(1) Norfet L.P is an Israeli partnership. As of June 15, 2010, 7.76% of
Norfet was held by FIMI Opportunity Fund, LP, approximately 40.15% of
Norfet was held by FIMI Israel Opportunity Fund, Limited Partnership,
approximately 42.29% was held by Mivtach Shamir Holdings Ltd.,
approximately 6.06% was held by Yashir Provident Funds Ltd.
Pursuant to Rule 13d-5, (i) Mr. Ishay Davidi, a director of the
Company, may be deemed to beneficially own the shares held by Norfet
due to his position as CEO of FIMI 2001 Ltd., which is the managing
general partner of each of FIMI Israel Opportunity Fund, Limited
Partnership and FIMI Opportunity Fund, L.P. and (ii) Mr. Meir Shamir,
a director of the Company, may be deemed to beneficially own the
shares held by Norfet due to his 34.15% interest in Mivtach Shamir
Holdings, Ltd. ("Mivtach-Shamir").
In addition, each of FIMI 2001 Ltd. and Mivtach-Shamir may be deemed
to beneficially own the shares held by Norfet due to the fact that, to
the best of the Company's knowledge, FIMI 2001 Ltd. and Mivtach-Shamir
share joint control of N.D.M.S. Ltd., which is the general partner of
Norfet and holds the sole management, operation and control of Norfet
pursuant to a limited partnership agreement between N.D.M.S. Ltd. and
the limited partners of Norfet.
(2) As described in footnote (1) above, FIMI 2001 Ltd. may be deemed to
beneficially own all of the 461,308 Ordinary Shares held directly by
Norfet. FIMI 2001 Ltd. may also be deemed to beneficially own (i)
149,124 shares held by Ta-Top, Limited Partnership, due to FIMI 2001
Ltd.'s position as the managing general partner of FIMI Delaware,
which is the sole shareholder of TA-TEK Ltd., the general partner of
Ta-Top, Limited Partnership and (ii) 1,967 shares held directly by
FIMI Opportunity Fund Limited Partnership and FIMI Israel Opportunity
Fund Limited Partnership, due to FIMI 2001 Ltd.'s position as general
partner of these partnerships. Mr. Ishay Davidi, a director of the
Company, may be deemed to beneficially own the shares held by FIMI
2001 Ltd. due to his position as CEO of FIMI 2001.
(3) Mivtach Shamir Holdings, Ltd. is an Israeli public company traded on
the Tel Aviv Stock Exchange. Mivtach-Shamir's largest shareholder is
Mr. Meir Shamir, who, as of June 15, 2010, held 34.15% of
Mivtach-Shamir. Mivtach-Shamir directly owns 149,124 Ordinary Shares.
In addition, as described in footnote (1) above, Mivtach-Shamir may be
deemed to beneficially own all of the 461,308 Ordinary Shares held
directly by Norfet. Mr. Meir Shamir, a director of the Company, may be
deemed to beneficially own the shares held by Mivtach-Shamir due to
his 34.15% interest in Mivtach-Shamir.
(4) Analyst I.M.S. Investment Management Services Ltd. is an Israeli
public company traded on the Tel Aviv Stock Exchange ("Analyst"). As
of June 15, 2010, 33.04% of Analyst was held by Mr. Ehud Shiloni,
33.04% was held by Mr. Shmuel Lev and 6.1% was held by D.S. Apex
Holdings Ltd. Analyst's holdings consist of (i) 213,645 Ordinary
Shares held by Analyst I.M.S. Investment Management Services (1986)
Ltd. and (ii) 8,132 Ordinary Shares held by Analyst Provident Funds
Ltd. As of June 15, 2010, Analyst held 99% of Analyst I.M.S.
Investment Management Services (1986) Ltd. and 99% of Analyst
Provident Funds Ltd.
The percentage ownership in the Ordinary Shares of Norfet, FIMI 2001 Ltd.
and Mivtach-Shamir as a group is approximately 24% as of June 15, 2010. All of
the Ordinary Shares held by Norfet are pledged in favor of two Israeli bank
institutions.
At June 15, 2010, there were 82 holders of Ordinary Shares of record
registered with a United States mailing address, including banks, brokers and
nominees. These holders of record represented approximately 46.76% of the total
outstanding Ordinary Shares (excluding 99,740 shares held by our wholly owned
subsidiary). Because these holders of record include banks, brokers and
nominees, the beneficial owners of these Ordinary Shares may include persons who
reside outside the United States.
63
7B. RELATED PARTY TRANSACTIONS
The following discussion includes summaries of the significant terms of
various agreements and transactions. Because these are summaries, they are
qualified by reference to the actual agreements, which are attached as exhibits
to this Annual Report.
The Companies Law requires that certain related party transactions be
approved as provided for in a company's articles of association and, in certain
circumstances, by a company's audit committee or its shareholders. Our Audit
Committee is responsible for reviewing potential conflicts of interest
situations where appropriate.
RELATIONSHIPS AND TRANSACTIONS WITH NORFET AND ITS SHAREHOLDERS
As of June 15, 2010, Norfet owned 461,308 Ordinary Shares, which
represented approximately 14.54% of Tefron's outstanding Ordinary Shares
(excluding 99,740 shares held by Tefron's wholly owned subsidiary).
Substantially all of Norfet is owned by (i) N.D.M.S. Ltd., a company wholly
owned by FIMI Opportunity Fund L.P., (ii) FIMI Israel Opportunity Fund, Limited
Partnership and (iii) Mivtach Shamir Holdings Ltd. and (iv) Yashir Provident
Funds Ltd..
Pursuant to a Share Purchase Agreement, dated February 17, 2004, we issued
to Norfet in April 2004, 352,941 Ordinary Shares for a base price of $42.5 per
share and a base aggregate consideration of $15 million. Norfet also acquired an
additional 136,500 of our Ordinary Shares in the aggregate from Arwol and
Macpell pursuant to a separate agreement. Immediately following the closing of
these agreements, Norfet held 489,441, or approximately 28.8% of our outstanding
share capital, without taking into account our Ordinary Shares held by our
wholly-owned subsidiary. In April 2005, due to a purchase price adjustment
agreed to with Norfet instead of the purchase price adjustment mechanism agreed
to in the Share Purchase Agreement, we issued to Norfet an additional 66,176
Ordinary Shares, and Arwol transferred 10,690 additional Ordinary Shares to
Norfet.
Under the Share Purchase Agreement, we also agreed to pay Norfet a
management fee of approximately $172,000 plus VAT per annum until our first
annual meeting in 2005 (which took place on June 28, 2005), and $120,000 plus
VAT thereafter. On March 2, 2010 we signed an agreement with our bank lenders
which, among other things, establishes new financial covenants and undertakings
for 2010, including our undertaking not to distribute any dividends or pay
management fees and/or any other payment to our shareholders until the loans
provided by our bank lenders have been repaid in full. See "Item 10. Additional
Information - 10C. Material Contracts - Agreement with Our Bank Lenders."
Norfet, our major shareholder, consented to the inclusion of this provision in
the agreement with our bank lenders, and accordingly, Norfet has effectively
waived the management fees owed to it from the date on which the loans were
granted to the Company and until the date on which all the loans are repaid in
full. In addition, on April 7, 2010, Norfet notified us that it waives the
$190,000 unpaid management fees that were then due to Norfet.
The Company, Norfet, Arwol and Macpell, together with Leber Partners L.P.,
are also party to a Registration Rights Agreement, dated April 22, 2004, which
replaced the previous Registration Rights Agreements to which the Company and
certain of these shareholders had been a party. On November 29, 2005, the
Securities and Exchange Commission declared effective a Registration Statement
on Form F-3 covering the resale of Ordinary Shares held by the shareholders
party to this agreement.
Please see "Item 10. Additional Information- 10C. Material Contracts -
Norfet Agreements" for a more complete description of these agreements.
On March 31, 2009, our board of directors approved an agreement with Orian
S.M. Ltd. (formerly known as Orian Agish Ltd.) ("Orian") for freight and
delivery services. FIMI Israel Opportunity Fund Limited Partnership and FIMI
Opportunity Fund L.P. are interested parties in Orian. Our Director, Yishai
Davidi, serves as senior partner of FIMI Israel Opportunity Fund, Limited
Partnership and FIMI Opportunity Fund, L.P. Mr. Davidi also serves as CEO of
FIMI 2001 Ltd., which controls the general partner of Norfet, one of the Norfet
limited partners (which is managed by FIMI 2001 Ltd.) as well as the other
Norfet limited partners by virtue of an irrevocable power of attorney. As of
June 15, 2010, Norfet and related parties held 24% of our shares. The agreement
with Orian will be reviewed quarterly by the Company's Audit Committee and the
Board of Directors.
64
On March 28, 2010, we issued 149,124 ordinary shares, at a price per share
of $3.8, to each of Mivtach Shamir Holdings Ltd. (one of the partners in Norfet)
and Ta-Top Limited Partnership (a partnership under the control of FIMI 2001,
Ltd.) in a private placement, resulting in aggregate gross proceeds of
approximately $1.1 million. The private placement was part of a transaction to
raise capital in connection with an agreement with our bank lenders, which
combined both a rights offering to all of our shareholders and a private
placement to Norfet (or whoever acts on its behalf) in which Norfet (or whoever
acts on its behalf) agreed to invest in Tefron the difference between $4 million
and the amount raised in the rights offering. See "Item 10. Additional
Information - 10C. Material Contracts - Private Placement to Norfet."
7C. INTERESTS OF EXPERTS AND COUNSEL.
Not Applicable.
ITEM 8. FINANCIAL INFORMATION
CONSOLIDATED FINANCIAL STATEMENTS
See Item 18.
LEGAL PROCEEDINGS
CLAIMS RELATING TO A FORMER EMPLOYEE'S IMPRISONMENT IN EGYPT
On November 15, 2006, a former employee of the Company filed law suits
against the Company and three of its former or current directors, with the
Israeli District Court and the Israeli Labor Law Court, seeking damages in the
amount of approximately $2 million plus non-specified bodily damages, due to
damages allegedly incurred by him as a result of his imprisonment in Egypt. The
Company believes that these law suits are without merit. As of June 15, 2010,
the claim is at the evidence stage and the next court hearing has been set for
December 2010.
CLAIMS RELATING TO TERMINATION OF EMPLOYMENT OF FORMER GENERAL MANAGER OF
MACRO
On September 3, 2009, Mr. Ron Grundland, the former general manager of the
Company's wholly owned subsidiary, Macro, and the Peles Institute for Automatic
Balances Ltd., a corporation wholly owned by Mr. Ron Grundland and his wife,
Smadar Grundland, through which Mr. Ron Grundland provided management services
to Macro (the "Management Company"), filed a lawsuit against the Company and
Macro for pecuniary losses of NIS 1,663,000 allegedly resulting from the
unilateral termination by Mr. Grundland of a management services agreement
between Macro and the Management Company on July 7, 2009. The parties have filed
their arguments and as of the date of this Annual Report, the parties are in
negotiations for a settlement.
In connection with the abovementioned claim, on December 10, 2009, the
court issued a temporary order for attachment against the Company and Macro in
an amount of up to NIS 1,663,000 (the amount of the claim), following an
application, ex parte, filed by Mr. Grundland and the Management Company for
temporary attachment of funds and rights due to Macro and the Company from four
customers. On January 13, 2010, the parties reached a settlement pursuant to
which the temporary order of attachment was cancelled and, in exchange, the
Company deposited deferred checks with Mr. Grundland's legal counsel to
guarantee payment of the verdict and legal expenses in the event that the final
verdict is in favor of Mr. Grundland.
65
ARBITRATION PROCEEDINGS RELATING TO ALLEGED UNLAWFUL TERMINATION OF AN
EMPLOYEE
On June 4, 2009, we signed an arbitration agreement with a former employee,
Mr. Reuven Hason, in connection with his claims regarding the circumstances of
his termination. An arbitrator was appointed to arbitrate the claims. On
September 1, 2009, Mr. Hason filed a claim against the Company for unlawful
termination in an amount of approximately NIS 751,000, plus additional amounts
for pain and suffering and salary payments due to him. The parties agreed not to
hold evidential hearings in connection with the arbitration and instead to hold
mediation meetings to examine the possibility of reaching a settlement. As of
June 15, 2010, the mediation process is still ongoing.
APPOINTMENT OF SPECIAL COMMITTEE TO ADDRESS ALLEGATIONS OF FORMER DIRECTOR
On May 28, 2009 the Company appointed a special committee to investigate
certain allegations made by Mr. Micha Korman, a former director of the Company,
concerning management's projections for the budget for the year 2009 and the
communication between management and the Company's board of directors. On
September 15, 2009 the company announced the findings of the special committee.
The special committee concluded that management's assessments as presented to
the Board of Directors were reasonable and were based on reasonable data.
Nevertheless, the special committee recommended that, in the future, when
presenting the annual budget to the board of directors for approval, management
should present the range of projections that management considered in preparing
the budget and address the differences between such projections. In addition,
the special committee recommended that the Company's Board of Directors
establish a policy for conveying information from management to the members of
the Board of Directors (which would address, among other things, the manner in
which the information is transferred, the timing for transfer of information and
the type of information to be transferred), including updating members of the
Board of Directors on an ongoing basis of any material changes that occurred in
the condition of the Company.
DIVIDEND POLICY
Although we have no established dividend policy, in the past we have
distributed dividends to our shareholders from our accumulated earnings. In
2006, we twice declared and paid dividends of approximately $5 million each, in
2007, we did not declare any dividends and in May 2008, we declared and paid a
dividend of $8 million. In 2009 we did not declare any dividends and as of
December 31, 2009, we had no accumulated earnings for distribution. We may
distribute dividends in the future if our Board of Directors so determines and
there are sufficient accumulated earnings in accordance with applicable law. On
March 2, 2010 we signed an agreement with our bank lenders which, among other
things, establishes new financial covenants and undertakings for 2010, including
our undertaking not to distribute any dividends or pay management fees and/or
any other payment to our shareholders until the loans provided by our bank
lenders have been repaid in full. See Item 10. Additional Information - C.
Material Contracts - Agreement with Our Bank Lenders.
ITEM 9 THE OFFER AND LISTING
9A. OFFER AND LISTING DETAILS
From the initial public offering of our Ordinary Shares on September 24,
1997 through December 18, 2008, our Ordinary Shares were traded on the NYSE
under the symbol "TFR". Since January 16, 2009, our ordinary shares have been
quoted on the OTCBB. The symbol of our ordinary shares on the OTCBB is "TFRFF".
All share price information has been adjusted to give retroactive effect to
a ten-for-one reverse split of our ordinary shares that became effective on
January 22, 2009.
66
As reported on the NYSE and the OTCBB, the annual high and low sales prices
for our Ordinary Shares were as follows:
HIGH LOW
--------- ---------
2005 $ 87.5 $ 38.4
2006 $ 130.5 $ 83.0
2007 $ 109.5 $ 40.5
2008 $ 56.5 $ 2.5
2009 $ 6.35 $ 2.2
As reported on the NYSE and the OTCBB, the quarterly high and low sales
prices for our Ordinary Shares for the last two years were as follows:
2008 HIGH LOW
---- --------- ---------
First quarter $ 56.5 $ 29.4
Second quarter $ 39.4 $ 21.4
Third quarter $ 23.3 $ 17.1
Fourth quarter $ 19.9 $ 2.5
2009
----
First quarter $ 4.0 $ 2.2
Second quarter $ 4.4 $ 3.2
Third quarter $ 6.1 $ 3.5
Fourth quarter $ 6.35 $ 2.7
2010
----
First quarter $ 4.6 $ 3.5
Second quarter $ 4.0 $ 1.5
As reported on the NYSE and on the OTC, the monthly high and low sales
prices for our Ordinary Shares for the lastix months were as follows:
2010
----
January $ 4.6 $ 3.5
February $ 4.4 $ 3.9
March $ 4.3 $ 3.8
April $ 4.0 $ 3.8
May $ 3.4 $ 2.0
June $ 2.0 $ 1.5
July (through July 12, 2010) $ 1.8 $ 1.5
Our Ordinary Shares have been traded on the TASE since September 28, 2005
under the symbol "TFRN".
67
As reported on the TASE, the annual high and low sales prices for our
Ordinary Shares were as follows:
HIGH LOW
--------- ---------
2007 NIS 463.3 NIS 165.6
2008 NIS 205.0 NIS 12.0
2009 NIS 12.1 NIS 25.5
As reported on the TASE, the quarterly high and low sales prices for our
Ordinary Shares for the last two years were as follows:
2008 HIGH LOW
---- --------- ---------
First quarter NIS 205.0 NIS 104.1
Second quarter NIS 148.5 NIS 81.4
Third quarter NIS 87.9 NIS 60.3
Fourth quarter NIS 60.3 NIS 12.0
2009
----
First quarter NIS 16.3 NIS 12.1
Second quarter NIS 19.8 NIS 13.4
Third quarter NIS 25.5 NIS 13.4
Fourth quarter NIS 21.9 NIS 10.5
2010
----
First quarter NIS 16.27 NIS 12.91
Second quarter NIS 15.09 NIS 5.6
As reported on the TASE, the monthly high and low sales price for our
Ordinary Shares for the last six months were as follows:
2010
----
January NIS 15.2 NIS 12.9
February NIS 15.3 NIS 14.2
March NIS 16.3 NIS 14.3
April NIS 15.1 NIS 13.5
May NIS 13.6 NIS 6.5
June NIS 6.8 NIS 5.6
July (through July 12, 2010) NIS 7.2 NIS 5.2
On September 8, 1998, we announced our intention to repurchase through a
stock repurchase program up to one million of our outstanding Ordinary Shares.
As of July 12, 2010, we had repurchased and hold in our treasury 99,740 Ordinary
Shares.
9B. PLAN OF DISTRIBUTION
Not Applicable.
9C. MARKETS
Our Ordinary Shares are quoted on the OTCBB and are traded on the TASE.
9D. SELLING SHAREHOLDERS
Not Applicable.
9E. DILUTION
Not Applicable.
68
9F. EXPENSES OF THE ISSUE
Not Applicable.
ITEM 10. ADDITIONAL INFORMATION
10A. SHARE CAPITAL
Not Applicable.
10B. MEMORANDUM AND ARTICLES OF ASSOCIATION
SECURITIES REGISTERS
We are registered with the Israeli Registrar of Companies. Our registration
number with the Israeli Registrar of Companies is 520043407. Section 2 of our
Memorandum of Association provides that our principal objects, among other
things, are to engage in any business connected with manufacturing, processing,
supplying and marketing undergarments, textiles and ready-made clothes. Article
2A of our Articles of Association provides that we may, at any time, carry on
business in any field or type of business permitted to us, whether explicit or
implied, according to our Memorandum of Association.
BOARD OF DIRECTORS
The Companies Law requires that certain transactions, actions and
arrangements be approved as provided for in a company's articles of association
and in certain circumstances by the audit committee, by the board of directors
itself and by the shareholders. The vote required by the audit committee and the
board of directors for approval of such matters, in each case, is a majority of
the disinterested directors participating in a duly convened meeting.
The Companies Law requires that a member of the board of directors or
senior management of the company promptly disclose any personal interest that he
or she may have (either directly or by way of any corporation in which he or she
is, directly or indirectly, a 5% or greater shareholder, director or general
manager or in which he or she has the right to appoint at least one director or
the general manager) and all related material information known to him or her,
in connection with any existing or proposed transaction by the company. In
addition, if the transaction is an extraordinary transaction (that is, a
transaction other than in the ordinary course of business, otherwise than on
market terms, or is likely to have a material impact on the company's
profitability, assets or liabilities), the member of the board of directors or
senior management also must disclose any personal interest held by his or her
spouse, siblings, parents, grandparents, descendants, spouse's descendants and
the spouses of any of the foregoing.
Once the member of the board of directors or senior management complies
with the above disclosure requirement, a company may approve the transaction in
accordance with the provisions of its articles of association. If the
transaction is with a third party in which the member of the board of directors
or senior management has a personal interest, the approval must confirm that the
transaction is not adverse to the company's interest. Furthermore, if the
transaction is an extraordinary transaction, then, in addition to any approval
stipulated by the articles of association, it also must be approved by the
company's audit committee and then by the board of directors, and, under certain
circumstances, by a meeting of the shareholders of the company.
69
Our Articles of Association provide that, subject to the Companies Law, all
actions executed by the Board of Directors or by a committee thereof or by any
person acting as a Director or a member of a committee of the Board of Directors
or by the General Manager will be deemed to be valid even if, after their
execution, it is discovered that there was a certain flaw in the appointment of
such persons or that any one of such persons was disqualified from serving at
his or her office.
Our Articles of Association provide that, subject to the Companies Law, an
officer is entitled to participate and vote in meetings concerning the approval
of actions or transaction in which he or she has a personal interest. Subject to
the Companies Law, a transaction between an officer of Tefron or an entity
controlling Tefron, and us, or a transaction between any other person in which
an officer or an entity controlling the company has a personal interest and us,
and which is not an extraordinary transaction, shall be approved by the Board of
Directors or by the Audit Committee or by any other entity authorized by the
Board of Directors.
Our Articles of Association provide that the Board of Directors may
delegate all of its powers to such committees of the Board of Directors as it
deems appropriate, subject to the provisions of the Companies Law. The Audit
Committee is responsible for reviewing, among other things, potential conflicts
of interest situations where appropriate. See "Item 6. Directors, Senior
Management and Employees - 6C. Board Practices - Audit Committee."
Arrangements regarding compensation of Directors require the approval of
the Audit Committee, the Board of Directors and the shareholders. The Board of
Directors may from time to time, at its discretion, cause us to borrow or secure
the payment of any money for our purposes, and may secure or provide for the
repayment of such money in the manner as it deems fit.
DESCRIPTION OF SECURITIES
We are authorized to have 6,999,550 Ordinary Shares issued, par value NIS
10 per share.
Our Ordinary Shares do not have preemptive rights. The ownership or voting
of Ordinary Shares by nonresidents of Israel or foreign owners is not restricted
or limited in any way by our Memorandum of Association or Articles of
Association, or by the laws of the State of Israel.
TRANSFER OF SHARES AND NOTICES. Fully paid Ordinary Shares are issued in
registered form and may be freely transferred pursuant to our Articles of
Association unless such transfer is restricted or prohibited by another
instrument. Each shareholder of record is entitled to receive at least seven
calendar days' prior notice of an ordinary shareholders' meeting and at least 21
calendar days' prior notice of any shareholders' meeting in which a special or
extraordinary resolution is to be adopted. For purposes of determining the
shareholders entitled to notice and to vote at such meeting, the Board of
Directors may fix the record date not more than 40 nor less than four calendar
days prior to the date of such meeting.
ELECTION OF DIRECTORS. The Ordinary Shares do not have cumulative voting
rights in the election of Directors. As a result, the holders of Ordinary Shares
that represents more than 50% of the voting power have the power to elect all
the Directors.
DIVIDEND AND LIQUIDATION RIGHTS. Our Ordinary Shares are entitled to the
full amount of any cash or share dividend, if declared. We may declare a
dividend to be paid to the holders of Ordinary Shares according to their rights
and interests in our profits. In the event of our liquidation, after
satisfaction of liabilities to creditors, our assets will be distributed to the
holders of Ordinary Shares in proportion to the nominal value of their
respective holdings. Such right may be affected by the grant of preferential
dividend or distribution rights to the holders of a class of shares with
preferential rights that may be authorized in the future by a special resolution
of our shareholders. Our Board of Directors may declare interim dividends and
propose the final dividend with respect to any fiscal year only out of profits.
Declaration of a final dividend requires approval by an ordinary shareholders'
resolution, which may decrease but not increase the amount proposed by the Board
of Directors. Failure to obtain such shareholder approval does not affect
previously paid interim dividends.
70
VOTING, SHAREHOLDERS' MEETINGS AND RESOLUTIONS. Holders of Ordinary Shares
have one vote for each Ordinary Share held on all matters submitted to a vote of
shareholders. Such voting rights may be affected by the grant of any special
voting rights to the holders of a class of shares with preferential rights that
may be authorized in the future. The quorum required for an ordinary meeting of
shareholders consists of at least two shareholders present in person or by proxy
who hold or represent, in the aggregate, at least one-fourth of the voting
rights of the issued share capital. A meeting adjourned for lack of a quorum is
adjourned to the same day in the following week at the same time and place or
any time and place as the Directors designate in a notice to the shareholders.
At such reconvened meeting the required quorum consists of two members present
in person or by proxy who hold or represent, in the aggregate, at least
one-fourth of our voting power.
Annual general meetings of shareholders are held once every year at such
time (within a period of not more than 15 months after the last preceding annual
general meeting) and such place as determined by the board of directors. The
board of directors may call extraordinary general meetings of shareholders and
are obligated to do so upon a written request in accordance with the Companies
Law. The Companies Law provides that an extraordinary general meeting of
shareholder may be called by the board of directors or by a request of two
directors or 25% of the directors in office, or by shareholders holding at least
5% of the issued share capital of the company and at least 1% of the voting
rights, or of shareholders holding at least 5% of the voting rights of the
company.
An ordinary resolution (such as a resolution for the election of directors,
the declaration of dividends or the appointment of auditors) requires approval
by the holders of a majority of the voting rights represented at the meeting, in
person or by proxy, and voting thereon. A special or extraordinary resolution
(such as a resolution amending our Memorandum of Association or Articles of
Association or approving any change in capitalization, merger, consolidation,
winding-up, or other changes as specified in the Companies Law) requires
approval of the holders of 75% of the voting rights represented at the meeting,
in person or by proxy, and voting thereon. In addition, if our share capital is
divided into different classes of shares, the approval of the holders of 75% of
the issued shares of a particular class or a special resolution passed at a
separate general meeting of the holders of the shares of such class is required
to modify or abrogate the rights attached to such shares.
10C. MATERIAL CONTRACTS.
Set forth below are summaries of our material contracts. Because these are
summaries, they are qualified by reference to the actual agreements, which are
attached as exhibits to this Annual Report.
AGREEMENT WITH OUR BANK LENDERS
On March 2, 2010, we and our subsidiaries, Hi-Tex and Macro (collectively,
the "Companies") signed an agreement with our bank lenders, Bank Leumi L'Israel
Ltd. - 51.3% (b) Bank HaPoalim Ltd. - 23.8%; (c) Israel Discount Bank Ltd. (the
"Agreement"), which among other things, provides for a re-organization of our
and our subsidiaries' credit lines with the banks. Pursuant to the agreement,
during March 2010, we raised an aggregate $4 million through the combination of
a rights offering to our shareholders and a private placement to Ta-Top, Limited
Partnership and Mivtach-Shamir Holdings, Ltd. For information on the private
placement, see " - Private Placement to Norfet's Shareholders".
