israel. Part of the paper waste collected by Amnir is purchased from third parties. As of report date, Amnir processes (sorts and compresses) at its facilities approximately 345 thousand tons of paper waste per annum. 80% of sold paper waste was sold by Amnir to Hadera Paper Packaging and is used for production of packaging paper by the company.

9.1.4. Since paper waste is the main raw material for the production of packaging paper, the level of demand for packaging paper which is influenced, inter alia, by market activity volume and export volumes, has a significant impact on demand for paper waste. For further details regarding the paper market, see section 7.3 above.

9.1.5. In recent years, Amnir has been expanding its activity in the sector of plastic product collection for recycling. The Company intends to continue this trend. During 2015, the Company expanded the plastic recycling plant, this for the purpose of increasing its volume of activity in the sector.

9.1.6. As part of its activity, Amnir also provides information security and deformation services (shredding services at customer premises or Amnir premises), and production of salvaged paper products. These activities are insignificant for Hadera Paper.

9.2. Limitations, Legislation, Regulations and Special Constraints applicable to the sector of collection and recycling services

9.2.1. Considering the nature of this operating sector, Group operations in sector of collection and recycling services are subject to regulation in different aspects, including: environmental protection provisions (such as: Hazard Prevention Law, Hazardous Materials Law, Clean Air Law, Packaging Law), permits and licenses (such as: Business Licensing Law), Anti-Trust (such as: Anti-Trust Law, Consensus Ordinances), Natural Gas Sector Law, etc.

9.2.2. For further details regarding the regulation that applies to Group’s activities in the sector of collection and recycling services, see Section 9.12 below.

9.3. Changes to volume of operations and profitability in the sector of collection and recycling services

9.3.1. As stated, paper waste is the main raw material in the production of packaging paper, and therefore fluctuations in demands and prices of packaging paper impact the operation sector.

9.3.2. Based on internal Company estimates, the consumption of packaging paper in Israel (excluding tissue) averaged approximately 900 million tons per year in recent years.

9.3.3. In the Company’s opinion, the rate of collected paper that was used as a raw material for the production of recycled paper in Israel as a proportion of the total paper consumption in the last year is approximately 45%. It should be noted that based on RISI (PPI) data, the annual average rate of collected paper used as a raw material for the production of recycled paper in Western Europe as a proportion of the total paper consumption is 65%.

9.3.4. The Company believes that the volume of collected paper used as a raw material for the production of recycled paper in 2015 amounted to 400 thousand tons (excluding waste by corrugators). The Company estimates the volume of collected paper in Israel has grown in recent years, as follows: approximately 2% in 2015, 2% in 2014 and 6% in 2013.

9.3.5. The Company estimates that there is potential for increase in the volume of paper waste collection in Israel, this inter alia while considering the existing gap between the quantities of consumed paper and the quantities collected for recycling, and the volumes of paper collected in

24

Europe.

9.3.6. Information concerning the potential for an increase in the volume of paper waste collection in Israel constitutes as forward-looking information as defined in the Securities Act and merely consists of forecasts and estimates by the Company which are not certain to materialize and are based on information available to the Company as of report date. The aforementioned Company forecasts and estimates may not materialize, in whole or in part, or may differ from current forecasts and estimates, due to multiple factors, including global supply and cost of paper waste, business opportunities available to the Group, changes in markets in which the Group operates, developments and changes to regulation of the operating sector and/or materialization of any of the risk factors set forth in section 24 hereafter.

9.3.7. For further details regarding the paper industry, see section 7.3 above.

9.4. Products and Services in the sector of collection and recycling services

The main activity of the Group within this sector is carried out by the subsidiary Amnir, and includes the provision of paper waste collection and processing services, where paper waste is used as raw material for production of packaging paper and tissue paper.

In recent years, Amnir has been expanding its activity in the sector of plastic product collection for recycling. Amnir is working towards increasing the production capacity of plastic product processing, and in 2015, the Company expanded the plastic recycling plant for the purpose of increasing the volume of its activity in the sector.

Amnir also provides information security and deformation services (shredding services), where the shredding waste is also used as raw material for the activity. In addition, Amnir has activity in salvaged paper products. Amnir is taking actions for expanding its activity in these sectors, although as at report date, such activities are not material for Hadera Paper.

9.5. Distribution of revenues from products and services in the sector of collection and recycling services

The operating sector's main revenue is derived from the sale of paper waste. Below is information about distribution of revenues from sale of packaging paper (NIS millions) 5:

Product

2015 2014 2013

Revenue



Quantity sold

(thousand tons)

Revenue



Quantity sold

(thousand tons)

Revenue



Quantity sold

(thousand tons)

Sale of paper waste

198 11% 365 219 13% 366 229.1 13% 364

9.6. Clients of the sector of collection and processing services

Approximately 80% of the paper waste collected by Amnir is sold to Hadera Paper Packaging. Approximately 20% of the paper waste collected by Amnir is sold as raw material to other


25

manufacturers (in 2015, mainly to Hogla-Kimberly, Shaniv Paper Industries Ltd, and export). Amnir has no dependence on any individual customer that does not form part of the Hadera Paper Group, nor has it any long-term agreements with said customers. Agreements are mostly signed for a period of one year, and include sale quantity and prices. Most of the customers are long-standing Group customers.

As at report date, Amnir estimates that the quantity of paper waste sold to Hogla-Kimberly will significantly decrease in 2016. Amnir is preparing for expanding its sales to additional clients and adjusting the quality and specification of its products as an alternative for paper waste import form abroad.

Information regarding Amnir preparation for its sales in 2016 is considered forward looking information as defined in the Securities Law, and constitutes as forecasts and assessments on behalf of the Company, the realization of which is not certain and is based on information existing in the Company as of the date of the report. The aforementioned Company forecasts and estimates may not materialize, in whole or in part, or may differ from current forecasts and estimates, due to multiple factors, including global supply and cost of paper waste, business opportunities available to the Group, changes in markets in which the Group operates, developments and changes to regulation of the operating sector and/or materialization of any of the risk factors set forth in section 24 hereafter.

9.7. Competition in the sector of collection and processing services

9.7.1. To the best of the Company's knowledge, there are two major competitors in paper waste collection, which operate throughout Israel in 2015 - KMM Recycling Plants Ltd. and Tal-El Collection and Recycling Ltd. In addition, there are many competitors with a small market share that mainly operate in a limited geography.

9.7.2. The Company estimates, based on its internal estimates, that Amnir's market share as of the report date in the collection of paper waste (excluding purchasing of waste from KMM and Tal-El) out of total paper waste collected in Israel is equal to 65%. For information about steps taken by Amnir in recent years to increase paper waste collection, see Section 9.10 below.

9.8. Output capacity in the sector of collection and recycling services

As at report date, Amnir operates two sorting and compressing facilities for processing collected raw material that are located at the Hadera site and Modi'in logistics center. Below is data with regard to sorting and compressing output (in thousands of tons) of raw materials, primarily paper and board waste, in 2015 and 2014, compared to potential output capacity:

26

Actual output (in thousands of tons)

2014 2015 Potential output capacity

(in thousands of tons) as at report date

170 164 312 Modi'in 139 125 192 Hadera 309 289 504 Total

It should be noted that the production capacity of sorting and compressing facilities in Modi'in decreased temporarily during 2015. In the beginning of 2016, Amnir took action for purchasing a large press with outputs that will increase production capacity.

9.9. Fixed assets, real estate and facilities in the sector of collection and recycling services

9.9.1. Waste collection network - As at report date, Amnir operates a fleet of 137 trucks (out which 76 via sub-contractors) for collection and processing of collected raw material (primarily paper and board waste).

9.9.2. Waste recycling - Amnir has two waste recycling facilities located at the Company's site in Hadera (including a facility for sorting, cleaning, and pressing cardboard and paper waste as well as a paper salvage facility), and at the Group's logistics center in Modi'in (that includes a facility for sorting and compressing waste, primarily paper and board waste, and advanced shredding equipment). For details regarding this subject, see section 14 below.

9.9.3. Plastic processing - during 2015, Amnir expanded the production line intended for plastic processing and manufacturing granulated raw material for the plastic industry, this for the purpose of increasing the volume of its activity in the sector. The plastic processing line is located at the Company's site in Hadera.

9.10. Raw materials and suppliers in the sector of collection and processing services

9.10.1. As stated, activity within this sector includes mainly collection, processing and sale of paper waste. Paper waste is collected by Amnir from thousands of sites around Israel and purchased by Amnir from other collectors in Israel and overseas, and is constantly transferred to the processing facilities at Modi'in and Hadera logistics centers.

9.10.2. Amnir has worked in recent years and continues to work to gradually increase the quantity of paper waste collected by the company. Following are some of the actions taken by the company: Intensifying collection operations with existing customers, establishment of a greater number of municipal paper collection points and development of new collection sources, and focus on collection sources at lower costs, cooperation with local authorities on paper waste collection, dedicated collection from private customers (inter alia, by installing collection containers and removing cardboard from streets), and conducting marketing projects to increase awareness toward waste recycling.

9.10.3. In the years 2015 and 2014, Amnir collected and purchased paper waste in Israel amounting to 345,000 tons and 359,000 tons, respectively. In 2015, the rate of waste collected by Amnir from additional collection companies in Israel is approximately 12% of total waste treated by Amnir, this compared to volumes at rate of 20%-25% in previous years. Amnir is not dependent on any specific supplier.

9.10.4. In 2015, the quantity of paper waste imported by the Group for the purpose of obtaining raw material required by the paper machines was marginal, this mainly due to increase the capacity of local paper waste collection. Furthermore, in 2015, Amnir exported paper waste, and it

27

expects to continue this export from time to time in 2016.

9.10.5. Below is graphical depiction of developments in paper waste prices in recent years (according to PPI (RSSI) data):

Paper waste prices (USD/ton):

As indicated by the graph, there is an evident trend of increase in the average paper waste price, although the price is subject to fluctuations.

9.10.6. It should be noted that the sale prices of paper waste processed for the packaging paper company are determined according to inter-group consents which mainly take into consideration the global trend of waste prices.

Information concerning Amnir estimates of paper waste export in 2016 constitutes as forward-looking information as defined in the Securities Act and merely consists of forecasts and estimates by the Company which are not certain to materialize and are based on information available to the Company as of the report date. The aforementioned Company forecasts and estimates may not materialize, in whole or in part, or may differ from current forecasts and estimates, due to multiple factors, including global supply and cost of paper waste, business opportunities available to the Group, changes in markets in which the Group operates, developments and changes to regulation of the operating sector and/or materialization of any of the risk factors set forth in section 24 hereafter.



The amount included in the financial statements as at

2015 (NIS thousands)

Current assets 136,509



69,855

28

9.11.2. Below is data regarding average credit duration and amount for suppliers and customers in 2015 and 2014 (in NIS millions):



Average credit days


Average credit days

Customers 93 101 103 103 Suppliers 58 87 61 90

In the area of operation, the average number of inventory days in 2015 was 15 days (including inventory of raw materials and maintenance materials), this as part Amnir's trend of reducing inventory volumes.

Raw Material and Finished Goods Inventory Policy: the Company maintains operating inventory of finished goods equivalent to consumption and delivery over 3 weeks - 1 month. In 2014, Amnir held relatively high inventory levels; yet, in 2015, Amnir significantly reduces its inventory quantities. Amnir intends to maintain low inventory levels also during 2016.

9.12. Restrictions on and Supervision of Corporate Operations in the sector of collection and processing services

Packaging Law

In January 2011, the Formalization of Treatment of Packaging Law 5771 – 2011 was passed (in the Knesset hereinafter: "the Packaging Law") with the goal of regulating arrangements in the matter of treatment of packaging waste. The law led to increasing awareness to recycling, and obligates local and regional authorities to take action for this purpose. Subsequently, the law led to increase in the quantity of paper waste available for collection. Furthermore, since the authorities receive a budget for paper collection services from the declared recycling corporation - TMIR, Amnir's exposure due to these clients has decreased.

9.13. Risk factors in the sector of collection and processing services


9.13.2. Special factors

Increase in the costs of paper waste collection might significantly impair the sector's profitability. Regulation provisions might cause an increase in collection costs as stated. It should be noted that Amnir estimates that the impact of this risk is low in light of the fact that collection costs are affected by many elements, some of which are controlled by Amnir, and in light of inter-group consents regarding paper waste sale to Hadera Paper Packaging.





Special Factors Paper waste collection costs

29

10. Fine paper sector

10.1. Structure of the fine paper sector

In the fine paper sector of activity, the Group engages in the manufacture and marketing of fine paper, and marketing of special paper imported by the Group. The sector's activity is carried out by the Company and its subsidiary. The Group markets fine paper to printing houses, publishing houses, marketers of office supplies, producers of paper products (such as notebooks, envelopes and so on), as well as to wholesalers that operate opposite smaller customers.

10.2. Changes to volume of operations in the sector and its profitability

10.2.1. In recent years, the global trend of decrease in fine paper demand continued, this in light of increasing transition to digital media use. Similarly to the trend in recent years, the trend of decrease in demand and increasing competition in the sector continued in 2015. As a result, sale prices on the local market continued to erode. The key factors for further decrease of prices at the sector in Israel, inter alia, are the high supply of paper imported from Europe, and recently also from South America countries, Russia and Turkey, this relatively to the decreasing demand level. These trends continued in recent years, and the Company does not expect future significant changes thereof. To the Company's best knowledge, a dumping claim against several large sector manufactures was recently approved in US. In case the claim is accepted, it may lead to directing production surpluses also to Israel, and thus to further increase the competition level. On the other hand, the outcome may create opportunities in the American market for the Company. It should be noted that paper plants have been closing around the world in recent years due to a supply surplus versus decreasing demand. Competition in the sector in Israel increased during the last year, also in light of import expansion.

10.2.2. The price of pulp, which is the main raw material for paper production, has been fluctuating in recent years. In average, the price of pulp slightly decreased in 2013-2014 and increased in 2015, so that prices returned to levels that are similar to market price levels in the first half of 2013.

10.2.3. Below is graphical depiction of developments in the Company's paper sales prices in recent years (in NIS):

10.2.4. As at report date, the Company does not expect change in said price changes in the sector during 2016.

10.2.5. In 2015, the quantitative sales volume increased by approximately 6% compared to 2014 due to an increase in the quantity of produced paper.

3000

4000

5000

Q12012

Q22012

Q32012

Q42012

Q12013

Q22013

Q32013

Q42013

Q12014

Q22014

Q32014

Q42014

Q12015

Q22015

Q32015

Q42015

Average sale prices 2012‐2015

₪‐מחיר ממוצע מקומי ₪‐מחיר ממוצע מיוצא average local price average export price

30

10.2.6. Within the framework of preparing the financial statements for 2015, the Company examined impairment of its activity in the fine paper sector, due to which it deducted a sum pf approximately NIS 38.9 million from the overall value of fixed assets of the activity sector.

10.2.7. In view of sector trends, including the competition level, and due to impairment of fixed assets and the accounting implications of the energy array sale as detailed in section 20.3 hereafter and attributing the relative part due to the loss in the sum of approximately NIS 10 million to the activity sector, in 2015, the activity sector recognized operational loss at the sum of approximately NIS 89.8 million.

The current operating profit (operating profit net of other revenue and expenses) in 2015 totaled at approximately NIS 36.6 million - an improvement of approximately NIS 62.9 million, compared with the current operating profit last year.

10.2.8. Aforementioned information regarding the implication of approving the dumping claim in US constitutes forward-looking information as defined in the Securities Law, and constitutes only as forecasts and assessments on behalf of the Company, the realization of which is not certain and is based on information existing in the Company as at report date. Company forecasts and estimates may not materialize, in whole or in part, or may significantly differ from estimates. Main factors which may affect this are business opportunities available to the Group, changes in demand in markets wherein the Group operates, global supply and cost of paper products and/or materialization of any of the risk factors set forth in Section 24 hereafter.

10.3. Developments in the fine paper sector and changes to its customer profile

10.3.1. The Group estimates that the fine paper market in Israel has been reducing in recent years in light of ongoing transition to digital media.

10.3.2. The variables affecting this market are mainly global and local supply and demand ratios for paper products in light of the transition to information consumption via digital media.

10.3.3. Along with weaker demand worldwide, paper supply increased globally in recent years due to larger production capacity in Asia Pacific. Import of wood-free paper from the Far East to Israel is subject to paper import levies. Furthermore, decrease of demand in Europe resulted in supply increase of paper manufactured in Europe and allocated to export. Increase in supply is partially directed to Israel and adversely affects paper prices. The Company does not expect a change in the demand decreasing trend in the near future.

10.3.4. Aforementioned information regarding trends in paper demand trends constitutes forward-looking information as defined in the Securities Law, and constitutes only as forecasts and assessments on behalf of the Company, the realization of which is not certain and is based on information existing in the Company as at report date. Company forecasts and estimates may not materialize, in whole or in part, or may significantly differ from estimates. Main factors which may affect this are business opportunities available to the Group, changes in demand in markets wherein the Group operates, global supply and cost of paper products and/or materialization of any of the risk factors set forth in Section 24 hereafter.


Fine paper sector products have imported substitutes.

10.5. Products and services in the fine paper sector

Below is information about Group products in the fine paper operating sector:

10.5.1. Pulp-based fine paper production - the Group manufactures and markets fine paper (including

31

rolls, sheets and small packages) produced from pulp purchased by the Group.

10.5.2. Recycled fine paper (RePaper) production - the Group also markets recycled fine paper. The Company completed the development of a 100% recycled paper from paper waste collected in Israel. The paper is produced without the use of bleach or chemicals. The Group markets the recycled paper under the brand name RePaper.

10.5.3. Sale of imported paper - as aforesaid, the Group compliments its basket of products by importing paper (such as coated, cardboard, duplex and special papers that it does not manufacture) from Europe and the Far East for sale in Israel.

10.6. Distribution of revenues of products and services in the fine paper sector

The majority of operating sector revenues are from sale of fine paper, as follows (NIS in millions) 6:

Product

2015 2014 2013

Revenue (NIS

million)

Percentage of total

Company revenues,

consolidated

Quantity sold

(thousand of tons)

Revenue (NIS

million)

Percentage of total

Company revenues,

consolidated

Quantity sold

(thousand of tons)

Revenue (NIS

million)

Percentage of total

Company revenues,

consolidated

Quantity sold

(thousand of tons)

Paper from self-production

445.2 25% 124.4 377.9 22% 106 418 23.9% 109.5

Purchased paper

110.4 6% 32.2 143.8 8% 42.1 139.5 8% 39.9

Total 555.6 31% 156.6 521.7 30% 148.1 557.5 31.9% 149.4

10.7. Customers of the fine paper sector

10.7.1. The Group markets its produce in the activity sector to a wide variety of clients in Israel and abroad. In 2015, approximately 110 thousand tons of paper produced and sold by this sector were marketed on the local market, while the remainder, consisting of some 46 thousand tons, was designated for export (mainly to US). Marketing abroad is mostly to large wholesalers in the paper sector.

10.7.2. In Israel, the Group's activity in the sector includes more than 250 customers, whereas key customers include printing houses (approximately 23%), paper wholesalers (approximately 24%), office supplies wholesalers (approximately 23%), manufacturers of paper products (approximately 25%), and others (approximately 5%). It should be noted that during 2015, the Company focused its activity on large clients for profitability purposes.

10.7.3. The Group has no client in the activity sector whose revenues account for 10% and more of total Hadera Paper revenue in the consolidated statements.

10.8. Marketing and distribution in the fine paper sector

10.8.1. Group activity in the sector of operations possesses a local distribution system which provides it


32

with the ability to market its products to a variety of customers operating within the Israeli market. The Group is constantly working towards the improvement and increased efficiency of its local distribution system.

10.8.2. Marketing and distribution to export markets, mainly US are conducted through agents. The Company believes that should such a sole agent discontinue working with the Group, an alternate agent or another local client could be located within a relatively short time. The Company estimates that such change will not significantly affect the profitability level of export activity. The Company therefore estimates that it has no dependence upon any of the agents or final clients.

10.8.3. The Group distributes fine paper products from its Hadera site, this after the distribution activity from the logistics center in Modi'in was merged with the Hadera site during 2015.

10.9. Competition in the fine paper sector

10.9.1. Competition in this sector continued also in 2015, inter alia, due to decrease in demand and further low-cost imports, which the Company believes resulted from excess global supply, and further strengthening of NIS relative to the Euro.

10.9.2. Group activity in the sector of operations is exposed to competition from paper importers that do not encounter significant entrance barriers to the Israeli market. In light of the significant competition level, the Group is required to work towards preserving the advantages granted to it as a local manufacturer, such as: availability, flexibility, service and quality, in order to handle its competitors.

10.9.3. To the best of the Company's knowledge, its main competitors in the segment of activity are the following paper importers: Niris Ltd., Ronaimer Ltd., Allenper Trade Ltd. Durmax Xerox, and Mei Hanahal Ltd. The Company believes that the Group holds a 45% share of the domestic market for fine paper used for writing, printing and other graphical uses. We emphasize that the aforementioned market share is based on the Company's internal assessment as at report date.

10.10. Output capacity in the fine paper sector

The Group owns a fine paper production machine (hereinafter: "Machine 4"), which operates 24 hours a day in 3 work shifts (excluding planned maintenance stops). The potential production capacity for this paper machine is approximately 140 thousand tons per annum. The annual production volume of fine paper produced by Hadera Paper Printing amounted to 132 thousand tons in 2015, compared with 114 thousand tons in 2014.

10.11. Fixed assets, real estate and facilities in the fine paper sector

10.11.1. Hadera Paper Printing leases from the Company most areas and buildings used by its for production and storage in Hadera. During 2015, Hadera Paper Printing discontinued its distribution activity from the logistics center in Modi'in. For further details regarding the Hadera site, see section 14 below.

10.11.2. Within the framework of preparing the financial statements for 2015, the Company examined impairment of its activity in the sector, due to which it deducted a sum pf approximately NIS 38.9 million from the overall value of fixed assets of the activity sector.

33

10.12. Raw materials and suppliers in the fine paper sector

The operations in this sector require the following raw materials:

10.12.1. Pulp

10.12.1.1. The principal raw material used in the production of paper is pulp. In recent years, Hadera Paper Printing purchases approximately 95,000 tons of pulp per annum, in average.

10.12.1.2. According to the agreement between the Company and Mondi Group, the Company was entitled to purchase pulp in bulk as part of acquisitions by Mondi Group which carries out acquisitions for the sector and other Mondi Group plants in Europe. In 2015, the Company initiated the termination of said agreement with Mondi as of the first quarter of 2016.

10.12.1.3. To this date, pulp is mainly purchased from abroad within the framework of annual contracts that include a price setting mechanism based on discount rates compared with the index of global market pulp prices.

10.12.1.4. As part of the aforesaid, the Group purchases a significant share of total amount of consumed pulp directly from a pulp producer in Chile. The volume of direct purchases from the supplier in 2015 amounted to 48% of total Hadera Paper Printing pulp purchases, and represented 38% of the total purchases by Hadera Paper Printing from all suppliers of raw materials during that year.

10.12.1.5. There are several pulp suppliers that are operating worldwide, which allows flexibility of relative consumption of pulp types while switching between various suppliers. Since the global pulp market is relatively large compared with the volume of sector utilization, the sector is not dependent on a specific supplier or pulp type.

10.12.1.6. The sector is exposed to fluctuating pulp prices and the impact of exchange rates on pulp cost in NIS. Unusual rises in the prices of pulp could harm Company profitability. For details regarding trends in pulp prices, see section 10.2.2 above.

10.12.1.7. Purchased paper suppliers - the Group imports paper mainly from APP Group and from Stora Enso. The Group has no dependency on APP and Stora Enso as the aforementioned paper suppliers. In the event that the Group ceases to collaborate with these suppliers, it will be able to purchase paper from other suppliers. Nevertheless, replacement of said suppliers may have an adverse impact on short term sector profitability.

10.12.1.8. PCC - Another important raw material in the production of fine paper is PCC (Precipitated Calcium Carbonate). The Group’s PCC supplier is Oumya Shefaya Ltd., an Israeli subsidiary under full ownership by the Swiss company Oumya International AG (hereinafter in this section: “the supplier”), per an agreement in effect until December 31, 2020. The Company is entitled to terminate the agreement, yet it will be required to reimburse the supplier according to agreement provisions. The sector is dependent upon this PCC supplier, such that arrangement cessation would lead to a shortage of PCC and could lead to production cessation until an arrangement is reached with a substitute supplier. The proportion of purchases from said supplier in 2015 and 2014 represented 6% and 7% out of total purchases of raw materials in the sector, respectively (without considering the costs of purchased paper imported by the Company).

10.12.1.9. Starch - Hadera Paper Printing purchases natural starch used in paper production from Galam Ltd. (hereinafter: "Galam"). Other starch types are purchased from additional suppliers. Due to competing import of starch at prices that are competitive with Galam, the Company believes that as at report date, it is not dependent on Galam. However, should

34

Hadera Paper Printing discontinue doing business with Galam, a short-term damage will be incurred. Production shutdown in Galam might cause similar delay in the Group's production.

The Group purchases starch from Galam and other suppliers under agreements for the period of several months up to one year. The volume of purchasing from Galam in the years 2015 and 2014 amounted to 4% and 5% out of total purchases made by the activity sector, respectively. The volume of purchasing from other suppliers of starch in the years 2015 and 2014 amounted to 1.1% and 1% out of the total purchases made by the sector, respectively (without considering the costs of purchased paper imported by the Company).



The amount included in the financial statements as at 2015 (NIS thousands)



Surplus of current liabilities over current assets

148,339

10.13.2. Below is data regarding average credit duration and amounts for suppliers and customers in 2015 and 2014 (in NIS millions):



Average credit days


Average credit days

Customers 154 101 154 106

Suppliers 66 50 104 74

10.13.3. The average days of inventory in this sector in 2015 was 46 days. Decrease in inventory days ensured from streamlining measures implemented in the sector, which included, inter alia, inventory reductions.

10.14. Material agreements in the fine paper sector

10.14.1. Oumya Shefaya Ltd. agreement - see section 10.12.3 above.

10.14.2. Agreement between the Company and the Mondi Group -

10.14.2.1. On December 2012, the Company completed the purchase of 25% out of Hadera Paper Printing share capital, which was held by Mondi AG (hereafter: "Mondi Group").

10.14.2.2. In accordance with pertaining signed agreements, and subject to law limitations, Mondi Group has undertaken to continue and assist Hadera Printing Paper in the purchase of raw materials (including pulp), provided that the purchase is intended for the consumption of Hadera Printing Paper. The said undertaking is for a period of 10 years as of agreement finalization date, following which each party shall be eligible to terminate the agreement via

35

advance notice. In 2015, the Company initiated the termination of said agreement with Mondi as of the first quarter of 2016.

10.14.2.3. Furthermore, within the framework of the agreements with Mondi group, the parties agreed upon the appointment of Hadera Paper as an exclusive distributor of wood-free paper from Mondi Group in Israel. This appointment was discontinued in late 2015.

10.15. Risk factors in the fine paper sector



Dependence on a single supplier - This sector is dependent upon the PPC supplier (Oumya Shefaya Ltd.). For further details see section 10.12.3 above.

Pulp price - as stated, one of the main raw materials utilized by the activity sector is pulp. Increase in global pulp prices might adversely affect sector results.

Global fine paper prices - sector products are offered by a variety of manufacturers and marketers worldwide and are imported to Israel on a regular basis by several importers. Product (commodity) prices are determined by global supply and demand, on which the Company has no impact.





Special Factors Pulp price

Global fine paper prices

Dependence upon a single supplier

11. Office Supplies Marketing sector

11.1. Structure of the Office Supplies Marketing sector

The office supplies marketing sector focuses on marketing office supplies, disposable paper products, office technology, office furnishings, complimentary equipment (dry food, cleaning products), sales promotion products and more. The Group's office supplies marketing activity is carried out by the subsidiary company - Graffiti.

Graffiti engages in marketing office supplies to business customers, institutional customers, chains and stores via sales methods that include sales agents, telephone sales and service centers and a B2B e-commerce website. This sector is characterized by numerous local and international brands.

In February 2015, the Company signed an agreement for the sale of all its holdings (100%) in Graffiti. The transaction was canceled under consent of both parties in July 2015. For further details, see the Company’s Immediate Report dated July 23, 2015 (reference number: 2015-01-081426).

36

11.2. Changes to volume of operations in the sector and its profitability

The office supplies market in Israel is affected by paper prices and exchange rates. Moreover, the overall level of economic activity impacts this market, as expressed by the change in consumption habits during periods of recession. Most of the products marketed in this sector are imported, including: various pens, office supplies, shredders, binding machines, disposable paper products etc. Moreover, the Israeli market is also engaged in marketing products acquired from local producers and suppliers, including: office furniture, printers, fax machines, computers and peripherals, food products, toiletry products, etc.

The volume of Graffiti activity during 2015 is smaller compared to 2014, and the activity transited into operational loss. The adverse change ensued from, inter alia, the continuation of the interim period between signing the Graffiti sale transaction and cancelation thereof, which led to uncertainty within some of its clients, and due to NIS weakening versus the USD, which caused an increase in the cost of products imported by Graffiti for marketing in Israel.

11.3. Critical success factors in the sector of operations

Critical success factors affecting the sector's activity are a high service level which is supported by appropriate logistics, and actions towards cost reduction by improvement of acquisition sources.


The office supplies market is competitive, and products marketed by the Group in the sector have substitutes from competitors.

11.5. Products and Services in the office supplies marketing sector

11.5.1. Graffiti specializes in providing comprehensive solutions for office supplies by direct supply to institutions and businesses. Paper products manufactured by the Group in the fine paper sector constitute as one of the main products marketed by Graffiti. Furthermore, Graffiti offers a variety of items to its customers nationwide, and is an exclusive distributor of international brands in the office supply sector via a subsidiary under full ownership. Graffiti has a website directed towards both the business and private sectors (which started operating during 2015), and intended for allowing Graffiti to serve a wider variety of clients without significantly increasing marketing costs.

11.5.2. The demand for products marketed in this sector of operations is relatively rigid, since it consists mostly of basic office consumables. Despite the aforesaid, during times of recession it is evident that consumption habits tend to change due to a cross-organizational trend of saving and cut-backs, which also includes office supplies. All products marketed by Graffiti have competing products sold by many suppliers and distributors.

11.6. Customers in the office supplies marketing sector

Graffiti sells its products to thousands of diverse customers in the business and institutional sectors in Israel only. Graffiti customers include government ministries, banks, HMOs, and other large companies. Amnir has no dependence on any individual customer or a limited number of customers.

11.7. Marketing and distribution in the office supplies marketing sector

Graffiti’s orders for products in this sector of operations originate from a number of sources (field sales personnel, telephone sales center, and an e-commerce website). Graffiti has three storage and distribution sites - the main and largest site is located in Modi'in, while the other sites are located in Haifa and Tiberias. Graffiti’s distribution system is based on a fleet of trucks under operational lease that are backed up by external distribution contractors in cases of peak demand. Graffiti is not dependent upon any of its external contractors. Graffiti started utilizing a computerized planning, distribution, and reporting system

37

for the purpose of distribution process streamlining.

11.8. Competition in the office supplies marketing sector

11.8.1. The office supplies marketing sector is competitive, with several competitors operating in the Israeli market. The names of Graffiti’s major competitors in this sector of operations are: Kravitz (1974) Ltd, Pythagoras (1986) Ltd, Dani ran Supply from the Heart Ltd, Lautman Rimon Ltd, and Pan Office Supply Manufacture and Import Ltd.

11.8.2. The Company believes that there are several dominant players in the sector of office supplies by direct supply to institutions and businesses as at report date: Graffiti and Kravitz (1974) Ltd., which operate primarily with: (a) customers primarily handled via tenders; and (b) large strategic customers (such as banks and local municipalities). In addition to the entities stated, there are numerous competitors on the business clients market. As of 2014, sector competition increased due to a trend of splitting office supply tenders to several suppliers.

11.8.3. Graffiti cannot estimate its market share, since the company markets a very large variety of products in the area of office supplies, with the aim of providing comprehensive solutions for supply of various products in the office supplies sector. Consequently, it is difficult to define the relevant market, and Graffiti's share thereof. Graffiti estimates that it constitutes as one of the main suppliers of the office supplies sector in Israel for the institutional market.

11.8.4. Graffiti handles its competitors by maintaining high standards of quality and service and a nationwide distribution network. The company believes that the size and variety of its products also grant it an advantage over its competitors. Furthermore, Graffiti has an advanced sales and service center, providing fast turnaround times for its customers. Graffiti works towards being the leading supplier in the tenders secured by it.

11.9. Fixed assets, real estate and facilities in the Office Supplies Marketing sector

To this date, Graffiti operates mainly from the Group's logistics center in Modi'in. Furthermore, Graffiti leases two additional buildings in Haifa and Tiberias. For details regarding the logistics center, see Section 14 below.



The amount included in the financial statements as at 2015

(NIS thousands)



Surplus of assets over current liabilities 3,100

11.10.2. Inventory policy - The levels of inventories in the area of office supplies are operational levels that are adjusted to the period of supply and the need to maintain variety. On average, inventory levels amount for approximately 2 months of expected delivery.

38


Data with regard to the average period and volume of credit from suppliers and customers during reporting periods during 2015 and 2014 (in NIS million) is provided below:



Average credit days


Average credit days

Customers 58 118 57 113

Suppliers 38 114 34 98

The average days of inventory in this sector in 2015 was approximately 60.4 days.

11.11. Risk factors in the office supplies marketing sector

For details regarding additional risk factors, see section 24 hereafter.


Exclusive distributor - As stated in section 11.5.1 above, Graffiti (via a subsidiary) is the exclusive distributor in Israel several international brand name products in the area of office sup-lies. Graffiti estimates that not constituting as an exclusive distributor may affect its activity.





Special Factors Exclusive distributor

39

Chapter D - Additional Information Regarding the Corporation

12. Critical success factors in the packaging paper sector of operations and changes therein

Several critical success factors may be indicated for Group operations in the packaging paper sector, which impact its operations:

12.1. Quality of leading products and customer service - high level quality and service mainly contribute to preserving existing clients. High product quality, availability and quality customer service are important success factors in this operating sector.

12.2. Local producer – For several operating sectors of the Group, a local producer enjoys an advantage over imports, as the former is able to ensure constant supply of the product at a relatively short lead time and at the size and quality required by customers, thereby saving them the need to maintain large inventories. In some cases, the Group is the only packaging paper producer in Israel, and therefore enjoys an advantage in this operating sector.

12.3. Condition of Israel's economy – a significant share of Group products is intended, directly or indirectly, for industry, agriculture and the food and the beverage sectors. As a result, extensive current economic activity has a positive material impact on the demand for these products. On the other hand, an economic crisis or a slowdown in economic activity will possess an adverse impact on the aforesaid.

12.4. Financing capability - The Group's activity sectors are characterized with significant investment in machine and infrastructure construction, and in ongoing equipment maintenance. Consequently, financing capabilities constitute an advantage in the sector of operations. It should be noted that during the last year the Company took measures for reinforcing its financial stability and reducing leverage, this inter alia for the purpose of improving its financing capability.

For details regarding success factors in the office supplies marketing sector, see section 11.3 to the Periodical Report.

13. Major barriers to entry and exit in the Group's activity sectors and changes therein

There are several entry barriers affecting a company's ability to enter activity in the various sectors of operations:

13.1. Tier 1 capital - Since the paper industry is capital intensive with heavy investment required in infrastructure and equipment (such as paper machines, presses, corrugators, trucks and other expensive machinery, paper waste processing systems and associated infrastructure), entry into this operating sector requires significant Tier 1 capital. Moreover, even after conducting initial investments for establishing the necessary infrastructure for entering the sector, this area of operations requires significant investment in ongoing equipment maintenance.

13.2. Limited customers - This operating sector typically has a limited number of customers. This fact, along with the competitive environment of this operating sector, makes it difficult for a new companies to enter the market since customers are hard to recruit as they often have long-term relationships with paper producers and/or importers.

13.3. Brand building and development capability - Penetration to some Company sectors of operation requires an extended period of time, inter alia due to the importance of reputation and leading brands in the sector. Furthermore, since the sector is characterized with advanced technology, entry into the sector would require technological know-how, development capabilities and frequent technological improvements.

40

The Company believes that there are no material exit barriers from this segment. It should be noted that in some cases, discontinuation of operations would require arrangements to be made with customers concerning conclusion of product inventory delivery as well as arrangement of payments to suppliers. Furthermore, with regard to payment of fixed expenses, the Company would be required to make appropriate arrangements, since some of these fixed expenses cannot be discontinued immediately.

14. Fixed assets, real estate and facilities

Following below are details regarding fixed assets and facilities in use by the Group:

14.1. Company Headquarters and main production and storage facilities are located in Hadera (hereinafter: "the Company site") on an area covering approximately 273 dunam (hereinafter: "the area"), part of which is owned by the Company (approximately 201 dunam), while the other part (approximately 72 dunam) is leased from the Israel Land Administration (hereinafter: "ILA"). Pursuant to the leasing agreements, the lease is terminate between the years 2018 and 2058. Some of the leasing agreements are under capitalization conditions. Some of the area is leased to third parties.

14.2. Moreover, the Company leases from the ILA an area of 25 dunam in Nahariya at which the plant for the manufacture and processing of paper is located until 2018. The area is rented out to Hogla-Kimberly. In addition, the Company also leases from ILA an area of 3.5 dunam in Nahariya that is also rented out to Hogla-Kimberly. Agreements regarding further lease of real estate by Hogla-Kimberly were signed within the framework of the Hogla-Kimberly sale.

14.3. In addition to the aforesaid, Company subsidiaries own and/or lease factories, offices and warehouses at various locations around the country, whereas the central sites are the logistics center in Modi'in and two production sites in Caesarea. For details regarding the agreement for the lease of the logistics center in Modi'in, see Note 13g to the Company's financial statements for 2015.

14.4. Infrastructure array - For the purpose of paper manufacturing activity, the Group maintains a network of complementary services for group companies operations at the Company site in Hadera that are provided by Hadera Paper Infrastructures. Some stated services are also provided in return for a fee to additional companies operating at the Company site, including Hogla-Kimberly and ICPower Ltd. The infrastructure array includes a wastewater facility, joint warehouses for spare parts and hazardous materials, a process laboratory, catering site, and critical systems (firefighting and water system). It should be noted that the costs of infrastructures activity in the Company's financial statements are attributed to the packaging paper and fine paper sectors of activity. It should be noted that infrastructures array assets are attributed to the packaging paper and fine paper sectors of activity, this according to the volume of services provided to each stated sector.

15. Human resources

15.1. Organizational structure

In recent years, the Company is taking efficiency and savings measures for the purpose of addressing the changing business environment of the Company's sectors of operation. Within the framework, the Company took measures for reinforcing its financial stability, and reducing leverage and Company fixed costs.

Furthermore, the Company has been and is taking measures for increasing the synergy between Group units and streamlining their activities, including by consolidating some production sites and flattening the organizational structure, including workforce and senior executives base reduction along with decrease of Group headquarters and the number of executives.

41

Following is a diagram of the Company's organizational structure as at report date:

15.2. Staff employed according to sectors of activity

As at December 31, 2013, the Company, directly or indirectly through its subsidiaries, employed staff in the five segments of operation described in sections 7-11 above, as follows: in the packaging paper segment - 157 employees, in fine paper segment – 545 employees, in the paper waste collection and processing segment – 385 employees, in the packaging and cardboard products segment - 220 employees, and in the office supplies segment - 189 employees. Furthermore, 127 employees are employed in the Company's infrastructures sector, while Company headquarters include 59 employees. The total number of employees employed by the Company and its subsidiaries is 1,682 and 1,756 as of December 31, 2015 and 2014, respectively.

15.3. Employment agreements

As of December 31, 2015, employees of the Company and its subsidiaries are employed under two types of agreements; 796 employees are employed under collective agreements and general extension orders in the field of industry that apply thereto (of which 246 are temporary employees), and 830 employees are employed under personal contracts. Furthermore, as at December 31, 2015, the Group employs 56 workforce employees.

15.3.1. Collective Labor Agreements

As stated above, as at report date, 796 employees of the Company and subsidiaries operating in Hadera, Caesarea and the logistics center in Modi'in are employed under special collective agreements which are renewed once in every 2-3 years. Out of these, 361 are operating at the Company site in Hadera (273 permanent employees and 88 temporary employees).

In late 2013, in light of a strike at the Company's site in Hadera and hearings regarding the matter at the Labor Court, the Company and the committee of unionized workers employed at the Company's site in Hadera reached consent according to which the collective agreement applying to both parties that was supposed to be in force on December 31, 2013 will be extended until June 30, 2016. In March 2015, the Company and the committee of unionized workers employed at the Company's site in Hadera (approximately 350 temporary and permanent employees at that date) signed an amendment to the collective agreement applying to both parties, which includes changes that pertain to, inter alia, the early retirement of up to 20 unionized employees under customary Company terms. For details, see the Company’s Immediate Report dated March 24, 2015 (reference number: 2015-01-058861).

Hadera Paper

Carmel Amnir Graffiti Finances Legal Operations Human Resources

Subsidiaries Paper plant

42

Due to the purchase of Company control by FIMI as detailed in section 2.2 above, on August 13, 2015, the Company's Board of Directors approved the grant of a non-recurring bonus at a total sum of approximately NIS 3.1 million to Company employees which were parties to the wage reductions instituted by the Company in recent years, employees employed under the collective agreement and employees employed under individual contracts, exclusive of employees classified as Company position holders. Given that the non-recurring grant is carried out on the grounds of the transaction for Company control transfer, the former controlling shareholder of the company, CII, has undertaken to carry the full cost of the non-recurring grant as stated.

It should be noted that during 2015, after finalizing the transaction for the sale of Company holdings in Hogla-Kimberly, the bargaining unit of Hogla-Kimberly employees was separated from the Company's unit.

A collective agreement was signed in 2014 with Amnir employees (162 permanent workers are employed at Amnir as at December 31, 2015).

15.3.2. Personal employment agreements

As aforesaid, as of reporting date, 830 employees of the Company and its subsidiaries are employed under personal employment contracts.

15.4. Agreements with senior officers

15.4.1. Senior management employees of the Company are employed under personal contracts.

15.4.2. As stated above, the Company's senior executive base changed due to reduction in the number of senior executive positions.

15.4.3. In August 2014, Mr. Shlomo Liran was appointed as the Company CEO, and replaced Mr. Ofer Bloch who served at this position since 2009. For further details regarding the the retirement terms of Mr. Ofer Bloch, see the Company's Immediate Report dated February 26, 2015 (reference number: 2015-01-039823). In January 2015, Mr. Liran announced the termination of his employment due to disagreements regarding the Company's activity methods and directions. For further details regarding the the retirement terms of Mr. Shlomo Liran, see the Company's Immediate Report dated February 12, 2015 (reference number: 2015-01-030733). After receiving his notice, it was decided upon the appointment of Mr. Gadi Cunia, the Company's CFO as the Acting CEO. For further details, see the Company's Immediate Report dated January 20, 2015 (reference number: 2015-01-015262).

15.4.4. In light of Company control purchase, the management services agreement between the Company and Clal Industries and Investments Ltd. that included active Chairman of the Board services was terminated.

For further information about Company officers, see Chapter D of the Periodical Report (Additional Information about the Company).

15.4.5. Compensation policy

In accordance with the provisions of The Companies Law (Amendment 20) 5773-2012, the Company adopted a compensation policy pertaining to service and employment terms of Company officers. The compensation policy was approved and amended by the Company's General Meeting, this further to obtaining approval by the Compensation Committee and the Company's Board of Directors. For details concerning the remuneration policy of the company and the updated format of the remuneration policy, see the Company's Immediate Report dated

43

August 26, 2014 (reference number: 2014-01-142731).