LOAN A
Subject to the signing of documents in the standard form at each bank, the
banks shall provide the Companies with a loan ("Loan A"), in an aggregate
principal amount of $15 million.
INTEREST - Loan A will bear annual interest at a rate to be agreed upon by
us and our subsidiaries and each of the banks. The interest rate on Loan A is
LIBOR plus 2.85%. The interest on the unpaid balance of the Loan A shall be paid
by the Companies in 40 (forty) consecutive quarterly installments, beginning on
the last day of the third month from the date on which Loan A was provided.
PRINCIPAL - Loan A is for a period of 120 months, and is repayable in three
equal installments in the amount of $1.25 million each, at the end of each of
the seventh, eighth and ninth years after the date on which Loan A was provided.
The balance of the Loan A principal, in the amount of $11.25 million shall be
repaid at the end of the tenth year after the date the date on which Loan A was
provided (the "Final Principal Payment of Loan A").
71
Early Repayment of Loan A - the Companies will make early repayment of the
unpaid balance of Loan A, in whole or in part, in the event of (i) a capital
raising, in which case approximately 50% of the net consideration from the
capital raising would be used for early repayment, (ii) the sale of assets not
in the ordinary course of business, in which event the whole net consideration
from the sale would be used for early repayment, or (iii) cash flow surplus of
the Companies (EBITDA (as defined in the Agreement) minus interest costs and
certain expenses) in a calendar year exceeds $8 million, 50% of the surplus
exceeding $8 million would be used for early repayment.
LOAN B
Subject to the signing of documents in the standard form at any bank, the
banks will provide the Companies with an additional loan in an aggregate
principal amount of $5 million.
INTEREST - Loan B will bear annual interest at a rate to be agreed upon by
us and our subsidiaries and each of the banks. The interest rate on Loan B is
LIBOR plus 2.15%. The interest on the unpaid balance of the Loan B will be paid
by the Companies in 24 (twenty four) consecutive quarterly installments,
beginning on the last day of the third month from the date on which Loan B was
provided.
PRINCIPAL - Loan B is for a period of 72 months, and is repayable in four
equal installments in the amount of $1.25 million each, at the end of each of
the third, fourth, fifth and sixth years after the date on which Loan B was
provided.
Loan A and Loan B shall be used solely and exclusively to repay portions of
the Companies' existing debts to each of the banks, divided among the banks
according to the Determining Ratio.
NEW SHORT-TERM CREDIT LINES (IN ADDITION TO LOANS A AND B)
Subject to the signing of documents in the standard form at any bank, in
place of the Company's existing credit lines (which will be cancelled) the banks
will make available to the Companies new short-term credit lines (in addition to
Loans A and B) for the Companies' working capital, in an aggregate amount of
$8.95 million (the "New Credit Lines"). The New Credit Lines will be provided
for a period not exceeding one year from the date on which the Agreement was
signed. All the terms of repayment of the New Credit Lines, including the rates
and types of interest on utilized credit in the framework of the New Credit
Lines and the date and method of payment of interest for the utilized credit in
the framework of the New Credit Lines, will be determined between the Companies
and any of the banks separately. The interest on the New Credit Lines is prime
+2.5% for NIS credit, and LIBOR +1.75% for dollar credit.
INVESTMENT IN TEFRON'S EQUITY
The Company undertook to complete a rights offering and/or private
placement in which at least $4 million (minus related expenses actually paid to
third parties in an amount not to exceed 6% of the amount raised by the Company
("Permitted Expenses")) was invested in the Company's equity by March 31, 2010
(the "Investment").
Accordingly, in March 2010, the Company completed a rights offering to its
shareholders and a private placement to Ta-Top, Limited Partnership and Mivtach
Shamir Holdings Ltd., in which the Company raised an aggregate amount of $4
million in proceeds, before deducting Permitted Expenses.
ADDITIONAL CREDIT LINES
Subject to the completion of the Investment, the banks will provide the
Companies, at their request, an additional $1.8 million short term credit line
(the "Additional Credit Line"). The Additional Credit Line will be provided for
a period not exceeding one year from the date on which such credit was provided.
All the terms of repayment of the Additional Credit Line, including the rates
and types of interest on utilized credit in the framework of the Additional
Credit Line and the date and method of payment of interest for the utilized
credit in the framework of the Additional Credit Line, will be determined
between the Companies and any of the banks separately.
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In addition, without derogating from the above, it was agreed, at the
request of the Companies, that the banks will provide the Companies with part of
the Additional Credit Line in an amount of up to $1.2 million prior to
completion of the Investment, if FIMI 2001 Ltd. and Mivtach-Shamir (the
"Guarantors"), indirect interested parties in Norfet, would sign letters of
continuing guarantee in favor of the banks for a total amount of $1.2 million,
to secure all the debts and liabilities of the Companies to the banks (the
"Letters of Guarantee"). During March 2010, FIMI 2001 Ltd. and Mivtach-Shamir
signed the Letters of Guarantee, and the banks provided the Companies with a
part of the Additional Credit Line in an amount of $1.2 million. The Letters of
Guarantee expired on March 28, 2010 following the completion of the rights
offering and private placement.
SECURITIES
To secure payment of all the credit described above, the banks will use all
of the securities which were created in the past and/or which will be created in
the future in favor of the banks, which include, among other things, a first
fixed lien for an unlimited amount on the share capital and the goodwill of the
Companies, and a first floating lien for an unlimited amount on the Companies'
plants and other assets.
ADDITIONAL UNDERTAKINGS
In addition to the securities and commitments in the Agreement, the
Companies undertook, among other things, (a) not to purchase, not to give
financing to, and not to undertake to purchase or give financing for the
purchase of shares of any of the Companies without the prior written consent of
the banks; (b) not to pass any resolutions regarding voluntary liquidation,
change in corporate structure or reorganization, merger, settlement or
arrangement without receiving the prior written consent of the banks; (c) not to
distribute any dividends or pay management fees and/or any other payment to our
shareholders until Loan A and Loan B have been repaid in full; (d) to allot to
the banks for no consideration 100,000 non negotiable and non transferable
warrants, exercisable into 100,000 Ordinary Shares, for an exercise price of
$4.5 per share, during a period of 48 months from the date on which the
Agreement was signed. The Company undertook to allot the warrants not later than
April 15, 2010. As of June 15, 2010, the Company has not yet allotted the
warrants to the banks.
Financial covenants - the banks provided waivers for the Company's failure
to meet its financial covenants in 2009 only. In addition, the Company undertook
to meet at all times during 2010 all of the following financial covenants and
undertakings:
(1) the EBITDA of the Company will be positive according to the
Company's 2010 consolidated financial statements (this financial covenant
was amended by agreement with the bank lenders on July 11, 2010, requiring
EBITDA of at least negative $2.1 million);
(2) according to the quarterly and annually consolidated financial
statements, (i) the Company's shareholders' equity will not be less than
$35 million, (ii) the Company's total amount of cash balances, inventories
and receivables will not be less than $33 million, and (iii) the balance of
the Company's receivables will not be less than $9 million; and
(3) the salary of the CEO and Chairman of the Board of Directors of
the Companies will not exceed the salaries on the date of the Agreement
plus linkage differences to the consumer price index.
By November 30, 2010, the Companies and the banks will mutually agree as to
additional financial covenants and undertakings, including regarding
restrictions on salaries of officers in the Companies, which the Companies must
meet beginning on January 1, 2011. Should such agreement not be reached by
November 30, 2011, the Companies must meet the financial covenants in effect
prior to the date on which the Agreement was signed.
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PRIVATE PLACEMENT TO NORFET'S SHAREHOLDERS
On March 28, 2010, we issued 149,124 Ordinary Shares, at a price per share
of $3.8, to each of Mivtach Shamir Holdings Ltd. (one of the partners in Norfet)
and Ta-Top Limited Partnership (a partnership under the control of FIMI 2001,
Ltd.) in a private placement, resulting in aggregate gross proceeds of
approximately $1.1 million. The private placement was part of a transaction to
raise capital in connection with an agreement with our bank lenders, which
combined both a rights offering to all of our shareholders and a private
placement to Norfet (or whoever acts on its behalf), in which Norfet (or whoever
acts on its behalf) agreed to invest in Tefron the difference between $4 million
and the amount raised in the rights offering. For information on the agreement
with our bank lenders, see " - Agreement with Our Bank Lenders" above.
DISPOSITION OF INTEREST IN ALBAHEALTH LLC
MEMBERSHIP INTEREST REDEMPTION AGREEMENT
The sale of our ownership interests in AlbaHealth LLC in April 2006 was
made pursuant to an AlbaHealth Membership Interest Redemption Agreement in
consideration for approximately $13 million, consisting of approximately $10
million paid in cash and $3 million pursuant to the terms of an Unsecured
Subordinated Promissory Note, the principal amount of which was due August 31,
2009. The note bore annual interest at LIBOR plus 3%, and the payment of the
note was subordinated in favor of AlbaHealth's senior bank lenders.
In connection with the execution of the Membership Interest Redemption
Agreement, we entered into an amendment to the existing general administrative
services agreement under which we provided various general administrative
services to AlbaHealth. Pursuant to this amendment, we were to be paid $766,000
for providing these services for the 12-month period ending January 1, 2007. We
also agreed to sell to AlbaHealth as of January 1, 2007 for the price of
$600,000 all of the computer hardware, including related software licenses and
hardware and software leases comprising the computer system in Valdese, NC and
Rockwood, TN, then owned by us and used by AlbaHealth. We were also granted the
right to designate a non-voting observer to the Board of Managers of AlbaHealth
until payment of the promissory note in full.
UNSECURED SUBORDINATED PROMISSORY NOTE
Under the terms of the Unsecured Subordinated Promissory Note issued to us
by AlbaHealth, AlbaHealth agreed to use its reasonable best efforts to negotiate
an increase in its revolving credit facility availability with its senior bank
lenders in order to prepay the principal amount of the note if trailing 12-month
EBIDTA of AlbaHealth for 2006, 2007 or 2008 reaches certain minimum amounts,
unless such increase would subject AlbaHealth to increased interest rates or
subject AlbaHealth to materially disadvantageous terms. AlbaHealth also agreed
on limitations on its ability to pay dividends, other than as necessary to
enable its security holders to pay taxes.
Upon occurrence of certain events of default, including default in the
payment of the principal when due, we were able to demand principal amount and
all accrued unpaid interest to be immediately due and payable. In addition, upon
the default in the payment of the principal, we also have the right to convert
the principal balance into common units of AlbaHealth at a price of
approximately $274.20 per common unit (subject to adjustments for dividends and
other distributions).
This Promissory Note was amended and restated, as described below.
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SUBORDINATION AGREEMENT
Pursuant to a Subordination Agreement we entered into with SunTrust bank,
as administrative agent for the lenders under AlbaHealth's Senior Credit
Facility, we subordinated our claims against AlbaHealth under the Unsecured
Subordinated Promissory Note to the full payment by AlbaHealth to the lenders
under its senior credit agreement; provided so long as no Default or Event of
Default under the senior credit agreement has occurred, we may receive (i)
regularly scheduled payments of interest under the Unsecured Subordinated
Promissory Note and (ii) any payments of principal and interest from AlbaHealth
after August 31, 2009. During 2007, AlbaHealth breached certain non-payment
covenants under its Senior Credit Facility, but the lender under the Facility
delivered a waiver with respect to these breaches.
AMENDED AND RESTATED UNSECURED SUBORDINATED PROMISSORY NOTE; NEW
SUBORDINATION AGREEMENT
During 2008, AlbaHealth did not meet its financial obligations under its
Senior Credit Facility, and pursuant to the terms of the Senior Credit Facility,
the lender under the Senior Credit Facility demanded full payment of the loan
and prevented AlbaHealth from making payments to us under our Unsecured
Subordinated Promissory Note. In light of this, on December 31, 2008, AlbaHealth
entered into a new credit facility ("Alternative Credit Facility") with Branch
Banking and Trust Company (the "Senior Lender") in order to refinance the Senior
Credit Facility. Simultaneously, we entered into an Amended and Restated
Unsecured Subordinated Promissory Note (the "Amended Note") with AlbaHealth and
a Subordination Agreement with the Senior Lender, subordinating our claims
against AlbaHealth under the Amended Note to the full payment by AlbaHealth to
the Senior Lender under the Alternative Credit Facility; provided that so long
as no Event of Default under the Alternative Credit Facility has occurred and is
continuing, we may receive (i) regularly scheduled payments of interest under
the Amended Note and (ii) regularly scheduled payments of principal and interest
under the Amended Note after August 31, 2009.
Pursuant to the Amended Note, accrued and unpaid interest for the period
April 1, 2008 through September 30, 2009 was paid beginning July 2009 and until
October 2009. Beginning on October 1, 2009 (i) accrued interest was due and
payable in consecutive quarterly installments until the Amended Note would be
paid in full; and (ii) the principal balance under the Amended Note was due and
payable in ten consecutive quarterly installments of $300,000 until the Amended
Note would be paid in full, with the final payment due on January 1, 2012. Prior
to July 1, 2009, interest accrued on the outstanding balance at LIBOR plus 5%;
on and after July 1, 2009, interest is to accrued on the outstanding balance at
LIBOR plus 3%.
On September 24, 2009, we signed an agreement with AlbaHealth for the early
repayment by AlbaHealth of the Amended Note. Pursuant to the agreement,
AlbaHealth paid us $1,715,000 in settlement of AlbaHealth's payment obligations
under the Amended Note, including accrued and unpaid interest due to us. As a
result of the early repayment, we recorded a $1,285,000 capital loss in our
financial statements for the year ended December 31, 2009. The total
consideration that we received for the redemption of our membership interest in
AlbaHealth was approximately $11.75 million.
NORFET AGREEMENTS
All share and per share information in this Annual Report has been adjusted
to give retroactive effect to a ten-for-one reverse split of our ordinary shares
that became effective on January 22, 2009.
We entered into a Share Purchase Agreement, or the Tefron Agreement, dated
February 17, 2004, with Norfet, Limited Partnership, or the Investor,
substantially all of the interests of which are owned by (i) N.D.M.S. Ltd., a
company wholly owned by FIMI Opportunity Fund, L.P., (ii) FIMI Israel
Opportunity Fund, Limited Partnership, (iii) Migdal Insurance Company, and (iv)
Shamir Insurers Investment Company and (v) the provident funds of First
International Bank of Israel, pursuant to which we issued to the Investor
352,941 Tefron Ordinary Shares for a base price of $42.5 per share and a base
aggregate consideration of $15.0 million. Due to purchase price adjustment
provisions in the Tefron Agreement, Tefron issued to Norfet an additional 66,176
Ordinary Shares in April 2005.
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Under the Tefron Agreement, we recorded annual management fees to Norfet in
the amount of $120,000. Beginning December 1, 2008, the management fees were
reduced by 15% until the end of 2009. However, we have not actually paid Norfet
any management fees since April 2008, and such unpaid fees amounted to $190,000,
as of December 31, 2009. On March 2, 2010 we signed an agreement with our bank
lenders which, among other things, included our undertaking not to distribute
any dividends or pay management fees and/or any other payment to our
shareholders until the loans provided by our bank lenders have been repaid in
full. Norfet, our major shareholder, consented to the inclusion of this
provision in the agreement with our bank lenders, and accordingly, Norfet has
effectively waived the management fees owed to it, as of the date on which the
loans were granted to the Company and until the date on which all the loans are
repaid in full. For information regarding the terms of the loans, see "Agreement
with Our Bank Lenders" above. On April 7, 2010 Norfet notified us that it waives
the $190,000 unpaid management fees that were then due to Norfet.
In connection with the Tefron Agreement, the Investor also acquired an
additional 136,500 Tefron Ordinary Shares in the aggregate from Arwol and
Macpell pursuant to an Agreement, or the Macpell Agreement, by and among
Macpell, Arwol and the Investor. Following the closing of the Tefron Agreement
and the Macpell Agreement, the Investor held 489,441, or approximately 30.7% of
the outstanding share capital of Tefron, without taking into account the Equity
Shares. Due to purchase price adjustment provisions in the Macpell Agreement,
Arwol transferred 10,690 additional Ordinary Shares to Norfet in April 2005.
Tefron, the Investor, Arwol and Macpell executed at the closing of the
Tefron Agreement and the Macpell Agreement a Registration Rights Agreement which
replaced the existing Registration Rights Agreement among the Company, Arwol and
Macpell.
The Tefron Agreement, the Registration Rights Agreement, and all
transactions contemplated by such agreements to which Tefron is a party are
collectively referred to as the "Norfet Agreements".
Below is a description of the principal terms of Tefron Agreement and
Registration Rights Agreement.
TEFRON AGREEMENT
ISSUE PRICE ADJUSTMENT. Under the terms of the Tefron Agreement, in the
event Tefron's earnings before income tax, depreciation and amortization, or
EBITDA, for 2004 (excluding (i) the EBITDA of AlbaHealth to the extent that it
exceeds zero and (ii) any increase in EBITDA of Alba Waldensian, Inc. as a
result of the exercise of the put option by AlbaHealth described below) as set
forth in Tefron's audited consolidated financial statements for the year ending
on December 31, 2004 is less than $23 million, then the price per share of $42.5
will be adjusted as follows: (i) if Tefron's EBITDA for 2004 was equal to or
less than $16 million, then the share price per share was to be reduced
retroactively by $7.5 (to $35.0), and if the Company's EBITDA for 2004 is higher
than $16 million but lower than $23 million, then the share price reduction was
to be calculated in accordance with the following formula:
Price Per Share = 42.5 - 7.5*[x]
Where x = [(23,000,000 -2004 EBITDA)/1,000,000]/7]
Tefron had the discretion to decide, in such instances, whether to issue
additional shares or to refund a proportionate part of the consideration paid by
the Investor.
Tefron's EBITDA for 2004 was $11.809 million and pursuant to an amendment
to the Tefron Agreement signed on March 31, 2005 Tefron issued to Norfet an
additional 66,176 Ordinary Shares, instead of the adjustment mechanism provided
for in the Tefron Agreement.
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Under the terms of the Tefron Agreement, the issue price per share will be
increased in the event that, during the three-year period following the closing
of the Tefron Agreement and the Macpell Agreement, the Investor sells at least
20% of the total number of shares purchased on April 22, 2004 from Tefron and
Macpell and Arwol for cash or publicly traded securities (excluding publicly
traded securities in connection with a merger or reorganization of Tefron), at
an average price of at least $92.2 per share (after adjustments for dividends,
share combinations and splits). The amount of the increase will be equal to the
difference between the average sale price and the threshold of $92.2 (as so
adjusted), provided that in any event, an upwards adjustment will be no more
than $7.5 per each share. The amount of any increase is to be paid by the
Investor to Tefron on the third anniversary of the closing of the Tefron
Agreement and the Macpell Agreement. After thoroughly reviewing the facts
related to the sale of shares by Norfet during the three years following the
closing of the Tefron Agreement, we concluded that we are not entitled to an
adjustment payment from Norfet under the terms described above.
The adjustment mechanism described in the immediately preceding paragraph
will also apply in respect of the four-year period following the closing of the
Tefron Agreement and the Macpell Agreement, but in such event, the Investor
average sale price must exceed $116.0 per share (rather than $92.2 per share)
for the adjustment to apply.
REGISTRATION RIGHTS AGREEMENT
The Investor entered into a Registration Rights Agreement with Tefron,
Arwol and Macpell on the date of closing with respect to the Ordinary Shares
that the Investor acquired pursuant to the Tefron Agreement and the Macpell
Agreement replacing the existing Registration Rights Agreement.
The Registration Rights Agreement was substantially the same as the
Registration Rights Agreement approved by the shareholders of Tefron and entered
into by Company, Arwol and Macpell in November 2003, other than (i) the
insertion of a new provision granting to the Investor, Arwol and Macpell the
right, once every 18 months, to request a registration on Form F-3 (short form
registration statement) when the aggregate net proceeds from the sale of such
holders' securities is at least $3.0 million, in which event Tefron would be
obligated keep such registration statement effective so as to permit sale of
Ordinary Shares pursuant to the Registration Statement for a period of two
years, subject to certain limitations, and (ii) the amendment of an existing
provision granting to the Investor, Arwol and Macpell the right to request a
registration even though Tefron is not eligible to use Form F-3 (short form
registration statement), in which event Tefron would be obligated to keep such
registration statement effective so as to permit sale of Ordinary Shares
pursuant to the Registration Statement for a period of 120 days, subject to
certain limitations.
In connection with the execution of the Share Purchase Agreement, in March
2004, with Leber Partners, L.P., which purchased approximately 107,000 Ordinary
Shares of Tefron, we agreed to enter into a Registration Rights Agreement with
Leber Partners, the Investor under the Tefron Agreement, Arwol and Macpell. This
Registration Rights Agreement replaced, and is on substantially the same terms
as, the Registration Rights Agreement that we agreed to execute in connection
with the Tefron Agreement, other than as provided below. In addition to the
rights to be granted to all of the shareholders that are to be party to the
Registration Rights Agreement, Leber Partners would have the right to request a
registration (even though we would not be eligible to use a short form
registration) of all, but not less than all, of the Ordinary Shares then held by
Leber Partners, but in any event not less than 500,000 Ordinary Shares. The
other shareholders have the right to request registration if holders of at least
25% of the aggregate number of Ordinary Shares subject to the agreement at such
time request to register a minimum of 5% of the share capital of Tefron then
outstanding, but not less than 50,000 Ordinary Shares. Leber Partners also has
the right to request a registration of all, but not less than all, of the
Ordinary Shares then held by it, but in any event not less than 50,000 Ordinary
Shares. If Macpell, Arwol and Norfet (collectively, the "Principal Holders")
intend to distribute the Ordinary Shares by means of an underwriting, the
underwriter will be selected by the Company and be reasonably acceptable to
Principal Holders holding a majority of the Ordinary Shares to be registered.
Under certain conditions, the Company may defer registering such Ordinary Shares
for a period not exceeding 180 days. In addition, the Company would have no
obligation to register these shares pursuant to requests once it has effected
three effective registrations pursuant to requests of Principal Holders.
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The Principal Holders also have the right, once every 18 months, to request
a registration on Form F-3 (short form registration statement) when the
aggregate net proceeds from the sale of such holders' securities are at least
$3.0 million. In addition, the Principal Holders also have certain rights to
register their Ordinary Shares for sale at the time the Company registers for
its own account any of its securities in connection with a public offering for
cash (called "piggyback registration").
Under the agreement, the first $50,000 of expenses in connection with
registrations made at the request of one or more Principal Holders will be borne
by the Company, and all expenses in excess of $50,000 will be divided equally
between the Company, on the one hand, and the selling shareholders, on the other
hand. All expenses incurred in connection with "piggyback registrations" will be
borne by the Company, other than underwriting discounts and commissions and
other fees relating to the Ordinary Shares to be sold for the account of the
Principal Holders.
Leber Partners, the Investor, Arwol and Macpell exercised their rights
under the Registration Rights Agreement, and asked for the registration of all
their shares by the Company. Accordingly, on November 29, 2005, the Securities
and Exchange Commission declared effective a Registration Statement on Form F-3
covering the resale of Ordinary Shares held by Leber Partners, the Investor,
Arwol and Macpell.
10D. EXCHANGE CONTROLS
Nonresidents of Israel who purchase our Ordinary Shares with U.S. dollars
or other foreign currency will be able to convert dividends (if any) thereon,
and any amounts payable upon the dissolution, liquidation or winding-up of the
affairs of the company, as well as the proceeds of any sale in Israel of the
Ordinary Shares to an Israeli resident, into freely repatriatable dollars, at a
rate of exchange prevailing at the time of conversion, pursuant to regulations,
provided that the Israeli income tax has been withheld with respect to such
amounts, to the extent applicable, or an exemption has been obtained.
10E. TAXATION
TAXATION OF SHAREHOLDERS
The following is a discussion of material United States federal and Israeli
income tax consequences to U.S. Holders (defined below) of Ordinary Shares. This
discussion is based upon existing United States federal and Israeli income tax
laws, including legislation, regulations, administrative rulings and court
decisions, all as in effect on the date of this Annual Report, as well as the
Convention Between the Government of the United States of America and the
Government of the State of Israel With Respect to Taxes on Income (the
"Treaty"). All of these authorities are subject to change (possibly with
retroactive effect) and to differing interpretations.
This summary is for general information only and does not purport to be a
complete analysis of all potential tax consequences of owning Ordinary Shares.
This summary only addresses Ordinary Shares that are held as capital assets
(generally, property held for investment), and does not address all tax
considerations that may be relevant to persons in light of their particular
circumstances, including, for example, persons who hold or at any time have held
(actually or constructively) 10% or more of all classes of voting stock of
Tefron, persons who acquired their Ordinary Shares before the listing of Tefron
shares on the NYSE, persons who acquired their Ordinary Shares pursuant to the
exercise of an employee stock option or otherwise as compensation, and persons
subject to special tax treatment under Israeli or U.S. federal income tax laws,
such as banks and other financial institutions, entities classified as
partnerships for U.S. federal income tax purposes and other pass-through
entities, insurance companies, tax-exempt entities, dealers in securities,
persons holding Ordinary Shares as part of a hedging or conversion transaction
or a straddle, and holders that have a functional currency other than the U.S.
dollar. This summary does not address any aspects of state, local or non-United
States (other than certain Israeli) tax laws, or any estate, gift or other
non-income tax considerations.
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For purposes of this discussion, a "U.S. Holder" means a beneficial owner
of Ordinary Shares (i) who is, for U.S. federal income tax purposes:
o a citizen or resident of the United States;
o a corporation (or another entity taxable as a corporation for U.S.
federal income tax purposes) created or organized in the United States or
under the laws of the United States or any political subdivision thereof;
o an estate, the income of which is subject to U.S. federal income tax
regardless of its source; or
o a trust, if a U.S. court is able to exercise primary supervision over the
administration of the trust and one or more U.S. persons have the authority
to control all substantial decisions of the trust, or, if it was in
existence on August 20, 1996, was treated as a U.S. person on the previous
day and has validly elected to continue to be so treated,
(ii) who is not a resident of Israel for Israeli income tax purposes, and whose
holding of Ordinary Shares is not in any way related to properties or activities
located in Israel, and (iii) who is fully entitled to the benefits of the Treaty
in respect of the Ordinary Shares.