The compensation terms for Company officers comply with compensation policy provisions.

15.4.6. Remuneration of Directors

For details about the compensation of Company directors, see Chapter D to the Periodical Report (Additional Information about the Company).

15.4.7. Letters of Indemnification and Liability Insurance

For details regarding letters of indemnification given to directors and officers of the Company and insurance policies that the Company purchased to insure the Company directors and officers, see Chapter D to the Periodical Report (Additional Details Regarding the Corporation).

15.4.8. Employee stock option plans

For details regarding the option plan for Company employees, see Note 10.b-d to the Company’s financial statements for the year 2015.

16. Restrictions and Supervision of Company Operations

16.1. The Natural Gas Market Council’s decision regarding capacity exhaustion events

In accordance with the decision by the Natural Gas Market Council, criteria were set for the distribution of natural gas pipeline capacity during capacity exhaustion events. According to the Gas Council’s decision, such events are expected to occur between the years 2015 and 2016. Per set criteria, the Company is included among consumers that are entitled to receive only a proportionate part of remaining capacity during a Capacity Exhaustion Event as stated (it should be noted that at this date, capacity exhaustion events are yet to occur). At this stage, the Company does not have any data which allows it to assess the frequency of Capacity Exhaustion Events and the proportionate part that it will receive at the time of such an event, and therefore it also cannot assess the effect of this Decision on its activities. According to Company agreements with ICPower, as detailed in section 20.2 hereafter, the occurrence of the event stated may impose additional costs on the Company; in case the discount on the electricity price is canceled for this period and the Company will be obligated to purchase alternative fuels for steam generation.

16.2. The Internal Enforcement Program with Regard to Securities

The Company adopted an internal enforcement plan which includes internal working procedures with regard to securities, designed to implement norms of compliance with the Companies Law and securities statutes by the Group, and to reduce exposure by the Group, its management and staff to any administrative enforcement proceedings. The enforcement program includes internal procedures which deal, inter alia, with the Company’s reporting obligations per the Securities Law, the identification and manner of approval of transactions with interested parties, the classification of transactions as non-exceptional transactions, work procedures for the Board of Directors, the Audit Committee and the Financial Statements Review Committee, prohibition against the use of inside information, Group employees reporting regarding flaws, and protection of whistle-blowing employees.

16.3. Concentration Law

The Law for the Promotion of Competition and Reduction of Concentration, 5774 – 2013 (hereinafter: "the Concentration Law") was published on records in December 2013. The Concentration law imposes, inter alia, limitations on public firms and bond companies of pyramid structure which consists of more than two tiers, and included limitations on parallel service of directors in a substantial financial entity and real substantial entity. The Concentration Law also imposes on state authorities to take into

44

account concentration and competition considerations when allocating rights, such as licenses in the area of essential infrastructures, etc. The list of centralizing entities, significant real corporations, and significant financial entities was published in December 2014. The Company is included in the list of centralizing entities as a significant real corporation, and therefore the said limitation regarding director service also applies to the Company.

16.4. Control over effectiveness of internal auditing of financial reporting and disclosure

The Company operates according to standards that comply with the provisions of I-SOX regulations. For details regarding the effectiveness of internal auditing at the Company, see the report regarding the effectiveness of internal auditing of financial reporting and disclosure in Chapter E to the Report.

17. Financing - Reportable credit

17.1. The Company finances its activity from its independent sources, through the capital markets and loans from banks and financial institutions. It should be noted that as of this date, the Company issued 6 bond series. As of report date, the Company had fully repaid the debentures (Series 1, 2 and 4).

17.2. The Company has defined material reportable credit in its separate or consolidated financial statements, as any credit agreement which constitutes 5% or more of total liabilities in the solo or consolidated financial statements, respectively.

17.3. The following is information about material credit agreements and debenture series of the Group:

45

Borrowing corporation

Total debt (NIS million)

Description of debt and collateral

Lending corporation

Loan terms

Interest Linkage

mechanism Repayment

schedule

Company As at 31.12.2015:

70.8

Bond Series 3: In 2008, the Company has issued NIS 187,500 thousand par value of bonds: (hereafter: "Series 3 Debentures"), CPI-linked, each with a par value of NIS 0.01, in return for financial remuneration of NIS 187,500 thousands. The debentures are not convertible into Company shares.

Institutional investors and the Public

The outstanding balance of debentures bears average interest of 4.65% per annum and effective interest of 4.8% per annum.

Debenture principal and interest are linked to the known CPI (basis - CPI for May 2008).

The unpaid balance of debentures (Series 3) as at December 31, 2015, in the amount of NIS 70.8 million, is repayable in 3 equal annual installments on July 10 of each of the years 2016 through 2018.


208.6

Bond Series 5: In May 2010, July 2011, June 2012 and October 2012, the Company issued NIS 521, 519 thousand par value of NIS bonds: (hereafter: "Series 5 Debentures") for consideration of NIS 518,807 thousand.

The debentures are not convertible into Company shares.


The unpaid balance of debentures bears average interest at 5.85% per annum, and effective interest of 6.22% per annum. The weighted discount rate specified for all debentures (Series 5) issued by the Company is approximately 0.96285%.

Unlinked The unpaid balance of debentures (Series 5) as at December 31, 2015, in the amount of NIS 208.6 million, is repayable in 2 equal annual installments on November 30 of each of the years 2016 through 2017.

46




Lending corporation

Loan terms

Interest Linkage

mechanism Repayment

schedule


546.0

Bond Series 6: In June 2013, January 2014, February 2014, July 2014, and October 2014, the Company issued NIS 574,761 thousand par value of bonds: (hereafter: "Series 6 Debentures") for consideration of NIS 588,701 million.

The debentures are not convertible into Company shares.

Within the framework of the debentures (Series 6) trust deed, the Company committed to comply with the following financial covenants:

(1) Minimal equity of NIS 400 million for a period exceeding two successive quarters. As at report date, the Company complies with the said financial covenant – its equity is NIS 585.8 million. For further details, see section 5.4 to debentures (Series 6) trust deed; and


The unpaid balance of debentures bears average interest at 5.89% per annum, and effective interest of 5.5% per annum. The weighted discount rate specified for all debentures (Series 6) issued by the Company is approximately 0.0859%%.

Non-linked The unpaid balance of debentures (Series 6) as at December 31, 2015, in the amount of NIS 546.0 million, is repayable in 9 equal annual installments that will be repaid as follows: (i) three (3) equal installments at rate of five percent (5%) from par value of debenture principal will be paid on December 30 of each of the years 2016 through 2018; (ii) four (4) equal installments at rate of ten percent (10%) from par value of debenture principal will be paid on December 30 of each of the years 2019 through 2022; (iii)

47




Lending corporation

Loan terms

Interest Linkage

mechanism Repayment

schedule

(2) The ratio between the Company’s equity (as set forth in Series 6 debentures) and the Company’s total consolidated balance (hereafter: “equity-balance ratio”) will not be less than 23% for a period exceeding two successive quarters. As at report date, the Company complies with the said financial covenant - equity-balance ratio is 24.3%%. For further details, see section 5.3 to debentures (Series 6) trust deed.

(3) The Company undertakes not to distribute any dividend and/or to make any purchase of its own shares in any case whereby subsequent to the dividend distribution and/or the purchase of its own shares, as the case may be, its shareholders' equity, according to the audited or reviewed consolidated financial statements of the Company, as the case may be, will decrease to reach a point below NIS 500 (five

two (2) equal installments at rate of twenty percent (20%) from par value of debenture principal will be paid on December 30 of each of the years 2023 through 2024 (inclusive).

48




Lending corporation

Loan terms

Interest Linkage

mechanism Repayment

schedule

hundred) million.

Furthermore, within the framework of the debentures (Series 6) trust deed, the Company undertook that as long as the debentures (Series 6) have not been repaid in full, the Company shall not create nor shall agree to create, in favor of any third party, any degree of permanent liens on its overall property, to secure any debt or liability, without contacting the Trustee in writing prior to creating any such lien, to inform him accordingly, and will also create in favor of the debenture holders (Series 6), in parallel and simultaneously with the creation of the lien in favor of the third party, a permanent lean of an equal degree, pari passu according to the ratio of debts, to secure the outstanding balance of the debt toward the debenture holders, and that this lien will remain in effect as long as the

49




Lending corporation

Loan terms

Interest Linkage

mechanism Repayment

schedule

debentures (Series 6) have not been repaid in full, or until the cancellation of the lien that was granted in favor of the third party, as aforementioned. For additional details, see section 5.2 to the debenture (Series 6) trust deed.


29.8

Long-term loans:

Credit obtained in 2009, amounting to NIS 100,000 thousand, for financing construction of Machine 8. The Company undertook a negative pledge with respect to this loan.

Institutionals Average and effective interest of 6.30%.

Non-linked Repayment dates: January and July of 2016-2017.

17.4. Below is information about the material credit facilities of the Group:

Borrowing corporation Credit line* as at 31.12.2015 (NIS

million)

Utilization of credit line as at 31.12.2015

(NIS million)

Applying corporation limitations

Financial contingencies

Compliance with financial contingencies as at 31/12/2015

Headquarters and other consolidating companies

207 91.1 None None N/R N/R

50

17.5. Following below are details regarding additional credit assumed by the Group companies:


Long-term / Short-term loan


Lending corporation

Loan terms

Applying corporation limitations

Financial contingencies

Compliance with financial contingencies

as at 31/12/2015

Average interest

Effective interest

Linkage mechanism

Repayment dates

Carmel

Long term

As at 31.12.15:

18.7

Leumi, Mercantil and HaPoalim banks

3.85% 3.91% Non-linked 2016 – 2018Collateral of fixed assets

None N/R N/R

Short term

As at 31.12.15:

64.6

Leumi, Mercantil, Discount, Mizrahi and HaPoalim banks

2.32% 2.32% Linked to Prime

2016 None

51

17.6. The Company has no restrictions on obtaining credit, nor any restriction which materially increases the cost of raising new capital or debt, other than as described above.

17.7. For further information regarding the bonds, see Note 9 to the Company's consolidated financial statements as of December 31, 2015, attached to this Report.

17.8. Except for the aforementioned undertakings of the Company and its subsidiaries (detailed above), the Company does not have additional financial covenants.

17.9. On-call loans held by the Company bear a variable interest rate. Interest update is carried out at the time of the Bank of Israel’s change in interest rates. During the years 2015, 2014 and 2013, the average interest rate due to the aforementioned loans was 2.2%-3.8%, 2.2%-4.6% and 2.5%-5.1%, respectively.

17.10. The interest rate for on-call loans in proximity to the date of this report is 2.2%-3.65%.

17.11. Interest rates on prime-linked loans in 2015 were 3.1%-3.25%. The weighted interest rate on prime-linked loans in proximity to the date of the report was 3.1%.

17.12. As of the report date, the Company possesses a credit rating of ilA / Stable by Maalot Standard & Poor's (hereinafter: "Maalot"), while the debentures (Series 3-6) issued by the Company are rated ilA. For details regarding the history of the rating of the Company and its debentures see the Company's Immediate Reports dated February 25, 2016 (reference number: 2016-01-035149).

18. Taxation

For details see Note 12 to the Company’s financial statements as at December 31, 2015, attached to this Report.

19. Environmental Risks and Management thereof

19.1. Environmental risks which have or may have substantial impact on the Company

19.1.1. Wastewater: wastewater created during the Company’s production processes contains materials with a potential to harm water sources upon reaching these without proper treatment treated. The Company discharges treated wastewater into the Hadera stream pursuant to a permit from the Manager of the Government Water and Sewage Authority by virtue of the Water Act, 1959 (hereafter: "the Water Act").

In accordance with Water Law provisions, breach of an authorization order grants relevant authorities permission to activate enforcement and penalty measures detailed in the law, including imposing administrative and criminal measures against the Company and/or its officers, and invalidation of the authorization order, which may obligate the Company to take various measures, such as: reducing production outputs, changing the product mix, and even shutting down some of its production facilities.

The current authorization permit under which the Company operates is valid up to May 25, 2016 (hereinafter: "the authorization order"), and is renewed annually. The permit includes various provisions, including conditions for discharging treated wastewater, setting its term and obligatory reporting. As at report date, The Company complies with the provisions of the Permit. The Company estimates that the authorization order will be extended.

The Company continues to invest in improving processes at the wastewater facility and its equipment for further fulfillment of authorization order provisions.

52

19.1.2. Hazardous Materials: the Company uses hazardous materials (mainly flammable materials) At its sites, which if not controlled could cause damages to people and to the environment. These materials are kept by the Company pursuant to a poison permit issued by the Ministry of Environmental Protection by virtue of the Hazardous Material Law, 1993. The toxins permit includes provisions concerning proper storage of hazardous materials, and is valid through July 6, 2016. The Company is working to comply with the toxins permit and does not anticipate any issue pertaining to current permit renewal upon its expiration.

19.1.3. Noise: operations at the Company's facility in Hadera involve noise, which may be a nuisance for neighboring residents. The Company takes the necessary measures to comply with noise levels prescribed in the Regulations for Prevention of Hazards (Unreasonable Noise) 5750 – 1990.

19.1.4. In-process waste: facility’s operations involve generation of process waste produced that is transferred to the dairy-farming industry (for use as padding and for solidification), and large waste (rejects), which is sent to be buried at a site approved for mixed waste.

19.1.5. Company estimates regarding potential renewal of the aforementioned permits constitute forward-looking information as defined in the Securities Law, and constitute only as forecasts and assessments on behalf of the Company, the realization of which is not certain and based on information existing in the Company as at report date. Company forecasts and estimates may not materialize, in whole or in part. Moreover, the actual results may differ from the current estimates and forecasts, and naturally, permits and orders may be obtained subject to determined terms, this due to various factors, including business opportunities available to the Company, regulatory developments and changes in the sector of operations including the environment and/or the realization of any the risk factors outlined in section 24 hereafter.

19.2. Substantial Ramifications of the Law on the Corporation

The provisions of law in effect on the date of this report having substantial ramifications on the Company, including on its capital investments, profits and competitive status:

19.2.1. Pursuant to the Business Licensing Law, 1968, the facility has a business license issued by the relevant local authority - Municipality of Hadera. The Company plant’s business license includes, inter alia, terms prescribed by the Ministry for the Protection of the Environment, designed to protect the environment and prevent nuisances. The Company believes that these terms are acceptable for similar facilities. Within the framework of business permit terms update, the Company was required to meet additional terms. The Company submitted all required documents within the framework of terms update.

19.2.2. The Company is required to keep and use hazardous materials for its manufacturing operations. This activity is subject, inter alia, to the Hazardous Materials Law, 5753 – 1993 and the regulations enacted thereunder, and requires maintaining a valid toxins permit. The toxins permit is granted under conditions pertaining mainly to the storage and use of these materials for the purpose of preventing incidents. The Company believes that the conditions in the toxins permit are customary for plants of this type. The plant holds a valid permit which is typically renewed annually upon filing the appropriate application. The Company is working to meet the conditions of this permit.

19.2.3. The Company discharges wastewater into the Hadera River in accordance with the permit order stated in Section 19.1.1 above, after treatment as part of a purification process in the Company’s facility.

53

19.2.4. Upon finalizing the sale of the power station which was operated by the Company at its Hadera site, the Company's plant is not regarded as a plant which requires a permit in accordance with the provisions of the Clean Air Law, 1968.

19.3. Details of material proceeding related to environmental protection to which the Company or senior officer thereof is party

19.3.1. On January 30, 2011, The Ministry of Environmental Protection held a hearing for the Company regarding suspicion of water pollution due to discharging low quality wastewater into the Hadera Stream. Following the hearing proceeding as described, an inquiry was launched into the Company and officers thereof. On July 13, 2014, the Company and some of its officers received an indictment in this matter, due to infringing the Water Law and the Business Registration Law. The defendants pleaded guilty, and the Company was convicted. Within the framework of the verdict, the court imposed a fine at rate of NIS 200 thousand on the Company. The court did not convict defendants who are position holders, and imposed on them the execution of public service and severance payment to the Maintenance of Cleanliness Fund. It should be noted that in January 2015, the Company received a request for the approval of a class action lawsuit due to damages allegedly sustained by the public on account of the pollution of the Hadera Stream, allegedly caused by the Company, and in light of the said indictment. The class action was dismissed and the request was deleted upon consent.

19.4. Details of Company policy on environmental risk management which has or is expected to have material impact on the Company, implementation and supervision thereof, including measures taken by the Company to mitigate environmental risk

The Company acts in accordance with an environmental management system managed using environmental protection procedures. The principles of environmental protection procedures are consistent with the requirements of Israeli standard ISO 14001/2004, and all Company divisions have been authorized by the Israel Standards Institute with regards to this standard. The Company has appointed a Ph.D in environmental engineering as the responsible party for the matter of environmental protection.

19.5. Information regarding amounts awarded, provisions recognized in the financial statements and other environmental cost applicable to the Company as described below (if material for the Company)

19.5.1. The Company invested NIS 2 million in infrastructure relating to environmental protection in 2015.

19.5.2. The expected 2016 budget for investments in environmental protection is NIS 2 million.

20. Material Agreements

20.1. Agreement for the sale of Company holdings in Hogla-Kimberly

The transaction for Company sale of its full direct and indirect holdings in Hogla-Kimberly (49.9%) to Kimberly-Klark, which as at transaction signing date held 50.1% of Hogla-Kimberly's share capital (hereafter: "Hogla-Kimberly transaction") was finalized on March 16, 2015. Following is a description of the main aspects of the Transaction:

20.1.1. Kimberly-Clark paid the Company an amount of NIS 650 Million (hereafter: “the purchase Price"), a part thereof in consideration for Hogla-Kimberly's shares and a part thereof as detailed in Section 20.1.5 in consideration for the Non-Competition Undertaking. In addition, until transaction finalization date, Hogla-Kimberly will return to the Company sums provided by the Company to Hogla-Kimberly in the amount of approximately NIS 4 Million.

54

20.1.2. The sale of Hogla-Kimberly's shares by the Company is on an "As Is" basis. The transaction includes representations relating, inter alia, to the incorporation of the parties to the agreement, the authority of the parties to the agreement to enter into the agreement, the Company's rights in Hogla-Kimberly's shares and the purchaser's financial ability to acquire the shares.

20.1.3. In addition, as part of the Transaction, the Buyer released the Company and related parties thereof from any claim arising prior to finalization, including unknown claims, other than claims for fraud.

20.1.4. As part of the transaction, the Company undertook not to compete with Hogla-Kimberly's existing activities (hereafter: “the Non-Competition Undertaking"). The Non-Competition Undertaking is subject to obtaining approval by the authorities (hereafter: “approval by the authorities") and shall be valid for a period of 3 years from the latest of the closing date or the date of such approval by the authorities. Within the transaction’s framework it was agreed, inter alia, that the Company may continue to operate in its existing activities and that such activity will not be considered a competition with the existing activities of Hogla-Kimberly.

20.1.5. In consideration of the Non-Competition Undertaking, Kimberly-Clark will pay the Company a total amount of NIS 40 Million, as follows: (a) a total of NIS 14 Million was paid on the closing date; (b) an additional amount of NIS 13 Million will be paid one year after the date of the first payment; (c) an additional amount of NIS 13 Million will be paid two years after the date of the first payment. At the Company's request, the said amount was placed in escrow by Kimberly-Clark.

20.1.6. Agreements for further lease of real estate from the Company by Hogla-Kimberly were signed within the framework of the transaction. Furthermore, the parties reached consent regarding further provision of some services provided by the Company to Hogla-Kimberly. The parties are negotiating the provision of remaining services.

For further details, see the Company's Immediate Report dated January 26, 2015 (reference number: 2015-01-019225) and March 16, 2014 (reference number: 2015-01-052744).

20.2. Agreement for the sale of Company holdings in Advanced Integrated Energy Ltd.

20.2.1. Within the framework of a transaction that was finalized on August 10, 2015 between the Company and ICPower Ltd. (hereafter: "ICP"), the Company sold all its holdings in Advanced Integrated Energy Ltd, a subsidiary fully owned by the Company (hereafter: "Integrated Energy"), which holds a contingent permit for the construction of a power station at output of 120MW, including owner loans provided by the Company, and the Company's existing energy center equipment to ICP (hereafter: "ICP transaction").

20.2.1.1. In return, the Company received a total amount of NIS 60 million.

20.2.1.2. The Company assigned to ICP the agreement for the supply of the Company's natural gas with Tamar Project, as well as the natural gas transmission agreement with INGL.

20.2.1.3. Within the framework of the ICP transaction, the Company entered into agreements with Integrated Energy regarding supply of all electricity and steam required to it from the power station that will be constructed by Integrated Energy for a period of 18 years after the date of commercial operation of the power plant constructed by Integrated Energy. The agreements included agreed upon electricity charge rates payable by the Company, which reflect a discount compared to the Electric Corporation, and a minimal annual quantity of steam that the Company has undertaken to purchase (take or pay conditioning). In

55

addition, the Company entered into land lease agreements with Integrated Energy, according to which the Company will lease to Integrated Energy the land on which the existing energy center is located and the area next to the Company’s factory in Hadera that is designated for power plant construction. The lease period will continue for 20 years from the date of commercial operation of the power plant constructed by Integrated Energy. The responsibility of the ICP to the Company shall be limited to the total annual rent paid by it in the past year.

It should be noted that due to the transaction, the Company recognized loss due to impairment in the amount of approximately NIS 26.7 million in its financial statements. For further details, see the Company's Immediate Report dated June 8, 2015 (reference number: 2015-01-043314) and August 10, 2015 (reference number: 2015-01--093486) and Note 14(k)(5) to the Company's financial statements for 2015.

20.3. Agreement for the sale of holdings in Graffiti

On February 11, 2015, the Company signed a definitive agreement for the sale of all its holdings (100%) in Graffiti to Kravitz (1974) Ltd. On July 23, 2015, the Company announced that the parties agree to cancel the deal without either party having claims against the other and due to receipt of documents Antitrust Commissioner regarding transaction finalization. For further details, see the Company's Immediate Report dated July 23, 2015 (reference number: 2015-01-081426).

20.4. Letters of indemnification: Pursuant to decisions by the General Meeting of Company shareholders, the Company grants letters of indemnification to all its Board members and officers. For further information about letters of indemnification approved and the wording thereof, see the Company's Immediate Report dated November 23, 2011 (reference number: 2011-01-336819).

20.5. Agreement for logistics center lease: For information about the lease agreement between the Company and Gav-Yam Land Corporation Ltd., see section 14.4 above.

20.6. Agreement with Tamar project partners: In January 2011, the Company signed an agreement (which was amended in October 2012) for the purchase of natural gas with the partners in Tamar project (hereinafter: "Tamar agreement"). For details regarding the agreement, see section 21.6 to the Company's Periodical Report for 2014, as published on March 19, 2015 (reference number: 2015-01-055327). As stated in section 20.1.2.1 above, in August 2015, the Company assigned the Tamar agreement to ICP, and as at report date, the Company is not a party to the agreement, as stated.

20.7. Agreement with Israel Natural Gas Lines Ltd: For details regarding the agreement, see section 21.7 to the Company's Periodical Report for 2014, as published on March 19, 2015 (reference number: 2015-01-055327). As stated in section 20.1.2.1 above, in August 2015, the Company assigned the agreement to ICP, and as at report date, the Company is not a party to the agreement, as stated.

21. Legal Proceedings

With regard to legal proceedings described in the financial statements, see Note 12 to the Company's financial statements as of December 31, 2015 attached to this report.

22. Business objectives & strategy and anticipated development over the next year

22.1. In recent years, the Company is taking efficiency and savings measures for the purpose of addressing the changing business environment of the Company's sectors of operation. Within this framework, in the last year, the Company took actions for reinforcing its financial stability and reducing leverage, inter alia via exercising its holdings in sectors that are not included in its business core, shares issuance, capital raising, and taking operational streamlining measures intended for improving its profitability.

56

22.2. In March 2015, the Company completed the sale of all its holdings in Hogla-Kimberly, this in return for approximately NIS 650 million. A transaction was finalized in August 2015, within the framework of which the Company sold all (100%) holdings (direct and indirect) in Advanced Integrated Energy Ltd. and the company's existing energy center equipment (including the company's power station) to ICPower Ltd, this in return for a total of approximately NIS 60 million. For additional details, refer to Section 20 above.

Moreover, during December 2015, the Company issued ordinary shares in return for approximately NIS 150 million. For further details, see section 4 below.

Furthermore, the Company has been and is taking measures for increasing the synergy between Group units and streamlining their activities, including by consolidating some production sites and flattening the organizational structure, including workforce reduction along with decrease of Group headquarters and the number of executives. As evident from the Company's financial statements for 2015, the Company estimates that these streamlining processes are productive and lead to improving Company results.

22.3. In parallel, the Company continues a process of business focus on the recycling and paper sectors along with reinforcing developing activity sectors and supporting activity sectors suffering from erosion considering the challenging activity markets. The Company continues to review its activities in the various sectors, and is examining opportunities for capital investments or purchasing activities that may have potential as growth engines which can be incorporated in its business.

22.4. In the packaging paper sector, in recent years the sectors engages in development of paper types based on 100% recycled fibers, whose high quality allows replacing packaging paper based on pulp in the corrugated board industry in Israel and overseas, thus providing an improved profitability potential. In addition, the Group has worked in recent years and continues to work to develop export markets for the sale of production surpluses that are not absorbed by the domestic market.

22.5. The packaging and cardboard products sector takes measures intended for gradually expanding the proportion of recycled paper use out of the raw materials used for the production of its products at the expense of virgin (pulp-based) paper. It should be noted in this respect that there is a trend of increased use of recycled materials on account of virgin paper use in Israel and worldwide.

22.6. In the sector of collection and recycling services, Amnir has worked in recent years and continues to work to gradually increase the quantity of paper waste that collected by it, with the goal of continuing to supply the required material for the Group's paper machines, this by reducing collection costs. In recent years, Amnir has been expanding its activity in the sector of plastic product collection and processing for recycling. In 2015, Amnir expanded the capabilities of its plastic recycling plant.

22.7. In the fine paper segment, the Company takes action for handling further competition in the sector and sale prices erosion, this inter alia by utilizing its advantages as a single local manufacturer, paper machine streamlining, development of additional products, and complementing the product range by import of papers whose local production is not profitable. As stated above, the Company does not estimate that the trend of decrease in demand and increase in supply which as stated, led to decrease in sector prices and profitability erosion (inter alia) may change in the near future.

22.8. In the office supplies sector, in light of Graffiti sale transaction, Graffiti is working towards increasing it sales and product range in order to return to profitability.

22.9. The Company is reviewing and promoting ways for reducing the volume of sewage discharged from the Company site into the Hadera stream, improving sewage quality and transferring part of the sewage for repeated use on-site.

The Company's strategic goals as described above are based on the Company's objectives and ambitions as of the reporting date and could change in accordance with relevant decisions made by the Company.

57

23. Risk factors

23.1. General

The Company conducts periodical discussions between relevant parties regarding market risks and exposure to exchange rate and interest rate fluctuations, in order to reach decisions in this matter. The officer responsible for the implementation of the market risk management policy at the Company is Gadi Cunia, the Group’s VP of Finance and Acting Chief Executive Officer.

23.2. Macro-Economic Risk Factors

23.2.1. Exposure to Fluctuations of the Index, Exchange Rate, and Credit Risks

For details regarding this risk, see section H2 to the Company’s Board of Directors’ report.

23.2.2. Geopolitical situation in Middle Eastern countries

The instability trend in several Middle Eastern countries, as well as trends which might result in termination of business activity between corporations from several countries and Israel might adversely affect Company results. The Group is continuously acting to reduce exposure to such implications, inter alia, by diversification of suppliers and reviewing potential new export markets.

23.2.3. Security risk

Company facilities, management, and most of its employees are located in Israel, and therefore worsening of the security situation may have an adverse impact on Group activities.

23.2.4. Increasing input and raw material costs

An increase in the prices of inputs and raw materials, particularly the prices of paper, electricity, water, transport, pulp and starch could adversely affect the Company’s profitability.

23.3. Sector-Specific Risk Factors

23.3.1. Competition - the Company's sectors of operation are competitive, whereas in some sectors competition is against local manufacturers, while in others the competition is against imported products. Entry of new competitors and/or expansion of activity by existing competitors, and/or an increase in import quantities may adversely affect the Group's volume of activity and its financial results.

23.4. Special factors

23.4.1. Dependency on a single steam and electricity supplier - as detailed in section 20.0 above, within the framework of the ICP transaction, the Company sold the power station operated by it, which provided all Company steam needs and partial electricity needs, and entered into agreements with Integrated Energy for the supply of all electricity and steam required to it from the power station that will be constructed by Integrated Energy for a period of 18 years after the commercial operation date of the power station constructed by Integrated Energy. Discontinuation of regular supply of the steam required for the Company's production activity may have a significant affect on Company activity.

23.4.2. Environmental protection - Requirements of the Ministry of Environmental Protection with regard to the Company's operations and its facilities require the Company to allocate financial resources for this issue. These requirements may expand and proliferate due to increasing awareness toward environmental protection and developing regulation in this area, which may

58

force the Company to allocate further financial resources. Furthermore, since the Company is involved with use of hazardous and toxic materials, it is exposed to damage which may be caused by such materials, including health impact, environmental impact, damage due to ignition of flammable materials, etc. Hence, the Company is exposed to claims which may negatively impact the business results of the Company as well as the Company's reputation. It should be noted that the Group companies use toxic materials. For additional details, refer to Section 19 above.

23.4.3. Closing of ports - Most Group companies import a large share of the raw material used for manufacturing their products, and export some of their products. Shutting down the seaports in Israel will impact the import of raw materials as well as export, and will directly impact Company operations. However, considering that most Group companies maintain an inventory of raw materials, the Company believes that shutdown of ports for several days will have a minor impact on Group operations.

23.4.4. Manufacturing and Distribution sites of The Company and Group companies

The production activity of Group companies is centralized at three main sites. Impact to one or more of the production and/or distribution sites may materially impact the financial results of Group companies.

23.5. Extent of risk factor impacts

Following below is a list of risk factors and their influence upon the Company. For details regarding the Company's assessment of the type and degree of influence of additional special risk factors, see sections 7.19, 8.17, 9.14, 10.17, and 11.13 above.



Macro-economic factors

Increasing input and raw material costs

Customer credit risks

Exchange rates

Exposure to index changes

Security risk

Geopolitical situation in Middle Eastern countries

Sectoral factors Competition

Special factors Single steam and electricity supplier

Environmental protection

Port closure

The Company's manufacturing and distribution sites

Part B

Management Discussion and Analysis

1

March 6, 2016

Board of Directors Report

The Board of Directors of Hadera Paper Ltd. (“The Company” or “Hadera Paper”) is hereby honored to present the Management Discussion as at December 31, 2015, reviewing the principal changes in Company operations during 2015 (“The Report Period" or "The Reported Period"). The report was formulated in accordance with the Securities Regulations (Periodic and Immediate Reports), 1970. a. Description of the Corporation's Business

1. Company Description

Hadera Paper and its subsidiaries are engaged in the manufacture and sale of packaging paper, corrugated board packaging, consumer product packaging and unique packaging for industry, collection services, processing and recycling of paper and plastic waste, manufacture and marketing of fine paper and marketing of office supplies. On March 16, 2015, the Company sold its holding in an associated company, Hogla-Kimberly (hereafter: "Hogla").

As of August 13, 2015, the holder of control of Hadera Paper is FIMI investment fund. For further details, see Note 1a to the financial statements as at December 31, 2015.

The Company’s securities are listed on the Tel-Aviv Stock Exchange.

This report includes or may include data, estimated and assessments by Company management, including in the context of developments associated with the paper sector and its products, and/or to related sectors, including the regulatory and/or fiscal aspect of the paper sector and/or related sectors, both in the State of Israel and in foreign countries. The Company has no control of and/or capability to forecast and/or affect such regulatory and/or fiscal processes, and thus such data is entirely regarded as forward-looking information.

2. General U

Principal Current Operations

2.1. The Business Environment

The estimated growth rate of the Israeli market in 2015 based on the forecast of the Bank of Israel is approximately 2.3%.

Following is the change in exchange rates and the Consumer Price Index:

Hadera Paper Ltd. Maizer Street, Industrial Zone POB 142, Hadera 38101 Company headquarters: Tel: 04-6349349 Fax: 04-6339740 www.hadera-paper.co.il

2

Representative exchange rates CPI

“in respect of”(in points)

EuroDollar (NIS per 1€)(NIS per 1$)Date of financial statements

221.134.2473.902December 31, 2015223.364.7253.889%

Change rates per period: (1.0)(10.1)0.3%Year ended December 31, 2015 (0.2)(1.2)12.0%Year ended December 31, 2014

The developments in global markets, particularly in the Eurozone and the US, which also include fluctuations in stock prices and exchange rates, affect and may further affect the business results of the Company, its liquidity, its equity value, the value of its assets and the ability to realize these assets, the state of its business (including the demand for the products of Company subsidiaries), its financial benchmarks and covenants, credit ratings, its ability to raise financing for operating activities and long-term activities, as well as the allocation of resources.

Price trend in the packaging paper market in Europe (Euro, per ton) 1

The graph appearing above illustrates a long-term trend of selling prices of fluting-type paper products and Kraft-liner (virgin) paper in Europe. These prices affect prices of imported paper, and indirectly the price of recycled Kraft paper sold by the Company. As evident, the selling prices of fluting-type paper products and Kraft-liner (virgin) paper have stabilized in Europe in the last quarter. On the other hand, the Euro exchange rate, that has decreased significantly vis-à-vis the NIS last year, decreased the cost of paper imported from Europe in NIS terms, which pushes downwards the price of recycled paper manufactured by the Company.

1 Source: RISI – German prices that represent prices in Europe

200

300

400

500

600

700

Q1-

201

0

Q2-

201

0

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201

0

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201

0

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201

1

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201

1

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201

1

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201

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201

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201

2

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2

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201

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201

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201

4

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201

4

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201

4

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201

5

Q2-

201

5

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201

5

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201

6

טון/€

פלוטינג קרפט ליינר בתולי

€/ton

3

Price trend in the fine paper market in Europe (in dollars and in NIS per ton):2

The graph appearing above illustrates that since the middle of 2014 there has been a gradual yet continuous decrease in A4 paper prices in USD terms in Europe, from a level of approximately $1,000 per ton to a level of approximately $800 per ton in 2015. Moreover, the exchange rate of NIS vis-à-vis the dollar has dictated in recent years a lower NIS sales price, as the NIS gained strength in relation to the dollar.

2.2. Impact of the Business Environment on Company Operations

General

In light of the challenging business environment, the Company is operating in two principal areas: the first consists of continued implementation of the efficiency program and focusing on the core business, while the second consists of improving and strengthening the financial soundness.

The efficiency and focus program includes a reduction in the corporate headquarters, reduction in general expenditures, continued operational efficiency in production, sales and distribution areas, reduction in the volumes of current investments and focusing on purchasing activities so as to reduce raw material costs.

As part of the implementation of the above program, the entire value chain is being analyzed along with an examination of Company assets and their contribution. Accordingly, Company management is making decisions concerning the realization of assets that lie outside the core business of the

2 Source: RISI – German prices that represent prices in Europe (upper range of A4 paper prices)

600

700

800

900

1,000

1,100

1,200

3,000

3,200

3,400

3,600

3,800

4,000

4,200Q

1-2

010

Q2-

201

0

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201

0

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201

5

US$/טוןטון) / מתורגם(ח "ש

ח"ש A4מחירי טון נייר $ A4מחירי טון נייר

USD/ton NIS (converted)/ton

A4 paper (tons) prices in NIS

A4 paper (tons) prices in USD

4

Company. Due to this process, a substantial improvement occurred in the Company’s financial stability and operational profitability.

During the reported period, the Company's leverage level decreased as a result of the sale of Hogla, sale of the power station, capital raising, and improving Company profitability via operational streamlining.

Segment Operations

Packaging paper

During the reported year, the demand for packaging paper continued to grow in Israel and worldwide, and as a result, paper manufacturers in Europe slightly raised the prices of recycled paper. Recycled paper prices increased by approximately 6% during the reported period, yet in parallel, the Euro exchange rate decreased by approximately 10%. Hence, paper price eroded in NIS terms. Further trend of demand increase for paper from pulp replacements on account of virgin paper (Kraft-liner) led to an increase in demand for recycled packaging paper in Israel, and allowed an increase in the quantity sold to the local market on account of sales to export.

Packaging and cardboard products

During the reported period, the trend of increase in demand for packaging and cardboard products continued in parallel to erosion of sale prices. On the other hand, deceleration in the sale of display stands and accessories at points of sale (“POS”) was recorded in the reported period, as part of the uncertainty stemming from the Promotion of Competition in the Food Industry Law, 5774-2014 that entered into effect in January 2015.

Collection and recycling services

Newspaper and cardboard waste, that constitutes the main raw material for the manufacture of packaging paper, is collected from various sources throughout Israel and processed by Amnir. During the reported period, the increase of awareness in Israel regarding recycling in general and recycling of paper waste in particular has increased. In light of the increasing awareness of recycling and ensuing business opportunities, during this year the Company invested in an innovative plastic recycling line that should commence operation in the near future.

Fine paper

The decreasing trend in the demand for writing and printing paper products in Israel and worldwide continued during the reported period. Euro weakening in the reported period compared with the corresponding period last year led to increase in the attractiveness of import from Europe to Israel, reduction in the quantities sold in Israel, and continued price erosion. On the other hand, an increase in the dollar rate compared to the corresponding period last year led to an increase in return in NIS terms due to export in dollar, and to an increase in exported quantity.

Furthermore, due to an increase in the dollar rate, the cost of pulp in NIS terms increased during the reported period compared to the corresponding period last year.

5

b. Explanation of the Results of Operations

1. Analysis of Operations and Profitability

Analysis of the Results of Operation during the Reported Period , net of inter-company revenue and expenses (NIS millions):

Item from Consolidated Statements of Income

2015 2014 Growth (decrease)

Note

Sales 1,741.4 1,757.4 (0.9%)

Decrease in sales ensues mainly from decrease in sales of the packaging paper to external clients overseas at the sum of approximately NIS 15 million. Furthermore, revenue of the collection and recycling services sector decreased by a total of approximately NIS 14 million due to a decrease in sales to external clients. Revenue of the office supplies sector decreased by approximately NIS 10 million compared to last year. On the other hand, sales of the fine paper sector increased by a total of approximately NIS 29 million due to an increase in sales to export.

Cost of sales 1,513.7 1,589.1 (4.7%)

The decrease in the cost of sales at total of approximately NIS 75 million originated primarily from a reduction in costs of the packaging paper segment at the amount of approximately 23 NIS million, reduction in costs of the collection and recycling services segment at the amount of approximately 25 NIS million, and a reduction in costs of the packaging products and cardboard segment at the amount of approximately 22 NIS million.

Sales expenses 142.9 148.7 (3.9%)

The decrease in selling and marketing expenses originated primarily from decrease in transportation to export expenses in the packaging paper segment due to a decrease in export volume, and reduction of transportation prices and wage costs in the packaging and cardboard products sector.

Administrative and general expenses

48.6 64.8 (25%)

The decrease in general and administrative expenses in 2015 compared with last year was obtained mainly due to the decrease in executive wage expenses in the amount of approximately NIS 15 million as a result of the retirement of managers.

Other revenue (expenses)

(350.6) 67.0 623% Other income in 2015 originated primarily from the gains of the sale of Hogla Kimberly, in the amount of approximately NIS 439 million which were slightly offset by other expenditures due to provision for impairment in the fine paper sector in the

6


2015 2014 Growth (decrease)

Note

amount of approximately NIS 39 million, a provision for impairment ensuing from the sale of activity and fixed assets (the energy center) at the amount of approximately NIS 39 million, and a provision ensuing from a decision of the Electricity Authority (see Note 13j in the financial statements) at the amount of approximately NIS 27 million, and from expenses due to the early employee retirement in the amount of about NIS 8 million. In the corresponding period last year, income was recorded from the sale of real estate assets in the amount of about NIS 73 million, which were offset by non-current assets decrease at the amount of approximately NIS 94 million due to impairment of the fine paper unit value, and impairment at the sum of approximately NIS 24 million in the packaging and cardboard products segment.

Operating Profit (Loss)

386.9 (112.3) 444%

Increase in operational profit ensued mainly from other revenue due to sale of Hogla. The current operating profit (operating profit net of other revenue and expenses) in 2015 totaled at approximately NIS 36 million - an increase of approximately NIS 82 million, compared with last year. The increase originated mainly from a decrease in the cost of sales at the amount of approximately NIS 75 million due to operational streamlining measures in most segments of activity.

Finance expenses, net

62.7 86.2 (27.3%)

Decrease in financial expenses in the amount of approximately NIS 23 in 2015 compared with last year ensued from decrease in financing expenses due to bank credit and bonds at the amount of approximately NIS 11 million due to a decrease in debt volumes and a reduction of expenses due to exchange rate differentials at the amount of approximately NIS 12 million.

Taxes on income (tax revenues), net

127.5 (4.7)-

Increase in tax expenses in 2015 originated primarily from provision to tax expenses due to the sale of Hogla-Kimberly.

Net Income (loss)

196.5 (154.7) (227%) Transition to net profit at the amount of approximately NIS 197 million ensued mainly from the sale of Hogla-Kimberly.

Basic earnings per share amounted to approximately NIS 38.16 per share in 2015, as compared with basic loss per share of NIS (30.4) last year.

7

Diluted earnings per share amounted to approximately NIS 38.16 per share in 2015, as compared with diluted loss per share of NIS (30.4) last year.

Analysis of the Results of Operation during the fourth quarter , net of inter-company revenue and expenses (NIS millions):


10-12/2015 10-12/2014Growth (decrease)

Note

Sales 437.8 433.2 1.1%

Increase in the consolidated sales turnover (net of inter-company sales ) at the amount of approximately NIS 5 million ensued mainly from an increase in sales of the fine paper sector at the amount of approximately NIS 11 million, due to an increase in sold quantity, mainly for export. This increase was offset due to a decrease in sales in the collection and recycling services sector.

Cost of sales 379.8 409.8 (7.3%)

The decrease in the cost of sales at total of approximately NIS 30 million originated primarily from a decrease in the amount of approximately 18 NIS million in the packaging paper and recycling sector, and a decrease in the amount of approximately 12 NIS million in the collection and recycling services sector.

Sales expenses 32.8 31.5 4.1%Increase in the cost of sales ensued mainly from an increase in transportation to export expenses in the fine paper sector as part of a trend for increasing sales for export.

Administrative expenses

12.2 19.6 (37.7%)The decrease in general and administrative expenses during the third quarter compared to the corresponding quarter in the previous year occurred mainly due to the decrease of approximately NIS 4 million in wage expenses and severance and retirement payments to executives.

Other expenses 69.2 109.6 (36.9%)

Other expenses in the fourth quarter originated mainly from recording a provision for impairment in the amount of approximately NIS 39 million in the fine paper sector, and recording a provision in the amount of approximately NIS 13 million due to the decision by the Electricity Authority (see Note 13j to the financial statements). Other expenses in the corresponding quarter last year resulted primarily from recording impairment of the packaging paper and packaging and cardboard products cash generating units in the amount of approximately NIS 61 million and approximately NIS 24 million, respectively.

Operation loss (56.1) (137.4) 59.2%))

Decrease in operational loss ensued from decrease in other expenses and improvement of the operational profit from current activity. During the fourth quarter, operating profit from current activity (operating profit less non-recurring expenses and income) amounted to approximately NIS 13 million, compared with an operational loss from current activity at the amount of approximately NIS 28 million

8


10-12/2015 10-12/2014Growth (decrease)

Note

in the corresponding quarter last year. Transition from loss to operating profit due to current operations and improvement in the amount of approximately NIS 41 million between reported quarters ensues primarily form an improvement of approximately NIS 35 million in gross profit due to decrease in sales expenses and administrative and general expenses in the amount of approximately NIS 7 million.

Finance expenses, net

14 25.1 (44.2%)

Decrease in financial expenses in the amount of approximately NIS 11 in the fourth quarter compared with the corresponding period last year ensued from decrease in financing expenses due to bank credit and bonds at the amount of approximately NIS 6 million due to a decrease in debt volumes and a reduction of expenses due to exchange rate differentials at the amount of approximately NIS 5 million, compared with the corresponding period last year.

Net loss (56.6) (131.2) (56.9%)Decrease in net loss in the fourth quarter compared with the corresponding quarter last year originates mainly from decrease in other expenses, as stated above.

9

2. Analysis of the Company’s Financial Situation

Condensed consolidated statements of financial position (in NIS millions):

Item from Consolidated Statements of Financial Position

31.12.15 31.12.14 Growth (decrease)

Note

Cash and equivalents (including deposits)

854.6 327.7 160.8%

The growth in the cash and deposits balance originated primarily from proceeds net in the amount of approximately 61 NIS million that were paid on account of the sale of Company holdings in Hogla Kimberly, issuance of shares in the amount of NIS 146 million, and sales of Integrated Energy and the energy center equipment in the amount of approximately NIS 60 million. Furthermore, the working capital increased by the amount of approximately NIS 93 million. This increase was offset repayment of bonds, repayment of loans and interest payments in the amount of approximately NIS 428 million.

Trade receivables

473.6 509.5 (7.04%)

The decrease in the customers balance in the amount of approximately 255 NIS million originates primarily from a decrease in the customer balance of the packaging paper sector due to improvement in average credit terms, and an increase in sales of the fine paper sector to the export market (where credit terms are better) during the reported period, which led to a decrease in the amount of NIS 77 million.

Receivables 46.8 55.3 (15.4%)

The decrease in accounts receivable originates primarily from a decrease of debt from Hogla Kimberly in the amount of approximately 320 NIS million on account of wages in the corresponding period last year (as of the reported period, wages are paid to Hogla-Kimberly employees directly by Hogla). This decrease was offset as a result of the recording of debt under trust in the amount of approximately NIS 26 million within the framework of Hogla sale.

10

Item from Consolidated Statements of Financial Position

31.12.15 31.12.14 Growth (decrease)

Note

Inventory 186.6 244.1 (23.6%)

Decrease in inventory originates primarily from implementing an inventory reduction policy, both for finished goods and raw materials, along with striving for inventory level optimization. Finished goods and process inventory decreased by approximately 20 NIS million: approximately 9 NIS million in the sector of collection and recycling sector, and approximately 7 NIS million in the fine paper sector. Raw and auxiliary materials inventory decreased by approximately 21 NIS million: approximately 12 NIS million in the fine paper sector, approximately NIS 2 million in the packaging paper sector, and approximately NIS 5 million in the cardboard and packaging sector. Furthermore, the purchased products inventory in the fine paper sector decreased by approximately NIS 13 million.

Accounts Payable

285.6 305.5 (6.5%)

A decrease was recorded in the Accounts Payable item, primarily as a result of a reduction in accounts payable in the fine paper sector in the amount of approximately NIS 14.2 million due to decrease in acquisition from purchased paper suppliers and in the amount of approximately NIS 2.6 million due to decrease in acquisition from raw material suppliers.

3. Investments in Fixed Assets

Investments in fixed assets amounted to approximately NIS 64 million in 2015 compared with approximately NIS 63 million last year. Investments during the report period included investments in innovative machines in the packaging and cardboard products sector and the sector of collection and processing services.

11

c. Liquidity

Cash Flows

Cash flow from current operations amounted to approximately NIS 195 million in 2015, compared with approximately NIS 89 million last year. Net of dividends received and equity profits from Hogla, cash flows from operating activities last year amounted to approximately NIS 30 million. The increase in current cash flows originated primarily from the improved operating profit from current operations in the amount of approximately NIS 82 million, and a decrease in working capital that amounted to approximately NIS 93 million in 2015, compared to a decrease of approximately NIS 14 million last year.

d. Details of Operations in the Various Segments

1. The company is implementing the International Accounting Standard IFRS8 - Operating Sectors. The segments of operations are reviewed regularly by the chief operational decision maker of the Group for the purpose of the allocation of resources and performance evaluation. Accordingly, the Company has identified five operating segments: the packaging paper segment, the packaging and cardboard products segment, the paper waste collection and recycling segment; the fine paper segment and the office supplies marketing segment (for further details, see Note 19 to the financial statements as at December 31, 2015). It should be noted that the analysis of financial results, as described above, is affected by the implementation of this standard.

2. Packaging paper (in NIS million)

Item from Statements of Income 2015 2014 Growth

(decrease) in NIS

Notes

Report period Sales 530.2 532.7 (2.5) 2.1Operating Profit 30.4 77.0 (46.6) 2.2Other (expenses) revenue (31.1) 535 (84.5) Current operational profit 61.5 23.5 37.9 Q4 Sales 131.8 130.3 1.5 2.1Operation loss (2.9) (0.5) (2.4) 2.2Other (expenses) revenue (20.9) 0.4 (21.2) Ongoing operational profit (loss) 17.8 (0.9) 18.8

2.1. Decrease in sales turnover originated primarily from a decrease in the average sale price that was partially offset by increasing the volume of sales to the local market on account of export. Increase in the sales turnover in the fourth quarter compared with the corresponding quarter last year ensues from an increase in the volume of sales to the local market that was partially offset by a reduction in sale prices.

12

2.2. The current operating profit in 2015 totaled at approximately NIS 62 million, as compared with operating loss of NIS 24 million last year. The current operating profit in the fourth quarter totaled at approximately NIS 18 million, as compared with a current operating loss of NIS 1 million last year. The improvement in the operating profit from current operations during 2015 and the fourth quarter was achieved mainly due to sales mix improvement and growth in the sales turnover on the local market where profitability rates are higher, and to a decrease in raw material costs (paper waste and chemicals). During the reported period, the sector recorded other expenses net at the amount of approximately NIS 31 million, mainly due to provision for impairment of steam generation equipment (related to the sale of the power station), and a provision die to the decision by the Electricity Authority regarding system electricity costs. On the other hand, other revenue at the amount of approximately NIS 54 million was recorded last year due to the sale of real estate assets.

3. Packaging and cardboard products (in NIS million)


(decrease) in NIS

Notes

Report period Sales 475.4 482.2 (6.8) 3.1Operating Profit (Loss) 6.4 (23.8) 30.2 3.2Other revenue (expenses) 0.1 (21.0) 21.1 Ongoing operational Profit (Loss) 6.3 (2.8) 9.1 Q4 Sales 127.8 123.8 4 3.1Operating Profit (Loss) 3.7 (25.8) 29.5 3.2Other expenses (0.7) (23.8) 23.1 Ongoing operational Profit (Loss) 4.4 (2.0) 6.4

3.1. Decrease in sales in 2015 compared with last year ensued from erosion in the sale price due to further competition in the sector. Increase in sales in the fourth quarter compared with corresponding period last year ensues from the timing of holidays during September.

3.2. Current operating profit in 2015 amounted to approximately NIS 6 million, compared to current operational loss in the amount of approximately NIS 3 million last year (after deducting other revenue and expenses net in the amount of approximately NIS 21 million, mainly due to provision for impairment of fixed assets). The improvement in the operating profit from current operations in the amount of approximately NIS 9 million was obtained due to a number of streamlining processes taken by the Company, including, inter alia, the reduction of the cost of wages and a decrease in energy expenses.

13

4. Collection and recycling services (NIS million)


2015 2014 Growth

(decrease) in NIS

Notes

Report period Sales 282.1 308.3 (26.2) 4.1Operating Profit (Loss) 3.7 (5.0) 8.7 4.2Other income 1.8 0.4 14 Ongoing operational Profit (Loss) 1.9 (5.4) 7.3 Q4 Sales 65.3 74.7 (9.4) 4.1Operating Profit (Loss) 0.0 (17.9) 17.9 4.2Other expenses (0.1) (18.5) 18.4 Ongoing operational Profit (Loss) 0.1 0.6 (0.5)

4.1. Decrease in sales in 2015 and the fourth quarter compared with last year

ensues primarily from decrease in the sale price of paper waste sold to the packaging paper company, and planned production shutdown in the plastic recycling array during August-December for the purpose of installing a new plastic recycling line. This decrease was partially offset due to further increase in revenue from evacuation services carried out by the sector, and a resulting quantitative increase in sales of paper waste export.

4.2. Increase in operational profit from current operations (despite decrease in sales) in 2015 was achieved due to streamlining measures taken by the Company which are expressed in lowered costs of waste collection. Furthermore, the operational loss in 2014 included an activity of a foreign company that was active in the waste collection sector and increased loss by the amount of approximately NIS 16.9 million, and non-recurring revenue due to sale of land in the amount of approximately NIS 16.5 million.

5. Printing and Writing Paper (in NIS million):


(decrease) in NIS

Notes

Report period Sales 555.5 521.8 33.7 5.1Operation loss (89.8) (162.7) 72.9 5.2Other expenses (58.1) (99.8) 41.7 Ongoing operational Loss (31.6) (62.9) 31.3 Q4 Sales 130.5 118.3 12.2 5.1Operation loss (55.3) (94.3) 39 5.2Other expenses/revenue (44.9) (67.7) 22.8 Ongoing operational Loss (10.4) (26.6) (16.2)

14

5.1. The growth in sales during 2015 and the fourth quarter, as compared with

last year, is primarily attributed to the quantitative growth in sales to export markets, as a result of the improved output of Machine 4 for the production of fine paper.

5.2. The current operating loss in 2015 totaled at approximately NIS 32 million, as compared with a loss of NIS 63 million last year. Decrease in operating loss compared to last year is partially attributed to an increase in sales turnover, as mentioned above, and partially due to streamlining and reduction of manufacture expenses. The reduction of production costs was achieved due to an improvement in the operational efficiency metrics of Machine 4 compared to the corresponding period last year. Additional reduction of maintenance and finish room costs was achieved. During the reported period, the segment recorded a non-recurring expenditure at the amount of approximately NIS 58 million, primarily due to impairment of non-current property and steam production equipment. For details, see Notes 4(c)(3) and 14(l) to the financial statements as at December 31, 2015. A non-recurring expense in the amount of approximately NIS 99.8 million was recorded in 2014 due to provision for impairment, out which approximately NIS 68 million in the fourth quarter.

6. Graffiti - Office Supplies Marketing (in NIS million)


2015 2014 Growth

(decrease) in NIS

Notes

Report period Sales 173.8 183.8 (10) 6.1Operating Profit (Loss) (2.0) 2.7 (4.7) 6.2Other (expenses) revenue (0.9) 0.0 (1) Ongoing operational Profit (Loss) (1.1) 2.7 (3.8) Q4 Sales 48.4 45.4 3 6.1Operating Profit 0.0 1.0 (1) 6.2Other (expenses) revenue (0.7) 0.0 (0.7) Current operational profit 0.7 1.0 (0.3)

6.1. The decrease in sales during the reported period, as compared with the corresponding period last year, is primarily attributed to the strengthening of competition in tenders for customers of the institutional market that led to a decrease in sales in this sector, coupled with the closure of branches in Be’er Sheva and Jerusalem in 2014.

Increase in sales in the in the fourth quarter compared with the corresponding quarter last year ensues from the impact of September holidays timing, which led to an increase in sales days during the fourth quarter this year.

15

6.2. The transition to operating loss in 2015, originates primarily from the decrease in the sales turnover, as mentioned above, coupled with the increase in the average dollar exchange rate compared to the corresponding period last year, that significantly affected the purchasing of products in this segment, which are mainly imported.

e. Exposure and Management of Market Risks

1. General

The Company conducts periodical discussions regarding market risks and exposure to exchange rate and interest rate fluctuations, with the participation of the relevant parties, so as to reach decisions in this matter. The officer responsible for the implementation of the market risk management policy at the Company is Lior Helman, the Group’s CFO and Acting Chief Executive Officer.

2. Market Risks to which the Company is Exposed

Description of Market Risks

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

Fluctuation of paper prices and naval transportation costs

The Company has a risk due to fluctuation of global paper prices that directly affect imported paper prices, and subsequently on paper sale prices in Israel, and as a result on the quantities of paper sold by the Company. Furthermore, the Company has risk due to the fluctuation of naval transportation prices, since this fluctuation affects the profitability of importing paper to Israel and exporting paper manufactured by the Company, and as a result on the Company's activity volumes. As stated, these risks may cause a price decrease and an increase in import volumes which may adversely affect the Group's activity volumes and its monetary results.

Exchange Rate Risks

Some Company sales are denominated in US dollars, while most of the sales are denominated in NIS and are affected by global paper prices denominated in foreign currency (primarily dollar and Euro). A significant part of the expenditures and liabilities of the Company are denominated in NIS and consequently, the Company is 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 of proceeds from 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 accumulatively, exposure to currency is reduced due to natural protections between the various segments of activity.

16

Consumer Price Index risks

The Company is exposed to changes in the Consumer Price Index that affect some of the debentures issued by the Company and the CPI-linked balances, in the total sum of approximately NIS 70.6 million.

The Company has significantly reduced exposure to the index by issuing NIS bond series that are not linked to the CPI.

Credit risks

Most of the Group’s sales are made in Israel to a large number of customers, hence the exposure to customer-related credit risks is 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 assessment 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 Factors as at 31.12.2015:

Sensitivity to Interest Rates

Sensitive instruments Profit (Loss) due to changes Fair value

as at 31.12.15

Profit (Loss) due to changes

Increase in

interest 10%

Increase in interest

5%

Decrease in interest

5%

Decrease in interest

10%(NIS thousand)

Cash in deposits 80,081 40,040 800,806 (40,040) (80,081)Liabilities to banks and other (9,204) (4,602) (92,043) (4,602) 9,204Total 70,877 35,438 708,763 (35,438) (70,877)

The fair value of the loans is based on a calculation of the present value of cash flows according to the generally-accepted interest rate on loans with similar characteristics (4.0% in 2015). Regarding the terms of debentures and loans – See Note 9 to the annual financial statements dated December 31, 2015.

Sensitivity to the Consumer Price Index

Sensitive instruments Profit (Loss) due to

changes Fair value as at

31.12.15


(NIS thousand) Increase of

index 2%

Increase of index

1%

Decrease of index

1%

Decrease of index

2%(NIS thousand)

Bonds 3 (1,520) (760) (76,006) 760 1,520Other debtors 34 17 1,687 (17) (34)Other payables (31) (16) (1,564) 16 31Total (1,517) (759) (75,883) 759 1,517

17

Sensitivity to foreign currency - Euro



31.12.15



Euro 10%

Increase of Euro 5%

Decrease of Euro 5%

Decrease of Euro 10%

(NIS thousand) Cash and cash equivalents 2,137 1,068 21,369 (1,068) (2,137)Receivables 343 172 3,430 (172) (343)Other payables and accrued expenses (3,030) (1,515) (30,302) 1,515 3,030Long term loan (750) (375) (7,502) 375 750Total (1,300) (650) (13,005) 650 1,300

Sensitivity to foreign currency - mainly Dollar



31.12.15



USD 10%

Increase of USD 5%

Decrease of USD 5%

Decrease of USD 10%

(NIS thousand)Cash and cash equivalents 3,242 1,621 32,419 (1,621) (3,242)

Receivables 3,764 1,882 37,643 (1,882) (3,764)Payables (5,458) (2,729) (54,575) 2,729 5,458Loans from others (72) (36) (724) 36 72Total 1,476 738 14,763 (738) (1,476)

Other accounts receivable reflect primarily short-term customer debts.

NIS million UnlinkedLinked

to index

In foreign currency, or linked thereto

(primarily US$)

€-linked

Non-Monetary

Items Total

Assets

Cash and cash equivalents 800.8 32.4 21.4 854.6

Receivables 461.4 1.7 37.6 3.4 16.3 520.4

Inventory 186.6 186.6

Deferred income tax 8.1 8.1

Non-current assets, net 929.9 929.9

Investment Property 43.6 43.6

Intangible assets 8.5 8.5

Other property 4.4 1.1 5.5

Employee benefit assets 0.2 0.2Total Assets

.1266 8 .1 7 .70 0 .24 8 .1194 1 , .2 557 4

18

Linkage Base Report

Below are the balance sheet items, according to linkage bases, as at 31.12.2015:

Linkage Base Report

Liabilities Short-term credit from banking corporations 65.7 65.7Payables 294.3 1.6 54.6 30.3 6.7 387.5Current tax liabilities 142.9 142.9Long term loans 56.2 0.7 7.5 64.4Bonds - including current maturities 765.9 70.7 836.6Long-term liabilities 0.3 0.3Employee benefit liabilities 71 71Liabilities at fair value through profit and loss 7.3 7.3Shareholders’ equity, reserves and retained earnings 981.7 981.7Total Liabilities and Equity

, ,1 189 7 .72 3 .55 3 .37 8 , .1 202 3 , .2 557 4

Surplus financial assets (financial liabilities) as at 31.12.2015

.77 1 ( . )70 6 .14 7 ( )13 ( . )8 2 -

NIS million Not

linked

Linked to

index

In foreign currency, or linked thereto

(primarily US$)

€-linked

Non-Monetary

Items Total

Assets

Cash and cash equivalents 223.9 3.4 0.4 227.7

Short term deposits and investments 100.0 100.0

Receivables 520.9 1.6 24.0 4.8 13.4 564.7Inventory 244.1 244.1Investments in associated companies 155.4 155.4Deferred income tax 1.5 1.5Non-current assets, net 1,093.8 1,093.8Investment Property 28.5 28.5Intangible assets 8.8 8.8Other property 4.4 4.4 8.8Employee benefit assets 0.3 0.3Total Assets 849.5 1.6 27.4 5.2 1,549.9 2,433.6Liabilities

Short-term credit from banking corporations 178.9 178.9Payables 320.1 2.1 79.7 20.5 1.5 423.9Current tax liabilities 0.9 0.9Deferred income tax 4.9 4.9Long term loans 102.8 0.9 10.9 114.6

19

Below are the balance sheet items, according to linkage bases, as at 31.12.2014:

f. Forward-Looking Statements

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

g. Corporate Governance Issues

1. Donations and Contributions

Hadera Paper Group has continued to implement its policy for corporate and social responsibility and has continued to invest both efforts and resources in matters related to community involvement and contribution. The company's employees and managers at the various sites are all taking an active part in community involvement, in supporting teenagers and students and primarily in working toward reducing social inequalities and in providing equal opportunity for education and for personal accomplishments within the framework of the company and the community. As part of this policy, the company makes contributions to various institutions active in the said areas. The Group's donations amounted to approximately NIS 96 thousand in 2015.

2. Independent Directors

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

3. Detailed processes undertaken by the company's supreme supervisors, prior

to the approval of the financial statements

1. 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

Bonds - including current maturities 939.2 95.0 1,034.2Long-term liabilities 1.9 1.9Employee benefit liabilities 81.6 81.6Shareholders’ equity, reserves and retained earnings 592.7 592.7Total Liabilities and Equity 1,542.9 97.1 80.6 31.4 681.6 2,433.6Surplus financial assets (financial liabilities) as at 31.12.2014 (693.4) (95.5) (53.2)

(26.2) 868.3 -

Assets

20

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.

2. 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 F of the 2015 periodical report for 2014).

Rafi Priel External director

Possesses accounting and financial qualifications

His education and professional experience (see chapter D, Appendix F of the 2015 periodical report for 2014).

Shalom Zinger

Independent Director


Bachelor of Accounting from the University of Haifa. Managing partner of Singer Meister Ltd, and also serving as a director of Robert Marcus Loss Adjusters Ltd. Previously served as the CEO of the First International Bank, CEO of the Ministry of Finance, and as the Chairman of the Investment Committee regarding Policies Participating in Profit in Clal Insurance Company Ltd. And as the Deputy Chairman of the Board of Directors of Elbit Simulation Ltd.

Mrs. Atalia Arad serves and the Chairman of the Committee.

3. On March 13, 2016, the Balance Sheet and Audit Committee met to discuss the financial statements of the Company for 2015 ("The Financial Statements") and formulate its recommendations for the Company's Board of Directors.

4. The position holders, interested parties, family members and/or anyone on their behalf present in the meeting of the committee, include: Gadi Cunia - Acting CEO, Lior Helman - Acting CFO, Anat Rothschild - Legal Counsel and Secretary, Elinor Amir - Treasurer, and Eli Greenbaum - Internal Auditor.

5. It should be noted that the auditing CPA also attended the meeting and presented the review process that was performed by him in relation to the financial statements.

6. In the course of the meeting, the committee examined the material issues related to the financial statements, crucial estimates and critical valuations implemented

21

in the financial statements, data plausibility, 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 management reflected in the financial statements. Upon completion of the discussion of data presented, the Committee handed down its recommendations to the Board of Directors of the Company, regarding the ratification of the financial statements.

7. The said recommendations were forwarded to the members of the Board of

Directors 3 days before the date that was set for the discussion and ratification of the financial statements.

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.

4. The Company’s Internal Auditor

1. Auditor's name: Eli Greenbaum Holding the position since: 16.07.06 Credentials: CPA

2. The Auditor is employed by the Company.

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

4. The Internal Auditor is supervised by the Chairman of the Board of Directors.

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

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

7. Scope of employment in 2015: full-time position for the auditor. The auditing hours number an average of 170 monthly hours in 2015, totaling approximately 2,040 hours annually, divided equally between the corporation and its investee companies:

22

Audited body Estimated hours of audit annually

Internal auditing at the Company

160 hours

Auditing at investee companies

1,880 hours

Total hours 2,040 hours

In addition to the Internal Auditor, there exists a team dealing in the execution and implementation of internal auditing processes as part of the I-SOX procedures, to which the Company is committed since it is traded on the Tel Aviv Stock Exchange. The Company believes that these procedures are complementary to the internal auditing work. The internal auditor conducts his audit in accordance with acceptable professional standards for internal audit in Israel and overseas, and according to the Company's Board of Directors, based on the assessment of the Company's Audit Committee, the internal auditor complies with the requirements set forth in those standards.

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

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

Submitted Discussed 4.3.15 10.3.15 7.5.15 10.5.15

4.8.15

2.11.15

6.8.15

5.11.15

The scope of employment of the Internal Auditor is determined according to a cycle that renders it possible to audit all the significant topics at the Company, once every few years.

This scope of activity, the nature, the continuity of operation and the work plan of the Internal Auditor – are reasonable – according to the estimation of the Company’s Audit Committee, while rendering it possible to realize the Internal Audit objectives of the organization.

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

5. Senior Employee Compensation

In accordance with the provisions of The Companies Law (Amendment 20) 5773-2012, the Company adopted a compensation policy pertaining to service and employment terms of Company officers. This remuneration policy, along with its amendment, was ratified by the General Meeting of the Company (special majority), pursuant to obtaining the approval of the Company’s Remuneration Committee and the Board of Directors. For details concerning the Company’s remuneration policy and the updated format of the remuneration policy, see the

23

Company's immediate report dated August 26, 2014 (Reference number: 2014-01-142731). In proximity to the publication date of the periodical report for 2015, the Company's Board of Directors conducted a comprehensive examination of the overall remuneration terms of all senior position holders. The Company’s Board of Directors was presented - to its satisfaction - with the principal terms of employment of each position holder in the reported period. In order to examine and evaluate the remuneration terms of the position holders, the Company’s Board of Directors has examined, inter alia, the compliance of the position holder with the requirements of his position and his performance, his contribution to the Company and whether the Company has met objectives that were defined in the work plan. Subsequent to a specific examination that was conducted by the Board of Directors regarding each of the said position holders and based on the information presented the Board of Directors, the Company's Board of Directors found (after also holding a discussion of the issue at the Remuneration Committee) that the remuneration terms of the said position holders comply with the Company's remuneration policy.

6. Auditing CPA Fees

Current Fees

The fee of the CPA on account of the auditing services is determined by the Board of Directors. The fee for the auditing services, including the auditing of the internal control over financial reporting, is determined after negotiations with the auditing CPAs, within whose framework the volume of auditing and its complexity is examined, while relating to the generally accepted fees of the auditing CPA. The fee for services that are not related to auditing is determined in accordance with the type of work, the volume of hours and the topic being audited. Below are details of the total fee payable to the auditing CPA of the Company and its subsidiaries in the reported year and in the preceding year:

Year 2015 Year 2014 NIS

thousandHours NIS

thousand Hours

Auditing and tax report auditing services to the company (including SOX)

800 6,014 845 8,061

Miscellaneous 92 214 39 -Total 892 6,228 884 8,061

7. Independent Directors

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

8. Internal auditing – I-SOX

The Company is operating and implementing the directives and requirements of the disclosure - internal control over disclosure of I-SOX regulations. For details regarding the effectiveness of internal auditing at the company, see the report regarding the effectiveness of internal auditing over financial reporting and

24

disclosure in Chapter E of the periodical report and in Section 16.4 of the periodical report for 2015.

9. Adoption of an enforcement plan and procedures in the area of securities

For details concerning the enforcement plan being implemented by the company, see Section 16.2 of the periodical report for 2015.

h. Disclosure Directives related to the Financial reporting of the Corporation

1. Events Subsequent to the Reported Period

For details regarding events that occurred subsequent to the reported date, see Note 20 to the financial statements dated December 31, 2015.

2. Critical accounting estimates

For critical accounting estimates, see Note 4 to the financial statements as at December 31, 2015.

25

i. Dedicated Disclosure to Debenture Holders

For details regarding the rating of debentures, see Note 17.12 to the periodical report for the year 2015.

1. Sources of finance (bonds to institutional entities and the public) See details in table hereafter.

Series Issue

Date Name of Rating Company

Rating at issue

Rating of the Corporation as of report date

Total par value at issue date

Interest type

Nominal interest

Registered for trade on stock exchange (Yes/No)

Interest payment dates

Nominal par value as at 31.12.15

Book value of debenture balances as at 31.12.2015

Book value of interest to be paid as at 31.12.2015

Fair value as at 31.12.15

Material series

NIS million

Series 3 7.2008 Ma'alot A+ A 187,500,000 Fixed 4.65% Yes

Annual interest on July 10 during 2018-2019

62.5 70.8 1.6 76.0 Yes

Series 5

5.2010, 7.2011, 6.2012

10.2012

Ma'alot A+ A+ A

A 521,519,000 Fixed 5.85% Yes

Semi-annual interest on November 30 and May 31 of 2010-2017

208.6 208.6 1.0 224.4 Yes

Series 6

6.2013, 1.2014 7.2014

10.2014

Ma'alot A A 574,760,500 Fixed 5.89% Yes

Semi-annual interest on June 30 and December 31 of 2013-2024

546.0 546.0 0.1 612.1 Yes

26

Notes:

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

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

3. Series 6 - Principal repaid in 10 annual installments, between December 2015 and December 2024.

4. The trustee of the publicly-traded debentures (Series 3) is Hermetic Trust Corporation (1975) Ltd. The responsible contact people on behalf of Hermetic Trust (1975) Ltd. are Mr. Dan Avnon and /or Ms. Merav Ofer-Oren (Telephone: 03-5272272).

5. The trustee of the publicly-traded 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 publicly-traded debentures is Mr. Uri Lazar (telephone: 03-6237777).

6. The trustee of the publicly-traded debentures (Series 6) is Reznik Paz Nevo Trusts Ltd. The responsible contact person at Reznik Paz Nevo Trusts Ltd. in the matter of the publicly-traded debentures is Yossi Reznik, CPA (telephone: 03-639-3311).

7. 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.

March 6, 2016

Date Yishay Davidi, Chairman of the Board of Directors

Gadi Cunia, Acting Chief Executive Officer

Part C

Financial Statements as at

December 31, 2015

HADERA PAPER LTD

CONSOLIDATED FINANCIAL STATEMENTS

AS OF DECEMBER 31, 2015

HADERA PAPER LTD

CONSOLIDATED FINANCIAL STATEMENTS


TABLE OF CONTENTS

Page

Auditor's

Consolidated Financial Statements 1-3

Consolidated statements of financial position 4-5

Consolidated Income Statements 6

Consolidated Statements of comprehensive income 7

Consolidated Statements of changes in equity 8-10

Consolidated Statements of Cash Flows 11-12

Notes to the Consolidated Financial Statements 13-81

1

Report of Independent Registered Public Accounting Firm To The Shareholders of Hadera Paper ltd. We have audited the accompanying consolidated statements of financial position of Hadera Paper Ltd. (hereinafter- “the Company”) as of December 31, 2015 and 2014, and the related, consolidated income statements, statements of comprehensive income, changes in equity and cash flows for each of the three years in the period ended on December 31, 2015. These financial statements are the responsibility of the Company's board of directors and management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audits in accordance with generally accepted auditing standards in Israel, including those prescribed by the Auditors' Regulations (Auditor's Mode of Performance), 1973. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by the company's Board of Directors and management, as well as evaluating the overall financial statement presentation. We believe that our audit provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company and its consolidated companies at December 31, 2015 and 2014, and their consolidated results of their operations, changes in equity and cash flows, for each of the three years in the period ended December 31, 2015, in conformity with International Financial Reporting Standards (IFRS) and the Israeli Securities Regulations (Annual Financial Statements)- 2010. Pursuant to Audit Regulation 104 of the Institute of Certified Public Accountants in Israel "Audit of Components of Internal Control on Financial Reporting" and its amendments, we also audited the internal Components of control on financial reporting of the Company as of December 31, 2015, and our report as of March 23, 2016 includes an unqualified opinion regarding the effective performance of such Components. Brightman Almagor Zohar& Co. Certified Public Accountants A Member Firm of Deloitte Touche Tohmatsu Israel March 6, 2016

2

Independent Auditors' Report to the Shareholders of Hadera Paper Ltd.

Regarding Components of Internal Control of Financial Reporting Pursuant to Section 9B(c) of the Securities Regulations (Periodic and Immediate Statements), - 1970

We have audited Components of internal control of the financial reporting of Hadera Paper Ltd. and its subsidiaries (collectively "the Company") as at December 31, 2015. These Components of control were determined as explained in the following paragraph. The board of directors and management of the Company are responsible for performance of effective internal control on financial reporting and for evaluating the effectiveness of the Components of internal control of the financial report attached to the periodic statement on the date referred to above. Our responsibility is to express an opinion on the Components of internal control of the financial report of the Company, based on our audit. The Components of the internal control on financial reporting that were audited, determined pursuant to Audit Regulation 104 of the Institute of Certified Public Accountants in Israel "Audit of Components of Internal Control of Financial Reporting" and its amendments (Audit Regulation 104"). These Components are: (1) Entity level controls including controls on Defining the Financial Closing and Reporting Process and ITGC control (2) controls on Inventory process (3) controls on Revenue process (4) controls on Payroll process (5) Controls on liquid resources' management (all of these together are referred to below as the "Audited Components of Control"). We conducted our audit pursuant to Audit Regulation 104. Pursuant to this Regulation, we were required to plan and perform the audit with the purpose of identifying the Audited Components of Control, and to obtain reasonable assurance as to whether these Components of control were performed effectively in all material respects. Our audit included obtaining an understanding regarding internal control of financial reports, identification of the Audited Components of Control, evaluation of the risk that a material weakness exits in the Audited Components of Control, and examination and evaluation of the effectiveness of the planning and operation of such Components of control, based on the estimated risk. Our audit regarding such Audited Components of Control also included performance of other such procedures that we thought were necessary under the circumstances. Our audit only referred to the Audited Components of Control, as opposed to internal control on all of the material processes in the Company regarding the financial report, and therefore our opinion refers only to the Audited Components of Control. In addition, our audit did not refer to the mutual influences between the Audited Components of Control and those that are not audited, and therefore, our opinion does not take into consideration such possible influences. We believe that our audit provides a reasonable basis for our opinion in the context described above.

3

Due to obvious limitations, internal control on financial reporting in general, and Components thereof in particular, are not likely to prevent or disclose a material misstatement. In addition, future conclusions based on any current effectiveness evaluation is exposed to the risk that the controls will become unsuitable due to changes in circumstances, or that the degree of performance of the policies or the procedures will change for the worse. In our opinion, the Company effectively performed the Audited Components of Control in all material respects, as at December 31, 2015. Pursuant to the accepted Regulations in Israel, we also audited the consolidated financial statements of the Company as at December 31, 2015 and 2014, and for each of the three years in the period ending on December 31, 2015, and our report of March 6, 2016 includes an unqualified opinion on those financial statements. Brightman Almagor Zohar& Co. Certified Public Accountants A Member Firm of Deloitte Touche Tohmatsu Israel March 6, 2016

HADERA PAPER LTD

4

CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

December 31 Note 2015 2014

NIS in thousands Assets Current Assets

Cash and cash equivalents 2f, 17d 854,594 227,706Short-term deposits - 100,000Trade receivables 14a 473,570 509,454Other receivables 14a 46,798 55,257Inventory 14b 186,592 244,085

Total Current Assets 1,561,554 1,136,502

Non-Current Assets

Fixed assets, net 7 929,880 1,093,826Investments accounted for using the equity method - 155,408Deferred tax assets 12 8,053 1,480 Intangible assets, net 8 8,475 8,765Investment in real estate 6 43,600 28,500Other assets 5,510 8,832Employee benefit assets 10 226 322

Total Non-Current Assets 995,744 1,297,133 Total Assets 2,557,298 2,433,635

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

HADERA PAPER LTD CONSOLIDATED

5

CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

December 31 Note 2015 2014

NIS in thousands

Liabilities and Equity Current Liabilities Credit from banks and others 9c 65,671 178,935 Current maturities of long-term bonds and long term loans 9a, b 187,337 238,459 Trade payables 14c 285,586 305,454 Other payables 14c 101,847 118,493 Financial liabilities for put options to the non-controlling interests 2G(4) 7,286 - Employee benefit liabilities 10 30,239 32,034 Current tax liabilities 142,927 883

Total Current Liabilities 820,893 874,258 Non-Current Liabilities

Loans from banks and others 9c 33,726 72,272 Bonds 9a,b 679,913 838,079 Deferred tax liabilities 12 - 4,882 Financial liabilities for put options to the non-controlling interests 2G(4) - 6,876* Employee benefit liabilities 10 40,796 49,531 Other Liabilities 245 1,895

Total Non-Current Liabilities 754,680 973,535

Capital and reserves 11 Issued capital 125,280 125,267 Reserves 483,472 290,718 Retained earnings 372,187 169,274*

capital and reserves attributed to shareholders 980,939 585,259

Non-controlling Interests 786 583*

Total capital and reserves 981,725 585,842

Total Liabilities and Equity

2,557,298 2,433,635

* Insignificant adjustment of comparative figures - see note 2G(4)

Approval date of the financial statements: March 6, 2016


I. Davidi G. Cunia L. Haalman

Chairman of the Board of Directors

Acting Chief Executive Officer

Acting Chief Financial Officer


6

CONSOLIDATED INCOME STATEMENTS



Year ended December 31 Note 2015 2014 2013

NIS in thousands

Revenues 14d 1,741,442 1,757,362 1,823,094 Cost of sales 14e 1,513,663 1,589,112 1,658,870

Gross profit 227,779 168,250 164,224 Selling, marketing, general and administrative expenses Selling and marketing expenses 14f 142,866 148,746 147,180 General and administrative expenses 14f 48,614 64,829 67,905 Other expenses (income), net 14k (350,574) 66,951 11,439

Total (income) expenses (159,094) 280,526 226,524

Profit (loss) from ordinary operations 386,873 )112,276( )62,300( Finance income 14i 6,239 3,088 8,978 Finance expenses 14j 68,917 *89,244 *74,624

Finance expenses, net 62,678 86,156 65,646

Profit (Loss) after financial expenses 324,195 )198,432( )127,946( Share in investments accounted for using the equity method, - 38,159 25,732

Profit (Loss) before taxes on income 324,195 )160,273( )102,214( Tax expense (income) 12c 127,509 )4,699( (26,531)

Profit (loss) for the year 196,686 )155,574( )75,683( Attributed to: Company shareholders 196,513 )154,741( * )74,849(* Non-controlling interests 173 )833( )834( 196,686 )155,574( )75,683(*

Profit (loss) for the period attributed to company shareholders NIS

Primary profit (loss) per share 38.16 )30.4*( )14.71(*

Fully diluted profit (loss) per share 38.16 )30.4*( )14.71(*

Weighted average of shares used to compute the primary earnings per share: 5,150,136 5,089,811 5,089,811 basic Diluted 5,150,136 5,089,811 5,089,811


7

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

Year ended December 31

2015 2014 2013 NIS in thousands

Profit (loss) for the year

196,686 *(155,574) )75,683( *

Amounts which will not be classified in the future to income statements, net

Revaluation in respect of transition from fixed assets to

investment in real estate

7,185 - - Actuarial profit (loss) from defined benefit plans, net 985 )2,397( )695( Share in Other Comprehensive profit (loss) of associated companies, net

- )650( 6

8,170 )3,047( )689(

Amounts which will be classified in the future to income statements, net

Exchange differences on translation of foreign operations, net - )677( 414 Share in other comprehensive income of associated companies,

net of tax

- 4,245 )2,443( Share in other comprehensive income of associated companies,

which allocated to the income statements, net

- 782 2,152 Share in other comprehensive income, which allocated to the

income statements, net of tax from realization of associated companies

39,716 - -

39,716 4,350 123

Total Other Comprehensive income (loss) for the year, net 47,886 1,303 )566(

Total Comprehensive Income (loss) for the year 244,572 )154,271( )76,249(

Attributed to: Company shareholders 244,369 *(153,271) *(75,489)Non-controlling interests 203 )1,000( )760(

244,572 )154,271( )76,249(



HADERA PAPER LTD

CONSOLIDATED FINANCIAL STATEMENTS OF CHANGES IN EQUITY

8

Share capital

Share Premium

Share based payments reserves

Capital reserves resulting from

tax benefit on exercise of

employee options

Capital reserve from

revaluation of acquisition achieved in

stages

Capital reserve from revaluation in respect of transition from fixed assets to investment in real

estate

Cash Flows

Hedging reserves

Foreign currency

translation reserves

Retained earnings

Total for Company

shareholders

Non-controlling

interests Total

Balance - December 31, 2014 (audited) 125,267 316,108 5,484 3,397 5,445 - 4,934 )44,650( 169,846 585,831 6,887 592,718

Adjustment of retained earnings in respect immaterial error correction (see note 2G(4)) - - - - - - - - )572( )572( )6,304( )6,876(

Balance - January 1, 2015 125,267 316,108 5,484 3,397 5,445 - 4,934 )44,650( 169,274 585,259 583 585,842 Exchange differences arising on translation of foreign operations - - - - - - - 44,650 - 44,650 - 44,650

Cash flow hedges transactions - - - - - - (4,934) - - )4,934( - )4,934( Revaluation in respect of transition from fixed assets to investment in real estate - - - - - 7,185 - - - 7,185 - 7,185

Actuarial loss from defined benefit plan, net - - - - - - - - 955 955 30 985

Profit for the period - - - - - - - - 196,513 196,513 173 196,686 Total Comprehensive Income (loss) for the period - - - - - 7,185 )4,934( 44,650 197,468 244,369 203 244,572

Share based payment - - 2,576 - - - - - - 2,576 - 2,576 Option expiration - 2,182 )2,182( - - - - - - - - - Shared issuance 13 145,620 - - - - - - - 145,633 - 145,633 Release of reserve from revaluation of acquisition achieved in stages to retained earning's - - - - )5,445( - - - )5,445( - - -

Transactions with Controlling Shareholder - 3,102 - - - - - - - 3,102 - 3,102

Balance – December 31, 2015 125,280 467,012 5,878 3,397 - 7,185 - - 372,187 980,939 786 981,725


HADERA PAPER LTD

CONSOLIDATED FINANCIAL STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

9



Share capital

Share Premium

Share based payments reserves

Capital reserves resulting from tax benefit on

exercise of employee

options


revaluation of acquisition achieved in

stages

Cash Flows Hedging reserves

Foreign

currency translation

reserves Retained earnings

Total for Company

shareholders

Non-controlling

interests Total

NIS in thousands Balance – December 31 2013 (audited) 125,267 313,506 2,602 3,397 7,188 438 )44,792( 325,472 733,078 5,634 738,712

Adjustment of retained earnings in respect immaterial error correction (see note 2G(4)) (185) (185) (6,304) (6,489)

Balance - January 1, 2014 125,267 313,506 2,602 3,397 7,188 438 (44,792) 325,287 732,893 (670) 732,223 Exchange differences on translation of foreign operations - - - - - - )11( - )11( )135( )146(

Cash flow hedges transactions - - - - - 4,496 - - 4,496 - 4,496 Actuarial loss from defined benefit plan - - - - - - - )3,015( )3,015( )32( )3,047(

Loss for the year - - - - - - - *(154,741) )154,741( (833) (155,574)

Total Comprehensive Income (loss) for the year - - - - - 4,496 )11( )157,756( (153,271) (1,000) (154,271) Release of reserve from revaluation of acquisition achieved in stages to retained earnings - - - - )1,743( - - 1,743 - - -

Issue of option notes - - 3,868 - - - - - 3,868 - 3,868 Share based payment - - 1,616 - - - - - 1,616 - 1,616 Expiration of employee options - 2,602 )2,602( - - - - - - - - Sale of subsidiary - - - - - - 153 - 153 2,253 2,406

Balance –December 31, 2014 125,267 316,108 5,484 3,397 5,445 4,934 )44,650( 169,274 585,259 583 585,842

HADERA PAPER LTD

CONSOLIDATED FINANCIAL STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

10



Share capital

Share Premiu

m

Share based

payments reserves

Capital reserves resulting from tax

benefit on exercise

of employee options

Capital reserve

from revaluation

of acquisition achieved in

stages

Cash Flows

Hedging reserves

Foreign

currency translation

reserves Retained earnings

Total for Company

shareholders

Non-controlling

interests Total

NIS in thousands Balance - January 1, 2013 For the Year ended December 31, 2013: 125,267 311,077 5,031 3,397 8,932 78 )44,472( 399,072 808,382 6,394 814,776

Exchange differences on translation of foreign operations - - - - - - )320( - )320( 83 )237(

Cash flow hedges transactions - - - - - 360 - - 360 - 360 Actuarial loss from defined benefit plan - - - - - - - )680( )680( )9( )689(

Loss for the year - - - - - - - *(74,849) (74,849) )834( (75,683)

Total Comprehensive Income (loss) for the year - - - - - 360 )320( (75,529) (75,489) )760( )76,249( Release of reserve from revaluation of acquisition achieved in stages to retained earnings - - - - )1,744( - - 1,744 - - - Expiration of employee options - 2,429 (2,429) - - - - - - - -

Put options issuance* - - - - - - - - - (6,304) (6,304)

Balance – December 31, 2013 125,267 313,506 2,602 3,397 7,188 438 )44,792( 325,287 732,893 (670) 732,223

HADERA PAPER LTD

11

CONSOLIDATED CASH FLOWS STATEMENTS


2015 2014 2013 NIS in thousands Cash flows – operating activities

Profit (loss) for the year 196,686 )155,574(* )75,638(* Tax expenses (income) recognized in profit and loss 127,509 )4,699( )26,531( Finance expenses recognized in profit and loss, net 62,678 86,156* 65,648* Gain from sale of fixed assets (10,023) )67,486( )1,727( Share in profit of associated companies - )38,159( )25,732( Dividend received from associated company - 19,960 42,914 Depreciation and amortization 95,811 109,235 110,791 Asset's impairment 65,610 117,412 12,282 Gain arising in changes in fair value of investment property )100( )178( )150( Share based payments expenses 2,576 1,616 - Expenses for a transaction with an controlling shareholder 3,102 - - Loss on revaluation of financial asset at fair value through

profit and loss - 172 192 Loss (profit) from the realization of subsidiary )3,232( 5,363 )2,256( Capital Gain from sale of investment in associated

companies )438,683( )2,525( -

101,934 71,293 99,746 Changes in assets and liabilities:

Decrease (Increase) in trade and other receivables 72,804 )9,356( 74,868 Decrease in inventory 55,252 42,301 34,293 Increase (Decrease) in trade and other payables )25,048( )9,520( )68,596( Increase (Decrease) in employee benefit liabilities )10,290( )9,191( 19,013

92,718 14,234 59,578

Receipt Taxes 13 2,974 3,482

Net cash generated by operating activities 194,665 88,501 162,806

* Insignificant adjustment of comparative figures - see note 2G(4) The accompanying notes are an integral part of the consolidated financial statements.