If an entity that is classified as a partnership for U.S. federal tax
purposes holds Ordinary Shares, the U.S. federal income tax treatment of its
partners will generally depend upon the status of the partners and the
activities of the partnership. Entities that are classified as partnerships for
U.S. federal tax purposes and persons holding Ordinary Shares through such
entities should consult their tax advisors about the income and other tax
consequences of purchasing, owning and disposing of the Ordinary Shares.
ALL PERSONS OWNING OR CONSIDERING AN INVESTMENT IN ORDINARY SHARES
(INCLUDING PERSONS THAT ARE RESIDENT OR OTHERWISE TAXABLE IN COUNTRIES OTHER
THAN THE UNITED STATES) ARE STRONGLY URGED TO CONSULT THEIR OWN TAX ADVISORS AS
TO THE PARTICULAR TAX CONSEQUENCES TO THEM OF AN INVESTMENT IN ORDINARY SHARES
UNDER THE TAX LAWS APPLICABLE TO THEM AND ANY POTENTIAL CHANGES IN THE TAX LAWS.
1. CAPITAL GAINS
U.S. FEDERAL INCOME TAX CONSIDERATIONS. Subject to the discussion below
under "Passive Foreign Investment Company Rules," upon the sale or other taxable
disposition of Ordinary Shares, a U.S. Holder generally will recognize capital
gain or loss equal to the difference between the amount realized on the
disposition and such holder's adjusted tax basis in the Ordinary Shares. Such
capital gain or loss will be long-term gain or loss if, at the time of
disposition, the U.S. Holder's holding period in the Ordinary Shares exceeds one
year. Non-corporate taxpayers are subject to lower tax rates on long-term
capital gains. All taxpayers are subject to certain limitations on the deduction
of capital losses.
Subject to complex conditions and limitations, any Israeli capital gains
tax paid with respect to a disposition of Ordinary Shares (see generally the
discussion below under "-Israeli Tax Considerations") will be a foreign income
tax eligible for credit against a U.S. Holder's U.S. federal income tax
liability (or, alternatively, for deduction against income in determining such
tax liability). In general, gain that a U.S. Holder recognizes on the sale or
other disposition of Ordinary Shares will be U.S. source passive income for
purposes of foreign tax credit limitations, and losses generally will be
allocated against U.S. source income. The rules governing foreign tax credits
are complex, and U.S. Holders should consult their own tax advisors regarding
the availability of foreign tax credits in their particular circumstances.
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ISRAELI TAX CONSIDERATIONS. Capital gain tax is imposed on the disposal of
capital assets by an Israeli resident, and on the disposal of such assets by a
non-Israeli resident if those assets either (i) are located in Israel; (ii) are
shares or a right to a share in an Israeli resident corporation; or (iii)
represent, directly or indirectly, rights to assets located in Israel. The
Israeli Income Tax Ordinance distinguishes between "Real Gain" and the
"Inflationary Surplus". Real Gain is the excess of the total capital gain over
Inflationary Surplus computed generally on the basis of the increase in the
Israeli CPI between the date of purchase and the date of disposal.
The real capital gain derived by a corporation generally will be subject to
tax at the corporate tax rate of 25% in 2010, and at the reduced capital gains
tax rate of 25% in 2009. Real capital gain derived from the sale of securities
(as defined in Section 6 of the Inflationary Adjustment Law) by a corporation
that had been subject on August 10, 2005 to the provisions of Section 6 of the
Inflationary Adjustment Law, will be taxed at the corporate tax rate (26% in
2009 and 25% in 2010). The capital gain accrued by individuals on the sale of an
asset purchased on or after January 1, 2003 will be taxed at the rate of 20%.
However, if the individual shareholder is a "Significant Shareholder" (i.e., a
person who holds, directly or indirectly, alone or together with another, 10% or
more of one of the Israeli resident company's means of control) at the time of
sale or at any time during the preceding 12 month period, such gain will be
taxed at the rate of 25%. In addition, until certain regulations will be
enacted, the capital gain derived by an individual claiming deduction of
financing expenses in respect of such gain will be taxed at the rate of 25%.
The capital gain accrued on the sale of an asset purchased prior to January
1, 2003 will be generally subject to tax at a blended rate. The marginal tax
rate for individuals (up to 46% in 2009 and up to 45% in 2010) and the regular
corporate tax rate for corporations (26% in 2009 and 25% in 2010) will be
applied to the portion of the gain amount which bears the same ratio to the
total gain realized as the ratio which the holding period commencing at the
acquisition date and terminating on January 1, 2003 bears to the total holding
period. The remainder of the gain realized will be subject to capital gains tax
at the rates applicable to an asset purchased after January 1, 2003 (see
aforementioned).
Individual and corporate shareholders dealing in securities in Israel are
taxed at the tax rates applicable to business income (tax rate of up to 26% in
2009 and 25% in 2010 for a corporation and a marginal tax rate of up to 45% in
2009 and up to 39% in 2016 for an individual). Notwithstanding the foregoing, if
the shareholder is a non-Israeli resident, then such taxation is subject to the
provision of any applicable double tax treaty. Moreover, capital gain derived
from the sale of the shares of an Israeli resident company publicly traded on a
recognized stock exchange by a non-Israeli shareholder may be exempt under the
Israeli Income Tax Ordinance from Israeli taxation provided the following
cumulative conditions are met: (i) the securities were purchased upon or after
the registration of the securities on the stock exchange (ii) the seller does
not have a permanent establishment in Israel to which the derived capital gain
is attributed, and (iii) if the seller is a corporation, less than 25% of its
means of control are held, directly or indirectly, by Israeli resident
shareholders. In addition, the sale of the shares may be exempt from Israeli
capital gain tax under the provisions of an applicable double tax treaty. Thus,
the U.S.-Israel Double Tax Treaty exempts U.S. resident from Israeli capital
gain tax in connection with such sale, provided (i) the U.S. resident owned
directly or indirectly, less than 10% of an Israeli resident company's voting
power at any time within the 12-month period preceding such sale; and (ii) the
seller, being an individual, is present in Israel for a period or periods of
less than 183 days at the taxable year; and (iii) the capital gain generated
from the sale of the shares is not attributed to a permanent establishment
maintained by the U.S. resident in Israel.
Either the seller, the Israeli stockbrokers or financial institution
through which the shares are held are obliged, subject to the above mentioned
exemptions, to withhold tax upon the sale of securities from the real capital
gains at the rate of 25% in respect of a corporation and 20% in respect of an
individual.
Upon the sale of traded securities, a detailed return, including a
computation of the tax due, should be filed and an advanced payment should be
paid on January 31 and June 30 of every tax year in respect of sales of
securities made within the previous six months. However, if all tax due was
withheld at source according to applicable provisions of the Israeli Income Tax
Ordinance and regulations promulgated thereunder, the aforementioned return
should not be filed and no advance payment should be paid. Capital gain is also
reportable on the annual income tax return.
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2. DISTRIBUTIONS
U.S. FEDERAL INCOME TAX CONSIDERATIONS. Subject to the discussion below
under "Passive Foreign Investment Company Rules," a U.S. Holder generally will
be required to include in gross income, as ordinary dividend income, the amount
of any distributions paid on the Ordinary Shares (including the amount of any
Israeli taxes withheld) to the extent that such distributions are actually or
constructively paid out of Tefron's current or accumulated earnings and profits
as determined for U.S. federal income tax purposes. Distributions in excess of
Tefron's earnings and profits as so determined will be applied against and will
reduce the U.S. Holder's adjusted tax basis in its Ordinary Shares and, to the
extent they are in excess of such tax basis, will be treated as gain from a sale
or exchange of such Ordinary Shares. Subject to certain limitations, "qualified
dividend income" (which dividends paid by Tefron should qualify as) received by
a non-corporate taxpayer generally is currently subject to U.S. federal income
tax at a reduced rate. Dividends paid by Tefron will not qualify for the
dividends-received deduction otherwise available to U.S. corporations.
In the event Tefron pays dividends in a currency other than the U.S.
dollar, such dividends will be includible in the gross income of a U.S. Holder
in a U.S. dollar amount calculated by reference to the exchange rate in effect
on the day they are actually or constructively received by the U.S. Holder
(regardless of whether the U.S. Holder in fact converts the dividends into U.S.
dollars). In general, any gain or loss resulting from currency exchange
fluctuations during the period from the date the dividend is received to the
date such foreign currency is disposed of will be treated as ordinary income or
loss.
Subject to complex conditions and limitations, any Israeli withholding tax
imposed on dividends paid by Tefron (see generally the discussion below under
"-Israeli Tax Considerations") will be a foreign income tax eligible for credit
against a U.S. Holder's U.S. federal income tax liability (or, alternatively,
for deduction against income in determining such tax liability). In general,
dividends will be treated as foreign-source passive income, for foreign tax
credit purposes. There are special rules for computing the foreign tax credit
limitation of a taxpayer who receives dividends that are subject to a reduced
rate of tax. The rules governing foreign tax credits are complex, and U.S.
Holders should consult their own tax advisors regarding the availability of
foreign tax credits in their particular circumstances.
ISRAELI TAX CONSIDERATIONS. A distribution of dividends from income
attributed to an "Approved Enterprise"/Privileged Enterprise will be generally
taxed in Israel at the rate of 15%, subject to a reduced rate under any
applicable double tax treaty. A distribution of dividends from income, which is
not attributed to an Approved Enterprise/Privileged Enterprise, to an Israeli
resident individual will generally be subject to income tax at a rate of 20%.
However, a 25% tax rate will apply if the dividend recipient is a "Significant
Shareholder" (i.e., a person who holds, directly or indirectly, alone or
together with another, 10% or more of one of the Israeli resident company's
means of control) at the time of sale or at any time during the preceding 12
month period If the recipient of the dividend is an Israeli resident
corporation, such dividend will be exempt from income tax provided that the
income from which such dividend is distributed was derived or accrued within
Israel.
Under the Israeli income tax ordinance, a non-Israeli resident (either
individual or corporation) is generally subject to an Israeli income tax on the
receipt of dividends at the rate of 20% (25% if the dividends recipient is a
"Significant Shareholder" (as defined above)); those rates are subject to a
reduced tax rate under the provisions of an applicable double tax treaty. Thus,
under the U.S.- Israel Double Tax Treaty, the following rates will apply in
respect of dividends distributed by an Israeli resident company to a U.S.
resident: (i) if the U.S. resident is a corporation which holds during that
portion of the taxable year which precedes the date of payment of the dividend
and during the whole of its prior taxable year (if any), at least 10% of the
outstanding shares of the voting stock of the Israeli resident paying
corporation and not more than 25% of the gross income of the Israeli resident
paying corporation for such prior taxable year (if any) consists of certain type
of interest or dividends - the tax rate is 12.5%, (ii) if both the conditions
mentioned in section (i) above are met and the dividend is paid from an Israeli
resident company's income which was entitled to a reduced tax rate applicable to
an Approved Enterprise/Privileged Enterprise under the Israeli Law for the
Encouragement of Capital Investments of 1959 - the tax rate is 15%, and (iii) in
all other cases, the tax rate is 25%. The aforementioned rates will not apply if
the dividend income was derived through a permanent establishment of the U.S.
resident in Israel.
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An Israeli resident company whose shares are listed on a stock exchange is
obligated to withhold tax, upon the distribution of a dividend attributed to an
Approved Enterprise/Privileged Enterprise 's income, from the amount
distributed, at the following rates: (i) Israeli resident corporation - 15%,
(ii) Israeli resident individual - 15%, and (iii) non-Israeli resident -
generally 15%, subject to a reduced tax rate under an applicable double tax
treaty. If the dividend is distributed from an income not attributed to the
Approved Enterprise/ Privileged Enterprise, the following withholding tax rates
will apply: (i) Israeli resident corporation - 0%, (ii) Israeli resident
individual - 20% and (iii) non-Israeli resident - 20%, subject to a reduced tax
rate under the provisions of an applicable double tax treaty.
3. PASSIVE FOREIGN INVESTMENT COMPANY ("PFIC") RULES
Based on current projections concerning the composition of Tefron's income
and assets, Tefron does not believe that it will be treated as a PFIC for its
current or future taxable years. However, because this conclusion is based on
our current projections and expectations as to future business activity, Tefron
can provide no assurance that it will not be treated as a PFIC in respect of its
current or any future taxable years. We urge you to consult your own tax
advisors regarding possible application of the PFIC rules to your ownership and
disposition of Ordinary Shares.
4. U.S. BACKUP WITHHOLDING AND INFORMATION REPORTING
A U.S. Holder may be subject to U.S. Internal Revenue Service information
reporting and U.S. backup withholding with respect to dividends received with
respect to Ordinary Shares and proceeds from the sale of Ordinary Shares, unless
the U.S. Holder is a corporation or within certain exempt categories and
demonstrates that fact when so required, or (in the case of backup withholding
only) furnishes a correct taxpayer identification number and makes the required
certifications.
U.S. backup withholding is not an additional tax. Any amounts withheld
under the backup withholding rules will be allowed as a credit against the U.S.
Holder's U.S. federal income tax liability and may entitle such U.S. Holder to a
refund, by timely filing the appropriate claim for refund with the Internal
Revenue Service and furnishing any required information.
10F. DIVIDENDS AND PAYMENT AGENTS
Not Applicable.
10G. STATEMENTS BY EXPERTS
Not Applicable.
10H. DOCUMENTS ON DISPLAY
We are currently subject to the information and periodic reporting
requirements of the Securities Exchange Act of 1934, as amended. Our SEC filings
are available for inspection and copying at the public reference facilities
maintained by the Commission in Room 1024, 450 Fifth Street, N.W. Washington,
D.C. 20549, and the Commission's regional offices located in New York, New York
and Chicago, Illinois. Please call the Commission at 1-800-SEC-0330 for further
information on the public reference rooms.
82
As a foreign private issuer, we are exempt from the rules under the
Securities Exchange Act of 1934, as amended, prescribing the furnishing and
content of proxy statements to shareholders. Certain of our SEC filings are also
available to the pubic on the SEC website at http://www.sec.gov. Because we are
a foreign private issuer, we, our directors and our officers are also exempt
from the shortswing profit recovery and disclosure regime of section 16 of the
Exchange Act.
10I. SUBSIDIARY INFORMATION
Not Applicable.
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
FOREIGN CURRENCY RISK
Our operating expenses are influenced by changes in the exchange rates
between the dollar and foreign currencies, especially the NIS. Our operational
expenses increase when the dollar is devalued against such currencies. At
December 31, 2009, our liabilities denominated in foreign currencies in the
amount of $19.9 million represented 38.1% of our total liabilities of $52.2
million. At December 31, 2009, our assets denominated in foreign currencies in
the amount of $6.2 million represented 6.2% of our total assets of $99.2
million. In 2009, the average amount of our net liabilities denominated in NIS
was approximately $14.7 million. Based on such amount, a depreciation of the
dollar in relation to NIS in the amount of 10% would cause us to incur annual
expenses in the amount of approximately $1.5 million. Due to the devaluation of
the NIS vis-a-vis the dollar in 2009, we generated gross income of approximately
$3.6 million Dollar and due to the appreciation of the NIS vis-a-vis the dollar
in 2008, we incurred gross expenses of approximately $0.2 million in 2008. This
amount does not take into account hedging transactions performed by the Company
during 2008 and 2009, which diminished the adverse effect of the appreciation of
the NIS in relation to the dollar. Although during 2009 the U.S. dollar
appreciated vis-a-vis the NIS, the NIS may appreciate vis-a-vis the U.S. dollar
again in the future.
Additionally, a portion of our sales is denominated in Euros. The dollar
value of these sales decreases when the Euro depreciates against the dollar. We
may from time to time utilize derivative financial instruments to manage risk
exposure to fluctuations in foreign exchange rates. Accordingly, in 2009 and
2008, forward exchange contracts were designated as hedging instrument. We do
not engage in any speculative or profit motivated forward or derivatives
activities. See "Item 3. Key Information - 3D. Risk Factors" and "Item 5.
Operating and Financial Review and Prospects - Impact of Inflation and Currency
Fluctuations".
Most of our sales are denominated in U.S. dollars, and we incur most of our
expenses in U.S. dollars and in NIS. According to the salient economic factors
indicated in IAS 21, "The Effects of Changes in Foreign Exchange Rates," our
cash flow, sale price, sales market, expense, financing and intercompany
transactions and arrangement indicators are predominately denominated in U.S.
dollars. In addition, the U.S. dollar is the primary currency of the economic
environment in which we operate, and thus the U.S. dollar is our functional and
reporting currency.
In our balance sheet, we re-measure into U.S. dollars all monetary accounts
(principally cash and cash equivalents and liabilities) that are maintained in
other currencies. For this re-measurement, we use the foreign exchange rate at
the balance sheet date. Any gain or loss that results from this re-measurement
is reflected in the statement of income as financial income or financial
expense, as appropriate.
We measure and record non-monetary accounts in our balance sheet
(principally fixed assets, prepaid expenses and share capital) in U.S. dollars,
and we do the same with operational accounts. For this measurement, we use the
U.S. dollar value in effect at the date that the asset or liability was
initially recorded in our balance sheet (the date of the transaction).
83
In managing our foreign exchange risk, from time to time we enter into
various foreign exchange hedging contracts. Our policy is to hedge significant
net exposures in the major foreign currencies in which we operate. We attempt to
limit our exposure resulting from liabilities and anticipated expenses that are
denominated in NIS through forward contracts. We monitor foreign exchange rates
and trends periodically to measure the effectiveness of our foreign currency
hedging. If our forward contracts meet the definition of a hedge and are so
designated, changes in the fair value of the contracts will be:
o offset against changes in the fair value of the hedged assets or
liabilities through earnings, or
o recognized in other comprehensive income until the hedged item is
recognized in earnings.
Under the agreement with our bank lenders described in "Item 10. Additional
Information - C. Material Contracts - Agreement with Our Bank Lenders" above,
and the memorandum of understanding that we signed with our bank lenders on
January 6, 2010, we closed all our open positions for forward transactions.
However, we may use our existing credit lines in order to carry out forward
transactions. As of June 15, 2010, opening any hedging positions is subject to
approval of our bank lenders.
INTEREST RATE RISK
Of our dollar-denominated financial liabilities at December 31, 2009, $25.5
million were loans denominated in dollar bearing interest at LIBOR. As a result,
our interest expenses are sensitive to changes in LIBOR.
Our dollar-denominated financial liabilities bear interest at 1.0% to 2.85%
over LIBOR. A hypothetical one percent shift in interest rates would result in a
decrease (or increase) in net income of approximately $43,000. In March 2010, we
signed an agreement with our bank lenders, which, among other things,
reorganized our bank credit arrangements, as described in "Item 10. Additional
Information - C. Material Contracts - Agreement with Our Bank Lenders" above.
Under the agreement with our bank lenders, we received credit lines of up to
$30.75 million. The restructuring of debt vis-a-vis the banks includes a split
of the debt into a loan of $5 million for a period of six years, and a loan of
$15 million for a period of ten years. Additionally the annual interest rate on
the long term loans was increased to three-month LIBOR plus 2.15% to 2.85%.
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
Not Applicable.
PART II
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
None.
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF
PROCEEDS
14A.TO E. Not Applicable.
84
ITEM 15T. CONTROLS AND PROCEDURES
(a) DISCLOSURE CONTROLS AND PROCEDURES. As of the end of the period covered
by this report, we performed an evaluation of the effectiveness of our
disclosure controls and procedures that are designed to ensure that the
information required to be disclosed in the reports that it files or submits
under the Securities Exchange Act of 1934 is recorded, processed, summarized and
reported within the time periods specified in the SEC's rules and forms.
Disclosure controls and procedures include, without limitation, controls and
procedures designed to ensure that information required to be disclosed by an
issuer in the reports that it files or submits under the Securities Act of 1933,
as amended, is accumulated and communicated to our management, including our
principal executive and principal financial officers, or persons performing
similar functions, as appropriate to allow timely decisions regarding required
disclosure. There can be no assurance that our disclosure controls and
procedures will detect or uncover all failures of persons within Tefron to
disclose information otherwise required to be set forth in our reports.
Nevertheless, our disclosure controls and procedures are designed to provide
reasonable assurance of achieving the desired control objectives. Based on our
evaluation, our management, including our Chief Executive Officer and Chief
Financial Officer, have concluded that our disclosure controls and procedures
(as defined in Rules 13a-15(e) and 15(d) - 15(e) of the Securities Exchange Act
of 1934, as amended) as of the end of the period covered by this report are
effective.
(b) MANAGEMENT'S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL
REPORTING. Our management, under the supervision of our Chief Executive Officer
and Chief Financial Officer, is responsible for establishing and maintaining
adequate internal control over our financial reporting, as defined in Rules
13a-15(f) and 15d-15(f) of the Exchange Act of 1934, as amended. The Company's
internal control over financial reporting is designed to provide reasonable
assurance to the Company's management and Board of Directors regarding the
reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted accounting
principles. Internal control over financial reporting includes policies and
procedures that:
o pertain to the maintenance of our records that in reasonable detail
accurately and fairly reflect our transactions and asset dispositions;
o provide reasonable assurance that our transactions are recorded as
necessary to permit the preparation of our financial statements in
accordance with generally accepted accounting principles;
o provide reasonable assurance that our receipts and expenditures are
made only in accordance with authorizations of our management and
Board of Directors (as appropriate); and
o provide reasonable assurance regarding the prevention or timely
detection of unauthorized acquisition, use or disposition of our
assets that could have a material effect on our financial statements.
Due to its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. In addition, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.
Under the supervision and with the participation of our management,
including our principal executive officer and principal financial officer, we
conducted an evaluation of the effectiveness of our internal control over
financial reporting as of December 31, 2009 based on the framework for Internal
Control-Integrated Framework set forth by The Committee of Sponsoring
Organizations of the Treadway Commission. Based on our assessment, our
management concluded that the Company's internal control over financial
reporting were effective as of December 31, 2009.
This Annual Report does not include an attestation report of our registered
public accounting firm regarding internal control over financial reporting.
Management's report was not subject to attestation by our registered public
accounting firm pursuant to temporary rules of the Securities and Exchange
Commission that permit us to provide only management's report in this Annual
Report.
85
(c) CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING. There were no
changes in our internal control over financial reporting that occurred during
the year ended December 31, 2009 that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.
ITEM 16. [RESERVED]
16A. AUDIT COMMITTEE FINANCIAL EXPERT
The Board of Directors has determined that Yacov Elinav is an "audit
committee financial expert" as defined in Item 16A of Form 20-F. Mr. Elinav is
an "independent" director in accordance with applicable SEC regulations.
16B. CODE OF ETHICS
We have adopted a code of ethics that applies to our Chief Executive
Officer, Chief Financial Officer, Corporate Controller Managers and employees in
the course of their work for the Company and its subsidiaries. This code of
ethics is posted on our website, WWW.TEFRON.COM , and may be found as follows:
1. From our main web page, first click on the "Investor Relations" can be
found on the right side of the bar menu.
2. Next, click on "company information", can be found on the left side of
the sub bar menu.
3. Next, click on "code of business ethics".
16C. ACCOUNTANTS' FEES AND SERVICES
The following table presents the aggregate fees for professional services
and other services rendered by Kost, Forer Gabbay & Kasierer in Israel, a member
of Ernst & Young Global to Tefron in 2009 and 2008.
US$ 2009 US$ 2008
-------- --------
Audit Fees $300,000 $234,000
Audit-related Fees $ 32,000 $ 15,000
Tax Fees $ 15,000 $ 15,000
All Other Fees - -
TOTAL $347,000 $264,000
Audit Fees consist of fees billed for the annual audit services engagement
and other audit services, which are those services that only the external
auditor can reasonably provide, and include the group audit; statutory audits;
comfort letters and consents; attest services; and assistance with and review of
documents filed with the SEC.
Audit-related Fees consist of fees billed for assurance and related
services that are reasonably related to the performance of the audit or review
of our financial statements or that are traditionally performed by the external
auditor, and include consultations concerning financial accounting and reporting
standards.
86
Tax Fees include fees billed for tax compliance services, including the
preparation of original and amended tax returns and claims for refund; tax
consultations, such as assistance and representation in connection with tax
audits, tax advice related to mergers and acquisitions, transfer pricing, and
requests for rulings or technical advice from taxing authority.
All Other Fees include fees billed for training; forensic accounting; data
security reviews; treasury control reviews and process improvement and advice;
environmental, sustainability and advisory services.
AUDIT COMMITTEE PRE-APPROVAL POLICIES AND PROCEDURES
Tefron's Audit Committee's main role is to assist the Board of Directors in
fulfilling its responsibility for oversight of the quality and integrity of the
accounting, auditing and reporting practices of the Company. The Audit Committee
oversees the appointment, compensation, and oversight of the public accounting
firm engaged to prepare or issue an audit report on the financial statements of
the Company. The audit committee's specific responsibilities in carrying out its
oversight role include the approval of all audit and non-audit services to be
provided by the external auditor and quarterly review the firm's non-audit
services and related fees. These services may include audit services,
audit-related services, tax services and other services, as described above. The
Audit Committee approves in advance the particular services or categories of
services to be provided to the Company during the following yearly period and
also sets forth a specific budget for such audit and non-audit services.
Additional services may be pre-approved by the Audit Committee on an individual
basis during the year.
During 2009, none of Audit-Related Fees, Tax Fees or Other Fees provided to
us by Kost, Forer Gabbay & Kasierer in Israel or by Ernst & Young or McGladrey &
Pullen, LLP in the United States were approved by the Audit Committee pursuant
to the de minimis exception to the pre-approval requirement provided by
paragraph (c)(7)(i)(C) of Rule 2-01 of Regulation S-X.
16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES.
None.
16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS.
None.
16F. CHANGES IN REGISTRANT'S CERTIFYING ACCOUNTANT.
Not applicable.
16G. CORPORATE GOVERNANCE.
Not applicable.
PART III
ITEM 17. FINANCIAL STATEMENTS
We have responded to Item 18 in lieu of this Item.
87
ITEM 18. FINANCIAL STATEMENTS
Our Consolidated Financial Statements beginning on pages F-1 through F-70
as set forth in the following index, are hereby incorporated herein by
reference. These Consolidated Financial Statements are filed as part of this
Annual Report.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
PAGE
----
Index to Consolidated Financial Statements F-1
Reports of Independent Registered Public Accounting Firm F-2
Consolidated Balance Sheets F-3
Consolidated Statements of income F-4
Consolidated Statements of Comprehensive income F-5
Consolidated Statements of changes in Equity F-6
Consolidated Statements of Cash Flows F-7-F-8
Notes to the Consolidated Financial Statements F-9-F-69
Appendix to Consolidated Financial statements-List of Subsidiaries F-70
88
ITEM 19. EXHIBITS
1.1. Amended and Restated Memorandum of Association of the Company (incorporated
by reference to Exhibit 1.1 to the Company's Annual Report on Form 20-F for
the fiscal year ended December 31, 2008).
1.2. Amended and Restated Articles of Association of the Company (incorporated
by reference to Annex A to the Registrant's Report on Form 6-K, dated
January 20, 2009).
2.1. Form of Credit Agreement, dated as of December 13, 1999, among AWS
Acquisition Corp., Israel Discount Bank of New York and Bank Hapoalim B.M.,
New York Branch as Administrative Agent (incorporated by reference to
Exhibit 99(b)(2) to Amendment No. 2 to Schedule 14D-1 in respect of
Alba-Waldensian, Inc. filed by the Company on December 13, 1999).
2.2 Letter, dated March 2, 2004, from Israel Discount Bank Ltd. to the Company
regarding shareholders' equity requirements under the Credit Agreement
(incorporated by reference to Exhibit 2.8 to the Company's Annual Report on
Form 20-F for the fiscal year ended December 31, 2003).
2.3 Letter, dated March 2, 2004, from Bank Hapoalim to the Company regarding
shareholders' equity requirements under the Credit Agreement (incorporated
by reference to Exhibit 2.9 to the Company's Annual Report on Form 20-F for
the fiscal year ended December 31, 2003).
2.4 Letter, dated February 16, 2004, from Israel Discount Bank to the Company
regarding revised repayment schedule and revised shareholders' equity
requirements under the Credit Agreement (incorporated by reference to
Exhibit 2.10 to the Company's Annual Report on Form 20-F for the fiscal
year ended December 31, 2003).
2.5 Letter, dated February 15, 2004, from Bank Hapoalim to the Company
regarding revised repayment schedule under the Credit Agreement
(incorporated by reference to Exhibit 2.11 to the Company's Annual Report
on Form 20-F for the fiscal year ended December 31, 2003).
2.6 Letter, dated March 31, 2004, from Bank Hapoalim to the Company regarding
revised shareholders' equity requirements under the Credit Agreement
(incorporated by reference to Exhibit 2.12 to the Company's Annual Report
on Form 20-F for the fiscal year ended December 31, 2003).
2.7 Sixth Amendment to Credit Agreement, dated December 15, 2004, among
Alba-Waldensian, Inc. and Bank Hapoalim, as Agent and Lender, together with
Term B Notes (incorporated by reference to Exhibit 2.7 to the Company's
Annual Report on Form 20-F for the fiscal year ended December 31, 2004).
2.8 Loan Agreement, dated as of December 21, 2004, between Israel Discount Bank
and Hi-Tex Founded by Tefron Ltd (incorporated by reference to Exhibit 2.12
to the Company's Annual Report on Form 20-F for the fiscal year ended
December 31, 2004).
2.9 Loan Agreement, dated as of December 31, 2004, between Bank Hapoalim and
Hi-Tex Founded by Tefron Ltd (incorporated by reference to Exhibit 2.13 to
the Company's Annual Report on Form 20-F for the fiscal year ended December
31, 2004).
2.10 Loan Agreement, dated as of December 25, 2004, between Israel Discount Bank
and the Company (incorporated by reference to Exhibit 2.14 to the Company's
Annual Report on Form 20-F for the fiscal year ended December 31, 2004).
89
2.11 Loan Agreement, dated as of December 31, 2004, between Bank Hapoalim and
the Company (incorporated by reference to Exhibit 2.15 to the Company's
Annual Report on Form 20-F for the fiscal year ended December 31, 2004).
2.12 Letter, dated March 24, 2009, from Bank Hapoalim to the Company regarding
covenant waiver (incorporated by reference to Exhibit 2.12 to the Company's
Annual Report on Form 20-F for the fiscal year ended December 31, 2008).
2.13 Letter, dated March 25, 2009, from Israel Discount Bank to the Company
regarding covenant waiver (incorporated by reference to Exhibit 2.13 to the
Company's Annual Report on Form 20-F for the fiscal year ended December 31,
2008).
2.14 Letter, dated March 31, 2009, from Bank Leumi to the Company regarding
covenant waiver (incorporated by reference to Exhibit 2.14 to the Company's
Annual Report on Form 20-F for the fiscal year ended December 31, 2008).
4.1 Membership Interest Redemption Agreement, dated April 26, 2006, by and
between AlbaHealth, LLC and Tefron USA, Inc. (incorporated by reference to
Exhibit 4.6 to the Company's Annual Report on Form 20-F for the fiscal year
ended December 31, 2006).
4.5 Subordination Agreement, dated April 26, 2006, by Tefron USA, Inc. in favor
of Suntrust Bank, in its capacity as administrative agent for the lenders
from time to time party to the Senior Credit Agreement (incorporated by
reference to Exhibit 4.7 to the Company's Annual Report on Form 20-F for
the fiscal year ended December 31, 2006).
4.6 Subordination Agreement, dated December 31, 2008, by Tefron USA, Inc. in
favor of Branch Banking and Trust Company (incorporated by reference to
Exhibit 4.6 to the Company's Annual Report on Form 20-F for the fiscal year
ended December 31, 2008).
4.7 Amended and Restated Unsecured Subordinated Promissory Note in the
principal amount of US $3 million, dated December 31, 2008, by AlbaHealth
LLC. in favor of Tefron USA, Inc. (incorporated by reference to Exhibit 4.7
to the Company's Annual Report on Form 20-F for the fiscal year ended
December 31, 2008).
4.8 Share Purchase Agreement dated February 17, 2004, by and between the
Company and Norfet Limited Partnership, including related Registration
Rights Agreement attached as a schedule (incorporated by reference to
Exhibit 4.9 to the Company's Annual Report on Form 20-F for the fiscal year
ended December 31, 2003).
4.9 Amendment to Purchase Agreement, dated March 31, 2005, by and between the
Company and Norfet Limited Partnership (incorporated by reference to
Exhibit 4.11 to the Company's Annual Report on Form 20-F for the fiscal
year ended December 31, 2004).
4.10 Share Purchase Agreement, made as of March 3, 2004, by and between Tefron
and Leber Partners, L.P, including related Registration Rights Agreement
attached as a schedule (incorporated by reference to Exhibit 4.10 to the
Company's Annual Report on Form 20-F for the fiscal year ended December 31,
2003).
4.11 Agreement, dated March 2, 2010, among Tefron Ltd., Hi-Tex Founded by Tefron
Ltd., Macro Clothing Ltd., Bank Leumi L'Israel Ltd., Bank HaPoalim Ltd. and
Israel Discount Bank Ltd. (incorporated by reference to Exhibit 10.1 to the
Company's Amendment No. 4 to its Registration Statement on Form F-1 (No.
333-161466) filed on March 10, 2010).
4.12 Letter, dated July 11, 2010, from Bank Hapoalim to the Company regarding
covenant waiver.
90
4.13 Letter, dated July 11, 2010, from Israel Discount Bank to the Company
regarding covenant waiver.
4.14 Letter, dated July 11, 2010, from Bank Leumi to the Company regarding
covenant waiver.
4.15 Subscription Agreement, dated March 2010, between Tefron Ltd. and TA-TOP,
Limited Partnership and Mivtach Shamir Holdings Ltd.
8.1 List of subsidiaries of the Company.
12.(a).1 Certification by CEO pursuant to Rule 13a-14(a) or Rule 15d-14(a) of
the Securities Exchange Act of 1934, as adopted pursuant to Section 302
of the Sarbanes Oxley Act of 2002.
12.(a).2 Certification by CFO pursuant to Rule 13a-14(a) or Rule 15d-14(a) of
the Securities Exchange Act of 1934, as adopted pursuant to Section 302
of the Sarbanes Oxley Act of 2002.
13.(a).1 Certification of CEO and CFO pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
14.(a).1 Consent of Kost, Forer Gabbay & Kasierer, a member of Ernst & Young
Global.
91
TEFRON LTD. AND ITS SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2009
U.S. dollars in thousands
TEFRON LTD. AND ITS SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2009
U.S. DOLLARS IN THOUSANDS
INDEX
PAGE
Report of Independent Registered Public Accounting Firm F-2
Consolidated Balance Sheets F-3
Consolidated Statements of Income F-4
Consolidated Statements of Comprehensive Income F-5
Consolidated Statements of Changes in Equity F-6
Consolidated Statements of Cash Flows F-7 - F-8
Notes to Consolidated Financial Statements F-9 - F-69
Appendix to Consolidated Financial Statements -
List of subsidiaries F-70
F - 1
| |
|---|
 | Kost Forer Gabbay & Kasierer
2 Pal-Yam Ave.
Haifa 33095, Israel
Tel: 972 (4)8654000
Fax: 972(3) 5633439
www.ey.com.il |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
TO BOARD OF DIRECTORS AND THE SHAREHOLDERS OF
TEFRON LTD.
We have audited the accompanying consolidated balance sheets of Tefron Ltd.
and its subsidiaries ("the Company") as of December 31, 2009 and 2008 and the
related consolidated statements of income, comprehensive income, changes in
equity, and cash flows for each of the years ended December 31, 2009, 2008 and
2007. These financial statements are the responsibility of the Company's board
of directors and management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. We were not engaged to
perform an audit of the Company's internal control over financial reporting. Our
audits included consideration of internal control over financial reporting as a
basis for designing audit procedures that are appropriate in the circumstances,
but not for the purpose of expressing an opinion on the effectiveness of the
Company's internal control over financial reporting. Accordingly, we express no
such opinion. An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of the Company and
its subsidiaries as of December 31, 2009 and 2008, and the results of their
operations and cash flows for each of the years ended
December 31, 2009, 2008 and 2007, in conformity with International Financial
Reporting Standards ("IFRS") as issued by the International Accounting Standards
Board ("IASB").
/s/ Kost Forer Gabay & Kasierer
-----------------------------------
Kost Forer Gabay & Kasierer
A member firm of Ernst & Young Global
Haifa,
July 13, 2010
F - 2
Tefron Ltd.
Consolidated Balance Sheets
- --------------------------------------------------------------------------------
AS OF DECEMBER 31,
------------------------------
2009 2008
------------ ------------
ASSETS NOTE $ IN THOUSANDS
-------- ------------------------------
CURRENT ASSETS
Cash and cash equivalents $ 1,904 $ 1,566
Short-term investments 737 847
Trade receivables, net 4 14,597 23,446
Other current assets 5 2,892 4,558
Inventories 6 19,778 32,125
------------ ------------
39,908 62,542
------------ ------------
NON-CURRENT ASSETS
Subordinated note receivable 9 - 2,700
Deferred taxes, net 16 1,409 -
Property, plant and equipment, net 7 56,920 64,469
Goodwill and other intangible assets, net 8 960 2,021
------------ ------------
59,289 69,190
------------ ------------
$ 99,197 $ 131,732
============ ============
LIABILITIES AND EQUITY
CURRENT LIABILITIES
Short-term loans (including current portion of long term - loans) 10,13 $ 25,847 $ 24,809
Trade payables 11 15,042 25,167
Other current liabilities 12 5,666 7,636
------------ ------------
46,555 57,612
------------ ------------
NON-CURRENT LIABILITIES
Employee benefits, net 15 729 2,169
Deferred taxes, net 16 3,080 6,897
Other non-current liabilities 12 1,838 1,309
------------ ------------
5,647 10,375
------------ ------------
EQUITY ATTRIBUTABLE TO OWNERS OF THE
PARENT 18
Share capital 7,518 7,518
Additional paid-in capital 107,522 107,104
Accumulated deficit (60,666) (43,739)
Treasury shares (7,408) (7,408)
Other capital reserves 29 23
------------ ------------
46,995 63,498
Employee stock options in a subsidiary - 247
------------ ------------
TOTAL 46,995 63,745
------------ ------------
$ 99,197 $ 131,732
============ ============
THE NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART THEREOF.
F - 3
Tefron Ltd.
Consolidated Statements of Income
- --------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
------------------------------------------
2009 2008 2007
---------- ---------- ----------
$ IN THOUSANDS
NOTE (EXCEPT FOR PER SHARE DATA)
-------- ------------------------------------------
Sales $ 115,538 $ 173,829 $ 158,614
Cost of sales, net 20a 119,339 167,557 139,145
---------- ---------- ----------
Gross profit (loss) (3,801) 6,272 19,469
Selling and marketing expenses 20b 13,842 16,959 12,443
General and administrative expenses 20c 3,779 6,406 5,190
Other expenses (income) 20d (496) 2,135 -
---------- ---------- ----------
Operating income (loss) (20,926) (19,228) 1,836
Loss from early repayment of subordinated note
receivable 1,285 - -
Financial income 20e (1,747) (319) (1,401)
Financial expenses 20e 2,259 3,347 2,690
---------- ---------- ----------
Income (loss) before income taxes (22,723) (22,256) 547
Tax benefit 16 5,330 4,677 35
---------- ---------- ----------
Net income (loss) $ (17,393) $ (17,579) $ 582
========== ========== ==========
NET EARNINGS (LOSS) PER SHARE ATTRIBUTABLE TO OWNERS OF
THE PARENT 21
Basic and diluted (loss) earnings per share $ (8.2) $ (8.3) $ 0.2
========== ========== ==========
THE NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART THEREOF.
F - 4
Tefron Ltd.
Consolidated Statements of Comprehensive Income
- --------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
------------------------------------------
2009 2008 2007
---------- ---------- ----------
$ IN THOUSANDS
------------------------------------------
Net income (loss) $ (17,393) $ (17,579) $ 582
---------- ---------- ----------
Other comprehensive income (loss) (net of tax effect) *):
Realized gain on cash flow hedges, net (23) (445) (52)
Realized loss (gain) on available-for-sale securities - 77 (3)
Unrealized gain from cash flow hedges, net 115 23 445
Unrealized loss on available for sale securities (86) - (77)
Actuarial gain (loss) on defined-benefit plans, net 466 (198) -
---------- ---------- ----------
Other comprehensive income (loss) 472 (543) 313
---------- ---------- ----------
TOTAL COMPREHENSIVE INCOME (LOSS) (16,921) (18,122) 895
========== ========== ==========
Total comprehensive income (loss) attributed to owners of the
parent $ (16,921) $ (18,122) $ 895
========== ========== ==========
*) See note 16e.
THE NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART THEREOF.
F - 5
Tefron Ltd.
Consolidated Statements of changes in Equity
- --------------------------------------------------------------------------------
ATTRIBUTE TO EQUITY HOLDERS OF THE PARENT
-----------------------------------------------------------------------------------------
CAPITAL
RESERVE FOR CAPITAL
AVAILABLE RESERVE SHARE
ADDITIONAL RETAINED FOR SALE FOR CASH OPTIONS IN
SHARE PAID IN EARNINGS TREASURY FINANCIAL FLOW CONSOLIDATED TOTAL
CAPITAL CAPITAL (DEFICIT) SHARES ASSETS HEDGES TOTAL COMPANY EQUITY
-------- -------- -------- -------- -------- -------- -------- -------- --------
$ IN THOUSANDS
----------------------------------------------------------------------------------------------------------------------
Balance as of January 1,
2007 $ 7,411 $102,100 $(18,544) $ (7,408) $ 3 $ 52 $ 83,614 $ - $ 83,614
Total comprehensive income
(loss) - - 582 - (80) 393 895 - 895
Share-based payment to
employees - 489 - - - 489 - 489
Exercise of stock options
related to employees and
directors 5 87 - - - 92 - 92
Exercise of tradable
options issued at the
secondary offering 102 4,188 - - - 4,290 - 4,290
-------- -------- -------- -------- -------- -------- -------- -------- --------
Balance as of December 31,
2007 $ 7,518 $106,864 $(17,962) $ (7,408) $ (77) $ 445 $ 89,380 $ - $ 89,380
-------- -------- -------- -------- -------- -------- -------- -------- --------
Balance as of January 1,
2008 $ 7,518 $106,864 $(17,962) $ (7,408) $ (77) $ 445 $ 89,380 $ - $ 89,380
Total comprehensive income
(loss) - - (17,777) - 77 (422) (18,122) - (18,122)
Share-based payments to
employees - 240 - - - - 240 - 240
Share-based payment in
consolidated company - - - - - - - 247 247
Dividend - - (8,000) - - - (8,000) (8,000)
-------- -------- -------- -------- -------- -------- -------- -------- --------
Balance as of December 31,
2008 $ 7,518 $107,104 $(43,739) $ (7,408) - $ 23 $ 63,498 $ 247 $ 63,745
-------- -------- -------- -------- -------- -------- -------- -------- --------
Balance as of January 1,
2009 $ 7,518 $107,104 $(43,739) $ (7,408) - $ 23 $ 63,498 $ 247 $ 63,745
Total comprehensive income
(loss) - - (16,927) - (86) 92 (16,921) - (16,921)
Share-based payments to
employees - 171 - - - - 171 - 171
Cancelation of stock
options in consolidated
company - 247 - - - - 247 (247) -
-------- -------- -------- -------- -------- -------- -------- -------- --------
Balance as of December 31,
2009 $ 7,518 $107,522 $(60,666) $ (7,408) $ (86) $ 115 $ 46,995 $ - $ 46,995
======== ======== ======== ======== ======== ======== ======== ======== ========
THE NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART THEREOF.
F - 6
Tefron Ltd.
Consolidated Statements of Cash Flows
- --------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
------------------------------------------------
2009 2008 2007
------------ ------------ ------------
$ IN THOUSANDS
------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income(loss) $ (17,393) $ (17,579) $ 582
------------ ------------ ------------
Adjustments to reconcile net (loss) income to net cash (used in) provided
by operating activities:
Adjustments to reconcile net (loss) income to net cash provided
by (used in) operating activities
Adjustments to the profit or loss items:
Depreciation and amortization 9,256 $ 8,925 8,568
Impairment (reversal of impairment) of property, plant and equipment
and intangible assets (496) 2,135 -
Inventories write-off 2,808 4,523 1,260
Extinguishment of contingent consideration (b) (399) - -
Impairment of available-for-sale securities - 553 -
Share-based payments 171 487 489
Loss (gain) on sale of property, plant and equipment (17) 188 (651)
Gain on sale of available-for-sale securities - (22) (134)
Deferred taxes, net (5,364) (5,558) 64
Change in employee benefits, net (850) 420 72
Loss on early repayment of subordinated note receivable 1,285 - -
Accrued interest and amortization of available-for-sale securities - (263) (189)
Accrued interest on deposits - (75) (613)
Taxes on income 1,427 (468) 450
Finance expenses 723 1,363 447
------------ ------------ ------------
8,544 12,208 9,763
------------ ------------ ------------
Changes in asset and liability items:
Decrease in trade receivables 8,849 5,587 1,622
Decrease (increase) in other accounts receivable and
prepared expenses 1,497 488 (920)
Decrease (increase) in inventories 9,730 (3,051) (4,925)
Decrease in trade payables (10,125) (4,553) (1,423)
Increase (decrease) in other current liabilities (428) 77 (2,562)
------------ ------------ ------------
9,523 (1,452) (8,208)
------------ ------------ ------------
Cash paid and received during the year for:
Interest paid (878) (1,528) (1,751)
Interest received 155 165 1,304
Taxes paid (1,427) - (450)
Taxes received - 468 -
------------ ------------ ------------
$ (2,150) $ (895) $ (897)
------------ ------------ ------------
Net cash provided by (used in) operating activities: $ (1,476) $ (7,718) $ 3,034
============ ============ ============
THE NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART THEREOF.
F - 7
Tefron Ltd.
Consolidated Statements of Cash Flows
- --------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
------------------------------------------------
2009 2008 2007
------------ ------------ ------------
$ IN THOUSANDS
------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment $ (611) $ (3,151) $ (6,089)
Proceeds from sale of property, plant and equipment 18 35 943
Purchase of intangible assets (75) (224) (288)
Contingent consideration paid (271) - -
Proceeds from early repayment loss from subordinated note receivable 1,715 - -
Acquisition of business (a) - (300) -
Proceeds from sale of available-for-sale securities - 5,914 17,240
Purchase of available-for-sale securities - - (18,973)
Proceeds from maturity of short - term investments - 7,139 4,668
------------ ------------ ------------
Net cash provided by (used in) investing activities 776 9,413 (2,499)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Short-term credit from banks, net 4,923 9,323 -
Repayment of long-term loans (3,885) (9,836) (5,948)
Proceeds from long-term loans - 6,000 -
Proceeds from exercise of options - - 4,382
Dividends paid to shareholders - (8,000) (551)
------------ ------------ ------------
Net cash provided by (used in) financing activities 1,038 (2,513) (2,117)
------------ ------------ ------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 338 (818) (1,582)
CASH AND CASH EQUIVALENT AT THE BEGINNING OF THE YEAR 1,566 2,384 3,966
------------ ------------ ------------
CASH AND CASH EQUIVALENT AT THE END OF THE YEAR $ 1,904 $ 1,566 $ 2,384
============ ============ ============
(a) ACQUISITION OF BUSINESS (NOTE 3)
Assets and liabilities of as of acquisition date:
Order backlog - $ 264 -
Customer relationships - 1,029 -
Goodwill - 344 -
Deferred tax liability - (323) -
------------ ------------ ------------
Total - 1,314 -
Contingent consideration - (1,014) -
------------ ------------ ------------
- $ 300 -
============ ============ ============
(b) SUPPLEMENT DISCLOSURE OF NON-CASH INVESTING ACTIVITIES
Purchase of other assets for contingent consideration - $ 1,014 -
============ ============ ============
Extinguishment of contingent consideration against goodwill $ 344 - -
============ ============ ============
THE NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART THEREOF.
F - 8
Tefron Ltd.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Note 1: GENERAL
a. Tefron Ltd. ("the Company") is a company organized under the laws of
the state of Israel. The Company designs, develops, manufactures and
sells intimate apparel, swimwear and active wear using two different
methods (the "Seamless" technique and the "Cut & Sew" technique). The
Company's principal markets are the United States and Europe.
b. The Company's shares are traded on the Tel Aviv Stock Exchange as well
as on the OTC Bulletin Board in the USA ("OTC"). The OTC is an
electronic quoting system that offers online quotes, prices and
trading volume of securities traded "over the counter," and not on one
of the United States stock exchanges.
The Company's headquarters are located at Misgav Industrial Zone.
b. DEFINITIONS
In these financial statements:
The Company Tefron Ltd.
The Group Tefron Ltd. and its subsidiaries, as detailed in
the enclosed list.
Subsidiaries Companies in which the Company has a controlling
interest (as defined in IAS 27) and whose
financial statements are consolidated with the
Company's financial statements.
Related parties As defined in IAS 24.
c. In 2009, for more efficient management of the Company, its operations
and its relations with customers and suppliers, the Group placed all
of the active wear and intimate apparel operations under Hi-Tex
Founded by Tefron Ltd. (hereinafter: "Hi-Tex"), whereas the swimwear
operations were kept under Macro Clothing Ltd. To this end, Tefron
transferred most of its assets to Hi-Tex against allotment of
additional Hi-Tex shares, pursuant to Section 104 of the Israeli
Income Tax Ordinance.
d. During February 2009, the Company decided on implementing a
comprehensive efficiency plan. Among other, the Company decided to
streamline all its production facilities, including by combining
several production sites operating in Jordan into fewer, larger
production facilities, improving the utilization of knitting capacity
and reducing knitting costs, making changes in the development
processes (in order to meet the production demands at the development
stage), assimilating an advanced system of quality assurance, with
precise feedback for the production process, reducing gaps of time
between the various production stages for the purpose of reducing lead
time for customers, reducing wastage and reducing our workforce by
about 15% .
e. During the first quarter of 2010, the Company began implementing a
turnaround plan which .Up to date, operational improvements are
occurring on the production floor such as reducing lead time to
customers, reduction in the level of production waste, reducing costs
such as salaries, rent and transportation.
F - 9
Tefron Ltd.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Note 1: GENERAL (CONT.)
f. The Company incurred a loss of $ 17,393 thousand in the year ended
December 31, 2009. Furthermore, in 2009 the Group generated negative
cash flow from current operations amounting to $1,476 thousand. The
Company has a negative working capital amounting to $6,647 thousand.
Due to the crisis in the global economy, the decrease in demands and a
continuation of accumulation of significant losses, the Company is
required for additional financing sources. The Company's management
plans for setting additional funding sources required for the
financing of working capital for the next year, and for financing its
strategic plan are: capital raising from shareholders through rights
offering and private placement.
In March 2010 the Company had raised through the rights offering to
shareholders and private placement to Norfet, or anyone on its behalf,
a total of $4 million gross, see note 24 c. In addition, on March 2,
2010, the Company signed an agreement with the banks regarding the
credit lines and liabilities as stated in note 24 b. In addition, the
Company examines non-bank financing options such as beginning working
with factoring companies that allow early payment from customers.
There is no certainty that the Company will be successful in finding
the stated financing resources.
If and insofar, for any reason whatsoever, the Company will not meet
the financial covenants and the banks will demand that the bank credit
will be payable immediately, then it will be very difficult to raise
financing from other sources.
g. The Company estimates that it will not meet the EBITDA covenant for
the year 2010 that was agreed upon between the Company and its three
bank lenders. On July 11 the Company was granted a waiver from the
banks for its expected inability to meet the EBITDA covenant, based on
the Company's forecast for improvement of its EBITDA ratio in 2010
compared to 2009 in accordance with the development to data in
connection with the implementation of the turnaround plan. According
to the waiver, the new EBITDA covenant is not more than a negative
EBITDA of $2.1 million.
h. On July 5, 2010 Mr. Jacov Gelbard terminated his position as the
chairman of the board of directors of the Company. On July 5, 2010 Mr.
Arnon Tiberg was appointed to the chairman of the board of directors.
F - 10
Tefron Ltd.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Note 2: SIGNIFICANT ACCOUNTING POLICIES
a. BASIS OF PREPARATION OF THE FINANCIAL STATEMENTS
The Group's financial statements have been prepared on a historical
cost basis, except for derivatives, financial assets available for
sale and employee benefits that have been measured at fair value.