HADERA PAPER LTD

12

CONSOLIDATED CASH FLOWS STATEMENTS (Cont.)


2015 2014 2013 NIS in thousands Cash flows – investing activities

Acquisition of property plant and equipment )61,322( )63,061( )79,868( Payment in respect of investment real estate - )1,622( )250( Acquisition of other assets )1,271( - Proceeds from disposal of fixed assets and from sale of

assets under an operating lease 9,896 65,662 3,481 Proceeds from sale of subsidiary's activity 59,160 )3,510( 2,000 Improvement levy payment for the sale of land )1,164( - - Interest received 783 981 1,812 Proceeds from sale of investment in associated

company(less transaction costs) 610,740 2,750 - Investing in short-term deposit 100,000 )100,000( -

Net cash provided by (used in) investing activities 716,822 )98,800( )72,825(

Cash flows – financing activities Proceeds from issuing bonds (less issuance expenses) - 477,448 111,253 Proceeds from the issuance of options - 3,868 Proceed from the issuance of the shares (less issuance

expenses) 145,633 - - Increase (decrease) of short-term bank credit – net )113,264( )102,965( 50,402 Long term loans received - 37,102 11,932 Repayment of long term loans )49,128( )42,310( )50,176( Interest Paid )68,975( )77,989( )69,776( Repayment of bonds )196,939( (167,350) )204,834( Share purchase from non-controlling interests in subsidiary - - 21,221

Net cash provided by (used in) financing activities )282,673( 127,804 )172,420(

Increase (Decrease) in cash and cash equivalents 628,814 117,505 )82,439(

Cash and cash equivalents beginning of the year 227,706 110,377 194,423 Net foreign exchange differences )1,926( )176( )1,607(

Cash and cash equivalents end of the year 854,594 227,706 110,377


HADERA PAPER LTD

13

NOTE 1 - DESCRIPTION OF BUSINESS AND GENERAL

1. Description Of Business

Hadera Paper Ltd. is a public company, incorporated in Israel, whose shares are traded on the stock exchange in Tel – Aviv. Hadera Paper Limited and its subsidiaries (hereinafter – "the Company") are engaged in the production and sale of paper packaging, in paper recycling activities, in the production and sale of printing and writing paper, in the production of cardboard and packaging products and in the marketing of office supplies (the Company and its investee companies – hereinafter – "the Group"). For details regarding the agreement for sale of all Company holdings (49.9%) in an associated company in the sector of household paper products, see Note 13a hereafter. The Company's control holder is FIMI fund, this pursuant to its holdings of approximately 59.19% of issued share capital and voting rights in the Company (approximately 56.78% in full dilution). FIMI fund purchased the control of the Company from Clal Industries Ltd. according to an agreement from June 24, 2015 that was finalized on August 13, 2015. Most of the Group's sales are made on the local (Israeli) market. For segment information, see note 19.

2. Definitions:

The Company - Hadera Paper Limited.

The Group - the Company and its affiliated Companies.

Related Parties - as defined by IAS 24.

Interested Parties - as defined in the Israeli Securities law and Regulations 1968.

Controlling Shareholder - as defined in the Israeli Securities Regulations (Annual Financial Statements), 2010.

CPI - the Israeli consumer price index.

Subsidiaries - companies in which the Company controls, (as defined by IFRS 10) directly or indirectly, and whose financial statements are fully consolidated with those of the Company.

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

A. Applying International Accounting Standards (IFRS)

Statement regarding the implementation of International Financial Reporting Standards (IFRS)

The consolidated financial statements have been prepared using accounting policies consistent with International Financial Reporting Standards (hereinafter – IFRS), and interpretations to them, that were published by the International Accounting Standards Board (IASB). The principal accounting policies described in the following notes were applied in a manner consistent with previous reporting periods presented in these consolidated financial statements, except for changes in the accounting policy arising from the implementation of standards, amendments to standards and interpretation that entered into effect on the date of the financial statements, as specified in note 3 below.

HADERA PAPER LTD

14

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont.)

B. Implementation Israeli securities regulations

The financial statements are drawn up in accordance with the Israeli Securities Regulations (Annual Financial Statements), 2010 (hereinafter – "Financial Statements Regulations").

C. The operating cycle

The company's operating cycle period is 12 months. D. Analysis format of expenses recognized on income statement

Company expenditures in the statement of income and other comprehensive income are presented based on the essence of the expenditures. The group estimates that in light of the organizational structure of the group, the classification of expenditures in this manner provides more reliable and relevant information.

E. Foreign currencies

(1) Functional currency and presentation currency

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

(2) Translation of transactions that are not in the functional currency

In preparing the financial statements of the individual entities, transactions in currencies other than the entity’s functional currency (foreign currencies) are recorded at the rates of exchange prevailing at the dates of the transactions. At the end of each reporting period, monetary items denominated in foreign currencies are retranslated at the rates prevailing at that date. Non-monetary items carried at fair value that are denominated in foreign currencies are retranslated at the rates prevailing at the date when the fair value was determined. Non-monetary items that are measured in terms of historical cost are retranslated at the rates of exchange prevailing at the date of the transaction in respect of the non- monetary item.

F. Cash and cash equivalents

Cash and cash equivalents include deposits that can be withdrawn anytime as well as short-term bank deposits that are not restricted in use, with a maturity of three months.

G. Consolidated Financial Statements

(1) General

The consolidated financial statements of the Group include the financial statements of the Company as well as those of entities directly or indirectly controlled by the Company. An investing company controls an investee company when it is exposed, or possesses rights, to fluctuating returns originating from its holdings in the investee Company, and when it has the ability to influence those returns by exercising power over the investee company. This principle applies to all investee companies. The results of subsidiaries acquired or disposed of during the year are included in the consolidated income statement from the effective date of acquisition or up to the effective date of disposal, as appropriate.

HADERA PAPER LTD

15


G. Consolidated Financial Statements (Cont.)

(1) General (Cont.)

All intercompany transactions, balances, income and expenses are eliminated in full on consolidation.

(2) Non –controlling interests

Non –controlling interests in net assets excluding goodwill of consolidated subsidiaries are presented separately under the Group's shareholders' equity. Non –controlling interests include the sum of these interests on the date of the business combination as well as the share of minority Non –controlling interests in the changes that occurred in the capital of the consolidated company subsequent to the date of the business combination.

(3) Loss of Control

Subsequent to losing control over a consolidated company, the Company recognizes profit or loss equal to the difference between the aggregate value of the proceeds received plus the fair value of any remaining investment in the formerly-consolidated company, and the book value of the assets, liabilities and rights that do not afford control over the formerly-consolidated company .

Financial liabilities for put options to the non-controlling interests

The Company has an obligation deriving from a PUT option granted to purchase shares of a subsidiary that gives the holder the right to sell to the Company its holdings in the subsidiary for a fixed amount of cash. The PUT option liability is measured at the present value of the payment and presented in the long-term liabilities. Changes in the time value of the liability are recognized in finance expenses in the income statement in accordance with the effective interest method.

(4) Insignificant adjustment of comparative figures

In the reporting period, an insignificant misstatement was reveal in the consolidated financial statements for 2014 regarding the accounting treatment of the financial liability for the PUT option of the non-controlling interest. The Company has evaluated the materiality of the misstatement in relation to its financial statements for the aforementioned year and after consideration of quantitative and qualitative factors, the Company has concluded that the misstatement is insignificant to require the reissuance of restated consolidated financial statements of the Company for 2014. The effects of the correction of the above mentioned misstatement on the statement of financial position as of December 31, 2014 is an increase of NIS 6,876 thousands of non-controlling interests, a decrease of NIS 6,304 thousands of non-controlling interests and an decrease of NIS 185 thousands in retained earnings. The effect of the correction on the profit or loss for the year ended December 31, 2014 is a decrease in financing costs of NIS 387 thousands. The above correction has been included in the comparative data in these financial statements by marking the corrected items "insignificant adjustment of comparative data".

HADERA PAPER LTD

16


H. Fixed assets

1) General

Property, plant and equipment are tangible items, which are held for use in the manufacture or supply of goods or services, or leased to others, which are predicted to be used for more than one period. The Company presents its property, plant and equipment items according to the following method:

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

2) Reduction of fixed assets

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

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

Assets leased under financial leases are amortized over their expected useful life on the same basis as owned assets, or over the term of the lease - whichever is shorter.

The annual depreciation and amortization rates are:

Useful life lengthBuildings 10-50 years Brown paper making machines 20-25 years White paper making machine 20 years White paper cutting machine 20 years Waste recycling machines 25 years Cardboard manufacturing machinery 10 years Other machinery and equipment 7-20 years Vehicle 5-7 years Furniture and office equipment 3-17 years

Scrap value, depreciation method and the assets useful lives are being reviewed by management in the end of every financial year. Changes are handled as a change of estimation and are applied prospectively.

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

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I. Intangible assets, except for goodwill

Intangible assets are identifiable, non-monetary assets which have no physical essence.

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

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

Useful life lengthCustomer relations 5-10 years Software 3 years

The group's intangible assets are recognized and measured in accordance with the manner in which they were created and were all acquired as part of a business combination.

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

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

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

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

For the purpose of the paper production activity, the Group maintains an array of accompanying services for the activity of Group companies at the Company site at Hadera which includes a wastewater facility, joint warehouses for spare parts and hazardous materials, a process laboratory, a catering site, and critical systems (firefighting and water system) which are supplied via the subsidiary Hadera Paper Development and Industries Ltd. (hereafter: "infrastructures"). In light of the sale of the energy center in August 2015, and transaction finalization in December 2015, the infrastructures company does not constitute a separate cash generating unit, and its main activity is attributed to the packaging

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J. Impairment of value of tangible and intangible assets, excluding goodwill (Cont.)

paper and recycling and printing and writing paper segments of activity, this according to the volume of service provided to all said segments.

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

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

If an impairment loss that was recognized in previous periods is reversed, the book value of the asset (or of the cash generating unit) will be restored back to the estimate of the up to date recoverable value but not to exceed the book value of the asset (or of the cash generating unit) that would have existed, had a related impairment loss not been recognized

in prior periods. The reversal of the loss from impairment of value is immediately recognized in the statement of income.

K. Inventories

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

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

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

Cost determined as follows:

Raw, auxiliary materials and others - Based on weighted-average basis.

Finished products and products in process- Based on overhead absorption costing. At cost, calculated based on the absorption pricing of production costs incurred during the production of finished goods

Products - Based on weighted – average basis.

The spare parts that are in continuous use are not associated with the specific fixed assets. Based on the experience accumulated by the Company, these spare parts are held for no longer than 12 months. In light of the above, the spare parts that are in continuous use are presented in inventory clause, and recognized in the profit and loss report when used.

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L. Financial assets

(1) General Financial assets are recognized in the statement of financial position of the Company when the Company becomes a party to the contractual terms of the instrument.

Investment in financial assets are initially measured at fair value, plus transaction costs, except for those financial assets classified as at fair value through profit or loss, which are initially measured at fair value.

(2) Financial Assets Measured at Amortized Cost and the Effective Interest Method

Debt instruments are measured at amortized cost when the following two conditions are met:

The business model of the Group is to hold the assets in order to collect contractual cash flows, and

The contractual terms of the asset stipulate precise dates on which the contractual cash flows that are solely payments of principal and interest will be received.

Debt instruments that meet these conditions are measured, on initial recognition, at fair value plus transaction costs. Subsequent to the initial recognition these instruments are measured at amortized cost, using the effective interest method, less impairments in value.

Subsequent to the initial recognition, in the event that the Group’s business model changes such that the aforementioned conditions no longer exist, these financial assets that are measured at amortized cost are reclassified at fair value through profit and loss.

The effective interest method is a method for calculating the amortized cost of a debt instrument, and for allocating the interest income over the life of the instrument. The effective interest rate is the rate that discounts precisely the future predicted cash flows (including commissions, transaction costs and the like) over the life of the debt instrument, or (when it is more correct) a shorter period, to the current value of the instrument on the date of initial recognition.

On the date of the initial recognition, the Group may designate a financial asset that meets the conditions for classification at amortized cost to fair value through profit and loss, with this classification canceling or significantly reducing any inconsistency in recognition or measurement that would have arisen in the absence of this designation.

(3) Impairment of financial assets measured at amortized cost

Financial assets that are measured at amortized cost, including accounts receivable in respect of financial leasing, are examined at the end of the reporting period in order to identify the existence of signs of impairment. Impairment exists when there is objective evidence that as a result of one or more events that took place subsequent to the date of the initial recognition of the financial asset, the future expected cash flows of the investment were adversely affected.

Signs of impairment may include, inter alia:

• Significant financial difficulty of the debtor; or

• Default or delinquency in interest or principal payments; or

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

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L. Financial assets (Cont.)

(3) Impairment of financial assets measured at amortized cost (Cont.)

In regards to customer debts, the Company examines the existence of impairment for most Group companies, based on previous experience, changes in the level of payment arrear, and financial changes associated with the sector and the economic environment at which they are operating. In light of the variance in customer characteristics, and in light of assessing impairment risks according to the specific method, the Company did not conduct the group examination, and it estimates that the impact on the financial statements is insignificant.

In respect of financial assets presented according to amortized cost, a substantial impairment of the difference between the book value of the financial assets and the present value of future cash flows expected therefrom, which reflect the effect of any collateral and guarantees received, discounted at their original effective interest rate.

If in the subsequent period the amount of the loss from an impairment of a financial asset has decreased and that decrease is objectively related to an event that took place subsequent to the impairment being recognized, then in this case, the loss from the impairment that was previously recognized is canceled, in full or in part, through the statement of income. The book value of the investment in the asset, on the date on which the loss from the impairment is canceled, shall not exceed the amount of the amortized cost of the asset that would have stood on that date had the impairment not been recognized in the past.

Impairment loss on financial assets is allocated to reduce the carrying amount of the financial asset, except for impairment losses of accounts receivable and trade receivables, which is carried to a provision account. The write-off of uncollectible debt is carried to the provision account.

Subsequent recoveries of amounts previously written off are credited against the provision account. Changes in the carrying amount of the provision account are recognized in the income statement.

M. Financial liabilities and equity instruments issued by the Group

(1) Classification as debt or equity

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

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

Financial liabilities are measured at the page and the following classification:

Financial liabilities measured at amortized cost.

(2) CPI-linked liabilities

The group has liabilities that are linked to the Consumer Price Index (hereinafter – the CPI), which are not measured at fair value under the statement of income. The Company determines the effective interest rate in respect of these liabilities as a real rate with the addition of linkage differences in line with actual changes in the CPI until the end of the reporting period.

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M. Financial liabilities and equity instruments issued by the Group (Cont.)

(3) Financial liabilities and equity instruments

The Company has an obligation deriving from a PUT option granted to purchase shares of a subsidiary that gives the holder the right to sell to the Company its holdings in the subsidiary for a fixed amount of cash.

The PUT option liability is measured at the present value of the payment and presented in the long-term liabilities.

Changes in the time value of the liability are recognized in finance expenses in the income statement in accordance with the effective interest method.

N. Revenue recognition

Revenue is measured at the fair value of the consideration received and/ or the consideration that the Group is entitled to receive in respect of revenue from sale of goods in the ordinary course. Revenue is reduced for estimated customer returns, rebates and other similar allowances.

(1) Sale of goods

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

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

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

The amount of revenue can be reliably measured;

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

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

Revenue from sale of goods is recognized on the date they are sent, as well as the legal ownership of them passes.

(2) Revenue from recycling services

Recycling services revenue is recognized when all the following conditions are satisfied:

The amount of revenue can be reliably measured

It is probable that the economic benefits associated with the transaction will flow to the entity, as well as

The company performed the service in question

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

(3) Interest revenue

Interest revenue is accrued on a time basis, by reference to the principal outstanding

and by using the effective interest rate method.

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O. Leasing

(1) General

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

(2) Lease of equipment, land and buildings from the Group

Operating lease

Lease income from an operating lease is recognized on the straight line basis over the leasing period. In operating lease agreements where no lease payments or reduced lease payments are received at the inception of the lease period, and additional benefits are provided to the lessor, the group recognized income on the straight line basis over the lease period.

(3) Lease of land, vehicles and buildings by the Group

Financial lease

Lease of land (which is not investment property measured at fair value) from the Israel Land Administration, the payment for which is made periodically, are classified as financial lease. At the commencement of the lease period, the group includes the leased asset in "fixed assets" and recognizes a corresponding liability at the lower of the fair value of the land and the current value of the minimum lease payments. In subsequent periods, the liability is accounted for as stated above and the land is amortized over the remaining period of the lease according to the straight line basis, including the extension option, whose realization is reasonably certain at the date of entering into the lease. Lease of land (which is not investment property measured at fair value) from the Israel Land Administration, with pre-paid lease payments are classified as financial lease. The deferred lease payments, which were paid at the commencement of the lease period, are presented in the statement of financial position in "fixed assets" and amortized at the straight line basis over the remaining period of the lease, including the extension option, which at the time of the lease it is reasonably certain that will be realized. Operating lease

Lease expenses in respect of an operating lease recognized at the straight line basis over the lease period.

P. Provisions

Provisions are recognized when the Group has a present obligation (legal or constructive) as a result of a past event, it is probable that the Group will be required to settle the obligation, and a reliable estimate can be made of the amount of the obligation.

The amount recognized as a provision is the best estimate of the consideration required to settle the present obligation at the end of reporting period, taking into account the risks and uncertainties surrounding the obligation.

Where a provision is measured using the cash flows estimated to settle the present obligation, its carrying amount is the present value of those cash flows. Changes due to time value are charged to the income statement.

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

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Q. Taxation

(1) General

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

(2) Current tax

The tax currently payable is based on taxable profit of the company and its subsidiaries for the reporting period. Taxable profit differs from profit as reported in the income statement because it excludes items of income or expense that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. The Group’s liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the end of reporting period. Current tax assets and liabilities are stated with offset, when the entity has an enforceable legal right to offset the recognized amounts, as well as the intention to discharge on net basis, or to realize the asset and discharge the liability concurrently.

(3) Deferred tax

Deferred tax is recognised on differences between the carrying amounts of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of taxable profit. Deferred tax (assets and liabilities) are measured at the tax rates that are expected to apply in the period in which the liability is settled or the asset realised, based on tax rates and tax laws that have been enacted or substantively enacted by the end of the reporting period. Deferred tax liabilities are generally recognised for all taxable temporary differences, and deferred tax assets are generally recognised for all deductible temporary differences to the extent that it is probable that taxable profits will be available against which those deductible temporary differences can be utilised. The Group does not generate deferred taxes with respect to temporary differences due to initial recognition of goodwill. The calculation of deferred taxes does not take into account the taxes that would have been applied in the event of realizing the investments in an associated companies, since the Group's management estimates that the temporary differentials that are liable for these deferred taxes are under the control of the group and are not expected to change in the foreseeable future. Deferred tax assets and liabilities are offset when there is a legally enforceable right to set off current tax assets against current tax liabilities and when they relate to income taxes levied by the same taxation authority. Deferred taxes in respect of temporary differences that relate to investment property are determined based on the tax rate expected to be in effect during the periods in which the temporary differences reverse, under the assumption that such reversal will take place when the property is sold.

R. Employee benefits

(1) Post-Employment Benefits

The Group's post-employment benefits include: benefits to retirees and liabilities for severance and retirement benefits. The Group's post-employment benefits are classified as either defined contribution plans or defined benefit plans. Most of the Group's employees have signed Section 14 to the Severance Law, 1963, pursuant to which the Group's regular deposits with pension funds and/or insurance

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R. Employee benefits (Cont.)

(1) Post-Employment Benefits (Cont.)

policies exempt it from any further obligations to the workers, for whom said amounts were deposited. The Group's deposits under the Defined Contribution Plan are carried to the income statements on the date of the provision of work services, in respect of which the Group is obligated to make the deposit and no additional provision in the financial statements is required. Expenses in respect of a Defined Benefit Plan are carried to the income statement in accordance with the Projected Unit Credit Method, while using actuarial estimates that are performed at the end of each reporting period. The current value of the Group's obligation in respect of the defined benefit plan as of 31 December 2015 Determined by discounting the future cash flows expected on account of the plan, while using a discount rate that is appropriate to the market returns on high quality corporate bonds, denominated in the currency in which payments on account of the plan will be made, and possessing maturity dates closely resembling the projected termination dates of the plan. In accordance with the accounting policy of the group, the net interest cost is included under financial expenses in the statement of income. Actuarial profits and losses are carried to the other comprehensive income on the date they were incurred. The Past Service Cost is immediately recognized in the Group's income statement. The Group's liability in respect of the Defined Benefit Plan which is presented in the Group's statement of financial position includes the current value of the obligation in respect of the defined benefit, net of the fair value of the plan's assets. For details regarding Amendment to IAS19 - Employee Contributions in regards to a defined benefit plan, see Note 3a.

(2) Short term employees benefits

Short-term employee benefits are benefits that are expected to be fully cleared within 12 months from the end of the year in which the service that entitles the employee to the benefit was provided. Short term company benefits include the Group's liability for short term absences, vacations, payment of grants, bonuses, current maturities of severance pay benefits, double profit and compensation. These benefits are recorded to the income statement, on a non-capitalized basis, which the company is expected to pay when created. The benefits are measured on a non-capitalized basis. The difference between the amount of the short term benefits to which the employee is entitled and the amount paid is therefore recognized as an asset or liability.

(3) Severance pay benefits

Severance pay benefits are benefits that need to be paid as a result of the group's decision to dismiss employees prior to the ordinary retirement date, or following an employee's decision to agree to early voluntary retirement, in return for such benefits. The group's liability on account of severance pay benefits is allocated to the statement of income at the date when it is no longer possible for the group to withdraw from the proposal or at the date of recognition of the costs on account of a structural change, pursuant to IAS 37, that include the payment of dismissal benefits, the earliest of the two. The sum of the benefits is determined while using a discount rate that is appropriate to the market returns on high quality corporate bonds.

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S. Net income per share

The computation of basic net income per share is generally based on earnings available for distribution to holders of ordinary shares, divided by the weighted average number of ordinary shares outstanding during the period. In computing diluted net income per share, the weighted average number of shares to be issued, assuming that all dilutive potential shares are converted into shares is to be added to the average number of ordinary shares used in the computation of the basic income (loss) per share. Potential shares are taken into account, as above, only when their effect is dilutive.

T. Exchange Rates and Linkage Basis

(1) Foreign currency balance, or balances linked to foreign currency are included in the financial statements according to the exchange rate announced by the Bank of Israel at the end of reporting period.

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

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

As of:

Representative exchange rates of

the dollar (NIS per $1)

Representative exchange rates

of the Euro (NIS per €1)

CPI “in respect

of” (in points) *

December 31, 2015 3.902 4.247 221.13 December 31, 2014 3.889 4.725 223.36

Increase (decrease) during the: % % % Year ended December 31, 2015 0.3 (10.1) (1.0) Year ended December 31, 2014 12.0 )1.2( )0.2(

(*) Based on the CPI for the month ending at the end of each reporting period, on an average

basis of 100 = 1993.

NOTE 3 - RECENTLY PUBLISHED IFRS, INTERPRETATIONS AND AMENDMENTS TO THE STANDARTS

A. Amendments to standards that influence this reporting period and/or previous reporting periods:

Amendment to IAS 19 "Employee Benefits" (concerning defined benefit plans: Employee deposits)

The amendment distinguishes between the deposits made by employees or third parties relating to services and those that are not and stipulates that deposits that do not relate to services (such as for the coverage of deficits in the plan) shall influence re-measurement on account of a plan for a defined benefit, whereas deposit relating to services shall be treated as a decrease in the cost of the service. It was further stipulated that deposits related to services that are also contingent upon the number of years of service, shall be distributed according to the projected method of entitlement. Moreover, the amendment allows for the event where the sum of deposits is independent of the number of years of service, in which case it will be possible to depreciate the cost of the current service during the period when the relevant service was provided. The amendment is to be applied retroactively for annual reporting periods commencing on or after January 1, 2015. Early adoption is permitted.

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NOTE 3 - RECENTLY PUBLISHED IFRS, INTERPRETATIONS AND AMENDMENTS TO THE STANDARTS (Cont.)

A. Amendments to standards that influence this reporting period and/or previous reporting periods: (Cont.)

Amendment to IAS 19 "Employee Benefits" (concerning defined benefit plans: Employee deposits) (Cont.)

At this stage, the Company’s management cannot assess the impact of the implementation of the amendment on its financial position and on the results of its operations.

B. Amendments to the standards that are not effective and that do not have a material effect on the reporting period and/or previous reporting periods, but their entry into effect might have an effect on future periods

IFRS 15 — "Revenue from Contracts with Customers"

The new standard provides a unified application that regulates the accounting treatment of revenue arising from contracts with customers. This standard supersedes IAS 18 "Revenue" and IAS 11 "Construction Contracts" and the accompanying interpretations thereof. The core principle of the standard is the recognition of revenue from the transfer of goods or services to customers in an amount that represents the economic benefits that the entity expects to receive in return for them. As such, the standard stipulates that the recognition of revenue will occur when the entity transfers the goods and/or services to the customer and the customer obtains control of those goods or services. The Standard provides a five-step model for implementing this principle: 1) Identification of the contract(s) with the customer. 2) Identification of performance obligations in the contract. 3) Determination of the transaction price. 4) Allocation of the transaction price among performance obligations. 5) Recognition of income when the entity has satisfied its performance obligations.

Application of this guidance will depend on the facts and circumstances present in a contract with a customer and will require the exercise of judgment. Furthermore, the standard fixates disclosure requirements for contracts with clients, significant estimates, and changes therein which were used when applying the provisions of the standard in order to enable financial statements users to understand the nature, quantity, timing, and uncertainty of income and cash flows arising from contracts with customers. The standard should be applied in an entity’s IFRS financial statements for annual reporting periods beginning on or after January 1, 2017. Earlier application is permitted. In general, the standard will be applied retrospectively, but entities will be allowed to choose certain adjustments within the transitional guidance of the standard regarding application for previous reporting periods. At this early stage, management is unable to estimate the effect of this standard on the Group's financial position and results of operations. The Group's management will examine the impact of implementing the provisions of the standard on customer contracts and examine whether these provisions will influence the timing and method of revenue recognition arising from these contracts, and whether they will influence the Group's financial statements.

Amendment to IAS 19 "Employee Benefits" (concerning the discount rate)

The amendment stipulates that high-quality corporate bonds that serve for calculating the discount rate of benefits subsequent to the termination of employment, shall be denominated in the same currency in which those same benefits will be paid, so that as a result of the amendment, the examination of the market depth of high-quality corporate bonds shall be determined that the currency level. The amendment is to be applied for annual reporting

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NOTE 3 - RECENTLY PUBLISHED IFRS, INTERPRETATIONS AND AMENDMENTS TO THE STANDARTS (Cont.)

B. Amendments to the standards that are effective and that do not have a material effect on the reporting period and/or previous reporting periods, but their entry into effect might have an effect on future periods (Cont.)

IFRS 15 — "Revenue from Contracts with Customers" (Cont.)

periods commencing on or after January 1, 2016. It is necessary to apply the amendment from the beginning of the earliest comparison period appearing in the financial statements in which the amendment is being applied for the first time.

Adjustments originating from the application for the first time shall be recognized in the retained earnings at the beginning of the period.

Amendment to IAS 7 - Statement of Cash Flows (regarding disclosure of changes in liabilities ensuing from financing activities)

The amendment states that certain discloses are required to enable users of financial statements to evaluate the changes in liabilities arising from financing activities, some which involve cash flows and other changes not involving cash flows.

The amendment was implemented prospectively for annual reporting periods beginning on or after January 1, 2017. Earlier application is permitted. Upon initial application of the amendment, the presentation of comparative information is not required.

IFRS16 - Leases

The new standard was published in January 2016 and replaces IAS 17 "Leases" and its accompanying guidance and outlines the rules for recognition, measurement, presentation and disclosure for the two parties to the transaction, the client (lessee) and supplier (lessor). The new standard eliminates the existing differentiation between finance and operating leases and creates a uniform accounting model for each type of lease. In accordance with the new model, the lessee is required to recognize an asset with respect to usage rights during the term of the lease and recognize an offsetting liability for lease fees for all leased property The aforementioned accounting model will not include leases for a period of less than 12 months or leases of low valued assets such as personal computers. The standard does not change the current accounting treatment of any leases on the lessor's books. The standard will take mandatory effect for annual reporting periods beginning on January 1, 2019 or thereafter. Earlier application is permitted, under the condition that IFRS 15 "Revenue from Contracts with Customers" is also implemented. In general, the standard will be applied retroactively, but entities will be allowed to choose certain adjustments within the framework of the standard regarding the implementation for previous reporting periods. As of the date of the financial statements, the Group has not yet examined the effects of this standard on its existing contracts for leased properties under its possession.

HADERA PAPER LTD NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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NOTE 4 - CRITICAL ACCOUNTING JUDGEMENTS AND KEY SOURCES OF ESTIMATION UNCERTAINTY A. General

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

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

B. Critical judgments in applying accounting policies

The main items in which uncertainty of estimates and critical judgments are involved, and that have the most significant effect on the amounts recognized in the financial statements, are:

Deferred taxes- The company recognizes deferred tax assets for all of the deductible temporary

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

Approximation of length of life of items of fixed assets-

Each period, the company’s management evaluates salvage values, depreciation methods and length of useful lives of the fixed assets.

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

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

Examination of the impairment of cash generating units – see C(3) below.

B. Key factor of estimation uncertainty

1. Provisions for legal proceeding

For purposes of evaluating the legal relevance of these claims, as well as determining the reasonableness that they will be realized to its detriment, the company’s management relies on the opinion of legal and professional advisors. After the company’s advisors expound their legal position and the probabilities of the company as regards the subject of the claim, whether the company will have to bear its consequences or whether it is will be able to rebuff it, the company approximates the amount which it must record in the financial statements, if at all. An interpretation that differs from that of the legal advisors of the company as to the existing legal situation, a varying understanding by the company’s management of the contractual agreements as well as changes derived from relevant legal rulings or the addition of new facts may influence the value of the overall provision with respect to

the legal proceedings that are pending against the company and, thus material affect the company’s financial condition and operating results.

See also note 13 as follows.


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NOTE 4 - CRITICAL ACCOUNTING JUDGEMENTS AND KEY SOURCES OF ESTIMATION UNCERTAINTY (Cont.)

B. Critical judgments in applying accounting policies (Cont.)

2. Employee benefits

The present value of the company’s obligation for the payment of benefits to pensioners and severance pay to employees that are not covered under Section 14 to the Severance Pay Law is based upon a great amount of data, which are determined on the basis of an actuarial estimation, through the utilization of a large number of assumptions, including the capitalization rate. Changes in the actuarial assumptions could affect the book value of the obligation of the company for employees’ benefits payments and severance pay. The Company estimates the annual discount rate, based on a discount rate of government bonds as of December 31, 2014 since then the discount rate yield curves derived from the same date of index-linked corporate bonds, which are rated AA - or higher. Other key assumptions are determined based on prevailing market conditions and based on the experience gained in.

3. Examination of the impairment of cash generating units

A. To determine whether there may be a need for impairment provision with respect to cash-generating units in accordance with IAS 36, the Company's management has primarily used appraisals performed by external independent land appraisers with the required knowledge, expertise and experience.

Below are the cash-generating units for which signs of impairment where identified as of December 31, 2015:

Name of the cash-generating unit

Discount rate

Economic value higher than book value

Impairment

Printing and Writing Papers 11.3% No Required. See B1 below

Carmel Frenkel Ind. 10.0% Yes Not Required. See B2 below.

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

In light of the above, the setting of the fair values of the cash generating units of the Group calls for employing judgment. Changes in the assumptions that serve for setting of the fair values of the cash generating units, can materially affect the Group's situation and results of operation.

B.

1. In view of indications that arose from the results of the Hadera Paper Printing cash generating unit, that belongs to the Hadera Paper Printing segment of operations, during the fourth quarter of the year, As a result of continuing losses in the fourth quarter, a delay in the launch of the recycled paper product and a change in the estimation of the future sales forecast of the product, the


30

NOTE 4 - CRITICAL ACCOUNTING JUDGEMENTS AND KEY SOURCES OF ESTIMATION UNCERTAINTY (Cont.)

B. Critical judgments in applying accounting policies (Cont.)

B. (Cont.)

1. (Cont.)

Company commissioned an external independent assessor to evaluate the need to create a provision for impairment. The evaluation was performed on the basis of its utilization value, based on the discounted cash flows expected for the company (DCF), using a discount rate of 11.3%,(12%, 2014) a permanent growth rate of 1.0%. The residual value percentage, out of the total value determined in the evaluation, is 86% (83.6% ,2014). The net operating assets of Hadera Paper Printing in the company books, as at December 31, 2015, amounted to NIS 183,500 thousands. The assessor evaluated the derived utilization value of Hadera Paper Printing at this time at approximately NIS 144,600 thousands. The obtained result indicates that the value of Hadera Paper Printing is lower than its book value by the sum of NIS 38,900 thousands and accordingly, the company recognized a loss on account of impairment that was allocated to other expenditures, against the amortization of fixed assets in the amount of NIS 38,900 thousands.

On September 30, 2014 and December 31, 2014, the Company recognized loss due to impairment at a sum of approximately NIS 32,327 thousand and NIS 61,200 thousand, respectively.

2. In view of indications that arise from the results of the Carmel Frenkel Ind cash generating unit, that belongs to The packaging and cardboard products segment of operations, during the fourth quarter of the year, as a result of a change in the prevailing economic conditions in the sector - concerning the impairment of the unit, the company commissioned an external independent assessor to evaluate the need to create a provision for impairment. The evaluation was performed on the basis of its utilization value, based on the discounted cash flows expected for the company (DCF), using a discount rate of 10% (2014: 10.7%), a permanent growth rate of 3.0%. The residual value percentage, out of the total value determined in the evaluation, is 67% (2014: 61.7%). The net operating assets of Carmel Frenkel Ind in the company books, as at December 31, 2015, amounted to NIS 209,000 thousands. The assessor evaluated the derived utilization value of Carmel Frenkel Ind at this time at approximately NIS 227,900 thousands. The obtained result indicates that the value of Carmel Frenkel Ind. is higher than its book value.

On December 31, 2014, the Company recognized loss due to impairment at a sum of approximately NIS 23,800 thousand.


31

NOTE 5 - INVESTMENTS IN ASSOCIATED COMPANIES:

A. Details of Subsidiaries and Associated Companies

Segments State of

Incorporation Ownership rights

The amount investment in an associated

company (*) at December 31 at December 31 2015 2014 2015 2014 % NIS in thousands Main subsidiaries(*):

Amnir Recycling Industries Ltd Paper waste collection and processing Israel 100.00 100.00 164,942 166,557

Graffiti Office Supplies and Paper Marketing Ltd. Marketing of office supplies Israel 100.00 100.00 (33,279) )28,653(

Hadera Paper –packaging paper and recycling Ltd. Production Packaging paper Israel 100.00 100.00 39,468 27,116

Hadera Paper - Development and Infrastructure Ltd. Provision of infrastructure services Israel 100.00 100.00 118,551 144,436

Carmel Frenkel Ind. Ltd.(1) Production of packaging products and cardboard Israel 94.00 94.00 101,513 (**)97,855

Hadera Paper-printing and writing paper Ltd.(2) Production of printing and writing paper Israel 100.00 100.00 - )102,223(

Hadera Paper – Printing and Writing Paper Marketing Ltd Marketing printing & Writing Paper Israel 100.00 100.00 (7,395) (14,567)

Main associated company:

Hogla-Kimberly Ltd. Manufacturing and marketing of household paper products

Israel - 49.90 - 155,588

(*) Not including dormant companies.

(**)Insignificant adjustment of comparative figures - see note 2G(4)


32

NOTE 5 - INVESTMENTS IN ASSOCIATED COMPANIES: (Cont.)

A. Details of Subsidiaries and Associated Companies (Cont.)

1. On November 2013 the company acquired all holdings (100%) of Frenkel CD Ltd. - an affiliate of the company (hereinafter- "Frenkel company"), the company agreed with Frenkel & Sons Ltd. (hereinafter- "Frenkel"), which held prior to the transaction -42.16% of the issued and paid shares of Frenkel company, under the agreement Frenkel will transfer to the company its share of the issued and paid share capital of Frenkel company in return for 6% of the issued and paid share capital of "Carmel Frenkel Ind Ltd" (hereinafter- "Carmel company"), a company which consolidates the operations of Frenkel company and Carmel Container Systems Ltd company. "(hereinafter- "transfer transaction"). The company, directly and indirectly held on the eve of the acquisition transaction, the share capital of 57.84% of the issued and paid share capital of Frenkel company, and after the completion of the transaction holds 94% of the issued and paid share capital of Carmel company and Frenkel holds the remaining 6%. The transfer transaction included, among others, a PUT option transaction (hereinafter- "PUT Option") started from the end of the blockage period (36 months from the closing date) until the date which is five years from the date of completion of the transaction. Frenkel will be entitled to notify the company in writing of its desire to sell its share of Frenkel in Carmel's shares, and the company will have to acquire from Frenkel Frenkel's share of allocated shares at a price of NIS 7,500 thousand plus linkage differentials to the CPI and the index known on the date of signing the agreement and the known index timely payment of the exercise price of the PUT option by Frenkel, who exceeds 5%. The PUT option can be exercised in full, only once. The date of transfer of the company's shares shall be agreed upon between the parties such that the transfer and payment of compensation will be performed simultaneously in, no later than 90 days from the date of Frenkel's notification of the PUT option exercise. The shares transferred by Frenkel to the company, will be transferred free and clear. The accounting treatment that has been applied in the financial statements for the first time was treated in a way of insignificant adjustment of comparative figures. See Note 2G(4). The transfer transaction included, among others, the transaction CALL option transaction (hereinafter- "CALL option") started from the end of the blockage period (36 months from the closing date) until the date which is five years from the date of completion of the transaction. The company may give written notice of its desire to purchase from Frenkel, Frenkel's share of Carmel company, and the Frenkel will have to sell his shares of allocated shares at a price of NIS 8,500 thousand. The call option can be exercised in full, only once. The date of transfer of the company's shares shall be agreed upon between the parties such that the transfer and payment of compensation will be performed simultaneously in, no later than 90 days from the date of the company's notification of the CALL option exercise. The shares transferred by Frenkel to the company, will be transferred free and clear. Notwithstanding the above, if on the date of exercise of the CALL option, Guy Frenkel will serve as CEO of Carmel company and / or served as CEO of Carmel company in a period of 12 months prior to the exercise of the CALL option, the acquisition price of the shares under the CALL option, will be adjusted and equaled to the higher of Carmel company equity capital divided by 130 million multiplied by 8,500 thousand, or 8,500 thousand. At the approval date of the financial statements the value of the option is not significant.


33


A. Details of Subsidiaries and Associated Companies (Cont.)

2. Within the framework of an internal reorganization process of Company is restructure, on December 21, 2015, the Company entered into an agreement for purchasing the activity of Hadera Paper - Printing and Writing Paper Ltd., including its holdings of the subsidiary Hadera Paper - Printing and Writing Paper Marketing Ltd. On this date, Hadera Paper - Printing and Writing Paper Ltd. started voluntary liquidation proceedings.

B. Investments in associated companies

Hogla-Kimberly Ltd. (Hogla-Kimberly – below)

As at December 31, 2014, the Company's holding rate of Hogla-Kimberly was 49.9%, whereas Kimberly Clark Corporation holding rate was 50.1%. On January 26, 2015, the Company announced that, the Company has executed, pursuant to the approval of the Board of Directors, an agreement for the sale all of the holdings (49.9%) of the Company, directly and indirectly, in associated company Hogla-Kimberly Ltd. ("Hogla-Kimberly") to Kimberley Clark (the "Purchaser"). Following is a description of the main aspects of the Transaction: 1. The Purchaser paid the Company an amount of NIS 650 Million (the "Purchase Price"),

a part thereof in consideration for Hogla-Kimberly's shares and a part thereof as detailed in Section b in consideration for the Non-Competition Undertaking.

2. As part of the Transaction the Company undertook not to compete with Hogla-Kimberly's existing activities (the "Non-Competition Undertaking"). The Non-Competition Undertaking received an approval of authorities (the "Authorities Approval") and shall be valid for a period of 3 years from the closing date. As part of the Transaction it is agreed, among other things, that the Company may continue to operate in its existing activities and that such activity will not be considered a competition with the existing activities of Hogla-Kimberly. In consideration of the Non-Competition Undertaking, the Purchaser will pay the Company a total amount of NIS 40 Million, as follows: (a) a total of NIS 14 Million was paid on the closing date; (B) an additional amount of NIS 13 Million will be paid one year after the date of the first payment; (C) an additional amount of NIS 13 Million will be paid two years after the date of the first payment. The balance of the unpaid amount of NIS 26 Million was placed in escrow by the Purchaser.

3. The closing of the Transaction was subject; inter alia, to, the approval and/or exemption from approval of the Antitrust Commissioner in Israel and Turkey.

4. On March 16, 2015, after the preconditions to the agreement were satisfied, as detailed in note 3 above, the transaction was completed, and the purchaser transferred the proceeds in US Dollars in an amount equal to the sale price calculated at the exchange rate as of Friday, March 13, 2015 The total proceeds received amounted to NIS 623 Million, of which NIS 14 Million for Non- Competition and a total of NIS 26 Million held in escrow pursuant to an agreement of sale. The Company recorded capital gain from the sale of Hogla-Kimberly in the amount of approximately NIS 298.7 Million, net from tax.


34


C. Details of loans provided to subsidiaries held directly by the Company

subsidiaries Amounts of loans made

to the subsidiary

December 31

2015 2014

NIS in thousands

Hadera Paper –packaging paper and recycling Ltd. 170,000 255,000

Hadera Paper-printing and writing paper Ltd* - 13,866

Graffiti Office Supplies and Paper Marketing Ltd 20,162 19,565

* See note 5a(2)

D. Lending terms

Weighted annual interest rates

Amounts of loans made to the subsidiary

December 31 December 31 2015 2015 2014 % NIS in thousands

Balances linked 4.00% 20,162 19,565 Unlinked 6.55% 170,000 268,866

190,162 288,431

NOTE 6 - INVESTMENT PROPERTY

A. Sums recognized in the statement of income for the year ended December 31 2015 NIS in thousands

Rental income from investment property (from associated company) 3,407

B. Determining the fair value of the Group's investment property

Investment in real estate is measured at fair value based on the valuation carried out by reputable external appraiser with experience regarding the location and type of the appraised property. The fair value represents the amount on the date of valuation, which is the amount for which the property could be exchanged between knowledgeable, willing parties in an arm's length transaction, in accordance with international valuation standards. Fair value is determined based on: 1. As of September 30, 2015, the Company estimated the fair value of its owned real estate for

investment in Nahariya via an external appraiser. According to the obtained value estimate, the fair value of real estate for investment as at September 30, 2015 is estimated at approximately NIS 28,600 thousand.