THE PREPARATION FORMAT OF THE FINANCIAL STATEMENTS
These financial statements have been prepared in accordance with
International Financial Reporting Standards ("IFRS"), as issued by the
International Accounting Standards Board (IASB). These Standards
comprise:
1. International Financial Reporting Standards (IFRS).
2. International Accounting Standards (IAS).
3. Interpretations issued by the (IFRIC) and by the (SIC).
CONSISTENT ACCOUNTING POLICIES
The accounting policies adopted in the financial statements are
consistent with those of all periods presented in the financial
statements.
CHANGES IN ACCOUNTING POLICIES IN VIEW OF THE ADOPTION OF NEW
STANDARDS:
IAS 1 (REVISED) - PRESENTATION OF FINANCIAL STATEMENTS
Effective January 1, 2009, the Group applies an amendment to IAS 1,
"Presentation of Financial Statements". the amended IAS 1 introduces
the `statement of comprehensive income' and requires that all changes
in equity arising from transactions with owners in their capacity as
owners to be presented separately from non-owner changes in equity.
(i.e., The statement of changes in equity includes only details of
transactions with owners, with all non-owner changes presented in
equity as a single line carried forward from the statement of
comprehensive income).
F - 11
Tefron Ltd.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Note 2: SIGNIFICANT ACCOUNTING POLICIES (Cont.)
a. BASIS OF PREPARATION OF THE FINANCIAL STATEMENTS (Cont.)
CHANGES IN ACCOUNTING POLICIES IN VIEW OF THE ADOPTION OF NEW
STANDARDS (Cont.)
IAS 1 (REVISED) - PRESENTATION OF FINANCIAL STATEMENTS (Cont.)
In addition, IAS 1 permits presentation of income and expenses in one
statement (a combined statement of income and other comprehensive
income), or in two linked statements - a statement of income followed
by a statement of other comprehensive income. The Company chose to
present items of income and expense and items of other comprehensive
income in two statements - a statement of income and thereafter a
statement of comprehensive income. In addition, the Company presents a
statement of changes in equity in place of disclosure as part of the
notes to the financial statements, immediately following the statement
of comprehensive income.
The amendment was adopted from January 1, 2009. The initial adoption
of the Standard did not have any material effect on the consolidated
financial statements.
IFRS 2 - SHARE-BASED PAYMENT:
Effective January 1, 2009, The Group adopted an amendment to IFRS 2,
"Share-based-payment). The amendment defines a `vesting condition' as
a condition that includes an explicit or implicit requirement to
provide service. Therefore, any condition that does not have such a
requirement is a non-vesting condition. The amendment requires
`non-vesting' conditions to be treated in a similar fashion to market
conditions and, hence, factored into account in determining the fair
value of the equity instruments granted. Where an award does not vest
as the result of a failure to meet a non-vesting condition, the
accounting treatment depends on whether the failure to meet the
condition is within or outside the control of either the entity or the
counterparty. A failure to satisfy a non-vesting condition that is
within the control of either the entity or the counterparty is
accounted for as a cancellation. However, failure to satisfy a
non-vesting condition that is beyond the control of either party does
not give rise to a cancellation.
The amendment was adopted from January 1, 2009. The initial adoption
of the Standard did not have any material effect on the consolidated
financial statements.
IAS 38 (REVISED) - INTANGIBLE ASSETS:
Pursuant to an amendment to IAS 38, expenses incurred for advertising,
marketing or promotional activities will be recognized as an expense
when the company has the right of access to the advertising goods or
when the company receives those services. For these purposes, the
activities also include production of catalogs and promotional
pamphlets.
The amendment was adopted from January 1, 2009. The initial adoption
of the Standard did not have any material effect on the consolidated
financial statements.
IFRS 7 FINANCIAL INSTRUMENTS: DISCLOSURES:
The amendment to IFRS 7 requires additional disclosures about fair
value measurement and liquidity risk. According to the amendment,
additional disclosures should be made, among others, as to the source
of inputs used to value financial instruments measured at fair value,
using a three-level hierarchy. The level within which a financial
instrument is categorized is based on the lowest level of input to the
instrument's valuation that is significant to the fair value
measurement in its entirety. The levels are for disclosure purposes
only and the measurement itself continues in terms of the hierarchy in
IAS 39.
F - 12
Tefron Ltd.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Note 2: SIGNIFICANT ACCOUNTING POLICIES (Cont.)
a. BASIS OF PREPARATION OF THE FINANCIAL STATEMENTS (Cont.)
In addition, a reconciliation between the opening and closing balance
for Level 3 fair value measurements is required (source of inputs that
is not based on market data), as well as disclosure of significant
transfers between levels in the fair value hierarchy.
The amendment was adopted as a prospective change from the financial
statements for the year beginning January 1, 2009 (there is no need to
provide comparative information).
b. SIGNIFICANT ACCOUNTING JUDGMENTS, ESTIMATES AND ASSUMPTIONS USED IN
THE PREPARATION OF THE FINANCIAL STATEMENTS:
JUDGMENTS
In the process of applying the Group's accounting policies, management
has made the following judgments which have the most significant
effect on the amounts recognized in the financial statements:
ESTIMATES AND ASSUMPTIONS
The preparation of the consolidated financial statements requires
management to make judgments, estimates and assumptions that affect
the reported amounts of assets, liabilities, revenues and expenses.
However, uncertainty about these assumptions and estimates could
result in outcomes that require a material adjustment to the carrying
amount of the asset or liability affected in future periods. The basis
of the estimates and assumptions is reviewed regularly. The changes in
accounting estimates are reported in the period of the change in
estimate.
The key assumptions made in the financial statements concerning
uncertainties at the balance sheet date and the critical estimates
computed by the Group that may cause a material adjustment to the
carrying amounts of assets and liabilities within the next financial
year are discussed below:
- LEGAL CLAIMS
In estimating the provision for legal claims filed against the
Company and its subsidiaries, the Company has relied on the
opinion of its legal counsels. The opinion of the Company's legal
counsels is based on their professional judgment, taking into
account the stage of proceedings and experience with respect to
that claim. Since the outcome of any legal claims will generally
be determined in the court, actual results could differ from
these estimates.
- DEFERRED TAX ASSETS
Deferred tax assets are recognized for carry forward tax losses
and deductible temporary differences to the extent that it is
probable that taxable profit will be available against which the
losses can be utilized. Significant management judgment is
required to determine the amount of deferred tax assets that can
be recognized, based upon the likely timing and level of future
taxable profits together with future tax planning strategies. For
further information, see Note 16.
- PENSION AND OTHER POST-EMPLOYMENT BENEFITS
The liability in respect of defined post-employment benefit plans
is determined using actuarial valuations. The actuarial valuation
involves making assumptions about discount rates, expected rates
of return on assets, future salary increases and mortality rates.
Due to the long-term nature of these plans, such estimates are
subject to significant uncertainty. For further information, see
Note 15.
F - 13
Tefron Ltd.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Note 2: SIGNIFICANT ACCOUNTING POLICIES (Cont.)
c. SIGNIFICANT ACCOUNTING JUDGMENTS, ESTIMATES AND ASSUMPTIONS USED IN
THE PREPARATION OF THE FINANCIAL STATEMENTS (CONT.):
- ALLOWANCE FOR DOUBTFUL ACCOUNTS
Company's management regularly reviews trade receivables and
assesses their collectability. Accordingly, the Company makes a
provision for trade receivables whose collection is doubtful.
- INVENTORIES
The Company reviews in each period the state and age of
inventories and records a provision for slow-moving inventories
accordingly. In assessing whether the inventory is obsolete or
slow moving, the Company relies on empirical data and on
assumptions with regard to anticipated order backlog.
- FAIR VALUE OF FINANCIAL INSTRUMENTS NOT TRADED IN AN ACTIVE
MARKET
Where the fair value of financial assets and financial
liabilities cannot be derived from active markets, they are
determined using valuation techniques including the discounted
cash flows model. The inputs to these models are taken from
observable markets where possible, but where this is not
feasible, a degree of judgment is required in establishing fair
values. The fair value of available-for-sale securities that are
not traded in an active market was determined by a qualified
independent valuator and the valuation technique included
considerations of inputs such as liquidity risk, credit risk and
volatility. Changes in assumptions about these factors could
affect the reported fair value of the available-for-sale
securities. The available-for-sale securities were classified as
level 3 in accordance with IFRS 7 hierarchy.
- IMPAIRMENT OF PROPERTY, PLANT AND EQUIPMENT
An impairment of property, plant and equipment is recorded if the
recoverable amount is less than the asset's carrying amount. The
recoverable amount is the higher of fair value less costs to
sell, and value in use based on discounted cash flow. In order to
determine the recoverable amount of its fixed assets, the Company
has engaged a qualified independent valuator.
c. CONSOLIDATED FINANCIAL STATEMENTS:
The consolidated financial statements include the statements of
companies that are controlled by the Company (wholly-owned
subsidiaries: Hi-Tex founded by Tefron, Ltd. (hereinafter: "Hi-Tex"),
Macro Clothing Ltd. (hereinafter: "Macro"), Tefron USA Inc.
(hereinafter: "Tefron USA"), Tefron UK Ltd. (hereinafter: "Tefron UK")
and El Masira Textile Co. (hereinafter: "El Masira"). Control exists
when the Company has the power, directly or indirectly, to govern the
financial and operating policies of an entity. The existence and
effect of potential voting rights that are currently exercisable or
convertible, including potential voting rights held by another entity,
are considered when assessing whether an entity has control over
another entity. Consolidation commences on the date on which control
is obtained and ceases upon loss of control.
All intra-group balances, transactions and gains and losses resulting
from intra-group transactions are eliminated in full in the
consolidated financial statements.
The financial statements of the subsidiaries are prepared for the same
reporting period as the parent company, using consistent accounting
policies.
F - 14
Tefron Ltd.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Note 2: SIGNIFICANT ACCOUNTING POLICIES (Cont.)
d. FUNCTIONAL AND FOREIGN CURRENCIES
1. FUNCTIONAL AND PRESENTATION CURRENCIES
The financial statements are presented in USD, which is the
Company's functional currency.
The functional currency is the currency that best reflects the
economic environment in which the Company operates and conducts
its transactions. Each entity in the Group determines its
functional currency which is used to measure its financial
position and operating results.
2. FOREIGN CURRENCY TRANSACTIONS
Transactions denominated in a foreign currency (i.e., a currency
other than the functional currency) are recorded initially at the
exchange rate at the date of the transaction. After initial
recognition, monetary assets and liabilities are translated at
each balance sheet date into the functional currency, at the
exchange rate at that date. Exchange rate differences are
recognized in the statement of income. Non-monetary assets and
liabilities that are measured in term of historical cost are
translated into the function currency of the exchange rate on the
date of the initial transaction. Non-monetary assets and
liabilities that are measured at fair value are translated into
the functional currency at the exchange rate on the date when the
fair value is determined.
e. CASH EQUIVALENTS
Cash equivalents are considered as highly liquid investments,
including unrestricted short-term bank deposits with an original
maturity of three months or less from the date of acquisition or with
a maturity of more than three months, however, they are repayable on
demand without penalty and form part of the Group's cash management,
and are not restricted by liens.
f. ALLOWANCE FOR DOUBTFUL ACCOUNTS
The allowance for doubtful accounts is determined in respect of
specific trade receivables whose collection, in the opinion of the
Company's management, is doubtful. Impaired trade receivables are
derecognized when they are assessed as uncollectible.
g. INVENTORIES
Inventories are measured at the lower of cost and net realizable
value. The cost of inventories comprises costs of purchase and costs
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.
The cost of inventories is assigned as follows:
Raw materials - Based on weighted average cost.
Work in progress - Based on weighted average cost including
material, labor and other direct and indirect
manufacturing costs.
Finished goods - Based on weighted average cost including
material, labor and other direct and indirect
manufacturing costs.
F - 15
Tefron Ltd.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Note 2: SIGNIFICANT ACCOUNTING POLICIES (Cont.)
g. INVENTORIES (Cont.)
The Company periodically evaluates the condition and age of
inventories and records a provision for slow-moving inventories.
The allocation of fixed production overheads to the costs of inventory
is based on the normal capacity of the production facilities. The
amount of fixed overhead allocated to the costs of inventory is not
increased as a consequence of low production. All unallocated
overheads are recognized as an expense in the period in which they are
incurred. Furthermore, cost of inventories does not include abnormal
amounts of materials, labor or other costs resulting from
inefficiency.
h. FINANCIAL INSTRUMENTS
FINANCIAL ASSETS:
Financial assets within the scope of IAS 39 are initially recognized
at fair value plus directly attributable transaction costs, except for
investments at fair value through profit or loss in which case
transaction costs are expensed as incurred.
After initial recognition, the subsequent accounting and measurement
of financial assets depends on their classification as follows:
o Financial assets at fair value through profit or loss.
o Loans and receivables.
o Available-for-sale financial assets.
The Company has classified its financial assets as follows:
1. AVAILABLE-FOR- SALE FINANCIAL ASSETS (SHORT TERM INVESTMENTS)
The Group has available-for-sale financial assets that are
financial assets (non-derivative) that are designated as
available-for-sale or are not classified in any of the three
preceding categories. After initial recognition,
available-for-sale financial assets are measured at fair value.
Gains or losses from fair value adjustments, except exchange
differences that relate to monetary debt instruments that are
carried to the statement of income in financial expenses or
income, are recognized directly in equity as unrealized gains,
net. When the investment is disposed of or in case of impairment,
the accumulated gain or loss is recognized in the statement of
income. Interest income on investments in debt instruments is
recognized in the statement of income using the effective
interest method.
2. LOANS AND RECEIVABLES
Loans and receivables are non-derivative financial assets with
fixed or determinable payments that are not quoted in an active
market. After initial measurement, such financial assets are
subsequently measured at amortized cost using the effective
interest rate method, less impairment.
F - 16
Tefron Ltd.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Note 2: SIGNIFICANT ACCOUNTING POLICIES (Cont.)
h. FINANCIAL INSTRUMENTS (Cont.)
3. FAIR VALUE
The fair value of investments that are traded in an active market
is determined by reference to the market prices at the balance
sheet date. For investments where there is no active market, fair
value is determined using valuation techniques. Such techniques
include using recent arm's length market transactions; reference
to the current market value of another instrument which is
substantially the same; discounted cash flow or other valuation
models. The valuation took into consideration interest and credit
components that are derived from the risk.
FINANCIAL LIABILITIES
FINANCIAL LIABILITIES MEASURED AT AMORTIZED COST:
Interest-bearing loans and borrowings are initially recognized at fair
value less directly attributable transaction costs. After initial
recognition, borrowings are measured at amortized cost. Gains and
losses are recognized in the statement of income when the loan is
derecognized as well as through the systematic amortization process.
TREASURY SHARES
Company shares held by the Company's subsidiary are presented at cost
and deducted from equity. No gain or loss is recognized in the income
statement on the purchase, sale, issue or cancellation of the
Company's own equity instruments. Any difference between the carrying
amount and the consideration is recognized in a capital reserve.
DERECOGNITION OF FINANCIAL INSTRUMENTS
FINANCIAL ASSETS
A financial asset is derecognized when the contractual rights to the
cash flows from the financial asset expire.
FINANCIAL LIABILITIES
A financial liability is derecognized when it is extinguished, i.e.
when the obligation is discharged, cancelled or expires. A financial
liability is extinguished when the debtor (the Group):
o discharges the liability by paying in cash, other financial
assets, goods or services; or
o is legally released from the liability.
Where an existing financial liability is exchanged with another
liability from the same lender on substantially different terms, or
the terms of an existing liability are substantially modified, such an
exchange or modification is accounted for as an extinguishment of the
original liability and the recognition of a new liability. The
difference between the carrying amount of the above liabilities is
recognized in the statement of income. If the exchange or modification
is immaterial, it is accounted for as a change in the terms of the
original liability and no gain or loss is recognized from the
exchange.
IMPAIRMENT OF FINANCIAL ASSETS:
The Group assesses at each balance sheet date whether there is any
objective evidence that the following financial asset or group of
financial assets is impaired.
F - 17
Tefron Ltd.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Note 2: SIGNIFICANT ACCOUNTING POLICIES (Cont.)
h. IMPAIRMENT OF FINANCIAL ASSETS (Cont.)
AVAILABLE-FOR-SALE FINANCIAL ASSETS
For debt instruments classified as available-for-sale financial
assets, objective evidence of impairment may arise as a result of one
or more events that have a negative impact on the estimated future
cash flows of the asset since the recognition of the asset. Evidence
of impairment may include indications that the debtor is experiencing
financial difficulties, including liquidity difficulty and default in
interest or principal payments. Where there is evidence of impairment,
the cumulative loss - measured as the difference between the
acquisition cost (less principal payments, amortizations using the
effective interest method and previous impairment losses) and the fair
value is reclassified from equity and recognized as an impairment
charge in the statement of income. In a subsequent period, the amount
of the impairment loss is reversed if the increase in fair value can
be related objectively to an event occurring after the impairment was
recognized and that leads to a change in the original considerations
that led to the conclusion that the investment is impaired. The amount
of the reversal, as above, is credited to the statement of income up
to the amount of any previous impairment.
FINANCIAL ASSETS CARRIED AT AMORTIZED COST
For financial assets carried at amortized cost the Group first
assesses individually whether objective evidence of impairment exists
individually for financial assets that are individually significant,
or collectively for financial assets that are not individually
significant.
If there is objective evidence that an impairment loss has incurred,
the amount of the loss is measured as the difference between the
asset's carrying amount and the present value of estimated future cash
flows (excluding future expected credit losses that have not yet been
incurred). If a loan has a variable interest rate, the discount rate
for measuring any impairment loss is the current effective interest
rate. The carrying amount of the asset is reduced through the use of
an allowance account and the amount of the loss is recognized in the
income statement. Interest income continues to be accrued on the
reduced carrying amount and is accrued using the rate of interest used
to discount the future cash flows for the purpose of measuring the
impairment loss. The interest income is recorded as part of finance
income in the income statement. Loans together with the associated
allowance are written off when there is no realistic prospect of
future recovery and all collateral has been realized or has been
transferred to the Group.
i. DERIVATIVE FINANCIAL INSTRUMENTS HELD FOR HEDGING
From time to time, the Group enters into contracts with derivative
financial instruments such as forward currency contracts (forward) and
Put and Call options in respect of foreign currency. Such derivative
financial instruments are initially recognized at fair value and
attributable transactions costs are recognized in the statement of
income when incurred. After initial recognition, the financial
derivatives are measured at fair value. Derivatives are carried in the
balance sheet as assets when the fair value is positive and as
liabilities when the fair value is negative.
The Group holds derivative financial instruments in order to hedge
foreign currency related risks. The fair value of forward currency
contracts and Put and Call options is calculated by reference to
current forward exchange rates for contracts with similar maturity
profiles.
For the purpose of hedge accounting, hedges are classified as cash
flow hedges when hedging exposure to variability in cash flows that is
either attributable to a particular risk associated with a recognized
asset or liability or a forecast transaction or the foreign currency
risk in an unrecognized firm commitment
F - 18
Tefron Ltd.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Note 2: SIGNIFICANT ACCOUNTING POLICIES (Cont.)
i. DERIVATIVE FINANCIAL INSTRUMENTS HELD FOR HEDGING (cont.)
At the inception of a hedge relationship, the Group formally
designates and documents the hedge relationship to which the Group
wishes to apply hedge accounting and the risk management objective and
strategy for undertaking the hedge. The documentation includes
identification of the hedging instrument, the hedged item or
transaction, the nature of the risk being hedged and how the entity
will assess the hedging instrument's effectiveness in offsetting the
exposure to changes in the hedged item's fair value or cash flows
attributable to the hedged risk. The hedge effectiveness is assessed
at each balance sheet date.
Hedges which meet the criteria for hedge accounting are accounted for
as follows:
CASH FLOW HEDGES:
The effective portion of the gain or loss on the hedging instrument is
recognized directly in equity, while any ineffective portion is
recognized immediately in the statement of income.
Amounts recognized as other comprehensive income (loss) are
reclassified to the statement of income when the hedged transaction
affects profit or loss, such as when the hedged income or expense is
recognized or when a forecast sale occurs.
If the forecast transaction or firm commitment is no longer expected
to occur, amounts previously recognized in equity are transferred to
the statement of income. If the hedging instrument expires or is sold,
terminated or exercised, or if its designation as a hedge is revoked,
amounts previously recognized in equity remain in equity until the
forecast transaction or firm commitment occurs.
j. LEASES:
The tests for classifying leases as finance or operating leases depend
on the substance of the agreements and are made at the inception of
the lease in accordance with the principles below as set out in IAS
17.
THE GROUP AS LESSEE:
OPERATING LEASES:
Lease agreements are classified as an operating lease if they do not
transfer substantially all the risks and benefits incidental to
ownership of the leased asset. Lease payments are recognized as an
expense in the statement of income on a straight-line basis over the
lease term.
THE GROUP AS LESSOR:
OPERATING LEASES:
Lease agreements where the Group does not actually transfer
substantially all the risks and benefits incidental to ownership of
the leased asset are classified as operating leases. Lease income is
recognized as revenue in the statement of income on a straight-line
basis over the lease term.
k. BUSINESS COMBINATIONS AND GOODWILL
Business combinations are accounted for by applying purchase method
pursuant to IFRS 3. Identifiable assets acquired and liabilities
assumed are measured at fair value on the acquisition date. The cost
of the acquisition is measured at the fair value of the assets given,
the equity instruments issued and the liabilities incurred on the
acquisition date plus direct acquisition costs.
F - 19
Tefron Ltd.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Note 2: SIGNIFICANT ACCOUNTING POLICIES (Cont.)
k. BUSINESS COMBINATIONS AND GOODWILL (Cont.)
Goodwill acquired in a business combination is initially measured as
the excess of the cost of the acquisition over the Group's interest in
the fair value of the net identifiable assets of the acquiree. After
initial recognition, goodwill is measured at cost less any accumulated
impairment losses. Goodwill is not systematically amortized. For the
purpose of impairment testing, the goodwill is allocated to a
subsidiary. As for impairment testing of goodwill, see n below.
Contingent consideration is recognized if, and only if, the Group had
a present obligation, the economic outflow was more likely than not
and a reliable estimate was determinable. Subsequent adjustments to
the contingent consideration affects goodwill.
l. PROPERTY, PLANT AND EQUIPMENT
Items of property, plant and equipment are measured at cost plus
direct acquisition costs less any accumulated depreciation, less
accumulated impairment losses and less related investment grants and
excluding day-to-day servicing expenses. Cost includes spare parts and
auxiliary equipment that can be used only in connection with the
machinery and equipment.
Deprecation is calculated at equal annual rates based on the straight
line method over the useful life of the asset as follows:
% MAINLY %
-------------- ---------------
Buildings 2.5 2.5
Machinery and equipment 7 7
Motor vehicles 15 15
Office furniture and equipment 6-25 Furniture - 6,
computers - 25
Leasehold improvements (*) (*)
(*) Leasehold improvements are depreciated using the straight line
method over the lease term (including any optional extension term
available to the Company which it intends to exercise), or over the
expected useful life of the assets, whichever is shorter.
The useful life, depreciation method and residual value of an asset
are reviewed at least each year end and the changes are accounted for
as a prospective change in accounting estimate. As for testing the
impairment of fixed assets, see n below.
An asset is derecognized on disposal or when no further economic
benefits are expected from its use. The gain or loss arising from the
derecognition of the asset (determined as the difference between the
net disposal proceeds and the carrying amount in the financial
statements) is included in the statement of income when the asset is
derecognized. See note 7.
m. INTANGIBLE ASSETS
Separately acquired intangible assets are measured on initial
recognition at cost with the addition of costs directly attributable
to the acquisition. The Cost of intangible asset acquired in a
business combination is its fair value at the acquisition date. After
initial recognition, intangible assets are carried at cost less any
accumulated amortization and any accumulated impairment losses.
F - 20
Tefron Ltd.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Note 2: SIGNIFICANT ACCOUNTING POLICIES (Cont.)
m. INTANGIBLE ASSETS (Cont.)
According to management's assessment, intangible assets have a finite
useful life. The assets are amortized over their useful life using the
straight-line method and reviewed for impairment whenever there is an
indication that the asset may be impaired. The amortization period and
the amortization method for an intangible asset with a finite useful
life are reviewed at least at each financial year end. Changes in the
expected useful life or the expected pattern of consumption of future
economic benefits embodied in the asset are accounted for as
prospective changes in accounting estimates. The amortization charge
on intangible assets with finite useful lives is recognized in the
statements of income.
The useful life of intangible assets is as follows:
YEARS
-------------------------
Computer software 4
Customer relationships (*) 7
Order backlog Period of delivery orders
Gains or losses arising from the derecognition of an intangible asset
are determined as the difference between the net disposal proceeds and
the carrying amount of the asset and are recognized in the statement
of income.
(*)In accordance with Accounting Standard IAS38 and IFRS3, customer
relationships are part of intangible assets due to the fact that they
arise from contractual legal rights and maintain the principle of
detection. Deprecation of customer relationship is done in accordance
with the abandonment of existing customers over the years.
COMPUTER SOFTWARE:
The Group's assets include computer systems comprising hardware and
software. Software forming an integral part of the hardware to the
extent that the hardware cannot function without the programs
installed on it, is classified as fixed assets. In contrast, software
that adds functionality to the hardware is classified as an intangible
asset.
n. IMPAIRMENT OF NON-FINANCIAL ASSETS
The Group assesses at each reporting date whether there is an
indication that an asset may be impaired. If any indication exists, or
when annual impairment testing for an asset is required, the Group
estimates the asset's recoverable amount. An asset's recoverable
amount is the higher of the asset's (or cash generating unit) fair
value less costs to sell and its value in use and is determined for an
individual asset, unless the asset does not generate cash inflows that
are largely independent of those from other assets or groups of asset,
in which case the recoverable amount is determined for the
cash-generating unit to which the asset belongs.
Where the carrying amount of an asset or cash generating unit exceeds
its recoverable amount, the asset is considered impaired and is
written down to its recoverable amount.
In measuring value in use, the estimated future cash flows are
discounted using a pre-tax discount rate that reflects the risks
specific to the asset or the cash generating unit.
F - 21
Tefron Ltd.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Note 2: SIGNIFICANT ACCOUNTING POLICIES (Cont.)
n. IMPAIRMENT OF NON-FINANCIAL ASSETS (cont.)
Impairment losses are recognized in the statement of income.
For assets excluding goodwill, an assessment is made at each reporting
date as to whether there is any indication that previously recognized
impairment losses may no longer exist or may have decreased. If such
indication exist, the Group estimates the asset's or cash-generating
unit's recoverable amount. A previously recognized impairment loss is
reversed only if there has been a change in the assumptions used to
determine the asset's recoverable amount since the last impairment
loss was recognized. The reversal is limited so that the carrying
amount of the asset does not exceed its recoverable amount, nor exceed
the carrying amount that would have been determined, net of
depreciation, had no impairment loss been recognized for the asset in
prior years. Such reversal is recognized in the income statement. See
note 7.
The following criteria are applied in assessing impairment of the
goodwill:
Goodwill:
The Group reviews goodwill for impairment once a year (on December 31)
or more frequently if events or changes in circumstances indicate that
the goodwill's carrying amount may be impaired.
Impairment is determined for goodwill by comparing the recoverable
amount of the cash-generating unit(s) to which the goodwill relates to
the carrying amount of the cash generating unit(s), including
goodwill. If the recoverable amount of the cash-generating unit(s) is
less than the carrying amount of the cash-generating unit(s), an
impairment loss is recognized. Impairment losses recognized for
goodwill cannot be reversed in future periods.
For the purpose of impairment testing, goodwill acquired in a business
combination is allocated, at the acquisition date, to each of the
Group's cash generating units that is expected to benefit from the
synergies of the combination.
o. GOVERNMENT GRANTS
Government grants from the Office of the Chief Scientist in Israel for
supporting research and development activities do not contain a
liability to pay royalties to the State, therefore, reduced from the
cost of sales.
Government grants are recognized when there is reasonable assurance
that the grant will be received and the Company will comply with the
attached conditions. The Company's government grants, which have been
received in prior years in order to purchase fixed assets, have been
recorded as a reduction in the carrying amount of the fixed asset.
p. TAXES ON INCOME
Taxes on income in the statement of income comprise current and
deferred taxes. The tax results in respect of current or deferred
taxes are recognized in the statement of income except to the extent
that the tax arises from items which are recognized directly in the
statement of comprehensive income. In such cases, the tax effect is
also recognized in the relevant item in statement of comprehensive
income.
F - 22
Tefron Ltd.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Note 2: SIGNIFICANT ACCOUNTING POLICIES (Cont.)
p. TAXES ON INCOME (Cont.)
DEFERRED TAXES:
Deferred income taxes are computed using the liability method on
temporary differences between the carrying amounts in the financial
statements and the amounts attributed for tax purposes, except for a
limited number of exceptions. Deferred taxes are carried directly to
equity if the tax relates to items that are taken to equity.
Deferred tax balances are measured at the tax rates that are expected
to apply to the period when the taxes are taken to the statement of
income or to equity, based on tax laws that have been enacted or
substantively enacted by the balance sheet date. The amount for
deferred taxes in the statement of income represents the changes in
said balances during the reported period, excluding in respect of
changes attributable to items carried directly to equity.
Deferred tax assets are reviewed at each balance sheet date and
reduced to the extent that it is not probable that they will be
utilized. Simultaneously, temporary differences (such as carryforward
losses) for which deferred tax assets have not been recognized are
reassessed and deferred tax assets are recognized to the extent that
their recoverability has become probable. Any resulting reduction or
reversal is recognized in the item taxes on income.
Taxes that would apply in the event of the sale of investments in
investees have not been taken into account in computing the deferred
taxes, as long as it is probable that the sale of the investments in
investees is not expected in the foreseeable future. Equally, deferred
taxes that would apply in the event of distribution of earnings by
investees as dividends have not been taken into account in computing
the deferred taxes, since the distribution of dividends does not
involve an additional tax liability or since it is the Company's
policy not to initiate distribution of dividends that triggers an
additional tax liability.
Deferred tax assets and deferred tax liabilities are presented in the
balance sheet as non-current assets and non-current liabilities,
respectively. Deferred taxes are offset if there is a legally
enforceable right to set off a current tax asset against a current tax
liability and the deferred taxes relate to the same taxpayer and the
same taxation authority.
q. SHARE-BASED PAYMENT TRANSACTIONS
The Company's employees and directors are entitled to remuneration in
the form of share-based payment transactions whereby employees and
directors render service as consideration for equity instruments
("equity-settled transactions").
EQUITY-SETTLED TRANSACTIONS:
The cost of equity-settled transactions with employees is measured at
the fair value of the equity instruments granted at the grant date.
The fair value is determined using an accepted pricing model (see Note
19).
The cost of equity-settled transactions is recognized in the statement
of income, together with a corresponding increase in equity (in
additional paid in capital), during the period which the service
conditions are to be satisfied, ending on the date on which the
relevant employees and directors become fully entitled to the award
("the vesting period"). The cumulative expense recognized for
equity-settled transactions at each reporting date until the vesting
date reflects the extent to which the vesting period has expired and
the Group's best estimate of the number of equity instruments that
will ultimately vest. The charge or credit to the statement of income
represents the movement in cumulative expense recognized at the
beginning and end of that reported period.
F - 23
Tefron Ltd.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Note 2: SIGNIFICANT ACCOUNTING POLICIES (Cont.)
q. SHARE-BASED PAYMENT TRANSACTIONS (cont.)
No expense is recognized for awards that do not ultimately vest.
Where the terms of an equity-settled transaction award are modified,
the minimum expense recognized is the expense as if the terms had not
been modified, if the original terms of the award are met. An
additional expense is recognized for any modification that increases
the total fair value of the share-based payment arrangement or is
otherwise beneficial to the employee, as measured at the modification
date.
r. PENSIONS AND OTHER POST EMPLOYEE BENEFITS
The Group has several employee benefit plans:
1. SHORT-TERM EMPLOYEE BENEFITS:
Short-term employee benefits include salaries, paid annual leave,
paid sick leave, recreation and social security contributions and
are recognized as expenses as the services are rendered.
2. POST-EMPLOYMENT BENEFITS
The plans are normally financed by deposits in insurance
companies and classified as defined contribution plans or as
defined benefit plans.
The Group has defined contribution plans pursuant to Section 14
of the Israeli Severance Pay Law, under which the amount of the
post-employment benefits received by the employee is limited to
the amount of contributions paid by the group, together with
investment returns arising from the contributions. As the Group
is not legally or constructively liable to make additional
payments even if sufficient amounts are not accumulated in the
fund to pay all the benefits due to an employee relating to his
current or past services, in consequence, actuarial risk and
investment risk fall on the employee.
Obligations in respect to contributions to defined contribution
pension plans are recognized as an expense in the periods during
which services are rendered by employees.
The Group also operates a defined benefit plan in respect of
severance pay pursuant to the Israeli Severance Pay Law.
According to the Law, employees are entitled to severance pay
upon dismissal or retirement. The cost of providing benefits
under this plan is determined using the projected unit credit
method. The actuarial assumptions comprise future salary
increases and rates of employee turnover based on the estimated
timing of payment. The amounts are presented based on discounted
expected future cash flows using a discount rate on Government
bonds with maturity that matches the estimated term of the
benefit payments.
The Company makes current deposits in respect of its liabilities
to pay compensation to certain of its employees in pension funds
and insurance companies ("the plan assets").
Plan assets comprise assets held by a long-term employee benefit
fund or qualifying insurance policies. Plan assets are not
available to the Group's own creditors and can not be returned
directly to the Group.
Actuarial gains and losses are recognized directly in other
comprehensive income (loss) in the period in which they occur.
F - 24
Tefron Ltd.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Note 2: SIGNIFICANT ACCOUNTING POLICIES (Cont.)
r. PENSIONS AND OTHER POST EMPLOYEE BENEFITS (cont.)
The net liability for employee benefits includes the present value of
the defined benefit obligation less past service costs and actuarial
gains and losses not yet recognized and less the fair value of plan
assets out of which the obligations are to be settled.
s. REVENUE RECOGNITION
Revenues are recognized when the amount of revenues can be measured
reliably, it is probable that the economic benefits associated with
the transaction will flow to the Group and the costs incurred or to be
incurred can be measured reliably. Revenues are measured at the fair
value of the consideration received excluding any trade discounts or
volume rebates.
The following specific recognition criteria must also be met before
revenue is recognized:
REVENUES FROM SALE OF GOODS
Revenue from the sale of goods is recognized when all the significant
risks and rewards of ownership of the goods have passed to the buyer
and the seller no longer retains managerial involvement to the degree
associated with ownership over the goods sold, usually on delivery of
the goods.
t. COST OF SALES
Cost of sales includes expenses for storage and transportation of
inventories to the end point of sale. Cost of sales also includes
losses from write-downs of inventories and provisions for slow-moving
inventories.
u. OPERATING SEGMENTS
According to IFRS 8, the Company adopted the "management approach" in
reporting on the financial performance of the operating segments.
An operating segment is a component of the Group that meets the
following three criteria:
1. Is engaged in business activities from which it may earn revenues
and incur expenses, including revenues and expenses relating to
intragroup transactions;
2. Whose operating results are regularly reviewed by the Group's
chief operating decision maker (the CEO of the Company) to make
decisions about resources to be allocated to the segment and
assess its performance; and
3. For which separate financial information is available.
v. EARNINGS (LOSS) PER SHARE
Earnings (loss) per share are calculated by dividing the net income
(loss) attributable to equity holders of the parent by the weighted
average number of ordinary shares outstanding during the period. Basic
earnings (loss) per share only include shares that were actually
outstanding during the period. Potential ordinary shares (employee
options) are included in the computation of diluted earnings (loss)
per share only when their conversion decreases earnings per share or
increases loss per share. Furthermore, potential ordinary shares that
are converted or exercised during the period are included in diluted
earnings (loss) per share only until the conversion or exercise date
and from that date in basic earnings (loss) per share.
F - 25
Tefron Ltd.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Note 2: SIGNIFICANT ACCOUNTING POLICIES (Cont.)
w. PROVISIONS
In accordance with IAS 37, a provision is recognized when the Group
has a present obligation (legal or constructive) as a result of a past
event and it is probable that an outflow of resources embodying
economic benefits will be required to settle the obligation and a
reliable estimate can be made of the amount of the obligation. Where
the Group expects some or all of a provision to be reimbursed, for
example under an insurance contract, the reimbursement is recognized
as a separate asset but only when the reimbursement is virtually
certain. The expense relating to any provision is presented in the
income statement net of any reimbursement.
If the effect of the time of money is material, provisions are
measured based on discounted cash flows, using a pre-tax interest rate
that reflects, where appropriate, those risks specific to the
liability. Where discounting is used, the increase in the provision
due to the passage of time is recognized as a finance cost.
x. STANDARDS ISSUED BUT NOT YET EFFECTIVE
1. IFRS 3 (REVISED) - BUSINESS COMBINATIONS AND IAS 27 (REVISED) -
CONSOLIDATED AND SEPARATE FINANCIAL STATEMENTS
IFRS 3 (Revised) and IAS 27 (Revised) (herein "the Standards")
will be effective for annual periods beginning on January 1,
2010,
The principal changes expected to take place following the
adoption of the Standards are:
- The definition of a business was broadened so that it also
contains activities and assets that are not managed as a
business as long as they are capable of being managed as a
business from a perspective of market participant.
- Contingent consideration in a business combination will be
initially classified as a liability or as equity. For
contingent consideration initially classified as a
liability, subsequent changes in the liability generally
will be recognized through profit or loss.
- Transaction costs directly attributable to the business
combination will be expensed as incurred.
- Subsequent recognition of a deferred tax asset for acquired
temporary differences which did not meet the recognition
criteria at acquisition date will be recorded in profit of
loss and not as adjustment to goodwill.
- A minority interest transaction without the loss of control,
whether a sale or a purchase, will be accounted for as an
equity transaction.
- A subsidiary's losses, although resulting in the
subsidiary's deficiency, will be allocated between the
parent company and minority interests, even if the minority
has not guaranteed or has no contractual obligation of
sustaining the subsidiary or carrying out another
investment.
- Upon the loss of control of a subsidiary, the remaining
investment in the subsidiary, if any, will be revalued to
its fair value through profit and loss. This fair value will
represent a new cost basis for the purpose of subsequent
treatment.
The Company believes that the effect of the Standards on its
financial condition, results of operations and cash flows is not
expected to be material.
F - 26
Tefron Ltd.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Note 2: SIGNIFICANT ACCOUNTING POLICIES (Cont.)
x. STANDARDS ISSUED BUT NOT YET EFFECTIVE (cont.)
2. IFRS 9 - FINANCIAL INSTRUMENTS:
In November 2009, the IASB issued IFRS 9, "Financial
Instruments", which represents the first phase of a project to
replace IAS 39, "Financial Instruments: Recognition and
Measurement". IFRS 9 focuses mainly on the classification and
measurement of financial assets and it applies to all financial
assets within the scope of IAS 39.
According to IFRS 9, upon initial recognition, all the financial
assets (including hybrid contracts with financial asset hosts)
will be measured at fair value. In subsequent periods, debt
instruments can be measured at amortized cost if both of the
following conditions are met:
- the asset is held within a business model whose objective is
to hold assets in order to collect the contractual cash
flows.
- the contractual terms of the financial asset give rise on
specified dates to cash flows that are solely payments of
principal and interest on the principal amount outstanding.
Subsequent measurement of all other debt instruments and
financial assets will be at fair value.
Financial assets that are equity instruments will be measured in
subsequent periods at fair value and the changes will be
recognized in the statement of income or in other comprehensive
income (loss), in accordance with the election of the accounting
policy on an instrument-by-instrument basis. Nevertheless, if the
equity instruments are held for trading, they must be measured at
fair value through profit or loss. This election is final and
irrevocable. When an entity changes its business model for
managing financial assets it shall reclassify all affected
financial assets. In all other circumstances, reclassification of
financial instruments is not permitted.
The Standard will be effective starting January 1, 2013. Earlier
application is permitted. Early adoption will be made with a
retrospective restatement of comparative figures, subject to the
reliefs set out in the Standard.
The Company is evaluating the possible effect of the adoption of
the new Standard on the consolidated financial statements but is
presently unable to assess such effect, if any.
3. IAS 1 - PRESENTATION OF FINANCIAL STATEMENTS:
The amendment to IAS 1 deals with current or non-current
classification of the liability component of a convertible
instrument. Pursuant to the amendment, terms of a liability that
can, at the option of the counterparty, be settled by the issue
of the entity's equity instruments do not affect its
classification as current or non-current. The amendment will be
prospectively adopted starting from the financial statements for
periods beginning on January 1, 2010. Earlier application is
permitted.
The Company believes that the effect of the amendment on the
financial statements is not expected to be material.
4. IAS 32 - FINANCIAL INSTRUMENTS: PRESENTATION - CLASSIFICATION OF
RIGHTS ISSUES:
The amendment to IAS 32 determines that rights, options or share
options to acquire a fixed number of the entity's equity
instruments for a fixed amount of any currency are classified as
equity instruments if the entity offers the rights, options or
share options pro rata to all of its existing owners of the same
class of its non-derivative equity instruments.
F - 27
Tefron Ltd.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Note 2: SIGNIFICANT ACCOUNTING POLICIES (Cont.)
5. IAS 36 - IMPAIRMENT OF ASSETS:
The amendment to IAS 36 defines the required accounting unit to
which goodwill will be allocated for impairment testing of
goodwill. Pursuant to the amendment, the largest unit permitted
for impairment testing of goodwill acquired in a business
combination is an operating segment as defined in IFRS 8,
"Operating Segments" before the aggregation for reporting
purposes. The amendment will be prospectively adopted starting
from the financial statements for periods beginning on January 1,
2010. Earlier application is permitted.
The Company believes that the effect of the amendment on the
financial statements is not expected to be material.
Note 3: - BUSINESS COMBINATIONS
ACQUISITION OF EXCELSIOR INC.
On September 17, 2008, a Company's subsidiary acquired the entire business
activity of Excelsior Inc. ("Excelsior"), a private company operating in
the USA that specializes in the design and distribution of swimwear in the
USA. The transaction was accounted for as business combination under IFRS
3.
The total cost of this business combination amounted to $1,314 thousand,
which included a cash payment of $300 thousand and contingent consideration
payable of $1,014 thousand. The contingent consideration payable is an
estimate of 10% of future sales of Excelsior in each of the two years
following the acquisition.
The Company has allocated the acquisition cost to the fair value of assets
acquired and liabilities assumed. Any changes in the contingent
consideration payable will be recorded as an adjustment to goodwill.
The financial statements include the operating results of Excelsior from
the date of acquisition and were immaterial to the results of the Group in
2008.
The fair value of the assets acquired and liabilities assume of Excelsior
as of the date of acquisition is as follows:
FAIR VALUE
------------
$ IN THOUSANDS
------------
Customer relationships $ 1,029
Order backlog 264
Deferred tax liability (323)
------------
Net assets 970
Goodwill 344
------------
Total Purchase cost $ 1,314
============
Acquisition cost:
$ IN THOUSANDS
------------
Cash paid $ 300
contingent consideration 1,014
------------
Total $ 1,314
============
F - 28
Tefron Ltd.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Note 3: - BUSINESS COMBINATIONS (cont.)
Acquisition cost:
$ IN THOUSANDS
------------
CASH OUTFLOW/INFLOW ON THE ACQUISITION
Cash and cash equivalents acquired with the Company
at the acquisition date $ -
Cash paid 300
------------
Net cash flow $ 300
============
The goodwill created on the acquisition is allocated to the forecasted
benefits derived from the synergy of activities combining of the Company
and the purchased company. See goodwill update against contingent
consideration.
On November 23, 2009, the subsidiary and Excelsior signed an amendment to
the selling agreement according to which, the period for royalties payments
will be due immediately upon transfer of a final payment to excelsior in
the amount of $200 thousand. On that date, the contingent consideration was
extinguished partly against the balance of the goodwill, with an additional
amount of $399 recognized in Selling and Marketing expenses.
Note 4:- TRADE RECEIVABLES, NET
AS OF DECEMBER 31,
-------------------------
2009 2008
---------- ----------
$ IN THOUSANDS
-------------------------
Trade Receivables (1) $ 14,523 $ 23,068
Notes Receivable 74 378
---------- ----------
$ 14,597 $ 23,446
========== ==========
(1) Net of allowance for doubtful accounts $ 990 $ 986
========== ==========
Impaired trade receivables are accounted for through recording an allowance
for doubtful accounts.
The movement in the allowance for doubtful accounts is as follows:
$ IN THOUSANDS
----------
BALANCE AS OF JANUARY 1, 2008 $ 172
Charge for the year 865
Derecognition of doubtful debts (51)
----------
BALANCE AS OF DECEMBER 31, 2008 $ 986
Charge for the year 33
Reversal of collected doubtful accounts (29)
----------
BALANCE AS OF DECEMBER 31, 2009 $ 990
==========
F - 29
Tefron Ltd.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Note 4 :- TRADE RECEIVABLES, NET (cont.)
At December 31, 2009, the aging analysis of the trade receivables is as
follows:
PAST DUE TRADE RECEIVABLES BUT NOT IMPAIRED WITH AGEING OF
NEITHER PAST DUE -------------------------------------------------------
(NOR IMPAIRED) UNDER 30 30 - 60 60 - 90 90 - 120 OVER 120
AGEING DAYS DAYS DAYS DAYS DAYS TOTAL
------- ------- ------- ------- ------- ------- -------
$ IN THOUSANDS
-------------------------------------------------------------------------------
DECEMBER 31, 2009 14,199 101 259 - - 38 14,597
======= ======= ======= ======= ======= ======= =======
DECEMBER 31, 2008 $18,954 $ 1,778 $ 800 $ 416 $ 642 $ 856 $23,446
======= ======= ======= ======= ======= ======= =======
Note 5: OTHER CURRENT ASSETS
AS OF DECEMBER 31,
-----------------------------
2009 2008
------------ ------------
$ IN THOUSANDS
-----------------------------
Prepaid expenses $ 358 $ 545
Advances to suppliers 995 974
Government authorities 1,063 1,001
Accrued income 123 543
Current maturity of subordinated note receivable - 300
Derivatives 195 196
Other 158 999
------------ ------------
$ 2,892 $ 4,558
============ ============
Note 6: INVENTORIES
AS OF DECEMBER 31,
-----------------------------
2009 2008
------------ ------------
$ IN THOUSANDS
-----------------------------
Raw Materials $ 7,148 $ 12,343
Work in process 7,650 11,323
Finished goods 4,980 8,459
------------ ------------
$ 19,778 $ 32,125
============ ============
The amount of inventories write-off recognized in cost of sales is $ 2,808
thousand (2008 - $4,523 thousand).
F - 30
Tefron Ltd.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Note 7: -PROPERTY, PLANT AND EQUIPMENT
a. Composition and movement:
2009
OFFICE
MACHINERY FURNITURE
LAND AND AND MOTOR AND LEASEHOLD
BUILDINGS EQUIPMENT VEHICLES EQUIPMENT IMPROVEMENTS TOTAL
--------- --------- --------- --------- --------- ---------
$ IN THOUSANDS
-----------------------------------------------------------------------------------
COST
Balance as of January 1, 2009 $ 5,918 $ 148,211 $ 422 $ 8,389 $ 6,284 $ 169,224
Additions during the year 9 174 - 95 333 611
Disposals during the year
(through sale) - (19) - - - (19)
Disposals (fully depreciated
assets) - - - (2,230) (148) (2,378)
--------- --------- --------- --------- --------- ---------
Balance as of December 31,
2009 $ 5,927 $ 148,366 $ 422 $ 6,254 $ 6,469 $ 167,438
--------- --------- --------- --------- --------- ---------
ACCUMULATED DEPRECIATION AND
IMPAIRMENT
Balance as of January 1, 2009 $ 1,542 $ 92,036 $ 412 $ 6,544 $ 2,277 $ 102,811
Additions during the year 207 7,911 6 386 393 8,903
Disposals during the year
(through sale) - (18) - - - (18)
Disposals (fully depreciated
assets) - - - (2,230) (148) (2,378)
--------- --------- --------- --------- --------- ---------
Balance as of December 31,
2009 $ 1,749 $ 99,929 $ 418 $ 4,700 $ 2,522 $ 109,318
--------- --------- --------- --------- --------- ---------
IMPAIRMENT
Balance as of January 1, 2009 $ 372 $ 1,344 - $ 419 - $ 2,135
Impairment charge (Reversal
of impairment loss), net 82 (738) - 63 - (593)
Reduction during the year (17) (276) - (49) - (342)
--------- --------- --------- --------- --------- ---------
Balance as of December 31, 2009 $ 437 $ 330 - $ 433 - $ 1,200
--------- --------- --------- --------- --------- ---------
NET BOOK VALUE, AS OF
DECEMBER 31, 2009 $ 3,741 $ 48,107 $ 4 $ 1,121 $ 3,947 $ 56,920
========= ========= ========= ========= ========= =========
F - 31
Tefron Ltd.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Note 7: -PROPERTY, PLANT AND EQUIPMENT (Cont.)
a. Composition and movement: (Cont.)
2008
OFFICE
MACHINERY FURNITURE
LAND AND AND MOTOR AND LEASEHOLD
BUILDINGS EQUIPMENT VEHICLES EQUIPMENT IMPROVEMENTS TOTAL
--------- --------- --------- --------- --------- ---------
$ IN THOUSANDS
----------------------------------------------------------------------------------
COST
Balance as of January 1, 2008 $ 5,281 $ 147,207 $ 422 $ 8,209 $ 6,222 $ 167,341
Additions during the year 637 1,030 - 188 484 2,339
Disposals during the year
(through sale) - (26) - (8) (422) (456)
--------- --------- --------- --------- --------- ---------
Balance as of December 31,
2008 $ 5,918 $ 148,211 $ 422 $ 8,389 $ 6,284 $ 169,224
--------- --------- --------- --------- --------- ---------
ACCUMULATED DEPRECIATION AND
IMPAIRMENT
Balance as of January 1, 2008 $ 1,349 $ 84,275 $ 399 $ 6,232 $ 2,299 $ 94,554
Additions during the year 193 7,781 13 312 189 8,488
Disposals during the year
(through sale) - (20) - - (211) (231)
--------- --------- --------- --------- --------- ---------
Balance as of December 31,
2008 $ 1,542 $ 92,036 $ 412 $ 6,544 $ 2,277 $ 102,811
--------- --------- --------- --------- --------- ---------
IMPAIRMENT
Balance as of January 1, 2008 - - - - - -
Additions during the year 372 1,344 - 419 - 2,135
--------- --------- --------- --------- --------- ---------
Balance as of December 31,
2008 $ 372 $ 1,344 - $ 419 - $ 2,135
--------- --------- --------- --------- --------- ---------
NET BOOK VALUE, AS OF
DECEMBER31, 2008 $ 4,004 $ 55,022 $ 10 $ 1,426 $ 4,007 $ 64,469
========= ========= ========= ========= ========= =========
d. IMPAIRMENT OF PROPERTY, PLANT AND EQUIPMENT
The Company engaged a qualified independent appraiser in order to
determine the fair value of its cash generating units (including
buildings, machinery and equipment, office furniture and equipment and
leasehold improvements) for the purpose of assessing recoverability.
As a result of the aforementioned valuation, the Company recorded in
2009, an impairment reversal, net in the amount of $496 thousand: Due
to cash generating unit Cut&Sew the Company recorded a loss from
impairment in the amount of $237 thousand, due to cash generating unit
Seamless the Company recorded an impairment reversal in the amount of
$394 thousand, and due to cash generating unit regarding knitting
machines that the Company leased in USA recorded an impairment
reversal in the amount of $339 thousand. In 2008 the Company recorded
an impairment loss amounting to $2,135 thousand, which was allocated
to cash generating unit Seamless. This loss, and a reversal of part of
it, as mentioned above, was calculated by matching fixed assets items
to their recoverable amount. The recoverable amount is the fair value
less costs to sell. A loss from impairment and a reversal of part of
it, as mentioned above, were recorded in the statements of income in
other expenses (income).
d. For liens, see Note 17.