2. Due to the sale of the energy centre and leasing to ICP the land on which the power plant will be erected (see Note 13c), as of September 30, 2015, the Company estimated the fair value of its owned real estate for investment and classified the non-current asset as real estate for investment via an external appraiser. According to the obtained value estimate, the fair value of real estate for investment as of September 30, 2015 is estimated at approximately NIS 15,000 thousand. The impact of revaluation as a result of value estimation, net of tax at sum of approximately NIS 7,185 thousand, was recognized against a re-evaluation fund due to transfer from non-current asset to real estate for investment.

As of December 31, 2015, there were no indications of change in fair value of these assets.


35

NOTE 7 - FIXED ASSETS: A. Composition of assets and the accumulated depreciation thereon, grouped by major classifications, and changes therein during 2015, are as follows:

C o s t Accumulated depreciation

Balance at beginning of

year

Additions during the

year

Disposals during the

year Deconsolidation

Balance at end of year


year


year Impairment

loss


year


Depreciated balance

December 31, 2015

NIS in thousands

Land and buildings thereon 368,141 2,109 52,755 - 317,495 159,648 7,572 - 45,589 121,631 195,864 Machinery and equipment 2,138,744(*) 51,399 375,025 - 1,815,118 1,378,615 80,939 65,610(**) 349,159 1,176,005 639,113

Vehicles 16,437 78 6,403 - 10,112 15,079 674 - 6,234 9,519 593 Office furniture and equipment (including computers) 87,808 640 8,972 - 79,476 46,991 5,065 - 8,239 43,763 35,713 Payments on account of machinery and equipment, net 37,139 10,480 - 34,246 13,373 - - - - - 13,373 Spare parts – not current, net 45,890(*) (666) - - 45,224 - - - - - 45,224

2,694,159 64,040 443,155 34,246 2,280,798 1,600,333 94,250 65,610 409,275 1,350,918 929,880

(*)Reclassified

(**) See note 4(c)3,13k


36

NOTE 7 - FIXED ASSETS: (Cont.)

B. Composition of assets and the accumulated depreciation thereon, grouped by major classifications, and changes therein during 2014, are as follows:

C o s t Accumulated depreciation


year


year


year DeconsolidationClassified as held for sale



year


year Impairment

loss


year Deconsolidation


Depreciated balance

December 31, 2014

NIS in thousands

Land and buildings thereon 372,956 3,586 5,735 2,666 - 368,141 156,708 6,863 - 3,536 387 159,648 208,493 Machinery and equipment 2,122,032(*) 52,865 32,187 3,966 - 2,138,744 1,201,885 96,258 111,562 30,483 607 1,378,615 760,129

Vehicles 22,990 486 6,367 672 - 16,437 20,238 1,136 - 6,060 235 15,079 1,358 Office furniture and equipment (including computers) 84,283 3,819 192 102 - 87,808 44,843 2,387 - 160 79 46,991 40,817 Payments on account of machinery and equipment, net 3,791 6,842 - 108 26,614 37,139 - - - - - - 37,139 Spare parts – not current, net 50,738 )4,848( - - - 45,890 - - - - - - 45,890

2,656,790 62,750 44,481 7,514 26,614 2,694,159 1,423,674 106,644 111,562 40,239 1,308 1,600,333 1,093,826

(*) Reclassified


37

NOTE 7 - FIXED ASSETS: (Cont.)

C. The item is net of investment grants in respect of investments in “approved enterprises”.

D. Depreciation expenses for the years 2015 and 2014 amounted to NIS 94,250 thousands and NIS 106,644 thousands, respectively. In additional, a depreciation expense in respect of impairment for the year's 2015 and 2014 amounted to NIS 65,610 thousand, and NIS 111,562 thousand see note 4c(3) below.

NOTE 8 – OTHER INTANGIBLE ASSETS:

A. Composition and changes are as follows:

Software

Order backlog Goodwill

Portfolio of Customers Total

NIS in thousands Cost Balance at January 1, 2015 5,046 3,082 14,437 40,394 62,959Additions during the year 1,271 - - - 1,271Balance at December 31, 2015 6,317 3,082 14,437 40,394 64,230

Cost Balance at January 1, 2014 1,789 3,082 14,437 40,394 59,702Additions during the year 3,257 - - - 3,257Balance at December 31, 2014 5,046 3,082 14,437 40,394 62,959

Accumulation amortization and impairment: Balance at January 1, 2015 2,087 3,082 12,730 36,295 54,194Deduction 865 - 150 546 1,561Balance at December 31, 2015 2,952 3,082 12,880 36,841 55,755

Accumulation amortization and impairment: Balance at January 1, 2014 1,638 3,082 12,730 28,303 45,753Deduction 449 - - 7,992 8,441Balance at December 31, 2014 2,087 3,082 12,730 36,295 54,194Amortized cost: December 31, 2015 3,365 - 1,557 3,553 8,475December 31, 2014 2,959 - 1,707 4,099 8,765

B. Amortization of intangible assets is presented in the statement of income under the following items:

Year ended December 31 2015 2014 NIS in thousands

Cost of sales 177 100

Selling and marketing expenses 881 1,696

General and administrative expenses 503 795

Other expenses - 5,850

1,561 8,441


38

NOTE 9 – FINANCIAL LIABILITIES: A. Notes

December 31 2015 2014 NIS in thousands Series

VI Series

V Series

IV Series

III Total Series

VI Series

V Series

IV Series

III Total

Balance (*) 546,023 208,608 - 70,789 825,420 574,761 312,911 39,260 95,240 1,022,172 Less - current maturities 28,738 104,304 - 23,596 156,638 28,738 104,304 39,260 23,810 196,112

517,285 104,304 - 47,193 668,782 546,023 208,607 - 71,430 826,060

(*) The aforementioned detailed balance does not include deferred issuance incomes in the amount of NIS 11,131 thousands (as of December 31, 2014– NIS 12,019 thousand) which were deducted from the notes balance.

Information on significant credit agreements and the series of notes of the Group as of December 31, 2015:

Borrower Total debt

(in NIS thousands)

Loan terms

Interest Linkage Repayment schedule

The Company

70,789

The unpaid balance of debentures bears an average interest rate of 4.65% per annum. (*)

Debenture principal and interest are linked to the Known Index (basis - CPI for May 2008)

The balance of debentures in the amount of approximately NIS 70.7 million is scheduled for repayment in 3 equal installments on July 10 of each year between 2016 and 2018.

The Company

208,608

The unpaid balance of debentures bears an average interest rate of 5.85% per annum. The weighted discount rate specified for all debentures (Series 5) issued by the Company is approximately 0.96285%. (*)

Unlinked

The balance of debentures in the amount of approximately NIS 208.6 million is scheduled for repayment in 2 equal installments on November 30 of each year between 2016 and 2017.

The Company

546,023

The unpaid balance of debentures bears an average interest rate of 5.89% (**) per annum. The weighted discount rate specified for all debentures (Series 6) issued by the Company is approximately 0.00859%.

Unlinked

The balance of debentures as at December 31, 2015 in the amount of approximately NIS 546 million, is scheduled for repayment in 9 installments as follows: (1) three installments at a percentage rate of five percent (5%) on December 30 of each year between 2016 and 2018, (2) Four equal installments at a percentage rate of ten percent (10%) on December 30 of each year between 2019 and 2022 (3) Two equal installments at a percentage rate of twenty percent (20%) on December 30 of the years 2023 and 2024.

(*) For the debentures above, there are no financial covenants.


39

NOTE 9 – FINANCIAL LIABILITIES: (Cont.)

A. Notes (Cont.)

(**) Financial covenants:

1. The Company undertakes that as long as the debentures (Series 6) have not been repaid in full, the Company shall not create and shall not agree to create, in favor of any third party, any degree of permanent liens on its overall property, to secure any debt or liability, without contacting the Trustee in writing, prior to creating any such lien, to inform him accordingly, and will also create in favor of the debenture holders (Series 6), in parallel and simultaneously with the creation of the lien in favor of the third party, a permanent lean of an equal degree, pari passu according to the ratio of debts, to secure the outstanding balance of the debt toward the debenture holders, and that this lien will remain in effect as long as the debentures (Series 6) have not been repaid in full, or until the cancellation of the lien that was granted in favor of the third party, as aforementioned.

2. The Company undertakes that as long as the debentures have not been repaid in full, the ratio between the shareholders' equity off the Company and the consolidated balance sheet total off the Company, according to its last audited or reviewed quarterly or annual consolidated financial statements, published by the Company prior to the date of examination, as the case may be, shall not fall below 23% for a period in excess of two consecutive quarters. At December 31, 2015 the ratio was 38.39 %.

It is hereby clarified that in the event that the ratio of shareholders' equity to the balance sheet total shall fall between 17% and 23%, the Company shall not be seen as being in breach of the aforesaid undertaking. In the case outlined above, for a period in excess of at least two consecutive quarters, upon termination of the said two quarters, the annual interest rate applicable to the outstanding balance of debentures will increase by a rate of 0.25% above the annual interest rate applicable to the debentures prior to the raising of the annual interest rate as aforementioned. So as to remove all doubt, is hereby clarified that the annual interest rate shall not increase, in any case, by more than 0.25%, on account of the ratio of shareholders' equity to the balance sheet total of the Company.

It is clarified that in the event that subsequent to the raising of the annual interest rate as aforementioned in this section above, the ratio of shareholders equity to balance sheet total will increase to reach at least 23%, then the annual interest rate paid by the Company to the holders of the debentures shall decrease by a rate of 0.25%.

3. The Company undertakes that for as long as the debentures have not been repaid in full, the shareholders equity of the Company shall not fall below NIS 400 (four hundred) million for a period exceeding two consecutive quarters.

4. The Company undertakes not to distribute any dividend and/or to make any purchase of its own shares in any case whereby subsequent to the dividend distribution and/or the purchase of its own shares, as the case may be, its shareholders' equity, according to the audited or reviewed consolidated financial statements of the Company, as the case may be, will decrease to reach a point below NIS 500 (five hundred) million.

In the event that the Company will be unable to meet any of the aforesaid covenants, it will report so in an immediate report to the debenture holders.

As of December 31, 2015 the company meets the financial covenants.


40

NOTE 9– FINANCIAL LIABILITIES: (Cont.)

B. Debentures Series 6, extensions 2014

1. On January 28, 2014 and February 3, 2014, the Company issued Package that includes debentures (Series 6) of the Company, by way of an expansion of a series issued on June 27, 2013 and option warrants (Series A). The Company has allocated NIS 142,772 thousands par value in unlinked debentures (Series 6), at an interest rate of 5.89%. The total net proceeds received by the Company on account of the private placement, net of the issuing expenses, amount to a sum of NIS 144,162 thousands. As part of the expansion, the company issued 95,181 Package each includes 1,500 debentures and 2 option warrants (series A). These option warrants may be exercised during any day of trading, starting from the registration date of the option warrants for trade on the stock exchange, through to January 18, 2017, in a manner whereby each option warrant (Series A) will be exercisable into one ordinary share of the Company, against a cash payment of the exercise price, in the amount of NIS 205.8 per option. Any option warrant (Series A) that shall not be exercised by the end of the exercise period, shall expire and be null and void and its holder shall possess no right or claim whatsoever. The total option warrants that were issued amount to 190,362 options, see note 10E below. The total net proceeds received in consideration of the option warrants, net of issuing expenses, amounted to NIS 3,868 thousands.

2. On July 3, 2014, the Board of Directors of the Company approved the private placement of debentures (Series 6), by way of expanding a series issued on June 27, 2013. The allocation of the debentures (Series 6) is at a volume of NIS 175,493 thousands, par value, such that subsequent to the completion of the private placement, the debenture series (Series 6), amounts to a total of NIS 430,765 thousands par value. The debentures (Series 6), were allocated according to a price of NIS 1,060 for each NIS 1,000 par value and at an interest rate of 5.89%, unlinked. The total net proceeds received by the Company on account of the private placement, net of the issuing expenses, amount to a sum of NIS 184,399 thousands. The terms and conditions of the debentures (Series 6) that were allocated as part of the private placement are identical - for all intents and purposes - to the terms and conditions of the debentures (Series 6), and constitute, as of the date of their registration for trade on the stock exchange, a single series for all intents and purposes, together with the debentures.

3. On October 1, 2014, the Board of Directors of the Company approved the private placement of debentures (Series 6), by way of expanding a series issued on June 27, 2013. The allocation of the debentures (Series 6) is at a volume of NIS 143,996 thousands, par value, such that subsequent to the completion of the private placement, the debenture series (Series 6) as of December 31, 2014 amounts to a total of NIS 574,761 thousands par value. The debentures (Series 6) were allocated according to a price of NIS 1,043 for each NIS 1,000 par value and at an interest rate of 5.89%, unlinked. The total net proceeds received by the Company on account of the private placement, net of the issuing expenses, amount to a sum of NIS 148,887 thousands. The terms and conditions of the debentures (Series 6) that were allocated as part of the private placement are identical - for all intents and purposes - to the terms and conditions of the debentures (Series 6), and constitute, as of the date of their registration for trade on the stock exchange, a single series for all intents and purposes, together with the debentures.


41

NOTE 9 – FINANCIAL LIABILITIES: (Cont.)

C. Credit from bank and others

1) Composition:

Yearly Interest

Rate Current Liabilities

Non-Current Liabilities Total

As of December 31 As of December 31 As of December 31 31.12.15 2015 2014 2015 2014 2015 2014 % NIS in thousands NIS in thousands NIS in thousands

Banks: Short-term credit 2.2 65,671 178,935 - - 65,671 178,935

Loans: Unlinked 5.1 28,184 39,581 28,014 63,161 56,198 102,742

Foreign currency 5.5 2,514 2,766 5,712 9,111 8,226 11,877

Total credit from bank and others 96,369 221,282 33,726 72,272 130,095 293,554

Yearly Interest

Rate As of December 31

% 2015 2014

NIS in thousands Loans: Fixed interest 5.4 58,124 89,914

Variable interest 3.1 6,300 24,705

Total loans 64,424 114,619


42

NOTE 10- EMPLOYEE BENEFITS

A. Composition

As of December 31 2015 2014 NIS in thousandsPost-Employment Benefits at defined benefit plan: Severance pay and retirement liability, net 7,131 7,795Benefits to retirees 13,136 14,187 20,267 21,982 Severance pay benefits (see c following):

20,303 27,227 40,570 49,209 Short term employee benefits: Salaries and wages, payroll and social benefits 32,467 48,671 Current maturities of Severance pay benefits 9,135 8,661Vacation employee benefits 21,105 23,374 62,707 80,706 Stated in the statement of financial position as follows: Employee benefit assets: Non-current assets 226 322 226 322 Employee benefit liabilities: Current liabilities – partly included in other payables

-see note 13 c (2) 62,707 80,706Non-current liabilities 40,796 49,531 103,503 130,237

B. Post-Employment Benefits

(1) Post-Employment Benefits at Defined benefit plan

Plans for Severance pay obligations

The Company and its subsidiaries have an approval from the Ministry of Labor and Welfare in accordance with Section 14 of the Severance Pay Law, 1963, pursuant to which its regular deposits with pension funds and/or insurance policies, exempt it from any further obligation to employees, in respect of whom the aforementioned deposits were made. The

Group deposits 8.33%-11.33% of the monthly wages of its employees in different benefit plans. The Groups has no legal or implied obligation to make additional payments if the plan will not have sufficient assets to pay the entire employee benefits relating to the employee's service during current and past periods. The total amount of the expenses recognized in the statement of income in respect of defined benefit plans in the year that ended on December 31, 2015 is NIS 19,960 thousands (2014 – NIS 19,073 thousands, 2013 – NIS 19,611 thousands).


43

NOTE 10- EMPLOYEE BENEFITS (cont.)

B. Post-Employment Benefits (cont.)

(2) Post-Employment Benefits at defined deposit Plans

a) General

Severance pay obligation

Labor laws and the severance pay law in Israel and abroad require companies in the Group to pay severance benefits to employees who are dismissed, resign or retire from their employment under different specific circumstances. Liabilities for employee severance benefits are calculated pursuant to the employment agreement in effect at the time of their employment and based on the employee's wages which, in management's opinion, creates entitlement to the severance benefits, taking into consideration the number of years of employment. The defined benefit liability was measured using actuarial assessments. The present value of the defined benefit liability and the related costs of current service and past service were measured using the projected unit credit method.

Benefits to retirees

Benefits to retirees are benefits which are expected to be utilized or which are payable during a period greater than 12 months from the end of the period in which the entitling service was provided. Benefits to retirees in the Company include liabilities in respect of retiree's holiday gift. Actuarial profits and losses in respect to these assets are included in the retained earnings in accordance with the Projected Unit Credit Method, while using actuarial assessments at the end of each reporting period. The current value of the Company's liability for retirees benefits is determined by discounting the projected future cash flows from the plan based on At a discount rate suitable to market returns on high-quality corporate bonds (See Note 9(b)(2)(c) below), which are stated in the currency in which pensioners benefits will be paid, whose terms to maturity are approximately identical to the projected pensioners benefits payment dates. Actuarial profits and losses are carried to the income statement as incurred. Past service cost is immediately recognized in the Company's financial statements.

b) Amounts recognized in the statement of income in respect of post-employment benefits at defined benefits plan

The expense was included in the following items: As of December 31 2015 2014 NIS in thousands

Cost of sales 784 2,505 Selling expenses 114 -

Administrative and general expenses 331 446

Financing expenses 744 703 1,973 3,654


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NOTE 10- EMPLOYEE BENEFITS (Cont.)

B. Post-Employment Benefits (cont.)

(2) Post-Employment Benefits at defined deposit Plans (Cont.)

c) Main actuarial assumptions as of the end of the reporting period of post-employment benefits

As of December 31 2015 2014

% %

Discount rate 3.7% 3.4% Projected rates of salary increases 3.0% 2.4% Churn and departure rates 8.2% 9.3%

Assumptions regarding future mortality rates are based on statistic data and mortality tables published by the Commissioner of the Capital Market in the Ministry of Finance in Pension Circular 2013-3-1, which are adjusted as of December 31, 2015. The average life expectancy for men that retired at the age of 67 is 19.4 while the average life expectancy for women that retired at the age of 62-64 is 24.9-26.9.

(3) Severance pay benefits

Benefits include liability due to early retirement.

Following and as part of efficiency and savings measures taken by the Company, on March 23, 2015, the Company signed an amendment to the collective agreement, which includes, inter alia, consents between the Company and unionized workers regarding early retirement of up to 20 unionized workers under customary Company terms and consent between both parties. Following the agreement, the Company allocated the cost of the retirement at total of approximately NIS 5.1 million due to early retirement of unionized employees of the companies in its financial statements for 2015.

NOTE 11 - SHAREHOLDERS’ EQUITY

A. Share capital

Composed of ordinary registered shares of NIS 0.01 par values, as follows:

December 31 2015 2014 Authorized Issued and paid

Number of shares of NIS 0.01 20,000,000 6,385,031 5,089,811

Amount in NIS 200,000 63,850 50,898

On December 10, 2015, the Company published a shelf prospectus for issuance and listing of ordinary shares for trade according to the shelf prospectus. Within this framework, the Company issued 1,295,220 ordinary shares in return for approximately NIS 150 million.

The shares are traded on Tel-Aviv stock exchanges at the rate of NIS 115.2 pare share, as of December 31, 2015. Regarding options issuance see D below.


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NOTE 11 - SHAREHOLDERS’ EQUITY (Cont.)

B. Detailed plans for the allocation of option warrants to position holders at the company

1. On March 2014, the Company's Board of Directors approved plans for allocation of non-tradable options without return to the exiting Chairman of the Board. Mr. Johanan Locker, the exiting Company CEO Mr. Ofer Bloch, and to nine Company position holders. Within the framework of the plan, 162,277 option notes were allocated, out of which 24,977 option notes to Mr. Johanan Locker due to discontinuation of his employment as a result of change in the control holders during the second half of 2015. An expense at rate of approximately NIS 1,015 thousand was recognized in profit and loss due to acceleration of the options vesting period, in addition to expiry of all options granted to him. Approximately 46,125 option notes were allocated to Mr. Ofer Bloch - the option notes expired at the end of 2014. Approximately 91,175 option notes were allocated to nine position holders - as part of a change in the Company's executive chain during 2014-2015, 5 position holders left the Company, due to which approximately 31,591 options and approximately 19,419 option notes expired, respectively. During the second half of 2015, an expense at sum of approximately NIS 754 thousand was recognized to profit and loss due to the acceleration of the vesting period and expiry of options due to Mr. Guy Yadlin whose employment was discontinued due to a change in Company control holders. Net expense at sum of approximately NIS 435 thousand and was recognized to profit and loss due to other position holders. All option notes were allocated in capital course according to the provisions of tax authorities, and on April 30, 2014, the allocation was approved in the presence pf the general meeting.

2. On July 21 and July 23, 2014, the Board of Directors of the Company approved the undertaking of a personal employment contract with Mr. Shlomo Liran, as the CEO of the company. As part of employment contract, agreed upon allocation of 61,078 options exercisable into ordinary shares of NIS 0.01par value each. The warrants allocated as part of an equity track, in accordance with the directives of the Tax Authorities. The allocation approved by the General Meeting of shareholders on September 4, 2014. On February 23, 2015, as a result of discontinuing the employment of Mr. Shlomo Liran, all the options allocated to him were forfeited.

3. On November 17 and November 19, 2014, the Board of Directors of the Company approved the undertaking of a personal employment contract with Mr. Gadi Cunia, as the CEO of the company. As part of employment contract, agreed upon allocation of 30,668 options exercisable into ordinary shares of NIS 0.01par value each. During 2015, an expense at sum of approximately NIS 372 thousand was recognized to profit and loss. The option notes were allocated in capital course according to tax authority provisions for 2014.


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B. Detailed plans for the allocation of option warrants to position holders at the Company (Cont.)

3. (Cont.)

Total allocated 254,023 option warrants were issued. Following below is a description of the principal terms of the plan:

The Plan

Description of the Plan

Manner of Disposal of

the Allocation

Allocation Date

Expiration Date

Vesting and Other

Terms Exercise

Supplement

Price of Share at

Allocation Date

Fair Value at Allocation

Date

NIS NIS NIS in

thousands Plan A Option warrants

granted to company employees, exercisable into company shares(*)

Disposal as shares

09/03/2014 5 years from the vesting

date )1( 194.97 181.3 6,254 )*(*

Plan B Option warrants granted to the Chairman of the Board and the outgoing CEO(*)

Disposal as shares

09/03/2014 2-3 years from the

vesting date )2( 194.97 181.3 3,416 )*(*

Plan C Option warrants granted to the retiring CEO(*)

Disposal as shares

23/07/2014 2-3 years from the

vesting date )3( 159.42 139.6 1,967 *)*(

Plan D Option warrants granted to the interim CFO(*)

Disposal as shares

19/11/2014 5 years from the vesting

date )4( 143.76 125.5 1,241 *)*(

(*) For expiry of options due to employment discontinuation, see section B (1)-(3) above

(1) The shares shall vest in a gradual manner, on the 13th of March in the years 2015-2017, in such a manner whereby one third of the quantity of shares granted shall vest each year, provided that the position holder shall continue to be employed by the company until the relevant vesting dates.

(2) The shares shall vest in a gradual manner, on the 13th of March in the years 2015-2018, in such a manner whereby one fourth of the quantity of shares granted shall vest each year, provided that the position holder shall continue to be employed by the company until the relevant vesting dates .All plan B options expired during 2015.

(3) The warrants shall vest in a gradual manner, on the 23th of July in the years 2015-2018, in such a manner whereby one fourth of the quantity of shares granted shall vest each year, provided that the position holder shall continue to be employed by the company until the relevant vesting dates. All plan C options expired during 2015.

(4) The warrants shall vest in a gradual manner, on the 19 of November in the years 2015-2017, in such a manner whereby one fourth of the quantity of shares granted shall vest each year, provided that the position holder shall continue to be employed by the company until the relevant vesting dates.


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B. Detailed plans for the allocation of option warrants to position holders at the Company (Cont.)

3. (Cont.)

(**) Amounts of expenditure for grants of March 9, 2014, July 23, 2014 and November 19, 2014 in the amount of NIS 9670 thousand, NIS 1,967 thousand and NIS 1,241 thousand, respectively will be credited to the income statement over the vesting period.

Fair value of the options granted during the period

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

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

Component Plan A Plan B Plan C Plan D

Share price (NIS) 181.3 181.3 144.9 124.6

Exercise price (NIS) 194.97 194.97 159.4 143.8

Anticipated volatility (*) 33.10%-35.41% 28.09%-35.41% 27.38%-34.24% 31.47%-33.88%

Length of life of the options (years) (*) 6-8 4-6 4-6 6-8

Non risk interest rate 2.49%-3.09% 1.62%-2.49% 1.37%-2.07% 1.48%-1.97%

Expected dividend rate 0% 0% 0% 0%

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

C. Additional details of options granted to employees

2015 2014 No. Of

options Weighted average

of the exercise price No. Of options

Weighted average of the exercise price

Options granted to employees which: Outstanding at the start of the period 188,479 129.93 46,990 223.96 Expired (39,301) - )46,990( - Granted - - 254,023 180.24

Exercised (78,346) - )65,544( 194.97

Outstanding at the end of the period 70,832 172.8 188,479 129.93

D. Issuing of options as part of the expansion of debenture Series 6

On January 28, 2014 and on February 3, 2014 the company issued a package containing the expansion of bond series 6 and issuance of warrants (Series A) (see Note 8 B). As part of the issuance, 95,181 packages were issued, consisting of 1,500 debentures at par value and two option warrants, each. The total option warrants that were issued amounts to 190,363 options. These option warrants may be exercised during any day of trading, starting from the registration date of the option warrants for trade on the stock exchange, through to January 18, 2017, in a manner whereby each option warrant (Series A) will be exercisable into one ordinary share of the Company, against a cash payment of the exercise price, in the amount of NIS 205.8 per option. Any option warrant


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D. Issuing of options as part of the expansion of debenture Series 6 (Cont.)

(Series A) that shall not be exercised by the end of the exercise period, shall expire and be null and void and its holder shall possess no right or claim whatsoever. The proceeds that are expected to be received in consideration of the exercise of the options into shares amount to a total of approximately NIS 39.2 million, between the years 2016-2017. True to the signing date of the financial statements the issued and outstanding equity of the company amount to 6,385,031 ordinary shares. Assuming that the entire quantity of option warrants will be exercised, in accordance with the terms of the option warrants, the issued and outstanding equity of the company shall amount to 6,575,393 ordinary shares.


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NOTE 12 - INCOME TAX CHARGE

A. Deferred income taxes

The composition of the deferred taxes assets (liabilities), are as follows:

Balance at

January 1, 2014 Recognized in profit and loss

Recognized in equity

Balance at December 31, 2014

Recognized in profit and loss

Recognized in equity


NIS in thousands Temporary differences

Intangible assets )1,861( 1,861 - - - - -Investment Property - - - - - (2600) (2600)Fixed assets )214,233( 17,124 - )197,109( 43,796 (153,313)Employee benefits

provisions 24,130 )2,722( 868 22,276 (8,100) (417) 13,759Doubtful debts 8,915 )359( - 8,556 (447) - 8,109Inventory 119 - - 119 119Rental expenses in

advance(*) - (3,108) - (3,108) 1,824 - (1,284)Financial asset at fair

value through profit and loss )226( 226 - - - - -

Total )183,156( 13,022 868 )169,266( 37,073 (3,017) (135,210)

Unutilized losses and tax benefits losses for tax purposes 178,696 )12,832( - 165,864 (22,601) - 143,263

Total )4,460( 190 868 )3,402( 14,472 (3,017) 8,053

(*) Reclassified


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NOTE 12 - INCOME TAX CHARGE (cont.)

A. Deferred income taxes (cont.)

Deferred taxes are presented in the statements of financial position as follows:

December 31 2015 2014 NIS in thousands Among non-current assets - Deferred tax assets 8,053 1,480 Among non-current liabilities - Deferred tax liabilities - )4,882(

Total 8,053 (3,402)

B. Amounts in respect of which deferred tax assets were not recognized

December 31 2015 2014 NIS in thousands

Business loss for tax purposes 204,263 198,880 Real losses from securities 11,786 11,786

(216,049) 210,666

Expiration dates:

In accordance with the tax laws in effect, there is no expiration date for the utilization of losses for tax purposes. The Company does not anticipate any profits in the foreseeable future that will allow it to utilize these losses and has therefore not created deferred tax assets in respect thereof.

C. Tax expense (income) on income recognized in profit and loss As follows:

For the year ended December 31


For the reported year: Current 140,303 504 352Former Years 1,678 )5,013( (3,424)Deferred taxes in respect of the reporting

period (14,472) (190) (24,764)Deferred taxes in respect of tax rate

change - - 1,305Total tax expenses (income) on income 127,509 (4,699) (26,531)

Current taxes in 2015 were computed at an average tax rate of 26.5%, 2014 – 26.5% and 2013 - 25%, see E below.


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NOTE 12 - INCOME TAX CHARGE (cont.)

C. Adjustment expenses (income) tax profit (loss)

For the year ended December 31 2015 2014 2013 NIS in thousands

Loss before taxes on income 324,195 *(160,273) )102,214(*Statutory tax rate 26.5% 26.5% 25%Tax incomes at statutory tax rate 85,912 (42,472) )25,553(Tax increments (savings) due to: Company's share of after-tax incomes (losses) of

associated company - )10,112( )6,433(Adjustments due to tax rate changes - - 1,305Losses for tax purposes on whose account deferred tax

assets were not recognized in the past, yet for whom deferred taxes were recognized during the reported period - )464( )3,148(

Adjustments were made for impairment of goodwill that can't be deductible - - 3,071

Impairment of fixed assets not recognized in deferred taxes during the reporting period - 25,429 -

Losses for tax purposes on whose account deferred tax assets were recognized in the past, yet for whom deferred taxes were not recognized during the reported period 10,814 23,502 6,254

A decrease in taxes deducted from deferred taxes calculated according to the different theoretical tax rate - 1,075 -

Tax expenses due to the differential between the capital gain due to the sale of an associated company that was recognized for tax purposes and the capital gain due to its sale that was recognized in the financial statements. 28,119 - -

Non-deductible expenses 156 1,861 430Other differences, net (618) 1,495 967

124,383 314 )23,107(Adjustments performed during the year in respect of

prior years' current taxes 3,126 )5,013( )3,424(

Taxes on income as presented in profit and loss 127,509 (4,699) (26,531)


D. More details

The Company and the majority of the subsidiaries are deemed final assessments through the tax year ended December 31, 2013. The other subsidiaries are deemed final assessments through the tax year ended December 31, 2011.

E. Income Tax Ordinance Amendment Law

In the beginning of January 2016, the Income Tax Ordinance Amendment Law was published. The law sets forth that the rate of company tax will be lowered to 25% (instead of 26.5%). The new company tax rate will apply to revenue generated or grown since 1.1.2016.


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NOTE 12 - INCOME TAX CHARGE (Cont.)

F. Income Tax Ordinance Amendment Law

The amendment is not relevant to tax rates imposed on revenue by the power of the Law for the Encouragement of Capital Investments, 5719-1959 (revenue from preferred/approved plant). According to the provisions of IAS 12 - Tax on Income, deferred tax balances as at December 31, 2015 do not take into account the provisions of said law since its legislation was finalized after end of the reporting period. If the legislation was finalized in practice until the end of the reporting period, the Company's deferred tax assets as at December 31, 2015 would have decreased by a sum of approximately NIS 456 thousand, the Company's deferred taxes for the year ended on that date would have increased by NIS 574 thousand, and the Company's comprehensive income for the year ended on that date would have increased by NIS 118 thousand.

NOTE 13 – COMMITMENTS AND CONTINGENT LIABILITIES

A. On March 16, 2015 the transaction for the sale of all holdings of an associated company Hogla-Kimberly was completed. For further details see Note 5(b).

B. On August 13, 2015, the Company announced that further to its announcement from June 24, 2015, Clal Industries Ltd. ("CII"), the former controlling shareholder signed an agreement to sell all of its holdings of the Company (3,007,621 common shares of the Company), representing approximately 59.09% of the issued share capital of the Company (the "Shares sold"), to FIMI Opportunity V (Delaware) LP and FIMI Israel Opportunity V, Limited Partnership (hereinafter collectively, “FIMI” and the “Agreement”), the principles of which are as follows:

1. In consideration for the Sold Shares, FIMI paid CIL a total sum of NIS 354,546 thousand (which reflects a sum of approximately NIS 117.88 per sold share; hereinafter the “Sale Price”).

2. The sale of Sold Shares within the framework of the Agreement was carried out, inter alia, based on presentations and undertakings accepted by the parties and the indemnification undertakings of CIL, pursuant to determined limitations. The Agreement also determines Sale Price adjustment mechanisms upon the occurrence of various events which the Agreement specifies. As part of the transaction during June 2015, discussions were held between the Company and the representatives of the employees regarding granting a non-recurring grant by the Company as part of the sale, totaling up to NIS 3.1 million, to all employees of the Company who were involved in the reducing wages introduced in recent years, (including workers employed under the collective agreement applicable to the Company and employees of the Company under personal contracts, and excluding employees classified as officers of the Company ("The non-recurring grant"). The non-recurring grant which was awarded to every entitled worker as stated was determined by his personal salary and was paid in August, the month following the date of completion of the transaction of company control transfer. To this end, the Company is contracting a special collective agreement (hereinafter- "Collective Agreement") with representatives of organized labor. As part of the collective agreement, it was agreed that, subject to its implementation, representatives of organized labor or anyone on their behalf shall not have any additional requirements, including with regard to changes in control of the Company, the Company, CII or Fimi Fund. In addition, representatives of organized labor have undertaken to maintain industrial peace in terms of the collective agreement and the instructions regarding the transaction of company control transfer.


53

NOTE 13 – COMMITMENTS AND CONTINGENT LIABILITIES (Cont.)

B. (cont.)

2. (Cont.) Given that the non-recurring grant is carried out on the grounds of the transaction of company control transfer, the former controlling shareholder of the company, CII, has undertaken to carry the full cost of the non-recurring grant as stated. The accounting treatment in respect of the non-recurring grant was recorded in the payroll expenses against the Share premium in the amount of approximately NIS 3.1 million.

C. On August 10, 2015, the Company announced that further to the signing of a binding agreement of June 8, 2015 ("Sale Agreement") with the company IC Power Limited ("ICP"), and after receiving the required regulatory approvals, including the approval of the Minister of National Infrastructures, Energy and Water, the Electricity Authority and the Antitrust Commissioner, the transaction was completed and included the following actions, inter alia:

(1) ICP Company acquired all of its holdings (100%) in Advanced Integrated Energy Inc., a fully owned subsidiary of the Company ("integrated energy"), which holds a conditional license to build a power plant with a capacity of 120MW ("power plant "), including shareholders loans made by the company. The existing energy center equipment of the Company was sold to ICP on December 31, 2015, the date on which ICP received an electricity generation license via the energy center equipment.

(2) In return, the Company received a total amount of NIS 60 million.

(3) Within the transaction framework, The Company assigned to ICP the agreement for the supply of the Company's natural gas with the Tamar Project, as well as the natural gas transmission agreement with INGL.

(4) With the signing of the sale agreement, the Company entered into agreements with Integrated Energy, which took effect on August 10, 2015, the date of transaction finalization.

(a) Electricity and steam supply agreements

The commercial operation date of the power station that will be constructed by Integrated Energy is likely to occur until the second half of 2018 ("the commercial operation date"). As of completion date and for a period of up to 18 years after the commercial operation date, the Company will acquire the full amount of electricity and steam needed to establish her power from Integrated Energy. During the interim period until the date of commercial operation, the Company will purchase electricity from the energy center owned by Integrated Energy and OPC Rotem Ltd. (a company related to ICP from which the Company purchases electricity today). Within the framework of these agreements, electricity charge rates payable by the Company were finalized. These rates reflect a discount in relation to the Electric power company price rates, rates of steam consumption, and the steam quantity adjusted to annual actual consumption. The parties have agreed on a minimum annual quantity of steam that the company has undertaken to purchase (take or pay Conditioning).

(b) Land lease agreements

The company will lease to Integrated Energy the space in the plant on which Energy Center equipment is currently located and the area near the plant for power station construction (which is approximately 27 dunam). The lease period will commence on the closing date and will continue until the end of 20 years from the date of commercial operation of the power plant, and in any event shall not last


54


C. (Cont.)

(4) (Cont.)

(b) Land lease agreements (Cont.)

more than 25 years less one day. In accordance with the lease agreement, the responsibility of ICP to the Company shall be limited to the total annual rent paid by it in the past year. The lease agreement includes provisions relating to cancellation by either party, including consent that the Company may terminate the agreement with respect to the area of the power station in case ICP does not start power plant construction within 24 months.

(5) The sale agreement includes a commitment by the Company to compensate ICP for breach of representations in accordance with its provisions, provided that the indemnity will not exceed the price paid to the Company under the transaction.

D. Further to the signing of a non-binding memorandum of understanding on December 31 2014, the Company signed on February 11, 2015 a definitive agreement to sell all (100%) holdings (direct and indirect) of Graffiti Office Supplies and Paper Marketing Ltd. ("Graffiti"), a fully owned subsidiary, to Kravitz (1974) Ltd. (the "Buyer" and "sale Agreement", respectively).

On July 23, 2015, the Company announced that the parties agreed to cancel the transaction without any of the parties having a claim against the other, this based on receiving the comments of the Antitrust Supervisor regarding transaction completion.

E. On March 23, 2015, the Company announced that the Company and the representatives of the organized employees in the Company (representing about 270 employees that are employed at the Company’s site in Hadera) signed an amendment to the collective agreement applying to the parties (the “Collective Agreement”). The amendment to the Collective Agreement included consents between the Company and the organized employees as stated, relating, inter alia, to early cessation of the collective period (which was agreed upon in the past), which included the commencement of decrease in salaries and freezing annual salary additions (corporate and rating additions) as well as the termination of salary 13, this against the provision of additions to employee salary, for which the Agreement applies as of the current date. Furthermore, within the framework of the amendment to the Collective Agreement, it was decided to execute early retirement for up to 20 of organized employees, under the conditions customary in the Company, in accordance with consents between the parties. For additional details, see note 10(b)(2)(c).

F. On July 17, 2013, the General Meeting of Company shareholders - subsequent to receiving approval from the Audit Committee and Board of Directors of the Company - approved in advance the engagement of the Company for the purchase of a Director and Position Holder Liability Insurance policies for several insurance periods that will not accumulatively exceed three years as of July 2014. On August 2015, the Company entered into agreement with Clal Insurance Company Ltd, and purchased an insurance policy for directors and position holders who are currently serving or may serve at the Company, its subsidiaries and/or its associated companies from time to time, including directors and position holders who are controlling shareholders and/or part thereof, if applicable, for the period of one year, this subject to approval terms by the shareholder meeting as stated above. The volume of policy coverage is ten (10) million dollars per claim and in total for the insurance term.


55


G. On September 18, 2008, an agreement was signed between the Company and Gav-Yam Land Corporation Ltd, a public company indirectly controlled by the Company's (former) control holder until July 5, 2012. According to the agreement, the Company leases a lot in Modi'in at an area of approximately 74.5 dunam, and buildings constructed by the leaser for the Company on an overall construction area of approximately 21,000 sqm. that is utilized as a logistics, industry and office center ("logistics center") for Company subsidiaries, and partially replaces existing lease agreements.

An amendment to the lease agreement was signed in the beginning of 2013. The preconditions for entry into force of the said agreement were fulfilled on April 4, 2013. Following is a summary of main amendment provisions: The lease period of the area leased in Modi'in that is used for logistics, industry and office center ("logistics center") for for Company subsidiaries and an associated company was extended by three years until January 31, 2029, the area leased by the Company was reduced to approximately 65 dunam of lot area, and an overall construction area of approximately 20,000 sqm, and accordingly monthly lease fees were reduced by approximately NIS 196 thousand. Furthermore, the option of early agreement discontinuation within ten lease years was canceled. The amendment to the logistics center lease agreement includes several additional provisions, which pertain, inter alia, to return of sums to the Company as reimbursement for works carried out by the Company on the leased asset, the manner of leaser use of the returned asset part, and the option of leasing part of the returned asset to third parties. It should be noted that some of the above area is not utilized for the Company's current operating activity, and accordingly, site evacuation expenses were included in the financial statements as described in Note 14(k)(6) based on Company's estimate.

The lease period for the area leased in Caesarea that is utilized as the main site of Carmel Frenkel Ind Ltd. (formerly Carmel Container Systems Ltd), a company owned by the Company was extended by 13 years until July 31, 2029, part of the leased area was returned to Gav-Yam, and a reduction of monthly lease fees was agreed upon. The amendment to the lease agreement for the area in Caesarea includes several additional provisions, which pertain, inter alia, to determining leaser responsibility due to deficiencies and/or defects in buildings located on the leased area, canceling the option for asset purchase, and canceling payment requirements issued by the leaser due to planning costs.

H. Consolidated companies provided guarantees for various entities due to tenders and promise of future payments and governmental authorities which amount to approximately NIS 1,801 thousand.

I. The Company has a negative pledge on assets in the amount of NIS 29,800 thousand against loans taken to finance the construction machine 8.

J. Several claims and monetary requirements at total of approximately NIS 18,058 thousand (December 31, 2014: NIS 4,099 thousand) are pending against the Company and the consolidated companies. A provision at sum of approximately NIS 16,023 thousand (December 31, 2014: NIS 2,143 thousand) was recognized due to said claims. See additional details in sections h-j hereafter.


56


K. During October 2015, a decision of the Public Utilities Authority (Electricity) (‘the Electricity Authority’) was brought to the attention of the Company. This concerned the fixing of tariffs for management services for the electricity system (system tariffs), as amended (‘the decision’). In the decision, the Electricity Authority determined, for the first time, a system tariff that would be included in the electricity tariff (the TAOZ). According to the decision, the system tariff will apply retroactively from June 1, 2013. The decision applies, inter alia, to holders of supply licenses and holders of independent production licenses, including the Company, since it held an independent production license during the relevant period. Moreover, the decision, as amended, mentioned several private producers and suppliers of electricity, including the Company.

The Company filed a petition against the decision and its retroactive application. On November 19, 2015, the Company filed to the Supreme Court, residing as High Court of Justice, a petition for a show cause order and an interim order against the Public Utilities Authority - Electricity and the Israeli Electric Corporation (hereafter: "the respondents"). After petition filing, the Israeli Electric Corporation submitted a bill to the Company due to some management expenses of the system pertaining to the petition. Subsequently, on November 26, 2015, the Company filed a request for granting a temporary order that will prevent the collection of system management expenses until temporary order ruling. The court acceded to the Company’s request for temporary order which was granted on that day ex parte, and even dismissed two requests for temporary order cancelation: one request that was submitted by the Israeli Electric Corporation, and another request that was submitted by the Public Utilities Authority - Electricity. On February 17, 2016, the court decided upon the cancelation of the temporary order granted to the Company, dismissing the Company's request for granting an interim order against the respondents, and setting file hearing for September 16, 2016 (on the same date of hearings pertaining to the same subject that were filed by other private electricity manufacturers).

On February 22, 2016, the Company received a payment request from the Electric Corporation at a sum of approximately NIS 13 million due to the period from June 2013 until June 2015 (inclusive).

To the Company's best knowledge, during the months since petition filing by the Company, similar request for granting interim and temporary orders against the respondents that were filed by other private electricity manufacturers were dismissed.

In light of the aforesaid recent developments and despite the based legal claims of the Company against retroactive application of the Electricity Authority decision, as at report date, the probability of petition acceptance cannot be assessed.