F - 32
Tefron Ltd.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Note 8: - GOODWILL AND INTANGIBLE ASSETS
CUSTOMER
RELATIONSHIPS
COMPUTER AND ORDER
SOFTWARE BACKLOG GOODWILL TOTAL
-------- -------- -------- --------
$ IN THOUSANDS
-------------------------------------------------
COST
Balance as of January 1, 2008 $ 2,941 $ - $ - $ 2,941
Additions - purchased separately 224 - - 224
Additions - Acquisition of Excelsior
activity (Note 3) - 1,293 344 1,637
-------- -------- -------- --------
Balance as of December 31, 2008 $ 3,165 $ 1,293 $ 344 $ 4,802
Additions - purchased separately 75 - - 75
Disposals (fully amortized) (1,561) - - (1,561)
Extinguishment of contingent consideration against
goodwill - - (344) (344)
-------- -------- -------- --------
Balance as of December 31, 2009 $ 1,679 $ 1,293 $ - $ 2,972
-------- -------- -------- --------
ACCUMULATED AMORTIZATION
Balance as of January 1, 2008 $ 2,344 $ - $ - $ 2,344
Amortization 251 186 - 437
-------- -------- -------- --------
Balance as of December 31, 2008 $ 2,595 $ 186 $ - $ 2,781
Additions - purchased separately 227 468 - 695
Disposal (fully amortized) (1,561) - - (1,561)
-------- -------- -------- --------
Balance as of December 31, 2009 $ 1,261 $ 654 $ - $ 1,915
-------- -------- -------- --------
IMPAIRMENT
Balance as of January 1, 2009 - - - -
Additions during the year 97 - - 97
-------- -------- -------- --------
Balance as of December 31, 2009 $ 97 $ - $ - $ -
NET BALANCE
As of December 31, 2009 $ 321 $ 639 $ - $ 960
======== ======== ======== ========
As of December 31, 2008 $ 570 $ 1,107 $ 344 $ 2,021
======== ======== ======== ========
AMORTIZATION EXPENSE
Amortization expense for intangible assets is classified in the statements
of income as follows:
FOR THE YEAR ENDED
DECEMBER 31
----------------------------------
2009 2008 2007
-------- -------- --------
$ IN THOUSANDS
----------------------------------
Cost of sales $ 227 $ 251 $ 249
Selling and Marketing expenses 468 186 -
-------- -------- --------
$ 695 $ 437 $ 249
======== ======== ========
F - 33
Tefron Ltd.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Note 9: - SUBORDINATED NOTE RECEIVABLE
In 2006, the Company exercised its option to sell its holdings in
AlbaHealth ("Alba"). The sale was made for a total consideration of $13
million, of which $10 million was paid to the Company in cash and $3
million was payable to the Company on August 31, 2009 in accordance with an
agreement for issuance of a subordinated note bearing market interest at
LIBOR + 3%, subject to repayment of Alba's debt to a bank in the USA. The
agreement was signed by Alba, Suntrust (Alba's major lender) and Tefron
USA. In accordance with the agreement, Tefron USA is entitled to receive
interest on the note for as long as Alba is in compliance with its credit
commitments to Suntrust, as set forth in the agreement between Alba and
Suntrust. In 2008, Alba failed to comply with one of the financial
covenants. Therefore it was in breach of its credit commitment, and acted
to replace its sources of financing.
On December 31, 2008, Alba signed a new loan agreement with BB&T Bank.
Suntrust and Tefron USA were also parties to this agreement, and have
consented for the note to be paid in ten equal installments of $300
thousand. Payments were made quarterly starting on October 1, 2009 and bear
an interest of LIBOR + 3%.
On September 24, 2009 the subordinated note, was early repaid, by mutual
agreement between the parties. According to the agreement Alba paid Tefron
$1,715 thousand and settled all the interest payments that were lagged. Due
to the aforesaid early repayment, the Company recorded a $1,285 thousand
capital loss.
Note 10: - SHORT - TERM LOANS
a. COMPOSITION:
WEIGHTED AS OF
AVERAGE DECEMBER
INTEREST RATE AS OF DECEMBER 31, 2009 31, 2008
---------- ---------------------------------- --------
DECEMBER 31,
2009 IN NIS IN U.S. $ TOTAL TOTAL
---------- -------- -------- -------- --------
% $ IN THOUSANDS
---------- -----------------------------------------------
Short-term credit from banks LIBOR+2.75 299 13,947 14,246 9,323
Current maturities of long-term loans - 4,151 4,151 4,151
Long-term loans classified as current (b) LIBOR + 1% - 7,450 7,450 11,335
-------- -------- -------- --------
299 25,548 25,847 24,809
======== ======== ======== ========
b. In 2009 and 2008 the Company failed to comply with its debt covenants.
As required by IAS 1, the Company classified its long-term loans as
current in both 2008 and 2009. Notwithstanding the aforementioned, the
Company received waivers from the banks subsequent to the year end in
both years. See also note 24b, regarding a new agreement with the
banks, signed on March 2, 2010.
F - 34
Tefron Ltd.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Note 10: - SHORT - TERM LOANS (Cont.)
c. MATURITIES AFTER THE BALANCE SHEET DATE AS OF DECEMBER 31, 2009:
YEAR 1 YEAR 2 YEAR 3 TOTAL
-------- -------- -------- --------
Short-term credit from banks 14,246 - - 14,246
Current maturities of long-term loans 4,151 - - 4,151
Long-term loans classified as current (b) - 4,151 3,299 7,450
-------- -------- -------- --------
Total 18,397 4,151 3,299 25,847
======== ======== ======== ========
d. For collaterals, see Note 17.
e. On March 2, 2010, the company signed a final agreement with the banks
for the restructuring of the Company's current credit lines and
long-term loans. As part of the restructuring, all of the existing
debts were reorganized to current and non-current (with different
maturities of up to 10 years), Whereas, loans in a cumulated amount of
$20 million are to be repaid starting the third year from the date of
receiving the loans.
Note 11: TRADE PAYABLES
AS OF DECEMBER 31,
-----------------------------
2009 2008
------------ ------------
$ IN THOUSANDS
-----------------------------
Trade Payables $ 14,826 $ 22,953
Notes Payable 216 2,214
------------ ------------
$ 15,042 $ 25,167
============ ============
Note 12: OTHER CURRENT LIABILITIES
AS OF DECEMBER 31,
-----------------------------
2009 2008
------------ ------------
$ IN THOUSANDS
-----------------------------
Payroll accruals $ 3,812 $ 3,528
Accrued expenses 533 1,177
Tax Authorities (*) 293 2,111
Other current liabilities 1,028 820
------------ ------------
$ 5,666 $ 7,636
============ ============
*) In January 2009, the Company reached an agreement with the Israeli Tax
Authorities with regard to payment of taxes in arrears by
installments. Amounts due more than one year after the balance sheet
date are presented under other non-current liabilities.
F - 35
Tefron Ltd.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Note 13: LOANS FROM BANKS
a. COMPOSITION:
AS OF DECEMBER 31, 2009
WEIGHTED BALANCE NET
AVERAGE OF CURRENT
INTEREST RATE BALANCE MATURITIES
------------- ------------ ------------
% $ IN THOUSANDS
------------- -----------------------------
Loans from banks LIBOR + 1.2-2 11,601 7,450(1)
============ ============
(1) Classified to short term loans, see note 10.
b. FINANCIAL COVENANTS
In accordance with the new agreement, signed on March 2, 2010 with the
banks, the Company is required to be in compliance with financial
covenants, including all the following financial ratios:
1. The Company's Earnings Before Interest, Taxes, Depreciation and
Amortization ("EBITDA") will be positive according to the
Company's 2010 consolidated financial statements (this financial
covenant was amended by agreement with the bank lenders on July
11, 2010, requiring EBITDA of not more than a negative EBITDA of
$2.1 million);
2. The Company's shareholders' equity, according to the quarterly
and annually consolidated financial statements will not be less
than $35 million;
3. The total amount of the cash and cash equivalents, trade
receivables, other current assets and inventory balances of the
Company, pursuant to the consolidated financial statements (on a
quarterly and annual basis) will not be less than $33 million;
4. The balance of the Company's trade receivables will not be less
than $9 million, according to its consolidated financial
statements (on a quarterly and annual basis).
According to the agreement, unless the parties agree on new financial
covenants for 2011 (including with regard to the salary limitations of
the officers of the Group companies, on which the Group is required to
comply effective from January 1, 2011) by November 30, 2010, the
Company shall be required to comply with the financial covenants,
which were in effect prior to the new agreement signed on March 2,
2010,.
Furthermore, the agreements contain restrictions that limit the Group
ability to make certain investments or obtaining additional loans,
material sale of assets, dividend distribution or other payments to
shareholders.
Failure to comply with the aforementioned covenants shall enable the
banks to demand immediate repayment in full of all credit extended to
the Company.
Up to December 31, 2009, the terms of the then existing long-term bank
loans required the Company to comply with financial covenants,
including the following financial ratios:
o Shareholders' equity shall not be less than $40 million.
o Ratio of shareholders' equity to Total assets shall not be
less than 20%.
o Ratio of total liabilities to banks to EBITDA shall not
exceed 9.5.
As of December 31, 2009 and 2008, the Company was in breach of the
EBITDA covenant. Subsequent to the balance sheet date, the Company
received waivers from all banks, as discussed in Note 10b.
F - 36
Tefron Ltd.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Note 14: FINANCIAL INSTRUMENTS
a. The financial assets and financial liabilities in the balance sheet
are classified by groups of financial instruments pursuant to IAS 39:
DECEMBER 31,
-----------------------------
2009 2008
------------ ------------
$ IN THOUSANDS
-----------------------------
Financial assets:
Financial assets at fair value through profit or loss:
Derivatives $ 195 $ 196
============ ============
Available-for-sale financial assets 737 847
============ ============
Loans and receivables - subordinated note receivable - 3,000
============ ============
Financial liabilities:
Financial liabilities measured at amortized cost $ 25,847 $ 24,809
============ ============
b. FINANCIAL RISKS FACTORS
The Group's activities expose it to various financial risks such as
market risk (including foreign exchange risk and interest rate risk),
credit risk and liquidity risk. The Group's comprehensive risk
management plan focuses on activities that reduce to a minimum any
possible adverse effects on the Group's financial performance. The
Group utilizes derivatives in order to hedge certain exposures to
risks.
The Board establishes documented objectives for the overall risk
management activities as well as specific policies with respect to
certain exposures to risks such as currency risk, interest rate risk,
credit risk, the use of derivative financial instruments and
non-derivative financial instruments.
1. MARKET RISKS:
a. FOREIGN CURRENCY RISK:
Foreign currency risk is the risk that the fair value or
future cash flows of a financial instrument will fluctuate
because of changes in foreign exchange rates. The Group's
exposure to the risk of changes in foreign exchange rates
relates primarily to the Group's operating activities (when
revenue or expense are denominated in a different currency
from the Group's functional currency)
The Group operates in a large number of countries and is
exposed to foreign currency risk resulting from the exposure
to different currencies, mainly the New Israeli Shekel
("NIS"). Foreign exchange risk arises from forward
commercial transactions and recognized assets and
liabilities denominated in a different currency from the
functional currency of the Company. The risk management unit
is responsible for managing the net position of each foreign
currency by entering into forward exchange contracts,
according to the Company's hedging policy.
Management's policy is to hedge forecasted payroll expenses
denominated in NIS, its payments to suppliers in NIS and its
sales in Euro. The hedging level is examined from time to
time, according to the market condition.
F - 37
Tefron Ltd.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Note 14: FINANCIAL INSTRUMENTS (CONT.)
1. MARKET RISKS (cont.):
b. INTEREST RISK:
Interest rate risk is the risk that the fair value or future
cash flows of a financial instrument will fluctuate because
of changes in market interest rates. The Group's exposure to
the risk of changes in market interest rates relates
primarily to the Group's short and long-term debt
obligations with floating interest rates (the long-term
loans are linked to the LIBOR and PRIME base interest rate).
2. CREDIT RISK:
Credit risk is the risk that a counterparty will not meet its
obligations under a financial instrument or customer contract,
leading to a financial loss.
The Group has no significant concentrations of credit risk. The
Group has a policy to ensure collection through sales of its
products to wholesalers with an appropriate credit history.
Credit risk may arise from the exposure of holding several
financial instruments with a single entity or from entering into
transactions with several groups of debtors with similar economic
characteristics whose ability to discharge their obligations will
likely be similarly affected by changes in economic or other
conditions. Factors that have the potential of creating
concentrations of risks consist of the nature of the debtors'
activities, such as their business sector, the geographical area
of their operations and the financial strength of groups of
borrowers.
The Company provides an allowance for doubtful accounts based on
the factors that affect the credit risk of certain customers,
past experience and other information.
The Company maintains cash and cash equivalents and other
financial instruments in various financial institutions in Israel
and in other countries in which the Company works. The Company's
policy is to diversify its investments among the various
institutions.
As of December 31, 2009, cash and cash equivalents totaled $
1,904 thousand.
The Company's revenues are mainly from customers in the United
States and Europe. Outstanding customer receivables are regularly
monitored by the Company, and allowances for doubtful accounts
which, according to the Company's evaluation, adequately reflect
the expected loss of debts whose collection is doubtful, were
recorded in the financial statements
3. LIQUIDITY RISK:
Liquidity risk is the risk that the Company will not be able to
pay its financial liabilities at payment date.
The Group's objective is to maintain a balance between continuity
of funding and flexibility through the use of bank overdrafts,
and bank loans.
The Company's management is responsible for handling the Group's
liquidity risk, The Company's management has a plan for managing
financial risks and liquidity for the short, medium and long term
according to the Company's needs. The Company manages the
liquidity risk by performing updating financial forecasts.
F - 38
Tefron Ltd.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Note 14: FINANCIAL INSTRUMENTS (CONT.)
The table below presents the maturity dates of the Group's
financial obligations based on contractual undiscounted payments:
AS OF DECEMBER 31, 2009
LESS THAN 1 TO 2 2 TO 3
1 YEAR YEARS YEARS TOTAL
------------ ------------ ------------ ------------
$ IN THOUSANDS
---------------------------------------------------------------
Loans from banks $ 18,397 $ 4,151 $ 3,299 $ 25,847
Trade payables 15,042 - - 15,042
Other accounts payable 5,374 - - 5,374
Other liabilities 292 1,838 - 2,130
------------ ------------ ------------ ------------
$ 39,105 $ 5,989 $ 3,299 $ 48,393
============ ============ ============ ============
AS OF DECEMBER 31, 2008
LESS THAN 1 TO 2 2 TO 3 3 TO 4
1 YEAR YEARS YEARS YEARS TOTAL
------------ ------------ ------------ ------------ ------------
$ IN THOUSANDS
--------------------------------------------------------------------------------
Loans from banks $ 13,474 $ 4,151 $ 4,151 $ 3,033 $ 24,809
Trade payables 25,167 - - - 25,167
Other accounts payable 5,525 - - - 5,525
Other liabilities 2,111 915 394 - 3,420
------------ ------------ ------------ ------------ ------------
$ 46,277 $ 5,066 $ 4,545 $ 3,033 $ 58,921
============ ============ ============ ============ ============
c. FAIR VALUE
The carrying amount of cash and cash equivalents, trade receivables,
other current assets, subordinated note receivable, short - term loans
from banks and long-term loans, trade payables and other current
liabilities approximate their fair value.
d. CLASSIFICATION OF FINANCIAL INSTRUMENTS BY FAIR VALUE HIERARCHY:
The financial instruments presented in the balance sheet at fair value
are grouped into classes with similar characteristics using the
following fair value hierarchy which is determined based on the lowest
significant source of input used in measuring fair value:
Level 1 - quoted prices (unadjusted) in active markets for
identical assets or liabilities.
Level 2 - inputs other than quoted prices included within Level 1
that are observable either directly or indirectly.
Level 3 - inputs that are not based on observable market data
(valuation techniques which use inputs that are not
based on observable market data).
F - 39
Tefron Ltd.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Note 14: FINANCIAL INSTRUMENTS (CONT.)
d. Classification of financial instruments by fair value hierarchy
(Cont.):
FINANCIAL LIABILITIES MEASURED AT FAIR VALUE:
December 31, 2009:
LEVEL 1 LEVEL 2 LEVEL 3
---------- ---------- ----------
$ IN THOUSANDS
----------------------------------------
Financial liabilities at fair value through profit or
loss:
Foreign exchange foreign contracts - hedged - 195 -
Available for sale financial assets:
Mortgage-backed securities - - 737
---------- ---------- ----------
- 195 737
========== ========== ==========
During 2009, there were no transfers between Level 1 and Level 2 fair
value measurements, and no transfers into and out of Level 3 fair
value measurements.
Changes in financial assets classified as Level 3:
AVAILABLE-FOR-SALE
FINANCIAL
ASSETS
$ IN THOUSANDS
----------
Balance as of January 1, 2009 $ 847
Total recognized gains (losses):
In other comprehensive income (loss) (110)
----------
Balance as of December 31, 2009 $ 737
==========
Total gain (loss) for the year included in profit or loss
relating to assets held at the end of the reporting year $ -
==========
e. DERIVATIVES AND CASH FLOW HEDGING
The Group in Israel is exposed mainly to foreign currency risk.
As of December 31, 2009 and 2008 the Group held forward contracts and
Call and Put options in foreign currency for the purpose of hedging
the following: its Israeli employees wages , its purchases of expected
future raw materials from local suppliers, and expected sales in Euro
to the Company's customers in Europe. all the above-mentioned
transactions are considered highly probable.
The cash flow hedges of expected future purchases in January through
March 2010 were assessed to be highly effective, and as of December
31, 2009, net unrealized gain amounting to $95 thousand, plus deferred
tax liability amounting to $24 thousand, was included in the statement
of comprehensive income.
The cash flow hedges of expected future sales in January through April
2010 were assessed to be highly effective, and as of December 31,
2009, net unrealized gain amounting to $20 thousand, plus deferred tax
liability amounting to $7 thousand, was included in statement of
comprehensive income.
F - 40
Tefron Ltd.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Note 14: FINANCIAL INSTRUMENTS (CONT.)
e. DERIVATIVES AND CASH FLOW HEDGING (Cont.)
The cash flow hedges of expected future purchases in January through
March 2009 were assessed to be highly effective, and as of December
31, 2008, net unrealized gain amounting to $47 thousand, plus deferred
tax liability amounting to $16 thousand, was included in statement of
comprehensive income.
The cash flow hedges of expected future wages payments in January 2009
was assessed to be highly effective, and as of December 31, 2008, net
unrealized loss amounting to $28 thousand, plus deferred tax asset
amounting to $17 thousand, was included in statement of comprehensive
income.
The cash flow hedges of expected future sales in January through March
of 2009 were assessed to be highly effective, and as of December 31,
2008, net unrealized gain amounting to $4 thousand, plus deferred tax
liability amounting to $1 thousand, was included in statement of
comprehensive income.
The following are details of the Group's financial derivatives:
EXERCISE / EXPIRATION PAR VALUE ($ FAIR VALUE
DATE IN THOUSANDS) $ IN THOUSANDS
---------------- ------------ ------------
December 31, 2009
Forward transactions purchased, net Jan. - May. 2010 $ 6,692 $ 195
============ ============
December 31, 2008
Forward transactions purchased, net Jan. - Jun. 2009 $ 13,483 $ 196
============ ============
Options purchased:
Call options Jan. - Feb. 2009 $ (2,000) $ (88)
============ ============
Put options Jan. - Feb. 2009 $ 2,000 $ 1
============ ============
f. SENSITIVITY TESTS RELATING TO CHANGES IN MARKET FACTORS
Changes in interest rates for financial liabilities as of December 31
would have increased (decreased) shareholders' equity and income or
loss by the following amounts. This analysis assumes that all other
variables are constant and ignores tax implications.
SENSITIVITY TEST TO CHANGES IN
INTEREST RATES
------------------------------
GAIN (LOSS) FROM CHANGE
------------------------------
1% INCREASE IN 1% DECREASE IN
INTEREST INTEREST
------------ ------------
$ IN THOUSANDS
------------------------------
2009 $ (430) $ 430
============ ============
2008 $ (2,170) $ 2,170
============ ============
F - 41
Tefron Ltd.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Note 14: FINANCIAL INSTRUMENTS (CONT.)
f. SENSITIVITY TESTS RELATING TO CHANGES IN MARKET FACTORS (Cont.)
Changes in NIS exchange rates as of December 31 would have increased
(decreased) shareholders' equity and income or loss by the following
amounts. This analysis assumes that all other variables are constant
and ignores tax implications.
SENSITIVITY TEST TO FLUCTUATIONS
IN NIS EXCHANGE RATE
-------------=---------------
GAIN (LOSS) FROM CHANGE
-----------------------------
1% INCREASE IN 1% DECREASE IN
EXCHANGE RATE EXCHANGE RATE
------------ ------------
$ IN THOUSANDS
-----------------------------
2009 $ 1,420 $ (1,420)
============ ============
2008 $ 1,700 $ (1,700)
============ ============
Changes in NIS exchange rates as of December 31 would have increased
(decreased) shareholders' equity and income or loss by the following
amounts. This analysis assumes that all other variables are constant
and ignores tax implications.
GAIN (LOSS) FROM CHANGE
------------------------------
1% INCREASE IN 1% DECREASE IN
MARKET FACTOR MARKET FACTOR
------------ ------------
FOREIGN CURRENCY $ IN THOUSANDS
------------------------------
US DOLLAR
2009 - In respect of forward transactions and options $ (300) $ 300
2008 - In respect of forward transactions and options $ (1,000) $ 1,000
EURO
2009 - In respect of forward transactions $ (290) $ 290
2008 - In respect of forward transactions $ (35) $ 350
SENSITIVITY TESTS AND PRINCIPAL WORK ASSUMPTIONS:
The selected changes in the relevant risk variables were determined
based on management's estimate as to reasonable possible changes in
these risk variables.
The Company has performed sensitivity tests of principal market risk
factors that are liable to affect its reported operating results or
financial position. The sensitivity tests present the profit or loss
and/or change in equity (before tax) in respect of each financial
instrument for the relevant risk variable chosen for that instrument
as of each reporting date. The test of risk factors was determined
based on the materiality of the exposure of the operating results or
financial condition of each risk with reference to the operating
currency and assuming that all the other variables are constant.
The sensitivity test for long-term loans with variable interest was
performed solely on the variable component of interest.
F - 42
Tefron Ltd.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Note 15: EMPLOYEE BENEFITS
Employee benefits consist of short-term benefits and post-employment
benefits.
a. POST-EMPLOYMENT BENEFITS
According to the labor laws and Severance Pay Law in Israel, the
Company is required to pay compensation to an employee upon dismissal
or retirement or to make current contributions in defined contribution
plans pursuant to Section 14 to the Severance Pay Law, as specified
below. The Company's liability is accounted for as a post-employment
benefit. The computation of the Company's employee benefit liability
is made in accordance with a valid employment contract based on the
employee's salary and employment term which establish the entitlement
to receive the compensation.
The post-employment employee benefits are normally financed by
contributions classified as defined contribution plans or as defined
benefit plans, as detailed below.
b. DEFINED CONTRIBUTION PLANS
Section 14 of the Severance Pay Law, 1963 in Israel applies to part of
the compensation payments, pursuant to which the fixed contributions
paid by the Group into pension funds and/or policies of insurance
companies release the Group from any additional liability to employees
for whom such contributions were made. These contributions and
contributions for compensation represent defined contribution plans.
FOR THE YEAR ENDED DECEMBER 31
----------------------------------------------
2009 2008 2007
------------ ------------ ------------
$ IN THOUSANDS
----------------------------------------------
Expenses in respect of defined contribution plans $ 1,072 $ 1,170 $ 1,139
============ ============ ============
c. DEFINED BENEFIT PLANS
The Group accounts for that part of the payment of compensation that
is not covered by contributions in defined contribution plans, as
above, as a defined benefit plan for which an employee benefit
liability is recognized and for which the Group contributes amounts in
central severance pay funds and in qualifying insurance policies.
1. EXPENSES CHARGED TO THE STATEMENTS OF INCOME:
FOR THE YEAR ENDED DECEMBER 31
------------------------------------------------
2009 2008 2007
------------ ------------ ------------
$ IN THOUSANDS
------------------------------------------------
Current service cost $ 147 $ 382 $ 319
Interest cost on benefit obligation 95 143 126
Expected return on plan assets (35) (55) (43)
Other 40 (121) (82)
------------ ------------ ------------
Total expenses in respect of employee benefits $ 247 $ 349 $ 320
============ ============ ============
Actual return on plan assets $ 37 $ 10 $ 43
============ ============ ============
Expenses presented in the statements of income are
as follows:
Cost of sales $ 199 $ 100 $ 194
Sales and Marketing expenses 44 115 42
General and administrative expenses 4 134 84
------------ ------------ ------------
$ 247 $ 349 $ 320
============ ============ ============
F - 43
Tefron Ltd.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Note 15: EMPLOYEE BENEFITS (cont.)
c. DEFINED BENEFIT PLANS (Cont.)
2. PLAN ASSETS (LIABILITIES), NET
AS OF DECEMBER 31,
------------------------------
2009 2008
------------ ------------
$ IN THOUSANDS
------------------------------
Defined benefit obligation $ (1,468) $ (3,098)
Fair value of plan assets 739 929
------------ ------------
Total liabilities, net $ (729) $ (2,169)
============ ============
3. CHANGES IN PRESENT VALUE OF DEFINED BENEFIT OBLIGATION
2009 2008
------------ ------------
$ IN THOUSANDS
------------------------------
Balance as of January 1 $ 3,098 $ 2,425
Interest expenses 95 143
Current service cost 147 382
Benefits paid (770) (574)
Net actuarial loss (gain) (588) 222
Exchange rate differences (514) 500
------------ ------------
Balance as of December 31 $ 1,468 $ 3,098
============ ============
F - 44
Tefron Ltd.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Note 15: EMPLOYEE BENEFITS (cont.)
c. DEFINED BENEFIT PLANS (Cont.)
4. PLAN ASSETS
a) PLAN ASSETS
Plan assets include assets held by a long-term employee
benefit fund and by qualifying insurance policies.
b) MOVEMENT IN FAIR VALUE OF PLAN ASSETS
c)
2009 2008
------------ ------------
$ IN THOUSANDS
------------------------------
Balance as of January 1 $ 929 $ 940
Expected return 35 55
Employer contributions to the plan 72 118
Benefits paid (216) (152)
Net actuarial loss (20) (42)
Exchange rate differentials (61) 10
------------ ------------
Balance as of December 31 $ 739 $ 929
============ ============
5. PRINCIPAL ASSUMPTIONS USED IN DETERMINING THE DEFINED BENEFIT
PLAN
YEAR ENDED DECEMBER 31,
----------------------------------------------
2009 2008 2007
------------ ------------ ------------
%
----------------------------------------------
Discount rate 5.4 3.9-4.6 3.9-4.6
============ ============ ============
Expected return on plan assets 3.6-5.4 5-6.7 5-6.7
============ ============ ============
Expected salary increase rate 0 0 0
============ ============ ============
6. The amounts for the current and previous years:
YEAR ENDED DECEMBER 31,
----------------------------------------------
2009 2008 2007
------------ ------------ ------------
$ IN THOUSANDS
----------------------------------------------
Present value of defined benefit obligation $ 1,468 $ 3,098 $ 2,424
============ ============ ============
Fair value of plan assets $ 739 $ 929 $ 940
============ ============ ============
Surplus in the plan $ 729 $ 2,169 $ 1,485
============ ============ ============
F - 45
Tefron Ltd.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Note 16: INCOME TAXES
a. TAX LAWS APPLICABLE TO GROUP COMPANIES
The Company is subject to provisions of Income Tax Regulations (Rules
for Bookkeeping by Foreign Investment Companies and Certain
Partnerships and Determination of Taxable Revenue), 1986. In
accordance with the aforementioned regulations, the Company files its
income tax returns in USD.