As at December 31, 2015, the Company included in its financial statements a provision of approximately NIS 13 million.


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L. On January 30, 2011 the Ministry for the Protection of the Environment (hereinafter: "The Ministry") held a hearing for the Company regarding suspicion of water pollution due to discharging low quality wastewater into the Hadera Stream.

On February 8, 2011, the Company received a hearing summary which stated, inter alia, that the Company must improve wastewater quality, and submit a weekly report to the Ministry regarding wastewater quality. The Company has taken measures to significantly improve the quality of treated wastewater discharged into the stream. Following the hearing proceeding as described, an investigation was launched against the Company and officers thereof.

On July 1, 2015 the defendants pleaded guilty, and the Company was convicted. Guilty Company employees were sent for receiving expert opinion within the framework of probation service, for the purpose of considering an option of non-conviction ruling. A sentence arguments meeting was conducted on November 25, 2015, and within the framework of the verdict, the court imposed a fine at rate of NIS 200 thousand on the Company. In regards to defendants who are position holders, the court accepted the probation service's recommendation to avoid their conviction, and imposed on them the execution of public service at volume of 150 hours each, according to a plan that was set by the probation service authority, and severance payment to the Maintenance of Cleanliness Fund.

M. On February 1, 2015, the Company announced that on January 29, 2015, it obtained a request for the approval of a class action lawsuit pursuant to the Class Action Law -2006 ("Class Action Lawsuit"). The class action was filed on account of damages allegedly sustained by the public on account of Hadera Stream pollution, which was allegedly caused by the Company and in light of the indictment filed against the Company on account of transgressions of the Water Law and Business Registration Law. The class action plaintiff has estimated the volume of the lawsuit in the event that it is approved as a class-action at approximately NIS 20 million, inter alia on account of the crime of negligence, by virtue of the Torts Ordinance and on account of breaching a prescribed duty according to the directives of the Water Law. As decided by the Lod District Court from March 11, 2015, the request was transferred to the Haifa District Court which has local authority to hold a hearing regarding the matter. The Company filed its response to the request, and a preliminary hearing was held on November 3, 2015. After the preliminary hearing, both parties conversed and agreed that the plaintiff should withdraw its claim, without any party admitting the claims of the other. The Company agreed to review and refresh its procedures versus supervisors at its plant in all pertaining to claim topics, and to pay remuneration at sum of NIS 1 thousand to the plaintiff, and a professional fee at sum of NIS 19 thousand plus VAT to its representative, subject to their withdrawal. This consent was submitted for approval by the court, and on December 4, 2015, the court accepted the consent and instructed class action dismissal and approval request deletion.


58

NOTE 14 - SUPPLEMENTARY FINANCIAL STATEMENT INFORMATION:

Statement of financial position:

A. Account Receivables: December 31

2015 2014 NIS in thousands

1) Trade receivables :

Open accounts 431,754 458,002Checks collectible 41,816 51,452

473,570 509,454The item is: Net of allowance for doubtful accounts 20,436 27,201

Includes associated companies - 47,286 Aging of customers debts Are not in delay 413,127 440,504Delay till 6 months 54,640 65,981Delay from 6 months to 12 months 3,006 4,681Delay from 12 months to 24 months 6,509 *3,430Delay more than 24 months 16,724 22,059Total 494,006 536,655Deduction of allowance for doubtful accounts 20,436 27,201

473,570 509,454 Aging of provision for bad debts Up to 1 year arrear 2,146 4,0871-2 years arrear 2,842 1,4352+ years arrear 15,448 21,679Total 20,436 27,201 Movement in provision for doubtful debts during the year: Balance at the beginning of the year 27,201 30,732Impairment losses recognized on receivables 2,438 4,418 Amounts written off as uncollectible (6,436) (7,552)Amounts recovered during the year (1,210) (373)Reversal of impairment losses in respect of accounts receivable (1,557) (54)Balance at the end of the year (20,436) 27,201

2) Other receivables:

Employees and employee institutions 530 1,527Associated companies - current debt - 32,778Prepaid expenses 8,994 11,199Advances to suppliers 7,310 2,192Accounts Receivable 446 568Receivables for Hogla sales 25,832 -Others 3,686 6,993

46,798 55,257

*Reclassified


59


Statement of financial position:

B. Inventories:


For industrial activities: Products in process 22,414 20,214 Finished goods 50,929 *72,479 Raw materials and supplies 67,329 88,514Total for industrial activities 140,672 *181,207For commercial activities - purchased products 29,084 *43,279 169,756 224,486Maintenance and spare parts 16,836 19,599

186,592 244,085

* Reclassified

Additional information – the amount of inventory recognized during the period under cost of sale amounted to NIS 805,386 thousand in 2015 (2014 – NIS 880,514 thousand).

C. Account payables:


1) Trade payables: Open accounts 281,130 302,137 Checks payable 4,456 3,317 285,586 305,454

2) Other payables: Payroll and related expenses 32,467 48,671

Employee institutions 6,469 12,077 Accrued interest 3,790 6,885 Accrued expenses 26,713 22,103 Income in advance 6,668 1,468 Customs and VAT authorities 5,121 9,800 Others 20,619 17,489 101,847 118,493

D. Sales (1) Year ended December 31


Industrial operations (2) 1,446,731 1,416,369 1,453,302Commercial operations 294,711 340,993 369,792 1,741,442 1,757,362 1,823,094(1) Including sales to associated companies - 51,184 51,943(2) Including sales to export 288,066 253,294 256,823


60

NOTE 14 - SUPPLEMENTARY FINANCIAL STATEMENT INFORMATION: (cont.)

Statements of income: (cont.)

E. Cost of sales: Year ended December 31 2015 2014 2013

NIS in thousands Industrial operations: Materials consumed (*) 585,909 622,697 604,509Expenditure on the basis of benefits to

employees (see g below) 242,896 238,912 278,817Depreciation and amortization 87,664 98,459 101,046Other manufacturing costs (**) 359,485 379,307 396,524Decrease (increase) in inventory of finished

goods 18,232 )8,081( )3,303( 1,294,186 1,331,294 1,377,593Commercial operations - cost of products sold 219,477 257,818 281,277

1,513,663 1,589,112 1,658,870 Materials: (*) 234,003 217,920 218,405Cellulose 115,675 134,712 134,799Cardboard manufacturing 85,358 92,792 90,438Chemicals 107,946 129,363 119,211Waste paper recycling 42,927 47,910 41,656

Other 585,909 622,697 604,509 Other manufacturing expenses: (**) 76,024 81,053 87,374Outdoor Works 139,962 154,338 166,976Energy 19,974 18,819 18,609Municipal taxes 5,757 8,029 5,245Insurance 40,672 51,537 43,114Maintenance and spare parts 77,096 65,531 75,206

Other 359,485 379,307 396,524

F. Selling, marketing, administrative and general expenses: Year ended December 31


Selling and marketing: Expenditure on the basis of benefits to employees

(see g below) 50,919 51,207 51,906Packaging, transport and shipping 56,396 55,474 55,723Commissions 3,016 3,647 4,734Depreciation and amortization 3,040 5,207 4,742Storage expenses 15,899 20,306 24,700Other 13,596 12,905 5,375

142,866 148,746 147,180


61



F. Selling, marketing, administrative and general expenses: (Cont.) Year ended December 31

2015 2014 2013

NIS in thousands

Administrative and general: Expenditure on the basis of benefits to employees (see g below) 42,069 56,565 56,366

Office supplies, rent and maintenance 2,283 3,330 5,189 Professional fees 3,115 4,092 2,252 Depreciation and amortization 4,996 4,915 5,100 Doubtful accounts and bad debts 894 4,385 2,920 Other 17,294 12,291 17,115 70,651 85,578 88,942Less - rent and participation from associated companies 22,037 20,749 21,037

*Reclassified 48,614 64,829 67,905

G. Expenses in respect of employee benefits Year ended December 31 2015 2014 2013 NIS in thousands

Composition: Payroll and bonuses 314,651 *321,932 340,691Expenses in respect of a defined deposit plan 19,960 19,073 19,611

Expenses in respect of a defined benefit plan 1,949 1,711 5,369

Share-based payment transactions 2,576 1,616 -Severance benefits 5,140 *3,641 23,383 344,276 347,973 389,054Net of capitalized amounts (see note 6e) - )1,226( )1,930(

344,276 346,747 387,124*Reclassified

H. Depreciation and amortization Year ended December 31 2015 2014 2013

NIS in thousands Composition: Depreciation of fixed assets (see note 7) 94,250 106,644 108,274Impairment of intangible assets (see note 8) 1,561 2,591 2,446

Depreciation of other assets - - 71Provision of impairment (see note 4C(3) 65,610 117,412 12,282

161,421 226,647 123,073


62



I. Finance income Year ended December 31 2015 2014 2013 NIS in thousands

(1) interest income Interest income from short-term

balances 701 1,088 2,087Interest income from operational revaluation

– net 5,052 1,700 6,266Total interest income 5,753 2,788 8,353

(2) Other 486 300 625

Total Finance income 6,239 3,088 8,978

J. Finance expenses Year ended December 31

2015 2014 2013

NIS in thousands 1) interest expenses

Interest expenses from bank loans and short-term loans 3,129 8,617 9,834

Interest expenses from long-term loans 3,939 5,692 7,220Interest expenses on account of non-

convertible notes net of related hedges 55,403 58,697 53,072Interest expenses from operating monetary

balance-net 2,214 11,115 1,084Other interest expenses 1,855 *1,890 *679

Total interest expenses 66,540 86,011 71,889 2) other

Bank commissions 1,453 1,222 1,038Interest costs from employee benefits 924 2,011 1,697

Total other finance expenses 2,377 3,233 2,735

Total finance expenses 68,917 89,244 74,624



63

NOTE 14 - SUPPLEMENTARY FINANCIAL STATEMENT INFORMATION: (Cont.)

Statement of income: (Cont.)

K. Other expenses (revenue) Year ending December 31 2015 2014 2013 NIS in thousands

Capital (profit) loss due to sale of activity and fixed assets (1), (3), (4) (10,023) (67,486) 4,715

Capital profit due to actualization of investment in an associated company (8) (438,683) - -

Loss (profit) due to exit from consolidation (3,232) 16,642 (2,256)Loss (profit) due to revaluation of a Put option

for owners of non-controlling interests - (2,378) -Restitution of a mutual fund for employers (2) - (10,000) (3,640)Provision for devaluation (5), (9) 65,610 117,412 12,282Loss due to devaluation of a financial asset at

fair value through profit and loss - 2,550 -Expenses due to Electricity Authority

requirement (11) 13,320 - -Expenses due to site evacuation (6) 5,383 10,200 -Provision due to employee early retirement (7) 8,392 - -Expenses due to the power station transaction 3,543 - -Expenses due to a transaction with a

controlling owner (10) 3,102 - -Other 2,014 11 338

Total other expenses (revenue) (350,574) 66,951 11,439

(1) As of the Company has decision, on January 28, 2013, to relocate the activity of one of the manufacturing sites of Carmel Container Systems Ltd., a wholly owned subsidiary of the Company ("Carmel"), located in Carmiel, to Carmel's central site of operations located in Caesarea and consequently - the shutting down of the manufacturing site in Carmiel. As a result of relocating of the operation and Carmel agreements with the employees at the Carmiel site, the Company recognized during the reporting period, non-recurring operation expenses in the amount of approximately NIS 5.5 million that are included in the income statement in other expenses.

(2) On December 29, 2013, HADERA PAPER Group was reimbursed contributions amounting in total to NIS 3,640 thousands (hereinafter: "the reimbursement") and On November 13, 2014 received amount in total to NIS 10,000 thousands, Respectively from the Employer Mutual Fund, as reimbursement of contributions made by the Group to the Fund. The reimbursements were subject to Group commitment to repay these amounts, in whole or in part, in certain cases which the Company believes are unlikely to materialize.

(3) On March 31, 2014, the transaction was signed for the sale of an asset on Eshkol Street in Hadera, in consideration of NIS 1.7 million. Pursuant to the finalization of the transaction, the company recorded capital gains totaling NIS 1.3 million, net of taxes.

(4) On June 26, 2014, the Board of Directors of the Company approved the engagement of the Company and a subsidiary - Amnir Recycling Industries - for the sale of its rights in a plot of land covering 57,000 square meters in the Hadera Industrial Zone, in consideration of NIS 66.2 million, plus VAT, as prescribed by law. As at December 31, 2015, the full consideration was paid to the Company.


64


Statement of income: (Cont.)

K. Other income (Cont.)

(4) (Cont.)

The Company has the right to continue using the property for a long period, even after receipt of the full consideration for the acquisition of the property, free of rent or use, in order to prepare operationally for the transition from the property. The Company estimates the value of this right was about NIS 11.7 million. And as at the date of financial statements, this is valued at the total of NIS 4.8 million that was presented as assets of advance short term and long term rental expenses in the amount of approximately NIS 3.3 million and NIS 5.1 million, respectively.

In consideration of the sale of the rights in the plot, given in exchange for assets and recognized, the Company and the subsidiary have recorded net capital gains totaling approximately NIS 46.2 million in their financial statements as at December 31, 2014.

(5) In view of the agreement for the sale of the power plant and equipment used to produce steam during 2015, the Company recognized provision for impairment in the amount of approximately NIS 26.7 million, which was recorded in other expenses. For details, see Note 13(c) above.

(6) During 2014, as part of a streamlining process in the fine paper sector, the Company started to evacuate its site in Modi'in, and is taking actions for finding an alternative renter. As a result, the Company recognized an expense at a sum of approximately NIS 10.2 million. In 2015, the Company have not found an alternative renter, and hence recorded an additional expense at sum of NIS 5.4 million.

(7) See Note 10(b)(3).

(8) See Note 5(b).

(9) See Note 4(c)(3).

(10) See Note 13(b).

(11) See Note 13(j).


65

NOTE 15 - NET INCOME PER SHARE

Following are data relating to the profit and the number of shares (including adjustments to such data) used for the purpose of computing the basic and fully diluted net income per ordinary share. (See note 2W)

Net income Year ended December 31 2015 2014 2013 NIS in thousands

Total profit (loss) for the year, as reported in the income statements, used in computation of basic income per share 196,513 (154,741)* (74,849)Total profit (loss) for the year used in computation of diluted income per share 196,513 (154,741)* (74,849) Number of shares Year ended December 31 2015 2014 2013 Weighted average number of ordinary shares used for computing the basic income per share 5,150,136 5,089,811 5,089,811

Weighted average number of ordinary shares used for

computing the diluted income per share 5,150,136 5,089,811 5,089,811


NOTE 16 - ACTIVITIES NOT INVOLVING CASH FLOWS:

A. As of December 31, 2015 the acquisition of fixed assets with suppliers credit amounted to NIS 6,230 thousand.

B. As of December 31, 2014 the acquisition of fixed assets with suppliers credit amounted to NIS 17,740 thousand.

NOTE 17 - FINANCIAL INSTRUMENTS AND RISK MANAGEMENT

A. The purpose of financial risk management

The finance division of the Group supplies services to the business operation provides access to domestic and international financial markets, monitors and manages the financial risks associated with the Group's activities through internal reports that analyze the level of exposure to risks according to their degree and intensity. These risks include market risks (currency risk, fair value risk in respect of interest rates, price risk and cash flow risk in respect of interest rates), credit risks and liquidity risk.

The Group reduces the impact of above risks mainly by bearing most if its liabilities in NIS and fixed interest, and by utilizing existing natural foreign currency protections between the Company's sectors of activity.

Group's activity exposes it mainly to financial risks of change in foreign currency exchange rates (see section d hereafter).

B. Market risk

Market risks reflect the risk of changes in value of financial instruments that are affected by changes in interest rates, CPI and exchange foreign currency, and also price changes in world commodity markets.

During the reporting period there was no change in exposure to market risks or the manner in which the Group manages and measures the risk.


66

NOTE 17 - FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (Cont.)

C. Credit risks

Credit risks relate to the risk that the counter party will not fulfill its contractual obligations for payment and cause the Group financial losses. The Group has a policy of entering transactions with parties that have a credit rating and obtaining sufficient collateral, when appropriate, as a means of reducing the risk for financial losses as a result of failures. When this information is not available, the Group draws on available public financial information and its commercial experience in order to grade its main customers. The Group's exposure and the credit ratings of counter parties are examined on a regular basis.

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

See note 14a details of the aging of customers' debts as of December 31, 2015.


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NOTE 17 - FINANCIAL INSTRUMENTS AND RISK MANAGEMENT: (cont.) D. Foreign currency risks

December 31, 2015 December 31, 2014 In, or linked

to, foreign currency (mainly dollar)

In Euro

Linked to the Israeli

CPI

Unlinked

In, or linked to, foreign currency (mainly dollar)

In Euro


CPI

Unlinked NIS in thousands NIS in thousands

Assets: Current assets: Cash and cash equivalents and designated deposits 32,419 21,369 - 800,806 3,366 370 - 323,970 Financial assets measured at amortized cost 37,643 3,430 1,687 461,304 23,993 4,813 1,620 520,895

70,062 24,799 1,687 1,262,110 27,359 5,183 1,620 844,865

Liabilities: Current liabilities:

Short-term credit from banks - - - 65,671 - - - 178,935 Accounts payables and accruals 54,575 30,302 1,564 294,324 79,712 20,502 2,129 320,136 Long-term liabilities (including current maturities): Long –term loans 724 7,502 - 56,199 931 10,946 - 102,742 Notes - - 70,655 765,896 95,005 939,186 Other liability - 245 1,895

55,299 37,804 72,219 1,182,335 80,643 31,448 97,134 1,542,894

Total Exposure 14,763 (13,005) (70,532) 79,775 (53,284) )26,265( )95,514( )698,029(

As to exposures relating to fluctuations in foreign currency exchange rates and the use of derivatives for hedging purposes - see a above. As to sensitivity analyze of foreign currency – see below.


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NOTE 17 - FINANCIAL INSTRUMENTS AND RISK MANAGEMENT: (cont.)

D. Foreign currency risks (cont.)

Sensitivity analysis of foreign currency:

The group is primarily exposed to the US dollar and the euro. The following table illustrates the sensitivity to a decrease of 5% in the NIS vis-à-vis the other currencies. 5% was the rate of sensitivity that was used in reporting to key executives. This index also represents management estimates regarding the reasonable potential change in exchange rates. The sensitivity analysis includes the existing balances of monetary items denominated in foreign currency and adjusts their translation at the end of the period to a change of 5% in the foreign exchange rates. The impacts on profit and loss of a decrease of 5% in the NIS vis-à-vis the other currencies, after the impact of taxes and net of discounted sums:

The influence of the

Euro The influence of the

US Dollar

December 31 December 31

2014 2015 2014 2015

NIS in thousands NIS in thousands

)965( 478 )1,935( (515) Loss

E. Interest rate and liquidity risk

The Group manages liquidity risks by maintaining suitable funds, banking and loans, ongoing monitoring of actual and anticipated cash flows and adjusting the vesting of financial assets and liabilities.

1. Financial liabilities that do not constitute derivative financial instruments

The following tables specify the remaining contractual repayment dates of the Group in respect of financial liabilities, which do not constitute a derivative financial instrument. These tables were prepared based on the non-discounted cash flows of financial liabilities, based on the earliest date in which the Group may be required to repay them. The tables include cash flows in respect of the principal and the interest.

Average effective

interest rate Till 1

month 1-3

months

From 3 months

to 1 year

From 1 year to 5

years Above 5

years Total % NIS in thousands As of December 31, 2015 Short-term credit 2.2 65,667 - - - - 65,667Loans from banks 3.7 999 2,920 10,499 11,562 - 25,980Long-term loans from others 6.1 8,590 369 10,066 23,649 - 42,674Index linked notes carrying permanent interest 5.7 - - 177,406 392,857 413,670 983,933Notes carrying permanent interest 4.8 - - 26,897 50,350 - 77,247

75,256 3,289 224,868 478,418 413,670 1,195,501


69

NOTE 17 - FINANCIAL INSTRUMENTS AND RISK MANAGEMENT: (cont.)

E. Interest rate and liquidity risk (cont.)

1. Financial liabilities that do not constitute derivative financial instruments (Cont.)

Average effective

interest rate Till 1

month 1-3

months

From 3 months

to 1 year

From 1 year to 5 years

Above 5 years Total

% NIS in thousands As of December 31, 2014

Short-term credit 2.50 129,266 - 50,700 - - 179,966Loans from banks 3.61 2,130 6,277 19,500 33,169 - 61,076Long-term loans from others 5.60 8,533 414 10,298 43,638 - 62,883Index linked notes carrying permanent interest 5.40 - - 227,385 489,211 495,915 1,212,511Notes carrying permanent interest - - 28,239 77,846 - 106,085

139,929 6,691 336,122 643,864 495,915 1,622,521

2. Non derivative financial instruments

The following tables present the expected repayment dates of the group on account of financial instruments that are not derivatives. The tables were prepared on the basis of the expected, non-discounted repayment dates of the financial assets, including the interest that will accrue from these assets, except for those cases where the group anticipates that the cash flows will be generated in a different period. The tables were prepared based on cash payments/receipts for derivative instruments settled on a net basis and the gross non-discounted cash payments/receipts for those derivatives that require net settlement. When the amount payable or receivable is not fixed, the disclosed amount was determined based on the projected interest rates as described by the existing interest yield curve as at the end of the reporting period.

Till 1

month 1-3

months

From 3 months to

1 year Total 2015

Loans measured at depreciated cost

Bank Deposits 854,594 - - 854,594 854,594 - - 854,594

Trade receivables and other receivables

Open accounts 127,011 214,143 90,600 431,754Checks collectible 16,744 24,049 1,023 41,816Other receivables - 30,358 - 30,048Accounts receivable 446 - - 446 144,201 268,240 91,623 504,064 998,795 268,240 91,623 1,358,658


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NOTE 17 - FINANCIAL INSTRUMENTS AND RISK MANAGEMENT: (Cont.)

E. Interest rate and liquidity risk (Cont.)

2. Non derivative financial instruments (Cont.)

Till 1

month 1-3

months

From 3 months to

1 year Total

2014

Loans measured at depreciated cost

Bank Deposits 327,706 - - 327,706 327,706 - - 327,706

Trade receivables and other receivables

Open accounts 122,379 148,877 186,747 458,003Checks collectible 32,102 17,096 2,254 51,452Other receivables - 41,299 - 41,299Accounts receivable 568 - - 568 155,049 207,272 189,001 551,322 482,755 207,272 189,001 879,028

3. Interest risk

The group is exposed to interest rate risks due to the fact that the group companies lend and borrow funds at both fixed and variable interest rates. The risk is managed by the group by maintaining a proper business attitude between loans at a variable rate of interest and loans at a fixed rate of interest. The group's exposure to interest rates on financial assets and liabilities is described in the section regarding liquidity risk management that is presented further below in this note. During the year the exposure to interest risk decrease by NIS 602,992 thousands net, as a result of increase at banks deposits.

Sensitivity analysis of interest rates:

The sensitivity analysis was determined on the basis of the exposure to the interest rates of both derivative and non-derivative financial instruments at the end of the reported period. The sensitivity analysis regarding liabilities carrying a variable rate of interest was prepared under the assumption that the sum of liabilities at the end of the reported period was the actual sum throughout the entire reported year. For the purpose of internal reporting to key executives regarding interest rate risks, a rate of increase or decrease in base points of 5% was used, representing management estimates regarding the reasonable potential change in interest rates. Assuming that interest rates would have increased by 5% while all other parameters would have remained constant, the impact after taxes would have been as follows: The earnings of the group for the year ended December 31, 2015 would have been increased by NIS 26,047 thousands (2014: in decreased of NIS 3,936 thousands). This change originates primarily from the group's exposure to interest rates on account of variable-interest loans.


71


F. Fair value of financial instruments

The fair value of financial assets and liabilities were determined as follows:

The fair value of financial assets and liabilities with customary terms that are traded in active markets is determined based on quoted market prices.

The following table specifies the carrying amount and fair value of financial instrument groups that are not presented in the financial statements at their value, the rest of the assets and liabilities are presented in the statement of financial position at their fair value, or approximately:

Carrying Amount Fair Value

Carrying Amount Fair Value

December 31, 2015 December 31, 2014 NIS in thousands NIS in thousandsFinancial Liabilities

Notes – series 3 (1) 70,655 76,006 95,005 98,958Notes – series 4 (1) - - 39,347 40,018Notes – series 5 (1) 207,737 224,357 311,185 327,524Notes – series 6 (1) 558,157 612,091 588,654 524,182Long term loans with fixed interest (2) 48,531 49,993 78,038 80,849

885,080 962,447 1,112,229 1,071,531 (1) The fair value is based on quoted prices on an active market on the date of the

Statement of Financial Position. (2) The fair value of long-term Assets and Liabilities are based on the calculation of the

current value of cash flows at real interest rate of 4.0%.

NOTE 18 - INTERESTED AND RELATED PARTIES-TRANSACTIONS AND BALANCES:

A. General:

Company stakeholders are the parent fund Fimi and its related parties, directors and key executives of the Company or the parent company, and a close family member thereof. Transactions with the parent company Fimi are presented as of the date of transaction completion as of August 13, 2015. Transactions with the former parent company, Clal Industries and Investments Ltd. (hereafter: "CII Group") are presented until the date of transaction completion as of August 13, 2015. Transactions with a former associated company, Hogla-Kimberly, are presented until the date of transaction completion as of March 16, 2015.

B. Transactions with Interested and Related Parties

The Company and its consolidated companies are carrying out transactions with stakeholders under market terms during their regular course of business.

Negligible transactions:

On August 8, 2010 and November 15, 2011, the Company's Board of Directors set forth that in lack of special qualitative considerations arising from all circumstances of the matter, a stakeholder transaction that is not considered as extraordinary (as implied by the Companies law) will be regarded as negligible


72

NOTE 18 - INTERESTED AND RELATED PARTIES-TRANSACTIONS AND BALANCES:(Cont.)

B. Transactions with Interested and Related Parties (Cont.)

Negligible transactions: (Cont.)

transaction for the purposes stated above, if the relevant criterion calculated for the transaction is at rate of less than 0.5%, and the transaction volume does not exceed a total of NIS 8 million (when this amount is adjusted according to the rate of increase in known CPI at the beginning of 2010, from time to time).

For each stakeholder transaction whose classification as a negligible transaction was examined, one or more criteria relevant to the specific transaction will be calculated based on the Company's reviewed or audited consolidated financial statements:

(a) Fixed asset ("non-current asset") purchase - transaction volume versus total assets (in the Statement of Financial Position included in the Company's consolidated financial statements);

(b) Fixed asset ("non-current asset") sale - profit/loss due to the transaction versus the annual average profit (i.e. for four quarters) based on the last 12 quarters for which Company consolidated financial statements were published. In this regard, the profit/loss due to the transaction and the profit/loss in each quarter will be calculated at their absolute value;

(c) Receiving a financial liability - transaction volume versus total liabilities in the Statement of Financial Position included in the last consolidated financial statements;

(d) Sale of products or services (excluding fixed assets) - transaction volume versus revenue from sales and services in the last 4 quarters for which Company consolidated financial statements were published.

(e) Purchase of products or services (excluding fixed assets) - transaction volume versus total operational expenses and costs in the last 4 quarters for which Company consolidated financial statements were published.

(f) In regards to annual stakeholder transactions, the transaction volume will be calculated on an annual basis. For example, in an insurance transaction for several years, annual paid insurance fees will be calculated according to the transaction volume. In cases where according to the Company's discretion, all aforesaid quantitative criteria are not relevant for examining the negligibility of a stakeholder transaction, the transaction will be regarded as negligible according to another relevant criterion that will be determined by the Company, granted that the relevant criterion calculated for the transaction is at rate of less than 0.5%, and the transaction volume does not exceed NIS 8 million (when this amount is adjusted according to the rate of increase in known CPI at the beginning of 2010, from time to time).


73

NOTE 18 - INTERESTED AND RELATED PARTIES-TRANSACTIONS AND BALANCES: (Cont.)


Classified transactions with properties, as follows:

1. Service acquisition transactions with interested and related parties Communication services, tourism services, services of the Company's logistics center operation, investment consulting services, and other financial services.

2. Transactions for the purchase and/or sale of renting chattels and goods from stakeholders and related parties: trucks and towing equipment, vehicles, insurance products.

3. Transactions pertaining to marketing campaigns, advertising and discounts with stakeholders and related parties, or pertaining to products of stakeholders and related parties.

4. Transactions with stakeholders and related parties pertaining to the purchase of gift certificates of stakeholders and related parties.

5. Transactions for the rent of buildings and real estate.

6. Sale of paper and board products, office supplies and other products to companies in CII Group until August 13, 2015.

The transaction's negligibility is examined annually for the purpose of this report, along with attaching all Company transactions of the same type with the stakeholder and other corporations under his control.

Following is a general description of the transactions conducted with Company stakeholders, whereas exclusive of the transactions detailed hereafter, these should be regarded as negligible according to the tests detailed above:

For the year ending December 31 Stakeholders:

2013 2014 2015

Thousands of NIS 110,941124,616 73,626Sales (1)

19,8678,936 5,380Operational expenses (2) Related parties:

51,94351,185 7,699Sales (1) 32,08731,637 6,595Operational expenses (2)

(1) Sales

The Company sells too many companies from CII Group paper products, office supplies and other products, via multiple transactions, whereas each transaction amount is negligible. Prices are determined via negotiation and within regular course of business.

a. The Company sells packaging paper to a former stakeholder of CII Group. Total transactions per the stakeholder in 2015, 2014 and 2013 are approximately NIS 66.0 million, NIS 113.7 million, and NIS 110.9 million, respectively.


74



(2) Sales (Cont.)

b. The Company sells cardboard to a former stakeholder of CII Group. Total transactions per the stakeholder in 2015 and 2014 are approximately NIS 7.9 million and NIS 10.9 million, respectively.

c. Until March 16, 2015, the Company sold to an associated company which is a related party: fine paper, packaging paper, office supplies and white paper waste. Total transactions for related parties in 2015, 2014 and 2013 are approximately NIS 7.7 million, NIS 51.2 million, and NIS 51.9 million, respectively.

(3) Operational expenses

During the year, the Company conducted multiple transactions with suppliers that are stakeholders and related parties of CII Group. The transactions included purchase of raw materials, ongoing and other services for Group companies. Prices and credit terms are determined via negotiation and within regular course of business.

During the year, the Company purchased cleaning and toiletry products from an associated company which is a related party. Total purchased from related parties in 2015, 2014 and 2013 are approximately NIS 2.5 million, NIS 10.9 million, and NIS 11.1 million, respectively.

The Company concluded transactions with associated companies that are related parties due to revenue from lease of buildings and computer services. Total transactions in 2015, 2014 and 2013 are approximately NIS 4.1 million, NIS 20.7 million, and NIS 21.0 million, respectively.

The Company concluded transactions with stakeholders from Clal Group Industries Ltd. due to purchase of cardboard. Total transactions per the stakeholder in 2015, 2014 and 2013 are approximately NIS 5.4 million, NIS 8.9 million, and NIS 12.6 million, respectively.

Above transaction amounts pertain to transactions that the Company conducts during its regular course of business (since the parties are Company investees) under terms and prices which do not deviate from customary Company practices in regards to its other clients and suppliers.

Benefits to key executives

In addition to wages, Group senior executives are entitled to non-cash benefits (such as a vehicle, and so on). The Group deposits funds for this purpose within the framework of a defined benefit plan after transaction termination. Senior executives also participate in the plan of option notes for Company shares (see Note 10 regarding share based payments).


75



Benefits to key executives (Cont.)

1) Remuneration of key executives:

For the year ending December 31 2015 2014 2013 Thousands of NIS

Short-term benefits 5,745 9,590 7,810Benefits after transaction completion 745 1,130 31Share based payment 1,611 540 - 8,101 11,260 7,841

2) Benefits granted to stakeholders:

For the year ending December 31

2013 2014 2015

Thousands of NIS

Wages and salary to the employed

stakeholder 2,019*5,535 2,130In the Company, NIS thousand

12 1Number of people pertaining to the benefit

1,0591,332 822Wage of directors not employed by the Company - in NIS thousand

119 8Number of people pertaining to the benefit

(*) Due to the wage of the previous CEO, Mr. Ofer Bloch and wage of the

retiring CEO, Mr. Shlomo Liran.

On February 12, 2015, the Company announced that according to the provisions of the Company's remuneration policy, the Company's remuneration committee and Board of Directors approved the grant of a non-recurring adaptation bonus at sum of NIS 270 thousand to the retiring Company CEO, which equals to 3 times of the monthly salary received by Mr. Shlomo Liran during his service.

On February 26, 2015, the Company announced that according to the provisions of the Company's remuneration policy, the Company's remuneration committee and Board of Directors approved the grant of non-recurring retirement terms at sum of NIS 660 thousand, which equals to 6 times of the monthly salary received by Mr. Ofer Bloch that are granted as six months of adaptation bonus due to his service.

The above number of directors represents the number of directors as at December 31, 2015.


76


B. Balances with Interested and Related Parties

As at December 31

2014 2015

Thousands of NIS

*59,126 398Receivables - commercial activity

6,387 -Payables

(*) As at December 31, 2014, there are also balances with associated companies - see Note 13.


77

NOTE 19 - SEGMENT INFORMATION

A. General: The Group has been implementing IFRS 8 "Operating segments" (hereinafter – "IFRS 8") as of January 1, 2009. In accordance with the provisions of IFRS 8, operating segments are identified on the basis of internal reports on the Group's components, which are regularly reviewed by the chief operational decision maker of the Group for the purpose of allocating resources and evaluating the performance of the operating segments.

The identified operating segments, according to IFRS8 are:

The Packaging paper and recycling segment – generates revenue from the sale of paper products to paper manufacturing companies as well as from the recycling of paper and cardboard.

The packaging and cardboard products segment – generates revenue from the sale of packaging and cardboard products to customers.

Paper waste collection segment – generates revenue from providing waste collection services of paper and cardboard waste and from sales to the paper manufacturers.

The printing and writing paper segment – an associated company that generates revenue from the manufacture and marketing of fine paper.

The office supplies marketing segment – generates revenue from the sale of office supplies to customers.

The Hogla Kimberly segment – On March 16, 2015, the Company sold its interest in an associated company that issued the revenue from the manufacture and marketing of household paper products, hygiene products, disposable diapers and complementary kitchen products, in

Israel and in Turkey, see note 5(1) above.

As a result of the sale of Hogla-Kimberly, as mentioned above, the associated company Hogla-Kimberly is not recognized as a segment in the Company's financial statements, and its comparative figures of segments were amended according to new recognition and allocation in light of the change in the Company's internal organizational structure.


78

NOTE 19 - SEGMENT INFORMATION: (cont.)

Total Adjustments to consolidation

Marketing of office supplies

Printing and writing paper


Packaging and carton

products

Packaging Paper and recycling

B. Business segment data 2015:

NIS in thousands 1,741,442 - 173,087527,255143,203469,458 428,439Sales to external

- )275,666( 718 28,269 138,900 5,975 101,804 Sales between Segments 1,741,442 )275,666( 173,805555,524282,103475,433 530,243Total revenues of the segment

386,873 3438,133 )1,984()89,756(23,6616,393 130,426Profit (loss) from ordinary operations6,239 Financial income

68,917 Financial expenses 324,195 Loss before taxes on income 127,509 Taxes on income 196,686 Profit for the year

2,557,298 47,711 73,035309,142221,565 290,370 1,615,475Segment's assets

285,586 - 38,62760,27758,309 70,719 57,654Segment's liabilities

1,289,987 Join liabilities that were not allocated between

segments 1,575,573 Total liabilities in the consolidated statements

161,421 - 2,944 60,447 12,733 22,345 62,952Depreciation and amortization 65,311 - 579 7,601 20,638 24,597 11,896 Capital investments in non-current assets

(1) Segment results include non-recurring expenses of NIS 16,827 thousand in respect of impairment due to sale of equipment used to produce steam as part of the power plant, see note 14(k)(5) above.

(2) Segment results include non-recurring expenses due to impairment from the sale of equipment used to produce steam as part of the power plant at sum of NIS 9,883 thousand (see Note 14(k)(5) above), and a provision for impairment of property plant and equipment at sum of NIS 38,900 thousand, (see Note 14(c)(3) above).

(3) Adjustments to the consolidated statement include non-recurring income from capital gains from the exercise of Hogla-Kimberly,at the amount of approximately NIS 438,683 thousand, see note 5(b) above.


79







products


C. Business segment data 2014:

NIS in thousands

1,757,362 - 182,479498,068157,160476,169 443,486Sales to external

- )271,494( 1,310 23,710 151,172 6,061 89,241 Sales between Segments 1,757,362 )271,494( 183,789521,778308,332482,230 532,727Total revenues of the segment

)112,276( )426( 2,690)162,718(4)4,981(3)23,823(2 ¹76,982Profit (loss) from ordinary operations 3,088 Financial income

89,244 Financial expenses )198,432( Loss before taxes on income )4,699( Taxes on income )193,733( Loss from operations of the Company and its subsidiaries

38,159 Share in profits of associated companies )155,574( Loss for the year

2,278,227 )292,501( 102,440289,908272,399 351,058 1,554,923Segment's assets 155,408 Join assets that were not allocated between segments (5)

2,433,635 Total assets in the consolidated statements

305,454 33,69474,79159,997 69,017 67,955Segment's liabilities 1,542,339 Join liabilities that were not allocated between segments 1,847,793 Total liabilities in the consolidated statements

226,647 2,780 105,279 14,268 43,759 60,561Depreciation and amortization 67,630 1,835 3,849 10,533 38,517 12,896 Capital investments in non-current assets

(4) Sector results include a non-recurring expense at a sum of NIS 47,891 thousand due to real estate asset sale. (5) Segment results include a non-recurring expense due to provision for impairment at sum of NIS 23,885 thousand. (6) Sector results include a non-recurring expense at a sum of NIS 16,563 thousand due to real estate asset sale. (7) Segment results include a non-recurring expense due to provision for impairment at sum of NIS 93,527 thousand. (8) Including investments in associated companies.


80







products


D. Business segment data 2013:

NIS in thousands 1,823,094 - 204,814528,772146,779512,386430,343Sales to external

- )311,434( 1,054 28,650 168,835 6,378 106,517 Sales between Segments 1,823,094 )311,434( 205,868557,422315,614518,764536,860Total revenues of the segment

)62,300( )238( )1,545()63,973(2,6624,067)3,273(Profit (loss) from ordinary operations

8,978 Financial income

74,624 Financial expenses

)127,946( Loss before taxes on income )26,531( Taxes on income

)101,415( Loss from operations of the Company and its subsidiaries

25,732 Share in losses of associated companies )75,683( Loss for the year

2,249,873 )160,598( 109,966376,913228,395 358,2101,336,987Segment's assets

130,332 Join assets that were not allocated between segments

2,380,205 Total assets in the consolidated statements

312,851 42,31651,58172,129 84,49862,327Segment's liabilities

1,335,131 Join liabilities that were not allocated between segments

1,647,982 Total liabilities in the consolidated statements 123,073 2,572 12,818 15,287 20,05072,346Depreciation and amortization 74,251 2,000 24,618 13,048 21,122 13,463 Capital investments in non-current assets


81


E. Information by geographical region

The Group operates in a number of main geographical regions: In its country of residence, Israel, as well as significant activities in the United States and Turkey. The composition of revenues from external customers:

For the year ended December 31 2015 2014 2013 NIS in thousands

Israel 1,453,376 1,504,069 1,566,271United states 143,668 72,818 80,209 Turkey 60,713 118,685 125,020 Others 83,685 61,790 51,594 1,741,442 1,757,362 1,823,094

The group allocates the revenues from external customers to the foreign countries, in accordance with the location of the customer’s management.

NOTE 20 – SUBSEQUENT EVENTS:

1. On February 22, 2016, the Company received a payment request from the Electric Corporation at a sum of approximately NIS 13 million due to the period from June 2013 until June 2015 (inclusive). See Note 13(j).

HADERA PAPER LTD

SEPARATE FINANCIAL STATEMENTS


HADERA PAPER LTD

SEPARATE FINANCIAL STATEMENTS


TABLE OF CONTENTS

Page

Auditor's 1

Separate Financial Statements:

Separate statements of financial position 2

Separate Income Statements 3

Separate Statements of comprehensive income 3

Separate Statements of changes in equity 4-6

Separate Statements of Cash Flows 7-8

Notes to the Separate Financial Statements 9-23

Special report of auditors on separate financial information in conformity with Regulation 9C of the Israeli Securities Regulations (periodic and Immediate reports) – 1970. We have audited the separate financial information that is given according to Regulation 9C of the Israeli Securities Regulations (periodic and Immediate reports) – 1970 of Hadera Paper Ltd. (hereinafter- “the Company”) as of December 31, 2015 and 2014, and for each of the three years in the period ended December 31, 2015 that is included in the annual report of the company. The separate financial information is the responsibility of the management and board of directors of the company. Our responsibility is to express an opinion on the separate financial information based on our audit. We conducted our audits in accordance with generally accepted auditing standards in Israel. Those standards require that we plan and perform the audit for the purpose of obtaining a reasonable measure of assurance that the separate financial information does not include a materially misleading presentation. An audit involves examining, on a test basis, evidence supporting the amounts and disclosures in the separate financial information. An audit also includes evaluating the appropriateness of accounting principles used in preparing the separate financial information and significant estimates made by the Board of Directors and management, as well as evaluating the overall separate financial information presentation. We believe that our audit provide appropriate basis for our opinion. In our opinion, the separate financial information, is edited in all material respects, in conformity with Regulation 9C of the Israeli Securities Regulations (periodic and Immediate reports) – 1970. Brightman Almagor Zohar& Co. Certified Public Accountants A Member Firm of Deloitte Touche Tohmatsu Israel March 6, 2016

HADERA PAPER LTD

2

SEPARATE STATEMENTS OF FINANCIAL POSITION

December 31, 2015 2014

Note NIS in thousands Current Assets

Cash and cash equivalents 716,258 119,686 Long-term deposits - 100,000 Trade receivables 31,016 - Other receivables 28,834 6,923 Inventory 56,112 - Subsidiaries and associated companies, net 562,228 693,586

Total Current Assets 1,394,448 920,195 Non-Current Assets

Investment in subsidiaries and associated companies 371,996 *433,091 Loans to subsidiaries and associated companies 112,806 211,075 Fixed assets 84,699 77,394 Investment Property 43,600 28,500 Other financial assets 3 120,000 130,000 Deferred tax assets 6 1,293 1,585

Total Non-Current Assets 734,394 881,645

Total Assets 2,128,842 1,801,840 Current Liabilities

Loan and credit from banks 209 20,000 Current maturities of long-term notes and loans 171,088 215,293 Trade payables 56,843 8,541 Other payables and accrued expenses 47,160 78,464 Financial liabilities for put options to the non-controlling interest 7,286 - Short term employee benefit liabilities 9,988 4,299 Current tax liabilities 144,442 2,700

Total Current Liabilities 437,016 329,297 Non-Current Liabilities

Loans from banks and others 15,375 36,826 Notes 679,913 838,079

Financial liabilities for put options to the non-controlling interests - 6,876* Employee benefit liabilities 15,599 5,503

Total Non-Current Liabilities 710,887 887,284

Capital and reserves 980,939 585,259*

Total Liabilities and Equity 2,128,842 1,801,840

* Insignificant adjustment of comparative figures - see note 10 Approval date of the separate financial statements: March 6, 2016 The accompanying notes are an integral part of the separate financial statements.

I. Davidi G. Cunia L. Haalman

Chairman of the Board of Directors

Acting Chief Executive Officer

Acting Chief Financial Officer

HADERA PAPER LTD

3

SEPARATE INCOME STATEMENTS


2015 2014 2013

Note NIS in thousands Income Revenues from services, net 2,191 3,148 10,648 Other income, net 438,129 36,572 - Finance income 9 35,016 34,642 41,720 Total income 475,336 74,362 52,368 Cost and expenses

Other expenses, net - - )9,285(

Share in losses of associated companies – net (94,305) )165,989( )63,051( Finance expenses (60,287) )62,959(* )58,488(* Total cost and expenses 154,592)( 228,948)( (130,824) Profit (loss) before taxes on income 320,744 )154,586( )78,456( Tax incomes (expenses) on the income 6c (124,231) )155( 3,607 Profit (loss) for the year 196,513 )154,741( )74,849(

SEPARATE STATEMENT

OF COMPREHENSIVE INCOME

Year ended December 31,


Profit (Loss) for the year 196,513 )154,741(* )74,849(*Amounts which will not be classified in the future to income statements, net

Revaluation in respect of transition from fixed assets to investment in real estate 7,185 - -Actuarial (loss) profit from defined benefit plans, net 127 )921( )153(Share in other comprehensive (loss) profit from associated companies, net 828 )2,248( )526(

8,140 )3,169( )679(Amounts which will be classified in the future to income statements, net

Other comprehensive income that was allocated to profit and loss, net of tax due to realization of associated companies 39,716 - -Total other comprehensive profit (loss) for the year 47,856 1,470 )640(

Total comprehensive profit (loss) for the year 244,369 )153,271( )75,489(* Insignificant adjustment of comparative figures - see note 10 The accompanying notes are an integral part of the separate financial statements

HADERA PAPER LTD SEPARATE FINANCIAL STATEMENTS OF CHANGES IN EQUITY

(NIS in thousands)

4

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

Share capital

Premium of share

Share based

payments reserves


exercise of employee options

Capital reserve from revaluation

from step acquisition

Capital reserve from revaluation in respect of

transition from fixed assets to

re-investment in real estate

Hedging reserves

Foreign currency translation reserves

Retained earnings Total

NIS in thousands

Balance - December 31, 2014 (audited 125,267 316,108 5,484 3,397 5,445 - 4,934 44,650( ) 169,846 585,831 Adjustment of retained earnings in respect immaterial error correction (see note 10) - - - - -

- - - (572) (572)

Balance - January 1, 2015 125,267 316,108 5,484 3,397 5,445 -

4,934 )44,650( 169,274 585,259 Exchange differences arising on translation of foreign operations - - - -

- 44,650 44,650

Cash flow hedges transactions - - - - (4,934) (4,934) Fixed assets to re-investments in real estate - - - - - 7,185 - - - 7,185 Actuarial loss from defined benefit plan - - - - - 955 955

Profit for the year - - - - 196,513 196,513

Total comprehensive income (loss) for the year - - - - - 7,185 (4,934) 44,650 197,468 244,369 Shares issuance 13 145,620 - - - - - - - 145,633 Depreciation of capital from revaluation from step acquisition to retained earnings - - - - (5,445)

- - - 5,445 -

Share based payment - - 2,576 - - - - - - 2,576 Expiration of employee options - 2,182 (2,182) - - - - - - - Transaction with controlling shareholder 3,102 - - - 7,185 - - - 3,102

Balance – December 31, 2015 125,280 467,012 5,878 3,397 - 7.185 - - 372.187 980,939


(NIS in thousands)

5

* Insignificant adjustment of comparative figures - see note 10


Share capital

Premium of share

Share based

payments reserves



Capital reserve from revaluation

from step acquisition

Hedging reserves

Foreign currency



NIS in thousands

Balance - December 31, 2013 (audited) 125,267 313,506 2,602 3,397 7,188 438 )ׁ 44,792( 325,472 733,078 Adjustment of retained earnings in respect immaterial error correction (see note 10) - - - - - - - )185( )185(

Balance - January 1, 2014 125,267 313,506 2,602 3,397 7,188 438 )44,792( 325,287 732,893 For the Year ended December 31, 2014: Exchange differences arising on translation of foreign operations - - - - - - )11( - )11(

Cash flow hedges transactions - - - - - 4,496 - - 4,496 Actuarial loss from defined benefit plan - - - - - - - )3,015( )3,015( Loss for the year - - - - - - - )154,741*( )154,741(

Total comprehensive income (loss) for the year - - - - - 4,496 )11( )157,756( )153,271( Depreciation of capital from revaluation from step acquisition to retained earnings - - - - )1,743( - - 1,743 -

Issue of option notes - - 3,868 - - - - - 3,868 Share based payment - - 1,616 - - - - - 1,616 Expiration of employee options - 2,602 )2,602( - - - - - - Sale of a subsidiary - - - - - - 153 - 153

Balance – December 31, 2014 125,267 316,108 5,484 3,397 5,445 4,934 )44,650( 169,274 585,259


(NIS in thousands)

6

* Insignificant adjustment of comparative figures - see note 10 The accompanying notes are an integral part of the condensed separate financial statements.

Share capital

Premium of share

Share based

payments reserves

Capital reserves

resulting from tax benefit on



revaluation from step

acquisition Hedging reserves

Foreign currency



NIS in thousands

Balance - January 1, 2013 125,267 311,077 5,031 3,397 8,932 78 (44,472) 399,072 808,382 For the Year ended December 31, 2013:

Exchange differences arising on translation of foreign operations - - - - - - )320( - )320(

Cash flow hedges transactions - - - - - 360 - - 360 Actuarial loss from defined benefit plan - - - - - - - )680( )680(

Loss for the year - - - - - - - *(74,849) (74,849) Total comprehensive income (loss) for the year - - - - - 360 )320( (75,529) (75,489) Depreciation of capital from revaluation from step acquisition to retained earnings - - - - )1,744( - - 1,744 -

Expiration of employee options - 2,429 )2,429( - - - - - - Balance – December 31, 2013 125,267 313,506 2,602 3,397 7,188 438 )44,792( 325,287 732,893

HADERA PAPER LTD

7

SEPARATE STATEMENTS OF CASH FLOWS


2015 2014 2013 NIS in thousands Cash flows – operating activities

Profit (loss) for the year 196,513 )154,741(* )74,849(* Tax expenses (income) recognized in profit and loss 124,231 155 )3,607( Financial expenses recognized in profit and loss, net 25,271 28,317* *16,768 Share in loss of subsidiaries and associated companies, net 94,305 165,989 63,051 Dividend received - 19,960 42,914 Loss on revaluation of financial asset at fair value through profit and loss - 2,550 192 Capital profit on sale of fixed assets (5,868) )49,586( - Loss (Profit) from the realization of associated companies (443,669) 5,363 - Share based payments expenses 1,059 602 - Income from fair value adjustment of investment property (100) )178( )150( Expenses for transaction with controlling shareholder 559 - - Depreciation and amortization 3,634 3,549 12,288

(4,065) 21,980 56,607

Changes in assets and liabilities: Decrease in associated companies and other receivables 137,159 57,662 33,178 Increase in trade and other payables 5,719 11,708 21,582

Increase (Decrease) in employee benefits and provisions (3,071) 1,097 )62( Cash used in operating activities 139,807 70,467 54,698

Receipt Taxes, net 120 - 1,518

Net cash generated operating activities 135,862 92,447 112,823

* Insignificant adjustment of comparative figures - see note 10 The accompanying notes are an integral part of the separate financial statements

HADERA PAPER LTD

8

SEPARATE STATEMENTS OF CASH FLOWS

Year ended

December 31

2015 2014 2013

NIS in thousands Cash flows – investing activities Acquisition of fixed assets and prepaid leasing expenses (785) )2,664( )2,495( Proceed from sale of fixed assets 4,182 45,497 - Proceeds from sale of subsidiary's activity 915 )3,510( - Payment in respect of investment in real estate - )1,622( (250) Granting of loans to an associated company (128,934) )208,196( (35,884) Investments in deposits 100,000 )100,000( - Interest received 38,608 930 2,023Improvement levy payment for the sale of land (1,164) - -Proceed from sale or investment associated company (Net of transaction costs) 610,757 - -

Net cash generated (used in) investing activities 623,579 (269,565) (36,606)

Cash flows – financing activities Proceeds from issuing notes (net of issue expenses) - 477,448 111,253 Short-term bank credit – net (20.000) )30,197( 35,196 Repayment of borrowings from banks and other (26,182) )21,316( (23,060) Interest Paid (64,995) )64,266( (56,753) Redemption of notes (196,939) )167,350( (204,834) Proceed from shared issue (Net of issue expenses) 145,633 - - Proceeds from the issuance of options - 3,868 - Share purchase from non-controlling interests in subsidiary - - (21,221) Net cash used in financing activities (162,483) 198,187 (159,419)

Increase (Decrease) in cash and cash equivalents 596,958 21,069 (83,202) Cash and cash equivalents – beginning of year 119,686 98,591 182,314 Effects of exchange rate changes on the balance of cash held in foreign currencies (386) 26 (521)

Cash and cash equivalents – end of year 716,258 119,686 98,591


HADERA PAPER LTD NOTES TO SEPARATE FINANCIAL STATMENTS

9

NOTE 1 - GENERAL

The separate financial statements of the Company are prepared in accordance with the provisions of Regulation 9c and the tenth addition to the Securities Regulations (Immediate and Periodic Reports), 1970.

A. Accounting policy:

The separate financial statements were drawn up in accordance with the accounting policy set forth in Note 2 of the consolidated financial statements of the Company as of December 31, 2015, except for the amounts of assets, liabilities, revenues, expenses and cash flows relating to investee companies, as specified below: 1. The assets and liabilities are presented in the same amount as in the consolidated financial

statements of the Company as a parent company, except for investments in investee companies.

2. Investments in investee companies are presented as the net amount of the total assets less total liabilities, which present financial information in the Company's consolidated financial statements in respect of investee companies, including goodwill.

3. The amounts of revenues and expenses reflect the revenues and expenses included in the consolidated financial statements of the Company as a parent company, divided between profits or losses and other comprehensive income, except for amounts of revenues and expenses in respect of investee companies.

4. The Company's share in the results of investee companies is presented as a net amount of total revenues less total expenses, which present operating results in the Company's consolidated financial statements, in respect of investee companies, including impairment of goodwill or reversal of impairment loss, divided between profit or loss and other comprehensive income.

5. Amounts of cash flows reflect the amounts included in the consolidated financial statements of the Company as a parent company, except for the amounts of cash flows in respect of investee companies.

6. Loans provided and/or received from investee companies are presented at the amount attributed to the Company as a parent company.

7. Balances, revenues and expenses with respect to transactions with investees, which were reversed on the consolidated financial statements, are measured and presented under the relevant items of the statement of financial standing and the statement of income or comprehensive income, in the same way these transactions would have been measured and presented had they been transacted with third parties. Deferred net gain is presented net of the Company's share of earnings of investees and of investments in investees.


A. Cash and cash equivalents

December 31 2015 2014 NIS in thousands Cash and cash equivalents in NIS 692,840 119,678Cash and equivalents in Foreign Currency 23,418 8 716,258 119,686


10


B. Short term deposits

Interest rate December 31 2015 2104 NIS in thousands Short term deposits 0.37% - 100,000

NOTE 3 - OTHER FINANCIAL ASSET

A. On September 1, 2013 other financial asset include capital note at the total amount of NIS 30,000 to an associated company. The capital note is unlinked and interest free. No repayment date has been fixed, but the company does not intend to demand the repayment of the capital note before September 1, 2018.

B. In the framework of a voluntary liquidation of Printing and Writing papers Ltd., as mentioned in note 4, the company purchased a capital note of its subsidiary in the amount of 90 million NIS. The capital note is non-interest bearing and is not -linked to the CPI.

NOTE 4 - BUSINESS COMBINATIONS

Within the framework of an internal reorganization process for Company holdings, on December 21, 2015, the Company entered into an agreement for purchasing the activity of Hadera Paper - Printing and Writing Paper Ltd, including its holdings of the subsidiary Hadera Paper - Printing and Writing Paper Marketing Ltd. On December 2015, Hadera Paper - Printing and Writing Paper Ltd. started voluntary liquidation proceedings. Total acquisition costs amounted to NIS 144.6 million, which were offset against owner loans previously granted by the Company that are yet to be repaid.

NOTE 5 - FINANCIAL INSTRUMENTS AND RISK MANAGEMENT:

A. Liquidity risk management

The Group manages liquidity risks by maintaining suitable funds, banking and loans, ongoing monitoring of actual and anticipated cash flows and adjusting the vesting of financial assets and liabilities.

Interest rate and liquidity risk tables

1. Financial liabilities that do not constitute derivative financial instruments

The following tables specify the remaining contractual repayment dates of the Group in respect of financial liabilities, which do not constitute a derivative financial instrument. These tables were prepared based on the non-discounted cash flows of financial liabilities, based on the earliest date in which the Group may be required to repay them. The tables include cash flows in respect of the interest and the principal.

Assets and liabilities recognized upon acquisition date: Thousands of NIS

Financial assets 116,338 Inventories 56,112 Non-current assets 15,641 Investments in an investee company (7,395) Financial liabilities (65,523) Total net identifiable data 115,173


11


A. Liquidity risk management (Cont.)

Interest rate and liquidity risk tables (Cont.)

1. Financial liabilities that do not constitute derivative financial instruments (Cont.)

Average

effective interest

rate Till 1

month1-3

months

From 3 months

to 1 year

From 1 year to 5 years

Above 5 years Total

% NIS in thousands Includes interest 2015 Loans from banks 209 - - - - 209Long-term credit from others 6.1 8,053 - 8,052 16,105 - 32,210Index linked notes carrying permanent interest 5.7 - - 177,406 392,857 413,670 983,933Notes carrying permanent interest 4.8 - - 26,897 50,350 - 77,247

- 459,312

8,262 - 212,355 459,312 413,670 1,093,599 2014 Loans from banks 2.70 - 1,490 24,414 7,152 - 33,056Long-term credit from others 6.30 8,053 - 8,052 32,211 - 48,316Index linked notes carrying permanent interest 5.40 - - 227,385 489,211 495,915 1,212,511Notes carrying permanent interest 4.65 - - 28,238 77,847 - 106,085

8,053 1,490 288,089 606,421 495,915 1,399,968

2. Financial assets that do not constitute derivative financial instruments

The following tables present the expected repayment dates of the group on account of financial instruments that are not derivatives. The tables were prepared on the basis of the expected, non-discounted repayment dates of the financial assets, including the interest that will accrue from these assets, except for those cases where the group anticipates that the cash flows will be generated in a different period. The tables were prepared based on cash payments/receipts for derivative instruments settled on a net basis and the gross non-discounted cash payments/receipts for those derivatives that require net settlement. When the amount payable or receivable is not fixed, the disclosed amount was determined based on the projected interest rates as described by the existing interest yield curve as at the end of the reporting period.

Till 1 month

2015

Cash and deposits in the banks 716,258

2014

Cash and deposits in the banks 219,686

HADERA PAPER LTD NOTES TO SEPARATE FINANCIAL STATEMENTS

12


B. Analysis of financial assets and liabilities according to linkage bases and foreign currency

December 31, 2015 December 31, 2014

In, or linked to, foreign

currency (mainly dollar)

In Euro


CPI

Unlinked

In, or linked to, foreign

currency (mainly dollar)

In Euro


CPI

Unlinked NIS in thousands NIS in thousands

Assets: Current assets:

Cash and cash equivalents and and short-term deposits 23,418 - - 692,840 8 - - 219,678 Financial assets measured at amortized cost 27,900 - 168 592,483 - - - 700,155

Non-Current assets: Investments in subsidiaries and associated companies - loans and long-term capital notes - - - 232,806 - - 19,565 321,510

51,318 - 168 1,518,129 8 - 19,565 1,241,343 Liabilities:

Current liabilities: Short term loans - - - 209 - - - 20,000

Accounts payables and accruals 11,415 7,200 1,564 83,823 42 - 2,129 84,834 Long-term liabilities (including current maturities):

Long –term loans - - - 29,825 - - - 56,007 Notes - - 70,655 765,896 - - 95,005 939,186

11,415 7,200 72,219 879,753 42 - 97,134 1,100,027


13

NOTE 6 - INCOME TAX CHARGE

A. Deferred income taxes

The composition of the deferred taxes assets (liabilities) are as follows:

Balance at January 1, 2014

Recognized in profit and loss

Recognized in other

comprehensive income


Recognized in profit and

loss

Recognized in other

comprehensive income

Balance at December 31,

2015 NIS in thousandsTemporary

differences

Fixed assets 595 )3,292(* - )2,697( 3,121 - 424

Employee benefits provisions 2,268 195 114 2,577 (767) (46) 1,764

Doubtful debts 1,705 - - 1,705 - - 1,705 Investments in real

estate property - - - - - (2,600) (2,600)

Financial asset at fair value through profit and loss )226( 226 - - - - -

4,342 )2,871( 114 1,585 2,354 (2,646) 1,293unutilized losses and

tax benefits losses for tax purposes 1,907 *(1,907) - - - - - Total 6,249 )4,778( 114 1,585 2,354 (2,646) 1,293

* Reclassified

Deferred taxes are presented in the balance sheets as follows:


Among non-current assets - Deferred tax assets 1,293 1,585

The Group anticipates the existence of taxable income in future periods apart from profits that will arise from the reversal of taxable temporary differences.

B. Amounts in respect of which deferred tax assets were not recognized

For the year endedDecember 31

2015 2014 NIS in thousands

Real losses from securities 11,786 11,786

Expiration dates: in accordance with the tax laws in effect, there is no expiration date for the utilization of losses for tax purposes. The Company does not anticipate any profits in the foreseeable future that will allow it to utilize these losses and has therefore not created deferred tax assets in respect thereof.


14

NOTE 6- INCOME TAX CHARGE (Cont.)

C. Tax expense (income) on income recognized in profit and loss

1) As follows:

For the year ended December 31


For the reported year: Current 126,705 377 -Previous years (2,354) 4,778 (1,366)Change in tax rate - - (297)Current taxes in respect of the reporting period (120) (5,000) (1,944)

124,231 155 (3,607)

Current taxes in 2015 were computed at an average tax rate of 26.5%, 2014 – 26.5%, 2013– 25%. D. Additional information

The Company are deemed final assessments through the tax year ended December 31, 2013.

E. Income Tax Ordinance Amendment Law

In the beginning of January 2016, the Income Tax Ordinance Amendment Law was published. The law sets forth that the rate of Companies tax will be lowered to 25% (instead of 26.5%). The new Companies tax rate will apply to revenue generated or grown since 1.1.2016.

The amendment is not relevant to tax rates imposed on revenue by the power of the Law for the Encouragement of Capital Investments, 5719-1959 (revenue from preferred/approved plant).

According to the provisions of IAS 12 - Tax on Income, deferred tax balances as at December 31, 2015 do not take into account the provisions of said law since its legislation was finalized after end of the reporting period.

If the legislation was finalized in practice until the end of the reporting period, the Company's deferred tax assets as at December 31, 2015 would have decreased by a sum of approximately NIS 73 thousand, the Company's deferred taxes for the year ended on that date would have increased by NIS 222 thousand, and the Company's comprehensive income for the year ended on that date would have increased by NIS 149 thousand.

NOTE 7- MATERIAL ENGAGEMENTS AND TRANSACTIONS WITH INVESTEE

COMPANIES

1. Loans:

a. During the period, the Company granted loans at sum of NIS 160 million to an investee company. The loans bear an annual interest at rate of 3.3%. The loan was offset as part of an acquisition cost of the affiliated company. See Note 4 above.

b. The Company granted a loan to an investee company. The loan is linked to the CPI and carries interest at a rate of 4% per annum. The balance of the loan as at 31.12.15, is NIS 19,565 thousands. The repayment date has yet to be set.

c. During 2010, the Company granted a loan at fixed interest of 6.55% to an investee company. The balance of the loan as at 31.12.15, is NIS 170,000 thousands.


15

NOTE 7- MATERIAL ENGAGEMENTS AND TRANSACTIONS WITH INVESTEE

COMPANIES (Cont.)

2. Leasing agreements:

The Company leases out production areas, offices and warehouses to investee companies, amounting to a total area of 195.2 m² in return for a sum of NIS 13,001 thousands per annum. The period of the lease is not limited.

3. Other services:

The Company provides its investee companies computerization, management and financing services in return for a sum of NIS 38,627 thousands and NIS 66,275 thousands in the years 2015 and 2014, respectively.

The Company has made available unlimited guarantees to its subsidiaries companies, in benefit of banks in Israel.

NOTE 8 - SHARE-BASED PAYMENT

During the year 2014, the Company granted options to officers of the company.

Regarding details concerning grant of options to officers of the company, see Note 11 to the financial statements as of December 31, 2015.

NOTE 9 - EVENTS DURING THE REPORTING PERIOD

a. Hogla-Kimberly Ltd. (Hogla-Kimberly – below)

As at December 31, 2014, the Company's holding rate of Hogla-Kimberly was 49.9%, whereas Kimberly Clark Corporation holding rate was 50.1%. On January 26, 2015, the Company announced that, the Company has executed, pursuant to the approval of the Board of Directors, an agreement for the sale all of the holdings (49.9%) of the Company, directly and indirectly, in associated company Hogla-Kimberly Ltd. ("Hogla-Kimberly") to Kimberley Clark (the "Purchaser"). Following is a description of the main aspects of the Transaction:

1. The Purchaser paid the Company an amount of NIS 650 Million (the "Purchase Price"), a part thereof in consideration for Hogla-Kimberly's shares and a part thereof as detailed in Section b in consideration for the Non-Competition Undertaking.

2. As part of the Transaction the Company undertook not to compete with Hogla-Kimberly's existing activities (the "Non-Competition Undertaking"). The Non-Competition Undertaking received an approval of authorities (the "Authorities Approval") and shall be valid for a period of 3 years from the closing date.

As part of the Transaction it is agreed, among other things, that the Company may continue to operate in its existing activities and that such activity will not be considered a competition with the existing activities of Hogla-Kimberly.

In consideration of the Non-Competition Undertaking, the Purchaser will pay the Company a total amount of NIS 40 Million, as follows: (a) a total of NIS 14 Million was paid on the closing date; (B) an additional amount of NIS 13 Million will be paid one year after the date of the first payment; (C) an additional amount of NIS 13 Million will be paid two years after the date of the first payment. The balance of the unpaid amount of NIS 26 Million was placed in escrow by the Purchaser.

3. The closing of the Transaction was subject; inter alia, to, the approval and/or exemption from approval of the Antitrust Commissioner in Israel and Turkey.

4. On March 16, 2015, after the preconditions to the agreement were satisfied, as detailed in note 3 above, the transaction was completed, and the purchaser transferred the proceeds in US Dollars in an amount equal to the sale price calculated at the exchange rate as of Friday, March 13, 2015 The total proceeds received NOTE


16

9 - EVENTS DURING THE REPORTING PERIOD (Cont.)

a. (Cont.)

4. (Cont.)

amounted to NIS 623 Million, of which NIS 14 Million for Non- Competition and a total of NIS 26 Million held in escrow pursuant to an agreement of sale.

The Company recorded capital gain from the sale of Hogla-Kimberly in the amount of approximately NIS 298.7 Million, net from tax.

b. On August 13, 2015 the Company announced that further to its announcement from, June 24, 2015, Clal Industries Ltd. ("CII"), the former controlling shareholder, signed an agreement to sell all of its holdings in the Company (3,007,621 common shares of the Company), representing approximately 59.09% of the issued share capital of the Company (the "Shares sold"), to FIMI Opportunity V (Delaware) LP and FIMI Israel Opportunity V, Limited Partnership (hereinafter collectively, “FIMI” and the “Agreement”), the principles of which are as follows:

1. In consideration for the Sold Shares, FIMI paid CIL a total sum of NIS 354,546 thousand (which reflects a sum of approximately NIS 117.88 per sold share; hereafter the “Sale Price”).

2. The sale of Sold Shares within the framework of the Agreement was carried out, inter alia, based on presentations and undertakings accepted by the parties and the indemnification undertakings of CIL, pursuant to determined limitations. The Agreement also determines Sale Price adjustment mechanisms upon the occurrence of various events which the Agreement specifies.

As part of the transaction during June 2015, discussions were held between the Company and employee representatives regarding granting a non-recurring grant by the Company as part of the sale, totaling up to NIS 3.1 million, to all employees of the company who were involved in the wage reduction introduced in recent years, (including workers employed under the collective agreement applicable to the Company and employees of the Company under personal contracts, excluding employees classified as Company officers ("The non-recurring grant")), The non-recurring grant which was awarded to every entitled employee as stated, was determined according to his personal salary and was paid in August, the month following the date of completion of the transaction of company control transfer.

To this end, the Company is contracting a special collective agreement (hereinafter- "Collective Agreement") with representatives of organized labor. As part of the collective agreement, it was agreed that, subject to its implementation, representatives of organized labor or anyone on their behalf shall not have any additional requirements, including with regard to changes in control of the Company, the Company, CII or FIMI Fund. In addition, representatives of organized labor have undertaken to maintain industrial peace in terms of the collective agreement and the instructions regarding the transaction of company control transfer.

Given that the non-recurring grant is carried out on the grounds of the transaction of company control transfer, the former controlling shareholder of the company, CII, has undertaken to carry the full cost of the non-recurring grant as stated. The accounting treatment in respect of the non-recurring grant was recorded in the payroll expenses against the Share premium in the amount of approximately NIS 3.1 million.


17

NOTE 9 - EVENTS DURING THE REPORTING PERIOD (Cont.)

c. On August 10, 2015, the Company announced that further to the signing of a binding agreement of June 8, 2015 ("Sale Agreement") with the company IC Power Limited ("ICP"), and after receiving required regulatory approvals, including the approval of the Minister of National Infrastructures, Energy and Water, the Electricity Authority and the Antitrust Commissioner, the transaction was completed and included the following actions, inter alia:

1. ICP Company acquired all of its holdings (100%) in Advanced Integrated Energy Inc., a fully owned subsidiary of the Company ("Integrated Energy"), which holds a conditional license to build a power plant with a capacity of 120MW ("power plant"), including shareholders loans made by the Company. The existing energy center equipment of the Company was sold to ICP on December 31, 2015, the date on which ICP received an electricity generation license via the energy center equipment.

2. In return, the Company received a total amount of NIS 60 million.

3. Within the transaction framework, The Company assigned to ICP the agreement for the supply of the Company's natural gas with the Tamar Project, as well as the natural gas transmission agreement with INGL.

4. With the signing of the sale agreement, the Company entered into agreements with Integrated Energy, which took effect on August 10' 2015 the date of transaction finalization.

(a) Electricity and steam supply agreements

The commercial operation date of the power station that will be constructed by Integrated Energy is likely to occur until the second half of 2018 ("the commercial operation date"). As of completion date and for a period of up to 18 years after the commercial operation date, the Company will acquire the full amount of electricity and steam needed to establish its power from Integrated Energy. During the interim period until the date of commercial operation, the Company will purchase electricity from the energy center owned by Integrated Energy and OPC Rotem Ltd. (a company related to ICP from which the Company purchases electricity today). Within the framework of these agreements, electricity charge rates payable by the Company were finalized. These rates reflect a discount in relation to the Electric power company price rates, rates of steam consumption, and the steam quantity adjusted to annual actual consumption. The parties have agreed on a minimum annual quantity of steam that the company has undertaken to purchase (take or pay Conditioning).

(b) Land lease agreements

The company will lease to Integrated Energy the space in the plant on which Energy Center equipment is currently located and the area near the plant for power station construction (which is approximately 27 dunam). The lease period will commence on the closing date and will continue until the end of 20 years from the date of commercial operation of the power plant, and in any event shall not last more than 25 years less one day. According to lease agreement provisions, ICP liability towards the Company will be


18


c. (Cont.) 4. (Cont.)

(b) Land lease agreements (Cont.) Limited to the amount of annual lease fee paid by it during the recent year. The lease agreement includes provisions relating to cancellation by either party, including agreement that the Company may terminate the agreement with respect to the area of the power station to an end in any case where ICP has not started the construction of the power plant within 24 months.

5. The sale agreement includes a commitment by the Company to compensate ICP for breach of representations in accordance with its provisions, provided that the indemnity will not exceed the price paid to the Company under the transaction.

d. Further to the signing of a non-binding memorandum of understanding on December 31 2014, the Company signed on February 11, 2015 a definitive agreement to sell all (100%) holdings (direct and indirect) of Graffiti Office Supplies and Paper Marketing Ltd. ("Graffiti"), a fully owned subsidiary, to Kravitz (1974) Ltd. (the "Buyer" and "sale Agreement", respectively).

On July 23, 2015, the Company announced that the parties agreed to cancel the transaction without any of the parties having a claim against the other, this based on receiving the comments of the antitrust supervisor regarding transaction completion.

e. On March 23, 2015, the Company announced that the company and the representatives of organized employees of the Company (representing approximately 270 employees of the Company's site in Hadera) signed an amendment to the collective agreement applicable to the parties (the "Collective Agreement"). The amendment to the Collective Agreement included consents between the Company and the organized employees as stated, relating, inter alia, to the early cessation of the collective period (which was agreed upon in the past), which included the commencement of decrease in salaries and the freezing of annual salary additions (corporate and rating additions) as well as the termination of salary 13, this against the provision of additions to the employees’ salary, for which the Agreement applies as of the current date. Furthermore, within the framework of the amendment to the Collective Agreement, it was decided to execute early retirement for up to 20 of the organized employees, under the conditions customary in the Company, in accordance with consents between the parties. For further details, see Note 10(b) to the financial statements as at December 31, 2015.

f. On July 17, 2013, the General Meeting of Company shareholders - subsequent to receiving approval from the Audit Committee and Board of Directors of the Company - approved in advance the engagement of the Company for the purchase of a Director and Position Holder Liability Insurance policies for several insurance periods that will not accumulatively exceed three years as of July 2014. On August 2015, the Company entered into agreement with Clal Insurance Company Ltd, and purchased an insurance policy for directors and position holders who are currently serving or may serve at the Company, its subsidiaries and/or its associated companies from time to time, including directors and position holders who are controlling shareholders and/or part thereof, if applicable, for the period of one year, this subject to approval terms by the shareholder meeting as stated above. The volume of policy coverage is ten (10) million dollars per claim and in total for the insurance term.


19


g. On September 18, 2008, an agreement was signed between the Company and Gav-Yam Land Corporation Ltd, a public company indirectly controlled by the Company's (former) control holder until July 5, 2012. According to the agreement, the Company leases a lot in Modi'in at an area of approximately 74.5 dunam, and buildings constructed by the leaser for the Company on an overall construction area of approximately 21,000 m2 that is utilized as a logistics, industry and office center ("logistics center") for Company subsidiaries, and partially replaces existing lease agreements.

An amendment to the lease agreement was signed in the beginning of 2013. The preconditions for entry into force of the said agreement were fulfilled on April 4, 2013. Following is a summary of main amendment provisions: The lease period of the area leased in Modi'in that is used for logistics, industry and office center ("logistics center") for for company subsidiaries and an associated company was extended by three years until January 31, 2029, the area leased by the Company was reduced to approximately 65 dunam of lot area, and an overall construction area of approximately 20,000 sqm, and accordingly monthly lease fees were reduced by approximately NIS 196 thousand. Furthermore, the option of early agreement discontinuation within ten lease years was canceled. The amendment to the logistics center lease agreement includes several additional provisions, which pertain, inter alia, to return of sums to the Company as reimbursement for works carried out by the Company on the leased asset, the manner of leaser use of the returned asset part, and the option of leasing part of the returned asset to third parties. It should be noted that some of the above area is not utilized for the Company's ongoing activity, and accordingly, site evacuation expenses were included in the financial statements as described in Note 14(k)(6) based on Company estimate.

h. During October 2015, a decision of the Public Utilities Authority (Electricity) (‘the Electricity Authority’) was brought to the attention of the Company. This concerned the fixing of tariffs for management services for the electricity system (system tariffs), as amended (‘the decision’). In the decision, the Electricity Authority determined, for the first time, a system tariff that would be included in the electricity tariff (the TAOZ). According to the decision, the system tariff will apply retroactively from June 1, 2013. The decision applies, inter alia, to holders of supply licenses and holders of independent production licenses, including the Company, since it held an independent production license during the relevant period. Moreover, the decision, as amended, mentioned several private producers and suppliers of electricity, including the Company.

The Company filed a petition against the decision and its retroactive application. On November 19, 2015, the Company filed to the Supreme Court, residing as High Court of Justice, a petition for a show cause order and an interim order against the Public Utilities Authority - Electricity and the Israeli Electric Corporation (hereafter: "the respondents"). After petition filing, the Israeli Electric Corporation submitted a bill to the Company due to some management expenses of the system pertaining to the petition. Subsequently, on November 26, 2015, the Company filed a request for granting temporary order that will prevent the collection of system management expenses until temporary order ruling. The court acceded to the


20


(h) (Cont.)

Company request for temporary order granting on that day ex parte, and even dismissed two requests for temporary order cancelation - one request that was submitted by the Israeli Electric Corporation and another request that was submitted by the Public Utilities Authority - Electricity. On February 17, 2016, the court decided upon the cancelation of the temporary order granted to the Company, dismissing the Company's request for granting an interim order against the respondents, and setting file hearing for September 16, 2016 (om the same date of hearings pertaining to the same subject that were filed by other private electricity manufacturers). On February 22, 2016, the Company received a payment request from the Electric Corporation at a sum of approximately NIS 13 million due to the period from June 2013 until June 2015 (inclusive).

To the Company's best knowledge, during the months since petition filing by the Company, similar requests for granting interim and temporary orders against the respondents that were filed by other private electricity manufacturers were dismissed.

In light of the aforesaid recent developments and despite the based legal claims of the Company against retroactive application of the Electricity Authority decision, as at report date, the probability of petition acceptance cannot be assessed.

As at December 31, 2015, the Company included in its financial statements a provision of approximately NIS 13 million.

i. On January 30, 2011 the Ministry for the Protection of the Environment (hereinafter: "The Ministry") held a hearing for the Company regarding suspicion of pollution of water by discharging low quality waste water into the Hadera Stream.

On February 8, 2011, the Company received a hearing summary which stated, inter alia, that the Company must improve wastewater quality, and submit a weekly report to the Ministry regarding wastewater quality. The Company has taken measures to significantly improve the quality of treated wastewater discharged into the stream. Following the hearing proceeding as described, an investigation was launched against the Company and officers thereof.

On July 1, 2015 the defendants pleaded guilty, and the Company was convicted. Guilty Company employees were sent for receiving expert opinion within the framework of probation service, for the purpose of considering an option of instructing non-conviction. A sentence arguments meeting was conducted on November 25, 2015, and within the framework of the verdict, the court imposed a fine at rate of NIS 200 thousand on the Company. In regards to defendants who are position holders, the court accepted the probation service's recommendation to avoid their conviction, and imposed on them the execution of public service at a volume of 150 hours each, according to a plan that was set by the probation service authority, and severance payment to the Maintenance of Cleanliness Fund.


21


j. On February 1, 2015, the Company announced that on January 29, 2015, it obtained a request for the approval of a class action lawsuit pursuant to the Class Action Law - 2006 ("Class Action Lawsuit"). The class action was filed on account of damages allegedly sustained by the public on account of the pollution of the Hadera Stream, allegedly caused by the Company, given the indictment filed against the company on account of transgressions of the Water Law and Business Registration Law. The class action plaintiff has estimated the volume of the lawsuit, in the event that it is approved as a class-action, at approximately NIS 20 million, inter alia on account of the crime of negligence, by virtue of the Torts Ordinance and on account of breaching a prescribed duty according to the directives of the Water Law. As decided by the Lod District Court from March 11, 2015, the request was transferred to the Haifa District Court which has local authority to hold a hearing regarding the matter. The Company filed its response to the request, and a preliminary hearing was held on November 3, 2015. After the preliminary hearing, both parties conversed and agreed that the plaintiff should withdraw its claim, without any party admitting the claims of the other. The Company agreed to review and refresh its procedures versus supervisors at its plant in all pertaining to claim topics, and to pay remuneration at sum of NIS 1 thousand to the plaintiff, and professional fee at sum of NIS 19 thousand plus VAT to its representative, subject to their withdrawal. This consent was submitted for approval by the court, and on December 4, 2015, the court accepted the consent and instructed class action dismissal and approval request deletion.

k. Examination of the impairment of cash generating units To determine whether there may be a need for impairment provision with respect to cash-generating units in accordance with IAS 36, the Company's management has primarily used appraisals performed by external independent land appraisers with the required knowledge, expertise and experience.

Below are the cash-generating units for which signs of impairment where identified as of December 31, 2015:

Name of the cash-generating unit

Discount rate

Economic value higher than book value

Impairment

Printing and Writing Papers 11.3% No Required. See 1 below

Carmel Frenkel Ind. 10.0% Yes Not Required. See 2 below.

The Company strives to determine the fair value of the cash generating units that is as objective as possible, yet the process of estimating the fair value also includes subjective elements, originating inter alia from the past experience of the external assessors and land appraisers and of the Company's management and its understanding of expected events in the market wherein the Group operates at the date when the fair value was determined. In light of the above, the setting of the fair values of the cash generating units of the Group calls for employing judgment. Changes in the assumptions that serve for setting of the fair values of the cash generating units, can materially affect the Group's situation and results of operation.


22


(k) . (Cont.)

1. In view of indications that arose from the results of the Hadera Paper Printing cash generating unit, that belongs to the Hadera Paper Printing segment of operations, during the fourth quarter of the year, As a result of continuing losses in the fourth quarter, a delay in the launch of the recycled paper product and a change in the estimation of the future sales forecast of the product, the Company commissioned an external independent assessor to evaluate the need to create a provision for impairment. The evaluation was performed on the basis of its utilization value, based on the discounted cash flows expected for the company (DCF), using a discount rate of 11.3%,(2014, 12%) a permanent growth rate of 1.0%. The residual value percentage, out of the total value determined in the evaluation, is 86% (2014, 83.6%). The net operating assets of Hadera Paper Printing in the company books, as at December 31, 2015, amounted to NIS 183,500 thousands. The assessor evaluated the derived utilization value of Hadera Paper Printing at this time at approximately NIS 144,600 thousands. The obtained result indicates that the value of Hadera Paper Printing is lower than its book value by the sum of NIS 38,900 thousands and accordingly, the company recognized a loss on account of impairment that was allocated to other expenditures, against the amortization of fixed assets in the amount of NIS 38,900 thousands.On September 30, 2014 and December 31, 2014, the Company recognized loss due to impairment at a sum of approximately NIS 32,327 thousand and NIS 61,200 thousand, respectively.

.

2. In view of indications that arise from the results of the Carmel Frenkel Ind cash generating unit, that belongs to The packaging and cardboard products segment of operations, during the fourth quarter of the year, as a result of a change in the prevailing economic conditions in the sector - concerning the impairment of the unit, the company commissioned an external independent assessor to evaluate the need to create a provision for impairment. The evaluation was performed on the basis of its utilization value, based on the discounted cash flows expected for the company (DCF), using a discount rate of 10% (2014: 10.7%), a permanent growth rate of 3.0%. The residual value percentage, out of the total value determined in the evaluation, is 67% (2014: 61.7%). The net operating assets of Carmel Frenkel Ind in the company books, as at December 31, 2015, amounted to NIS 209,000 thousands. The assessor evaluated the derived utilization value of Carmel Frenkel Ind at this time at approximately NIS 227,900 thousands. The obtained result indicates that the value of Carmel Frenkel Ind. is higher than its book value.

On December 31, 2014, the Company recognized loss due to impairment at a sum of approximately NIS 23,800 thousand.

NOTE 10 - PUT OPTION FOR ACQUIRING ADDITIONAL SHARES IN CARMEL FRENKEL IND LTD.

On November 2013, the Company acquired all holdings (100%) of Frenkel CD Ltd. - an affiliate of the company (hereinafter- "Frenkel company"). The Company agreed with Frenkel & Sons Ltd. (hereinafter- "Frenkel"), which held 42.16% of the issued and paid shares of Frenkel company prior to the transaction that under the agreement Frenkel will transfer to the Company its share of the issued and paid share capital of Frenkel company in return for 6% of the issued and paid share capital of "Carmel Frenkel Ind Ltd" (hereinafter-


23

NOTE 10 - PUT OPTION FOR ACQUIRING ADDITIONAL SHARES IN CARMEL FRENKEL IND LTD (Cont.)

"Carmel company"), a company which consolidates the operations of Frenkel company and Carmel Container Systems Ltd company. "(hereinafter- "transfer transaction").

On the eve of the acquisition transaction, the Company, directly and indirectly held, the share capital of 57.84% of the issued and paid share capital of Frenkel company, and after the completion of the transaction the Company holds 94% of the issued and paid share capital of Carmel company and Frenkel holds the remaining 6%.

The transfer transaction included, among others, a Put option transaction (hereinafter- "Put Option") started from the end of the blockage period (36 months from the closing date) until the date which is five years from the date of transaction completion. Frenkel will be entitled to notify the Company in writing of its desire to sell its share of Frenkel in Carmel's shares, and the Company will have to acquire from Frenkel Frenkel's share of allocated shares at a price of NIS 7,500 thousand plus linkage differentials to the CPI and the index known on the date of signing the agreement and the known index timely payment of the exercise price of the Put option by Frenkel, which exceeds 5%. The Put option can be exercised in full only once.

The date of Company's share transfer shall be agreed upon between the parties so that the transfer and payment of compensation will be performed simultaneously within 90 days from the date of Frenkel's notification regarding Put option exercise. The shares transferred by Frenkel to the Company will be transferred free and clear.

The accounting treatment that was initially implemented in the financial statements was handled by immaterial alignment of comparative figures - see Note 2(g)(4) to the Consolidated Financial Statements as tat December 31, 2015.

The transfer transaction included, inter alia, the Call option transaction (hereinafter- "Call option") which started from the end of the blockage period (36 months from the closing date) until the date which is five years from the date of completion of the transaction. The Company may give written notice of its desire to purchase from Frenkel, Frenkel's share of Carmel company, and Frenkel will have to sell its shares of allocated shares at a price of NIS 8,500 thousand. The Call option can be exercised in full only once.

The date of Company shares transfer shall be agreed upon between the parties so that the transfer and payment of compensation will be performed simultaneously within 90 days from the date of Company notice regarding Call option exercise. The shares transferred by Frenkel to the Company will be transferred free and clear.

Notwithstanding the above, if on the date of Call option exercise, Guy Frenkel will serve as CEO of Carmel company and/or served as CEO of Carmel company in a period of 12 months prior to the exercise of the Call option, the acquisition price of the shares under the Call option will be adjusted and equaled to the higher of Carmel company equity capital divided by 130 million multiplied by 8,500 thousand, or 8,500 thousand.

At the date of publication of the financial statements the value of the call option is not significant.

NOTE 11 – SUBSEQUENT EVENTS:

On February 22, 2016, the Company received a payment request from the Electric Corporation at a sum of approximately NIS 13 million due to the period from June 2013 until June 2015 (inclusive). See Note 9(h).

Part D

Additional Details Regarding the

Corporation

Contents

Regulation 8 B - Valuation ......................................................................................................... 1

Regulation 10 A – Summary of Quarterly Statements of Comprehensive Income .................... 1

Regulation 10 C – Use of proceeds from securities, with mention of objectives of proceeds

according to prospectus .............................................................................................................. 1

Regulation 11 - Schedule of company Investments in Subsidiaries and Associated

Companies, directly and indirectly, as at the balance sheet date ............................................... 1

Regulation 12 - Changes in company Investments in Subsidiaries and Associated Companies,

directly and indirectly, during the reported year ........................................................................ 1

Regulation 13 – Revenues of subsidiary companies and associated companies, and

corporation’s revenues therefrom as of the balance sheet date .................................................. 1

Regulation 14 – List of groups of loan balances given as of the date of the balance sheet, if

granting of loans was one of the corporation’s main dealings ................................................... 2

Regulation 20 - Stock exchange trading - securities registered for trade or whose trade was

discontinued ............................................................................................................................... 2

Regulation 21 - Remuneration of Interested Parties and Senior Officers .................................. 2

Regulation 21A - Control of the Corporation ............................................................................. 2

Regulation 22 - Transactions with a Controlling Shareholder .................................................... 3

Regulation 24 - holdings by interested parties and senior position holders - Shares and other

securities held by interested parties and by senior position holders in the corporation, in a

subsidiary company or in an associated company as at January 31, 2015 ................................. 3

Regulation 24A – Registered share capital, issued capital and convertible securities as at in

proximity to the report date ........................................................................................................ 3

Regulation 24B - Registry of the Shareholders as at in proximity to the date of the report ...... 3

Regulation 25A – Registered Address ........................................................................................ 4

Regulation 26 – Directors of the Corporation ............................................................................. 4

Regulation 26 A - Senior Position Holders ................................................................................. 4

Regulation 26B - Independent Approved Signatories of the Corporation .................................. 4

Regulation 27 – Corporation’s Certified Public Accountant ...................................................... 4

Regulation 28 – Changes in the memorandum or articles of association during the reported

year ............................................................................................................................................. 4

Regulation 29 – Directors’ Recommendations and Resolutions ................................................ 4

Regulation 29A - Company resolutions regarding topics outlined in the regulation .................. 5

Appendix A Summary of Quarterly Statements 6

Appendix B1 Schedule of Investments in Subsidiaries and Associated Companies 8

Appendix B2 Loans to Company subsidiaries and Associated Companies as at December 31, 2015

9

Appendix C List of Changes in Investments in Subsidiaries and Associated Companies

10

Appendix C1 List of Subsidiary and Associated Company Revenues 11

Appendix D Remuneration of Senior Officers 12

Appendix E Transactions with a controlling owner 13

Appendix F List of Directors 16

Appendix G List of Senior Officers at the Company 21

1

Company Name: Hadera Paper Ltd.

Company No. at Registrar of Companies: P.C 52-001838-3

Company number on stock exchange (issuer number):

632

The Company’s address: POB 142, Hadera 3810101

Telephone: 04-6349405

Fax: 04-6339740

Date of balance sheet: December 31, 2015

Date of Report: March 6, 2016

Reported Period: January 1, 2015 - December 31, 2015

E-mail: [email protected]

Regulation 8 B - Valuation

Significant financial value estimates which examine the impairment of operational assets of the Company's cash generating units are attached to the financial statements as at December 31, 2015. For details regarding value estimates, see Note 4(c)(3) to the financial statements as at December 31, 2015.

Regulation 10 A – Summary of Quarterly Statements of Comprehensive Income

The summary of the quarterly statements is attached hereto as Appendix A of this report.

Regulation 10 C – Use of proceeds from securities, with mention of objectives of proceeds according to prospectus

Reducing the Company's level of financial debt and reinforcing its equity, existing debt recycling, and ongoing investments.

Regulation 11 - Schedule of company Investments in Subsidiaries and Associated Companies, directly and indirectly, as at the balance sheet date

The list of investments is attached hereto as Appendix B1 of this report.

The list of loans to subsidiaries and associated companies of the company, as at December 31, 2015, is attached hereto as Appendix B2 of this report.

Regulation 12 - Changes in company Investments in Subsidiaries and Associated Companies, directly and indirectly, during the reported year

List of changes in investments attached hereto as Appendix C of this report.

Regulation 13 – Revenues of subsidiary companies and associated companies, and corporation’s revenues therefrom as of the balance sheet date

List of revenues attached hereto as Appendix C1 of this report.

2

Regulation 14 – List of groups of loan balances given as of the date of the balance sheet, if granting of loans was one of the corporation’s main dealings

The granting of loans was not one of the Corporation's main the things during the reported period and until the date of the report.

Regulation 20 - Stock exchange trading - securities registered for trade or whose trade was discontinued

1. Securities issued by the company and registered for trade on the stock exchange during the reported period:

1.1. 1,295,220 ordinary Company shares at par value of 0.01 each, that were offered to the public according to a shelf prospectus. For additional details, see the immediate reports of the Company dated December 10 and 13, 2015 (Reference numbers: 2015-01-177222 and 2015-01-177945).

2. Discontinued trade in the company's securities during the reported period:

In addition to limited discontinued trade during 2015, due to the publishing of the Company's financial statements, following are details regarding discontinued trade in Company securities during the report period:

Limited discontinued trade in Company securities occurred on June 24, 2015 due to publishing a material significant report pertaining to change in Company control. For further details, see the Company’s immediate report dated June 24, 2015 (Reference No.: 2015-01-055860).

Limited discontinued trade in Company securities occurred on January 26, 2015 due to publishing a material significant report pertaining to the sale of Company holdings in Hogla-Kimberly. For further details, see the Company’s immediate report dated January 26, 2015 (Reference No.: 2015-01-019225).

Limited discontinued trade in Company securities occurred on January 20, 2015 due to publishing a material significant report pertaining to the CEO's end of service. For further details, see the Company’s immediate report dated January 20, 2015 (Reference No.: 2015-01-015262).

Regulation 21 - Remuneration of Interested Parties and Senior Officers

Details attached hereto in Appendix D.

Regulation 21A - Control of the Corporation

The Company's control holder is FIMI fund. FIMI fund purchased the control of the Company from Clal Industries Ltd. according to an agreement from June 24, 2015 that was finalized on August 13, 2015. To the Company's best knowledge, based on FIMI fund reports to the Company, FIMI V 2012 Ltd. is the general partner in two limited partnerships which directly hold Company shares: FIMI Opportunity V (Delaware) LP and FIMI Israel Opportunity V , LP. FIMI V 2012 Ltd. is a company under (indirect) control of Mr. Yishay Davidi.

For details regarding holdings in Clal Industries Ltd. as at December 31, 2014, see details in Regulation 21a in the part "Additional details regarding the associated corporation" included

3

in the Company's periodical report for 2014, as published on March 19, 2015 (reference number: 2015-01-055327).

Regulation 22 - Transactions with a Controlling Shareholder

Details attached hereto in Appendix E.

Regulation 24 - holdings by interested parties and senior position holders - Shares and other securities held by interested parties and by senior position holders in the corporation, in a subsidiary company or in an associated company as at January 31, 2015

For further details, see the Company’s immediate report dated January 6, 2016 (Reference No.: 2016-01-004432).

Regulation 24A – Registered share capital, issued capital and convertible securities as at in proximity to the report date

1. The number of ordinary shares included in the registered capital of the Company: 20,000,000 ordinary shares, each of NIS 0.01 par value.

2. The number of ordinary shares included in the issued share capital of the Company: 6,385,031 ordinary shares, each of NIS 0.01 par value.

3. Number of ordinary shares included in the issued capital of the company, net of dormant shares: 6,385,031 ordinary shares at value of NIS 0.01.

4. Number of dormant shares of the Company: 0

5. Number of options issued to the public by the Company: 190,362 options, exercisable into ordinary shares of the Company.

On March 9 and 13, 2014, the Remuneration Committee and Board of Directors of the Company, respectively, adopted a stock option plan for Company employees and executives, within whose framework an allocation of options was approved, each exercisable into an ordinary share of the company, of NIS 0.01 par value. Pursuant to the conditions of the said option warrants, offerees that will exercise the option warrants will not be allocated all of the shares derived therefrom, but only a quantity of shares that reflects the sum of the financial benefit that is inherent to the option warrants at the exercise date only. In the course of 2014, the Company granted options to its executives. Considering the retirement of several executives who were granted options as aforesaid, as at the date of publication of this report, 70,832 options are being held by company executives. For further details concerning the stock option plan, see the Company’s immediate report dated April 10, 2014 (Reference No.: 2014-01-044730).

Regulation 24B - Registry of the Shareholders as at in proximity to the date of the report

For further details, see the Company’s immediate report dated December 29, 2015 (Reference No.: 2015-01-081379).

4

Regulation 25A – Registered Address

The corporation’s registered address: POB 142, Hadera Industrial Zone, 3810101.

E-mail address: [email protected]

Telephone No.: 04-6349405

Fax No.: 04-6339740

Regulation 26 – Directors of the Corporation

List of directors and their particulars attached hereto as Appendix F.

Regulation 26 A - Senior Position Holders

List of senior officers and their particulars attached hereto as Appendix G.

Regulation 26B - Independent Approved Signatories of the Corporation

There are no independent signatories at the company.

Regulation 27 – Corporation’s Certified Public Accountant

Name of the accountant of the Corporation during the reported period: Brightman Almagor Zohar and Co.

Address: 5 Ma'ale Shachrur, Haifa.

To the best of the company's knowledge, the accountant or his partner are not an interested party or related to an interested party or senior position holders at the company.

Regulation 28 – Changes in the memorandum or articles of association during the reported year

No changes were made to the memorandum of articles of Association during the reported year.

Regulation 29 – Directors’ Recommendations and Resolutions

a. Recommendations of the Board of Directors to the general meeting

(1) Payment of dividend or allocation or allotment of preferred shares - None.

(2) Change in the registered capital or issued capital of the corporation - None.

(3) Change in the memorandum or articles of association of the corporation - None.

(4) Repayment of securities - None.

(5) Early repayment of debentures - None.

(6) Transaction not according to market conditions between the corporation and an interested party therein - None.

5

b. Directors' decisions regarding issues outlined in the regulation that do not require approval of the general meeting

(1) Payment of dividend or allocation - as defined in the Companies Law, by another method or by allotment of preferred shares - None.

(2) Change in the corporation's registered or issued capital - as detailed above, in December 2015, the Company issued 1,295,220 ordinary Company shares to the public.

(3) Change in the memorandum or articles of association of the corporation - None.

(4) Repayment of shares - None.

(5) Early repayment of debentures - None.

(6) Transaction not according to market conditions, between the corporation and an interested party therein - None.

c. Decisions of the general meeting made not in accordance with the recommendations of the directors - None.

d. Decisions by an extraordinary general meeting - none.

Regulation 29A - Company resolutions regarding topics outlined in the regulation

1. Approval of actions according to Section 255 of the Companies Law - None.

2. Action according to Section 254 (a) of the Companies Law that was not approved - None.

3. Extraordinary transactions requiring special approval according to Section 270(1) of the Companies Law - None.

4. Indemnification of officers - Pursuant to decisions by the General Meeting of Company shareholders dated January 2, 2012, June 21, 2006 and July 14, 2004, the Company grants letters of indemnification to all its Board members and officers, including those considered to be controlling shareholders and/or relatives thereof and/or who serve as officers of and/or service providers to controlling shareholders of the Company and/or where controlling shareholders of the Company are considered to have a personal interest in such grant, as may be from time to time. For additional information, see details concerning Regulation 22.

5. Position holders liability insurance - On July 17, 2013, the General Meeting of Company shareholders - subsequent to receiving approval from the Audit Committee and Board of Directors of the Company - approved in advance the engagement of the Company for the purchase of a Director and Position Holder Liability Insurance policies for several insurance periods that will not accumulatively exceed three years as of July 2014. On August 2015, the Company entered into agreement with Clal Insurance Company Ltd, and purchased an insurance policy for directors and position holders currently serving or those who may serve at the Company from time to time, at its subsidiaries and/or its associated companies, including directors and position holders who are the controlling shareholders and/or part thereof, if applicable, for the period of one year, this subject to approval terms by the shareholder meeting as stated above. The volume of policy coverage is ten (10) million dollars per claim and in total for the term of the insurance. Annual premium is at sum of approximately USD 18,000 (eighteen thousand dollars).

6

For additional information, see details concerning Regulation 22.

Furthermore, in August 2015, following an approval by the Company's remuneration committee (also residing as an audit committee), the Company's Board of Directors approved that the Company shall purchase a run-off insurance policy for the purpose of insurance coverage of the liability of Company directors and position holders (including directors serving as position holders in the Company's holder of control and/or who are from within the control holder) for a period of 7 years as of the date of the Company's transfer of control. Said approval is in accordance with Regulation 1(2) to the Company Regulations (Relaxations in Transactions with Interested Parties), 5760-2000. It should be noted that Clal Industries Ltd. bore the full cost of the run-off policy. For further details, see the Company's Immediate Report dated August 13, 2015 (reference number: 2015-01-096057).

Hadera Paper Ltd.

Date of Signature: March 6, 2016

Names of signatories:

Gadi Cunia – Company Acting CEO

Anat Rothschild - Legal Counsel and Company Secretary.

7

Appendix A

Regulation 10 A – Summary of Consolidated Quarterly Financial Statements (in NIS thousands)

Q1 2015 Q2 2015 Q3 2015 Q4 2015 2015

Sales, net 451,838 436,271 415,532 437,801 1,741,442

Cost of sales 389,021 380,450 364,461 379,731 1,513,663

Gross profit 62,817 55,821 51,071 58,070 227,779

Selling, Marketing, General and Administrative and Other Expenses:

Selling and Marketing 3,908 36,927 34,113 32,718 142,866

Administrative and general expenses 14,635 10,701 11,075 12,203 48,614

Other (417,107) 1,498 (4,225) 69,260 (350,574)

Total Expenses (363,364) 49,126 40,963 114,181 (159,094)

Profit (loss) from regular activity 426,181 6,695 10,108 (56,111) 386,873

Finance income 2,320 3,486 - 14,407 20,213

Finance expenses 17,338 18,983 18,183 28,387 82,891

Financing expenses, net 15,018 15,497 18,183 13,980 62,678

Profit (loss) after financing 411,163 (8,802) (8,075) (70,091) 324,195

Share in earnings (losses) of associated companies, net of taxes - - - - -

Profit before taxes on income 411,163 (8,802) (8,075) (70,091) 324,195

Taxes on income (tax revenues) 140,530 (194) 816 (13,643) 127,509

Net Income (loss) for the period 270,633 (8,608) (8,891) (56,448) 196,686

8

Q1 2015 Q2 2015 Q3 2015 Q4 2015 2015

Net income attributed to:

Company shareholders 270,590 (8,603) (8,900) 56,574 196,513

Minority Interest 43 (5) 9 126 173

270,633 (8,608) (8,891) (56,448) 196,686

Basic net earnings (loss) per share (in NIS) 53.16 (1.69) (1.75) (11.56) 38.16

Diluted net earnings (loss) per share (in NIS) 53.16 (1.69) (1.75) (11.56) 38.16

No. of shares that served for calculating basic earnings per share 5,089,811 5,089,811 5,089,811 5,329,145 5,150,136

No. of shares that served for calculating diluted earnings per share 5,089,811 5,089,811 5,089,811 5,329,145 5,150,136

Comprehensive income (loss) attributed to the shareholders of the Company 310,319 (8,592) (1,840) (55,518) 244,369

Comprehensive income (loss) attributed to non-controlling interests 44 (5) 8 156 203

9

Appendix B1

Regulation 11 – List of investments in subsidiary companies and associated companies as of the balance sheet date

1. Material subsidiaries held by the company as at December 31, 2015:

Holding percentage in % (direct and indirect) Company name Group

number of share on stock exchange

Share type and par value in NIS

Group number of shares (1)

Total par value in NIS

Value in separate financial statements of the Corporation, according to Regulation 9C

In equity In voting rights

In right to appoint directors

Stock exchange price as at balance sheets in NIS per share

Notes

Amnir Recycling Industries Ltd. - Ord. 1 5,367,000 5,367,000 72,850 100 100 100 N.R. - Graffiti Office Supplies & Paper Marketing Ltd. - Ord. 1 1,000 1,000 (33,279) 100 100 100 N.R. - Carmel Container Systems Ltd. - Ord. 1 1,817,268 1,817,268 102,183 94 94 94 N.R. - Hadera Paper Development and Infrastructures Ltd. - Ord. 1 100 100 108,173 100 (2) 100 (2) 100 (2) N.R. - Hadera Paper - Packaging Paper and Recycling Ltd. (formerly: "Hadera Paper Industries Ltd.") - Ord. 1 100 100 46,006 100 (2) 100 (2) 100 (2) N.R. - Hadera Paper - Printing and Writing Paper Ltd. (formerly: “Mondi Hadera Paper Ltd.”) - Ord. 1 1000 1000 (7,395) 100 100 100 N.R. - American Israeli Paper Mills Marketing (1992) Ltd. - Ord. 1 100 100 (2,023) 100 (3) 100 (3) 100 (3) N.R.

Inactive company

Dafnir Packaging Systems Ltd. -

Ord. 0.0001 1,250,000 125 (893) 100 (3) 100 (3) 100 (3) N.R.

Inactive company

Niroz Investment Company Ltd. -

Ord. 0.0001 6 0.0006 92,092 100 (2) 100 (2) 100 (2) N.R.

Inactive company

1. Number of shares held by the company. 2. Including one share held by American Israeli Paper Mills Marketing (1992) Ltd. (inactive company). 3. Including one share held by Niroz Investment Company Ltd. (inactive company).

10

Appendix B2

Regulation 11 - List of investments in subsidiary companies and associated companies as of the balance sheet date

2. Loans to material subsidiaries and associated Companies of the Company as at December 31, 2015:

Lending party Borrowing party

Outstanding loans and capital notes, including accrued interest, in NIS

thousands

Interest rate%

Linkage type

Repayment years

Hadera Paper Ltd. Amnir Recycling Industries Ltd. 2,307 0% Not linked Repayment date yet to be set

Hadera Paper Ltd. Atar Office Supplies Marketing Ltd. 20,162 4% CPI-Linked Repayment date yet to be set

Nir Oz Investment Company Ltd.*

Hadera Paper Ltd. (14,673) 0% Not linked Repayment date yet to be set

Hadera Paper Ltd. American Israeli Paper Mills Marketing (1992) Ltd.*

2,103 0% Not linked Repayment date yet to be set

Hadera Paper Ltd. Dafnir Packaging Systems Ltd.* 1,134 0% Not linked Repayment date yet to be set

Hadera Paper Ltd. Hadera Paper - Packaging Paper and Recycling

170,000 6.55% Not linked Annual repayment

Hadera Paper Ltd. Graffiti Office Supplies & Paper Marketing Ltd.

10,000 3.1% Not linked Repayment date yet to be set

* Inactive company

11

Appendix C

Regulation 12 – Changes in investments in subsidiary companies and in associated companies during the reported year

In March 2015, a transaction was finalized within whose framework the Company sold its entire holdings - directly and indirectly (49.9%) - in Hogla Kimberly to Kimberly-Clark, that held approximately 50.1% of the share capital of Hogla Kimberly prior to the transaction, in consideration of the total sum of NIS 648 million, partly on account of the sale of the Hogla Kimberly shares and partly on account of the companies undertaking of a non-competition agreement with the Hogla Kimberly operations. For further details see Section 20.1, to Part A of the periodical report.

A transaction was finalized in August 2015, within the framework of which the Company sold all (100%) holdings (directly and indirectly) in Integrated Advanced Energy Ltd. and the Company's existing energy center equipment (including the Company's power station) to ICPower Ltd., this in return for a total of approximately NIS 60 million. For further details see Section 20.2, to Part A of the periodical report.

In December 2015, the Company decided on a re-organization process, within the framework of which Hadera Paper - Printing and Writing Paper Ltd. started voluntary liquidation proceedings, and all its assets and liabilities were transferred to the Company.

It should be noted that in February 2015, the Company signed an agreement for the sale of all its holdings (100%) in Graffiti. The transaction was canceled under consent of both parties in July 2015.

12

Appendix C1

Regulation 13 - Profit and loss of material subsidiaries and associated companies and revenues therefrom for the year ended December

31, 2015 (NIS thousands)

Revenues received

Profit (loss) before taxes and special items

Net profit (loss)

Other comprehensive profit (loss)

Overall profit (loss)

Dividend Dividend subsequent to balance sheet date

Management fees

Management fees subsequent to balance sheet date

Interest (received by company or eligibility)

Subsidiaries

Amnir Recycling Industries Ltd.

3,236 (2,204) 69 (2,135) - - - (18,183)

Graffiti Office Supplies & Paper Marketing Ltd.

(3,394) (4,873) (73) (4,746) - - - (388)

Hadera Paper - Packaging Paper and Recycling Ltd.

24,978 17,781 55 17,836 - - - 3,105

Hadera Paper Development and Infrastructures Ltd.

(50,070) (37,278) 189 (37,089) - - - (14,973)

Carmel Container Systems Ltd.

4,539 2,891 478 3,369 - - - -

Hadera Paper - Printing and Writing Paper Ltd.

(70,374) (69,235) 111 (69,124) - - - (1,006)

13

Appendix D

Regulation 21(a) - Remuneration of Interested Parties and Senior Officers

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

Recipient Details

Payments for Services

Total

Name Position Position volume

Holding rate in company equity, fully diluted

Labor wages**

Bonus

Share-based payment in respect of options

Gadi Cunia1

Group acting CEO

100% - 1,578,337 179,324 372,109 2,129,770

Guy Yadlin2

Former Paper Division CEO*

100% - 1,017,486 - 754,028 1,771,514

Guy Frenkel3

CEO of Carmel Frenkel Ind.

100% - 1,117,159 97,500 321,505 1,536,164

Uzi Carmi4 Former Group Chairman of the Board*

100% - 1,062,627 119,466 165,523 1,345,616

Shimon Biton5

Former Integrated Energy CEO*

100% - 1,317,472 - - 1,317,472

The sums appear in terms of the cost to the company in 2015.

* As stated in the table, all of the aforementioned senior executives left their positions in 2015.

** The salary component appearing in the table above includes all of the following components (inter alia): labor wages, social and additional deductions as normally accepted and company car.

1. Mr. Gadi Cunia started his service as the Group's Acting CEO on January 23, 2015.

2. Mr. Guy Yadlin started his service as the former Paper Division CEO on July 30, 2013, and served at this position until August 19, 2015.

3. Mr. Guy Frenkel started his service as the CEO of Carmel Frenkel Ind Ltd. on August 1, 2013.

4. Mr. Uzi Carmi started his service as the CEO of Amnir Ltd. on April 1, 1999.

5. Mr. Shimon Biton was employed as CEO of the energy company as of July 1977, and served in this role until December 2015.

14

Director Remuneration

In accordance with the management agreement between the Company and the Company's

former control holder, Clal Industries and Investments Ltd. ("CII"), the latter provided the

Company with active Chairman of the Board services through Mr. Yohanan Locker. The

agreement was valid until August 2015. The total remuneration paid to CII on account of the

management agreement in 2015 amounted to NIS 223,043. Moreover, during 2014, the

company allocated Mr. Yohanan Locker 24,977 options exercisable into up to 24,977

ordinary shares of the company, constituting - assuming their complete exercise - as at the

granting date, approximately 0.49% of the issued and outstanding share capital of the

company (approximately 0.46% fully diluted). Said options expired without being exercised.

Furthermore, in addition to said amounts paid due to the management agreement, total

remuneration paid to Company directors and the accompanying expenditures, are equal to the

“Set Sums” outlined in the Company Regulations (Rules Concerning Remuneration and

Expenses for External Directors), 2000, and amounted - during the reported period - to NIS

822,715 thousands (of which approximately NIS 151,647 thousands were paid to FIMI fund,

controlling shareholder of the company, on account of the service of Mr. Yishay Davidi, Ron

Ben-Haim, Amit Ben-Zvi, and Ami Bam, and a sum of approximately NIS 60,427 was paid to

Clal Industries Ltd. Due to the service of Mr. Mr. Dan Kleinberger).

15

Appendix E

Regulation 22 - Transactions with a Controlling Shareholder

1. Rules for Valuating Negligible Transactions

On March 8, 2009, the Board of Directors of the Company approved rules for the assessment of negligible transaction as the term is defined in the Securities Regulations (Preparation of Annual Financial Statements), 1993. The procedure was updated by the Board of Directors of the Company in August 2010 and in November 2011.

In its normal course of business, the Group conducted transactions with controlling shareholders that are “negligible transactions” in accordance with the said tests, types and characteristics appearing in Note 18 to the company’s financial statements, dated December 31, 2014.

It should be noted that in March 2015 (for the year 2014), the Audit Committee of the Company reviewed the manner of implementation of the instructions in this procedure by the Company, and also conducted sample examinations of interested-party transactions to which the Company is a direct party, that were classified as negligible transactions according to the procedural instructions. As part of the said sample examinations, the Audit Committee examined, inter alia, the manner by which prices are set, as well as the other terms of the transaction, as the case may be, as well as the quantitative benchmarks that were examined. Subsequent to its examination, the Audit Committee inferred that the procedure was properly and appropriately implemented by the Company.

2. Transaction classification as non-extraordinary

In November 2011, the Company's audit committee approved a procedure intended for defining criteria for a classifying an incoming transaction (as defined in the procedure) as non-extraordinary transaction without the need for additional approval by the audit committee.

According to the procedure, a transaction of the Company will be classified as a transaction that is not an extraordinary transaction (as defined by the Companies Law), in the event that three conditions are met: (a) The transaction is a transaction conducted in the normal course of affairs of the company (as defined in the procedure); (b) The transaction is conducted at market conditions, in accordance with the manner set in the procedure; and (c) The transaction possesses no material impact on the Company’s profitability, assets and liabilities in accordance with the quantitative and qualitative benchmarks set in the procedure. Every transaction that will be examined according to the directives of the procedure and will not be classified as a transaction that is not an extraordinary transaction, shall be forwarded to the Audit Committee of the Company for classification.

It should be noted that in March 2016, the Audit Committee of the Company reviewed the manner of implementation of the instructions in this procedure by the Company, and also conducted sample examinations of interested-party transactions to which the Company is a direct party, that were classified as transactions that are not extraordinary transactions according to the procedural instructions. As part of the said sample examinations, the Audit Committee examined, inter alia, the manner by which prices are set, as well as the other terms of the transaction, as the case may be, as well as the quantitative benchmarks that were examined. Subsequent to its examination, the Audit Committee inferred that the procedure was properly and appropriately implemented by the Company.

16

3. Unexceptional transactions with officers or controlling shareholders

3.1. On March 7, 2006, the board of directors of the Company - pursuant to the authority as defined in the company articles - approved that the Company's management is the authorized entity to approve unexceptional transactions of the Company with an officer or controlling shareholder or a transaction of the Company with another person, in which the officer or controlling shareholder in the Company has a personal interest, as stated in this section above.

3.2. The Company and/or its subsidiaries have several engagements with interested parties in the Company and/or with companies in which the interested parties in the Company are controlling shareholders and/or interested parties therein, which are conducted in the course of ordinary business under such conditions and at such prices which are not different from those acceptable in the Company with respect to its other clients and suppliers.

4. Transactions not outlined in section 270(4) of the Companies Law and are not negligible:

4.1. Officers' liability insurance: On July 17, 2013, the General Meeting of Company shareholders - subsequent to receiving approval from the Audit Committee and Board of Directors of the Company - approved in advance the engagement of the Company for the purchase of a Director and Position Holder Liability Insurance policies for several insurance periods that will not accumulatively exceed three years as of July 2014. On August 2015, the Company entered into agreement with Clal Insurance Company Ltd, and purchased an insurance policy for directors and position holders currently serving or those who may serve at the company from time to time, at its subsidiaries and/or its associated companies, including directors and position holders who are the controlling shareholders and/or part thereof, if applicable, for the period of one year, this subject to approval terms by the shareholder meeting as stated above. The volume of policy coverage is ten (10) million dollars per claim and in total for the term of the insurance. Annual premium is at sum of approximately USD 18,000 (eighteen thousand dollars).

4.2. Letters of indemnification: Pursuant to decisions by the General Meeting of Company shareholders dated January 2, 2012, June 21, 2006 and July 14, 2004, the Company grants letters of indemnification to all its Board members and officers, including those considered to be controlling shareholders and/or relatives thereof and/or who serve as officers of and/or service providers to controlling shareholders of the Company and/or where controlling shareholders of the Company are considered to have a personal interest in such grant, as may be from time to time. Under the letters of indemnification, the Company provides all the directors and officers therein, as they may be from time to time, indemnification in advance, in accordance with the company's Articles of Association and the provisions of the Companies Law in respect of any liability or expenses as outlined in the letter of indemnification. The amount of indemnification pursuant to all the letters of indemnification that have been provided and/or will be provided to the offers and employees of the Company, shall not exceed a cumulative sum equal to 25% of the shareholders' equity of the Company, in accordance with the last consolidated financial statements published prior to the actual provision of indemnification. For more information concerning the letters of indemnification, see the immediate report of the Company dated November 23, 2011 (Reference No. 2011-01-336819).

17

4.3. Sale and Purchase of Products from Cargal: In the course of 2015, through its subsidiaries, the Company sold to Cargal Ltd., a company in which Clal Industries Ltd. (the former control holder of the Company) is an interested party, packaging paper in return for the total sum of approximately NIS 66 million in 2015, while also purchasing from Cargal paper waste at a volume of approximately NIS 5.4 million.

The terms of the commercial agreement following commercial negotiations between the parties and were based, inter alia, on preceding transactions that were carried out between the Company and Cargal, subsequent to the examination of additional price proposals for the purpose of comparison, both in relation to the sale of packaging paper and in relation to the purchase of paper waste, and based upon market conditions and on the price alternatives existing in the market. The commercial agreement does not constitute an obligation on the part of Cargal to acquire packaging paper from the Company, nor for the purchase of paper waste back from Cargal. The actual purchases are made in an ongoing manner, in the normal course of the figures, from time to time, in accordance with the needs of the customer, although the price mechanism that was set is dependent upon the quantities actually purchased.

For details concerning the ratification of the Company’s entry into a framework agreement with Cargal for the year 2015, see the immediate report of the Company dated January 12, 2015 (Reference No.: 2015-01-009907).

4.4. Sale of triple wall cardboard to Triplex: Until August 13, 2015, through its subsidiaries, the Company sold triple wall cardboard to Triplex Containers (2003) Ltd. (”Triplex”), a subsidiary of Cargal Ltd., a company in which Clal Industries Ltd., the former control holder of the Company is an interested party, in return for the total sum of NIS 8 million in 2015.

The engagements with Triplex were made under market conditions and during the normal course of affairs of Carmel. For additional details concerning the said engagements and the ratification of similar engagements in 2015, see the immediate reports of the Company dated February 25, 2015 (Reference No.: 2015-01-038398).

5. Transactions outlined in section 270(4) of the Companies Law

5.1. Management agreement with the controlling shareholder: On April 30, 2014, the general meeting of shareholders of the company (with a special majority), following the ratification by the Remuneration Committee and Board of Directors of the company, ratified the management agreement between the Company and CII - controlling shareholder of the Company. In accordance with the management agreement, CII provides the Company with active Chairman of the board services through Mr. Yohanan Locker. For additional details concerning the management agreement and the options granted to Mr. Yohanan Locker on account of his tenure as active Chairman of the Board, see the immediate reports of the Company dated April 10, 2014 (Reference Nos.: 2014-01-045003 and 2014-01-044730). The management agreement was terminated in August 2015 in light of change in Company control.

Directors’ Remuneration:

On March 18, 2015, the Company announced a decision on the part of the Remuneration Committee and the Board of Directors of the Company regarding the approval of annual remuneration and participation remuneration for directors at the Company (excluding external directors) for 2016, at the level of the “Set

18

Sum” as defined in the remuneration directives, subject to meeting regulation 1a(2) to the relief directives, as stated in the company announcement. For further details, see the Company's immediate report dated March 6, 2016 (reference number: 2016-01-000921).

19

Appendix F

Regulation 26 – Directors of the Corporation

List of directors serving on the Board of Directors of the company in proximity to the report date:

Name: Ishay Davidy

ID: 57523367

Date of birth: 03.02.1962

Address for delivery of court proceedings:

Igal Alon 98, Tel Aviv.

Citizenship: Israeli

Membership in Board of Directors Committees:

No

External / independent director: No

Position held at the Company, subsidiary, company related to the Company or interested party therein:

Holder of control in the corporation's stakeholder - FIMI Fund

Appointment Date as Director: 13.08.2015

Professional certification / Accounting and financial skills:


Education: Holder of a Bachelor's degree in Industrial Engineering from Tel Aviv University, and an MA degree in Financing and Business Management from Bar-Ilan University.

Employment in the past five years and list of other corporations where serving as Director:

CEO and senior partner in FIMI fund.

Serves as a director of H.Mer, Novolog (Pharm-up 1966) Ltd, Inrom Industries, Inrom Construction Industries, Overseas Commerce, Ham-Let, Gilat, Rekah, and Polyram Plastic Industries.

Family relation with another interested party at the Company (if any):

No

Name: Ron Ben-Haim

ID: 24528655






No

20



Partner in FIMI fund, holder of Company control




Education: Holds a BA in Industrial Engineering from Tel Aviv University. Holds an MA in Business Management from New-York University


Partner in FIMI fund

Serves as a director in Tadir-Gan Precision Products Ltd, TAT Technologies Ltd, Magal Systems Ltd, Overseas Commerce Ltd, Rivulis Irrigation Ltd, Polyram Plastic Industries Ltd, Inrom Construction Industries Ltd, Nirlat Paint Ltd, Aloni Ltd, and Raval ICS Ltd.


No

Name: Amiram Bam

ID: 028785194






No



Partner in FIMI fund, holder of Company control




Education: Holds a BA degree in Law from Tel-Aviv University, BA in Economics from Tel-Aviv University, and Graduate of Business Administration from Tel-Aviv University.

Employment in the past five years and Partner in FIMI fund and managing partner in FITE

21

list of other corporations where serving as Director:

Serves as a director in Ormat Technologies Inc, Gilat Satelite Services Ltd, Ham-Let (Israel Canada) Ltd, Rekah Pharmaceutical Industry Ltd, Novolog (Pharm-up 1922) Ltd, and Dimar Cutting Tools Ltd.


No

Name: Amit Ben-Zvi

ID: 022644744






No



Partner of the corporation's stakeholder - FIMI Fund




Education: Holds a BA in law and Accounting from Tel Aviv University


2012 - Partner in FIMI fund

2008-2012 - CEO of Hermes Technologies and head of Europe and Japan activity in Magic Software.

Serves as a director in H.Mer, Dimar, Novolog (Pharm-up 1966) Ltd, and Overseas Commerce.


No

Name: Atalia Arad

ID: 053486767


Address for delivery of court 36 Bernstein St., Ramat-Gan, 52247

22

proceedings:

Citizenship: Israeli.


Member of the Audit Committee, Balance Sheet Committee, Remuneration Committee, Energy Committee, and in an independent committee for examining a transaction concerning the new power plant.

External / independent director: External Director.


None.

Appointment Date as Director: July 10, 2008 (her appointment was extended in July 2011 and 2014)

Expert External director: No.


Professional certification.

Education: BA in Sociology from the Hebrew University in Jerusalem and MA in Sociology from the Hebrew University in Jerusalem.


2008-2014 - External Director at Bank Otsar HaChayal


No.

Name: Priel Rafael Yehoshua

ID: 000517482



51 Katzenelson St.; Kfar Saba


Membership of Board of Directors Committees at the company:

Member of the Audit Committee, Balance Sheet Committee, Remuneration Committee, Energy Committee and in an Independent Committee of the Board Of Directors that was established in order to examine a transaction with the controlling shareholder concerning the power station.

External / independent director: External Director.

Professional certification / Accounting Accounting and financial skills.

23

and financial skills:

Expert External Director No.

Employee of the Company, a subsidiary of the Company, an affiliated Company of the company's or of a shareholder in the Company:

No.


Education: Master's Degree in Business Administration (MBA) from INSEAD Fontainebleau, in France.

Master's Degree in Industrial Engineering and Management from the Haifa Technion.

Bachelor’s Degree (BSc) in Industrial Engineering (Machines Department) from the Haifa Technion.


Member in MDAIS Associates management.

1995 - Present - Business manager, business consultant and entrepreneur, owner of PRN Ltd. - specializing in industry, commerce and services.

2000-2011 – CEO of Shaar HaNegev Industries.

2004-2013 – Chairman of the Board of Directors of Sagiv.

2009-2012 - Chairman of the Board of Directors of Kibbutz Yaqum Holdings

Currently serves as Chairman of the Board of Directors of Kibbutz Netzer Sireni Holdings and Chairman of the Economic Management of Kibbutz Ein HaShlosha, Director and Chairman of the Finance Committee of the Board of Directors of the Holdings Corporation of Kibbutz Revivim, Chairman of the Audit Committee of TaasiYeda Non-profit Organization and Member of the Board of Directors of Save a Child’s Heart Non-profit Organization.

Serves as an external director at Kafrit Industries (1993) Ltd. (2007-2010); Chairman of Dorot Garlic and Seasoning Industries (2005-2009), Chairman of Poliron Industries (2001-2006) and as Chairman of the Economic Management of Kibbutz Zikim and Kibbutz Mashabei Sadeh.


No.

24

Name: Itzchak Sharir

ID: 050080878



Zvia Lubatkin 2, Kfar-Saba


Member of Board of Directors Committees:

No



None.




Education: Holds a BA degree in Industrial Engineering from the Technion, Graduate of Materials Science from Ben-Gurion University, and a PhD in Materials Science from Illinois Institute of Technology.


Member of Bank Discount Board of Directors (end of service: October 2011), Chairman of the Board of Discount Capital Markets (end of service: March 2015), member of Zur-Shamir Board of Directors (end of service: January 2015), Chairman of Alut association (end of service: June 2015).

Serves as director in Reit 1.


No

25

Name: Shalom Zinger

ID: 00660894



Shlomo Ben-Yosef 11, Ramat-Aviv, Tel-Aviv


Member of Board of Directors Committees:

Membership in the audit committee, balance committee and remuneration committee

External / independent director: Independent Director


No




Education: Bachelor of Accounting from the University of Haifa.


2009 - Managing partner of Singer Meister Ltd

Serving as a director of Robert Marcus Loss Adjusters Ltd.


No

26

b. Directors who ceased serving on the Board of Directors of the company during the reported period

Following below are details regarding directors who ceased serving on the Board of Directors of the company during the reported period:

Director’s Name Identity

Number

Address Appointment date Tenure

termination date

Last name First name

City Street House No.

Year Month Day Year Month Day

Mr. Haim Amos 000155432 Jerusalem Kobobi 24a 1984 07 17 2015 09 09

Hefetz Sigalya 57248528 Tel Aviv HaZedef 12 2013 11 11 2015 08 13

Kleinberger Dan 060477510 Tel Aviv Azrieli Center 3, The Triangular Tower

Floor 45

2012 08 16 2015 08 13

Vardi Dan 06101323 Tel Aviv Meor Ya'ari

12 2010 12 22 2015 08 13

Gotliv Arie 065478430 Haifa Norway 3 2012 12 09 2015 08 13

Locker Yohanan 054231030 Tel Aviv Azrieli Center 3, The Triangular Tower

Floor 45

2013 05 13 2015 08 13

27

Appendix G

Regulation 26A - Senior position holders

Senior position holders in the Company

Eliahu Greenbaum Name: 051293298 ID: 10.02.1952 Date of birth: 16.07.2006 Holding the position since: Internal Auditor. Position held at the Company, subsidiary,

company related to the Company or interested party therein:

CPA, Bachelor’s Degree in Accounting and Economics, Tel Aviv University.

Education:

The Company’s Internal Auditor. Business activities in the last five years: No. Family relation to another position holder

at the Company (if any): Gadi Cunia Name: 024673261 ID: 24.03.1970 Date of birth: 23.01.2015 (Appointed CFO of the company on March 13, 2014)

Holding the position since:

Acting CEO.


BA in Business Administration and Accounting, Academic Program of the Tel Aviv College of Management

Education:

CEO of Gazit Germany. Deputy CEO and CFO at Gazit Globe.

Business activities in the last five years:

No. Family relation to another position holder at the Company (if any):

Lior Haalman Name: 22761902 ID: 01.07.1967 Date of birth: 06.03.2016 Holding the position since: Acting C.F.O Position held at the Company, subsidiary,


BA in Economics from Tel Aviv M.B.A, majoring in Finance and Marketing

Education:

28

from the University of Tel Aviv

MGS - CFO

Hot mobile - Acting CEO

Hot mobile - CFO


None. Family relation to another position holder at the Company (if any):

Yaron Dor Name: 58743675 ID: 5.6.1964 Date of birth: 1.2.2014 Holding the position since: Manager of the Operations Division Position held at the Company, subsidiary,


Bachelor of Food Engineering and Chemistry at the Technion and Graduate of Business Administration at Heriot-Watt University.

Education:

Deputy CEO and COO of the subsidiary Carmel Container Systems Ltd. and Manager of Operations at the subsidiary Hadera Paper - Packaging Paper and Recycling Ltd.



Anat Rothschild Name: 34202986 ID: 23.1.1978 Date of birth: 13.4.2015 Holding the position since: Legal Counsel and Company Secretary Position held at the Company, subsidiary,


Holder of an LLB degree in Law from the Tel Aviv College of Management, LLM Graduate in Law from the ERASMUS-Europe program and Executive MBA Graduate from Kellogg-Recanati.

Education:

Legal Counsel in Plasto-Sac Ltd.

Attorney in Hadera Paper Ltd.

Attorney in Fischer Behar Chen Well Orion & Co.



Elinor Amir Name: 046262226 ID: 21.10.81 Date of birth:

29

01.02.2016 Holding the position since: Treasurer Position held at the Company, subsidiary,


MBA Graduate in Business Management - specializing in Financial Management from Recanati, Management Faculty of Tel-Aviv University.

Education:

Treasurer of Hadera Paper - Printing and Writing Paper Ltd.


No. Family relation to another position holder at the Company (if any):

Shlomo Yehudai Name: 051981652 ID: 14.5.1954 Date of birth: 1.5.2011 Holding the position since: Head of Human Resources Position held at the Company, subsidiary,


BA degree in Social Science and Mathematics from Haifa University MBA from Derby University

Education:

Head of Human Resources, Hadera Paper Business activities in the last five years: No Family relation to another position holder

at the Company (if any):

Guy Avraham Frenkel Name: 056720535 ID: 2.11.1960 Date of birth: 1.8.2013 Holding the position since: CEO of Carmel Frenkel Ind. Ltd.


BA, Aeronautics Engineering, Haifa Technion and MBA, Tel Aviv University.

Education:

CEO of Frenkel CD Business activities in the last five years: None. Family relation to another position holder


Uzi Carmi Name: 54055405 ID: 15.4.1956 Date of birth: 1.4.1999 Holding the position since: CEO of Amnir Recycling Industries Ltd. Position held at the Company, subsidiary,


30

Lahav - Executive Education - Tel-Aviv University, specializing in Marketing Management, 1996. MIL - Israeli Management Center - General Management 1988-1989

Education:

Amnir CEO Business activities in the last five years: No Family relation to another position holder


Officers who ceased to serve during the reported period Following below are details concerning the officers who ceased to serve during the reported period:

Name of officer Position Filled

at the

Corporation

Identity

Number

Appointment date Tenure termination

date

Last name

First name

Year Month Day Year Month Day

Liran Shlomo CEO 050771161 2014 08 01 2015 01 23

Bason David VP, Supply Chain.

055722755 2010 03 01 2015 04 01

Nevo Yael Legal Counsel and Company Secretary

012319398 2010 11 01 2015 04 13

Yadlin Guy CEO of the Paper Division, CEO of the subsidiaries Hadera Paper - Paper Packaging Paper and Recycling Ltd., Hadera Paper - Paper Printing Ltd.

023907603 2013 07 30 2015 08 19

Molad Shmuel Treasurer 025447905 2006 02 01 2016 02 01

Documents

נייר חדרה - ברנע 2015 ENG - Hadera Paperen.hadera-paper.co.il/.../pdf/Hadera_Paper_Periodical_Report_2015.pdf · B Management Discussion and Analysis ... "Report date"