TAX BENEFITS UNDER THE LAW FOR THE ENCOURAGEMENT OF CAPITAL
INVESTMENT, 1959 ("THE LAW")
The Company's enterprises received a status of "approved enterprise"
under the law for the Encouragement of Capital Investment, 1959.
According to the Law, revenues from the approved enterprises, during
the seven years from the first year the approved enterprise earns
taxable income, provided that 7 years have not passed since the
approval was granted or 12 years have not passed since the enterprise
began operating, whichever is earlier ("benefit period"), will be
taxed at reduced tax rate of between 10% and 25% (in accordance with
the rate of foreign investments in the company). A company, in which
foreign investments exceed 25%, is entitled to a 10-year benefit
period. Approval letters dated January 1997 or later are entitled to a
tax exemption in the first two years of the benefit period.
Shareholders are taxed at a 15% tax rate (withheld) on dividends
distributed from revenues from the approved operations, and at a 25%
tax rate on dividends distributed from revenues from other sources,
unless otherwise stipulated by tax treaties.
TEFRON -Tefron has 9 approved investments under the grants track. The
benefit period of 6 approved investments of the Company has ended, and
as such income derived from these investments is taxable at the
regular corporate tax rate in Israel. The ratio of the revenue derived
from these investments is calculated according to growth in Company
sales over and above sales before the beginning of these investments.
The benefit period of 3 approved investments of the Company has yet to
be ended.
TAX BENEFITS UNDER THE LAW FOR THE ENCOURAGEMENT OF CAPITAL
INVESTMENT, 1959 ("THE LAW") (Cont.)
HI-TEX - Hi-Tex has 3 approved investments under the grants track. The
benefit period of them has yet to be ended.
In addition, the Company's fourth plan is in accordance with Amendment
60 of the Law ("the Amendment"), under the alternative track. Under
the alternative track, the benefit period start date is from the year
in which taxable revenue is first generated by the approved
enterprise, provided that less than 12 years have elapsed since the
start of the elective year. Under this track, the Company is tax
exempt in the first ten years of the benefit period.
The basic condition for receiving the benefits under this track is
that the enterprise is "a competitive enterprise".
Another condition for receiving the benefits under the alternative
track is a minimum qualifying investment. This condition requires an
investment in the acquisition of productive assets such as machinery
and equipment, which must be carried out within three years. The
minimum qualifying investment required for plant expansion is the
higher of NIS 300 thousand and an amount equivalent to the "qualifying
percentage" of the value of the productive assets. Productive assets
that are used by the plant but not owned by it will also be viewed as
productive assets.
F - 46
Tefron Ltd.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Note 16: INCOME TAXES (CONT.)
a. TAX LAWS APPLICABLE TO GROUP COMPANIES (CONT.)
The qualifying percentage of the value of the productive assets is as
follows:
THE VALUE OF PRODUCTIVE THE NEW PROPORTION THAT THE
ASSETS BEFORE THE EXPANSION REQUIRED INVESTMENT BEARS TO THE
(NIS IN MILLIONS) VALUE OF PRODUCTIVE ASSETS
------------------------------ ---------------------------------
Up to NIS 140 12%
NIS 140 - NIS 500 7%
More than NIS 500 5%
The income qualifying for tax benefits under the alternative track is
the taxable income of a company that has met certain conditions as
determined by the Law ("a beneficiary enterprise"), and which is
derived from an industrial enterprise or a hotel. The Law specifies
the types of qualifying income that is entitled to tax benefits under
the alternative track both in respect of an industrial enterprise and
of a hotel, whereby income from an industrial enterprise includes,
among others, revenues from the production and development of software
products and revenues from industrial research and development
activities performed for a foreign resident (and approved by the Head
of the Administration of Industrial Research and Development).
The Hi-Tex enterprise has elected 2007 as its elective year.
Furthermore, on June 30, 2008 an application for a pre-ruling was
filed with the Income Tax Professional Department, requesting
beneficiary enterprise status and determination of 2007 as the
elective year ("the application for a pre-ruling"). To date, response
from the Tax Authorities has yet to be received.
F - 47
Tefron Ltd.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Note 16: INCOME TAXES (CONT.)
a. TAX LAWS APPLICABLE TO GROUP COMPANIES (CONT.)
TAX BENEFITS UNDER THE LAW FOR THE ENCOURAGEMENT OF CAPITAL
INVESTMENT, 1959 ("THE LAW") (Cont.)
As mentioned in Note 1c above, in January 2009 the Group placed all of
the active wear and intimate apparel operations under Hi-Tex founded
by Tefron Ltd. To this end, Tefron transferred most of its assets to
Hi-Tex against allotment of additional Hi-Tex shares, pursuant to
Section 104 of the Israeli Income Tax Ordinance. Therefore, Tefron
applied to the Investment Center to indorse its approval to Hi-Tex. To
date, response has yet to be received. In addition, Hi-Tex updated the
application for a pre-ruling accordingly.
MACRO - Macro has elected 2005 as the elective year under the
alternative track, pursuant to the amendment to the Law. The Company
informed the income tax assessor on its election in its letter from
December 27, 2006.
THE LAW FOR ENCOURAGEMENT OF INDUSTRY (TAXES), 1969
The Company and its subsidiaries in Israel are "industrial companies"
in conformity with the Industry Promotion Act (Taxes), 1969. The
principal benefits to which the companies are entitled under this Act
are accelerated depreciation on property, plant and equipment, a
consolidated tax return and allowed deduction for tax purposes, over a
three year period, of costs incurred in listing shares for trading.
CAPITAL GAINS/LOSSES
Under provisions of the Israeli Income Tax Ordinance (Amendment 132),
2003 (the "Reform Act"), a reduced tax rate of 25% applies to capital
gains realized after January 1, 2003 instead of the normal tax rate.
When selling assets acquired prior to the effective date of the
"Reform Act", the reduced tax rate shall apply only to the part of the
gain made after the "Reform Act" came into effect, to be calculated as
set forth in the act. Furthermore, the "Reform Act" stipulates that
carry-forward capital losses for tax purposes may be offset against
capital gains with no time limits. The Reform Act also sets forth the
option to offset capital losses from sale of assets outside Israel
against capital gains in Israel.
b. TAX RATES APPLICABLE TO THE INCOME OF THE GROUP:
In June 2004, an amendment to the Income Tax Ordinance (No. 140 and
Temporary Provision), 2004 was passed by the "Knesset" (Israeli
parliament) and on July 25, 2005, another law was passed, the
amendment to the Income Tax Ordinance (No. 147) 2005, according to
which, among others, the corporate tax rate is to be progressively
reduced to the following tax rates: 2004 - 35%, 2005 - 34%, 2006 -
31%, 2007 - 29%, 2008 - 27%, 2009 - 26%, 2010 and thereafter - 25%.
In July 2009, the "Knesset" (Israeli Parliament) passed the Law for
Economic Efficiency (Amended Legislation for Implementing the Economic
Plan for 2009 and 2010), 2009, which prescribes, among others, an
additional gradual reduction in the rates of the Israeli corporate tax
and real capital gains tax starting 2011 to the following tax rates:
2011 - 24%, 2012 - 23%, 2013 - 22%, 2014 - 21%, 2015 - 20%, 2016 and
thereafter - 18%.
The effect of the abovementioned change on the balances of deferred
taxes has been a decrease in loss of approximately $ 888 thousand
which was carried to taxes on income in 2009.
The tax rate on a subsidiary in the United States is 34%.
F - 48
Tefron Ltd.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Note 16: INCOME TAXES (CONT.)
b. TAX RATES APPLICABLE TO THE INCOME OF THE GROUP (cont.):
El Masira is incorporated in the Free Trade Zone in Jordan, and is
taxed according to tax laws applicable in Jordan. The statutory tax
rate in the Free Trade Zone in Jordan, for the industry in which the
Group is engaged, is 0%.
c. FINAL TAX ASSESSMENTS
The Company and its subsidiaries operating in Israel have final tax
assessments through 2004. Major subsidiaries operating outside Israel
have final tax assessments through 2007.
The Company is subject to provisions of Income Tax Law (Rules for
bookkeeping by foreign investment companies and certain partnerships
and determination of taxable income), 1986. In accordance with the
aforementioned provisions, the Company files for taxes on income
purposes in accordance with provisions concerning bookkeeping, in USD.
d. CARRYFORWARD LOSSES FOR TAX PURPOSES AND OTHER TEMPORARY DIFFERENCES
Tefron, Hi-Tex and Macro have carryforward losses for tax purposes as
of December 31, 2009 amounting to $ 37,881 thousand, which may be used
over an unlimited period. In respect of said balances and other
deductible temporary differences relating to employee benefits and
provision for doubtful accounts, the Company recorded in its financial
statements deferred tax assets amounting to $ 9,216 thousand (because
of their expected utilization as a result of deferred tax liabilities
in the amount of $10,887 thousand, mainly property, plant and
equipment). Furthermore, a subsidiary in the USA has carryforward
losses for tax purposes amounting to $ 13,006 thousand as of December
31, 2009. The Company estimates that these losses cannot be utilized;
hence, no deferred tax asset has been recognized.
e. DEFERRED TAXES
Composition:
BALANCE SHEETS STATEMENTS OF INCOME
-------------------------- ------------------------------------------
DECEMBER 31 FOR THE YEAR ENDED DECEMBER 31
-------------------------- ------------------------------------------
2009 2008 2009 2008 2007
---------- ---------- ---------- ---------- ----------
$ IN THOUSANDS
--------------------------------------------------------------------------
DEFERRED TAX LIABILITIES
Property, plant and equipment $ (10,649) $ (13,169) $ 2,520 $ (274) $ (96)
Cash flow hedging transactions (38) (15) - - -
Actuarial profit in respect of
defined benefit plan (42) - - -
Acquisition of Excelsior (158) (277) 119 48 -
---------- ----------
(10,887) (13,461)
---------- ----------
DEFERRED TAX ASSETS
Carryforward tax losses for tax
purposes 8,528 5,390 3,138 5,021 161
Allowance for doubtful accounts 230 241 (11) 216 (11)
Employee benefits 431 867 (436) 242 (85)
Available for sale financial assets 27 - - - -
Actuarial loss in respect of a
defined benefit plan - 66 - - -
---------- ----------
9,216 6,564
---------- ---------- ---------- ---------- ----------
Deferred tax income (expenses) $ 5,330 $ 5,253 $ (31)
========== ========== ==========
Deferred tax liabilities, net $ (1,671) $ (6,897)
========== ==========
F - 49
Tefron Ltd.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Note 16: INCOME TAXES (CONT.)
e. DEFERRED TAXES (cont.)
Deferred taxes are presented in the balance sheet as follows:
DECEMBER 31
------------------------------
2009 2008
------------ ------------
$ IN THOUSANDS
------------------------------
Non-current assets $ 1,409 $ -
Non-current liabilities (3,080) (6,897)
------------ ------------
$ (1,671) $ (6,897)
============ ============
The deferred taxes are computed at the average tax rate of 23.5%
(2008-21.0%) based on the tax rates that are expected to apply upon
realization.
TAXES ON INCOME RELATED TO ITEMS CARRIED TO EQUITY:
DECEMBER 31
------------------------------------------------
2009 2008 2007
------------ ------------ ------------
$ IN THOUSANDS
------------------------------------------------
Loss in respect of investments available-for-sale securities $ (27) $ - $ -
Actuarial gain (loss) in respect of defined benefit plan 108 (66) -
Gain in respect of cash flow hedging transactions 38 8 165
------------ ------------ ------------
$ 119 $ (58) $ 165
============ ============ ============
f. TAX INCOME (EXPENSE) INCLUDED IN STATEMENTS OF INCOME
DECEMBER 31
------------------------------------------------
2009 2008 2007
------------ ------------ ------------
$ IN THOUSANDS
------------------------------------------------
Deferred taxes, see also (e) above $ 5,330 $ 5,253 $ (31)
Taxes in respect of previous years - (576) 66
------------ ------------ ------------
$ 5,330 $ 4,677 $ 35
============ ============ ============
The Company does not intend to distribute dividends which would create
a tax liability for its revenues from an "approved enterprise".
F - 50
Tefron Ltd.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Note 16: INCOME TAXES (CONT.)
g. A RECONCILIATION between the tax expense, assuming that all the income
and expenses, gains and losses in the statement of income were taxed
at the statutory tax rate and the taxes on income recorded in the
statement of income is as follows:
YEAR ENDED DECEMBER 31
------------------------------------------
2009 2008 2007
-------- -------- --------
$ IN THOUSANDS
------------------------------------------
(Loss) income before taxes $(22,723) $(22,256) $ 547
======== ======== ========
Statutory tax rate 26% 27% 29%
======== ======== ========
Tax (tax saving) computed at the statutory tax rate (5,908) (6,009) 159
Increase (decrease) in taxes on income resulting from
the following factors:
Non-deductible expenses for tax purposes 155 379 105
Increase in unrecognized tax losses in the year 192 146 -
Update of deferred tax balances due to changes in tax
rates 500 - -
Taxes in respect of previous years - 576 (66)
Others (269) 231 (233)
-------- -------- --------
Taxes (benefit) expense $ (5,330) $ (4,677) $ (35)
======== ======== ========
Effective tax rate 23.5% 21.0% (6.4)%
======== ======== ========
Note 17: CONTINGENT LIABILITIES, CONTRACTS AND LIENS
a. CONTINGENCIES
1. According to the law for the Encouragement of Capital Investment,
1959, the Company and its subsidiaries received grants according
to their investments in enterprises. The receiving of the grants
is conditioned in applying all of the conditions in the
application for a pre-ruling and also that at least 30% of the
investments will be financed by the outstanding share capital.
Lack of applying the conditions in the application for a
pre-ruling will oblige the return of the grants with an addition
of interest and linkage differences from the grant date.
In order to fulfill the conditions related to receiving the
investment grants, the Company and its subsidiaries recorded
floating liens on their entire assets, in favor of the state of
Israel.
F - 51
Tefron Ltd.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Note 17: CONTINGENT LIABILITIES, CONTRACTS AND LIENS (cont.)
a. CONTINGENCIES (cont.)
2. LEGAL PROCEEDINGS
a. On November 15, 2006, a former employee of the Company filed
claims with the District Court and with the Labor Court
against the Company, a serving Board member of the Company
and two former Board members of the Company. The plaintiff
was convicted and jailed in Egypt in November 1996 on
charges of spying, while in Egypt on Company business. The
plaintiff claims a direct link exists between his arrest in
Egypt and his employment by the Company in Egypt. The claim
filed with the District Court and with the Labor Court
amounts to $2,000 thousand.
Group management estimates, based on the opinion of legal
counsel, that the claim is without merit, hence no provision
was made for this claim. As of the report date, the claim is
in the evidence stage and the next court session was set for
July 2010.
b. Two legal claims were filed against the Company by two
former employees. The total amount of the claims amounted to
$600 thousand. The claims were lodged due to claims
regarding the termination of the working relations. At this
stage, the claims are in preliminary stages.
Group management estimates, based on the opinion of legal
counsel, that the provisions included in its financial
statements are sufficient to cover potential damage caused
to it, if any, from those claims. These provisions were
presented in the statements of income under "general and
administrative expenses".
b. CONTRACTS
COMMITMENT TO MAKE RENT PAYMENTS
The facilities of the Company and most of its subsidiaries are located
in buildings leased for various terms ending between 2012 and 2019.
The aggregate minimum rent commitments under non-cancelable leases as
of December 31 are as follows:
2009 (*) 2008
------- -------
$ IN THOUSANDS
---------------------
Year 1 $ 2,172 $ 3,231
Years 2 1,970 3,034
Years 3 1,875 2,939
Years 4 and thereafter 11,633 1,309
------- -------
$17,650 $10,513
======= =======
(*) Minimum lease payments for 2009 are presented in accordance with
the agreement signed with "Reit 1" in March 21, 2010, specified
in Note 24 d below.
F - 52
Tefron Ltd.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Note 17: CONTINGENT LIABILITIES, CONTRACTS AND LIENS (Cont.)
c. LIENS
1. All liabilities to banks are secured by a floating lien on the
Company's and the subsidiaries' existing and future assets, which
permits the Company to dispose of assets in the normal course of
business,.
2. To secure compliance with conditions of the "approved enterprise"
status granted to the Company and its subsidiaries pursuant to
the Capital Investment Promotion Act, 1959, the Company and its
subsidiaries have pledged floating liens up to an unlimited
amount on all their assets in favor of the State of Israel.
Note 18: SHAREHOLDERS' EQUITY
a. REVERSE SPLIT OF COMPANY SHARES
On January 20, 2009, a special General Meeting approved a reverse
split of Company share capital, such that 10 ordinary shares of NIS 1
par value each would be converted into one ordinary share of NIS 10
par value. The effective date for this reverse split was January 22,
2009 at trading start on the Tel Aviv Stock Exchange. Earnings (loss)
per share have been retrospectively adjusted in the Company's
financial statements.
Furthermore, the General Meeting of shareholders approved an increase
in the Company's authorized share capital, from 49,995,500 shares of
NIS 1 par value each to 69,995,500 shares of NIS 1 par value each, at
values prior to the reverse split of share capital, or from 4,999,550
shares of NIS 10 par value each to 6,999,550 shares of NIS 10 par
value each in values subsequent to the reverse-split of share capital.
The Company's Articles of Incorporation and Bylaws were amended
accordingly.
b. SHARE CAPITAL COMPOSITION
DECEMBER 31, 2009
-----------------------------------------
AUTHORIZED ISSUED OUTSTANDING
--------- --------- ---------
NUMBER OF SHARES
-----------------------------------------
Ordinary shares, NIS 10 par value each 6,999,550 2,220,039 2,120,299
========= ========= =========
DECEMBER 31, 2008
-----------------------------------------
AUTHORIZED ISSUED OUTSTANDING
--------- --------- ---------
NUMBER OF SHARES
-----------------------------------------
Ordinary shares, NIS 10 par value each 4,999,550 2,220,039 2,120,299
========= ========= =========
F - 53
Tefron Ltd.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Note 18: SHAREHOLDERS' EQUITY (Cont.)
c. RIGHTS CONFERRED BY SHARES
ORDINARY SHARES
1. Voting rights at the General Meeting, right to dividends, rights
upon liquidation of the Company and right to appoint Company
Board members.
2. Traded on the Tel Aviv Stock Exchange.
On December 22, 2008, Company shares were suspended from trading on
the New York Stock Exchange (NYSE) for failure to meet quantitative
listing conditions, which include a requirement of average market
capitalization of no less than $25 million over a period of 30 trading
days. Shortly afterwards, Company shares started being traded on the
OTC.
d. TREASURY SHARES
As of the balance sheet date, Tefron Holdings (98) Ltd., a
wholly-owned subsidiary of the Company, holds 99,740 Company shares,
which constitute 4.49% of Company shares and whose cost is $7,408
thousand. The investment in these shares is recorded according to the
"treasury shares" method in the equity.
To secure a received loan, those shares are pledged to a bank.
e. OTHER CAPITAL RESERVES
CAPITAL RESERVE FOR HEDGES
The effective portion of the gain or loss (net of tax) on cash flow
hedges is recognized directly in capital reserve for hedges.
Net gain for cash flow hedges recognized in 2009 is $115 thousand
(2008 - $23 thousand gain).
f. RIGHTS OFFERING, SHELF PROSPECTUS AND A PRIVATE PLACEMENT
Regarding the rights offering, shelf prospectus and private placement
occurred subsequent to the balance sheet date, see Note 24 c below.
g. DIVIDEND PAID
On April 2, 2008, the Company declared a cash dividend to Company's
shareholders as of April 14, 2008 ("the effective date"). The amount
included in the statement of changes in shareholders' equity,
amounting to $ 8,000 thousand, reflects a dividend of $ 0.377 per
share outstanding on the dividend declaration date. The dividend was
distributed on May 1, 2008.
h. CAPITAL MANAGEMENT IN THE COMPANY:
The Company's capital management objectives are:
1. To preserve the Group's ability to ensure business continuity
thereby creating a return for the shareholders, investors and
other interested parties.
2. To ensure adequate return for the shareholders by pricing of
products and services adjusted to the level of risk in the
Group's business activity.
F - 54
Tefron Ltd.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Note 18: SHAREHOLDERS' EQUITY (Cont.)
h. CAPITAL MANAGEMENT IN THE COMPANY (CONT.)
The Company acts to achieve a capital return at a level that is
customary in the industry and markets in which the Company operates.
This return is subject to changes depending on market factors in the
Company's industry and business environment. The Company is under
minimal equity requirements of $35 million according to the financial
covenants included in the agreements with the lending banks and is not
required to attain a certain level of capital return. In 2009 and
2008, the Company achieved a negative capital return.
As for loans from the banks (see also Note 13), the Company was
required to meet financial covenants, including the ratio of equity to
total balance of 1:5. As of December 31, 2009, the Company meets the
condition required.
In accordance to the financing reorganization agreement with the
banks, as detailed in Note 13b, the Company's equity, shall be no less
than $35 million during 2010.
Note 19: SHARE-BASED PAYMENT
a. EXPENSE RECOGNIZED IN FINANCIAL STATEMENTS
The total share based compensation expense related to all of the
Company's share based compensation, recognized for years ended
December 31, 2009, 2008 and 2007, was comprised as follows:
FOR THE YEAR ENDED DECEMBER 31
--------------------------
2009 2008 2007
---- ---- ----
$ IN THOUSANDS
--------------------------
Compensation related to options granted $171 $240 $489
to employees and directors
Compensation related to options granted
to an employee in a subsidiary - 247 -
---- ---- ----
Total expense arising from share-based payment
transactions $171 $487 $489
==== ==== ====
Share-based payment transactions granted by the Company to its
employees are described below. In 2007 a change was made in the
benefit plan for the Company's former CEO - see section b2a below.
During 2009 and 2008, there were no modifications or cancellations in
the said benefit plans to employees.
b. SHARE-BASED PAYMENT PLAN TO COMPANY'S EMPLOYEES AND EXECUTIVES
1. STOCK OPTION PLAN FOR COMPANY EMPLOYEES AND EXECUTIVES
a. In September 1997, the Company's Board of Directors adopted
a stock option plan in which options to acquire 116,605
ordinary shares would be granted to Board members,
executives, employees and consultants of the Company. At
shareholders meetings in August 1999, July 2001 and March
2004, it was resolved to increase the number of shares
issued under the stock option plan by 60,000, 50,000 and
44,627 ordinary shares, respectively. The exercise price for
options yet to be granted would be determined by the
Company's Board of Directors. Most of the options vest after
3 to 4 years, and are due to expire 10 years after their
grant date, or upon termination of employment. The term of
the option plan was originally 10 years, and was extended on
March 2008 for an additional 10 years, through March 1,
2018.
F - 55
Tefron Ltd.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Note 19: SHARE-BASED PAYMENT (Cont.)
b. SHARE-BASED PAYMENT PLAN TO COMPANY EMPLOYEES AND EXECUTIVES (Cont.)
1. STOCK OPTION PLAN FOR COMPANY EMPLOYEES AND EXECUTIVES (cont.)
b. On November 15, 2009, the Company's Board of Directors
approved a grant of 54,000 options (not listed for trading),
to purchase 54,000 ordinary shares having a nominal value of
NIS 10 each to five senior officeholders in the Company, who
are not interested parties in theCompany and who shall not
become interested parties in the Company following the
grant. The allocation of the Options to the Offerees was
effected in accordance with the option plan for employees,
officeholders and advisers of the Company, which was adopted
by the Company's Board in September 1997, and amended in
January 2003.
Each Offeree's Options will vest over a three-year period.
The vesting period shall begin on the date on which the
Offeree's employment at the Company commenced (except with
regard to one Offeree in respect of whom the vesting period
shall begin on the date on which the Options were granted).
The exercise price for each option shall be the higher of:
(a) $5.06, which is the closing price of the Company's share
on the Stock Exchange trading day on which the Company's
Board's resolution concerning the grant was adopted; (b) the
average closing price of the Company's shares on the Stock
Exchange on ten trading days concluding on the day of the
Board's resolution concerning the grant.
The market price of the Company's shares on the grant date
was $5.06. The fair value of the aforementioned stock option
grant amounts to $73 thousand. Therefore, the Company
recorded expenses amounting to $6 thousand in 2009. This
expense was presented in the statements of income under
"selling and marketing expenses" and "general and
administrative expenses".
2. STOCK OPTIONS FOR COMPANY'S FORMER CEO'S
a. In April 2004, the Company granted its former CEO 65,000
options which may be exercised at an exercise price of $42.5
per share. The options vest in equal installments over a
four-year period starting in January 2004 and expire 10
years from the grant date. The market price of the Company's
shares on the grant date was $58.5. The Company recorded
compensation expense of $303 thousand and $142 thousand in
2005 and 2006, respectively. This expense was presented in
the statements of income under "general and administrative
expenses". The agreement includes adjustment of the option
exercise price in case of dividend distribution, by an
amount equal to the dividend per share. This adjustment
would apply to options which could not be exercised upon the
dividend distribution date, whether because of non-vesting
of the options or in case of compliance with Section 102 of
the Israeli Income Tax Ordinance. In the third quarter of
2007, the Company's Board of Directors approved an amendment
to the agreement, whereby the exercise price adjustment upon
dividend distribution would apply in all cases to all 65,000
options, through October 22, 2008, whether or not the
options have vested by that date for dividends distributed
through October 22, 2008. This approval is effective
retrospectively since October 2006. Consequent to the
amendment to the agreement, the Company recorded an
additional expense in its 2007 financial statements,
amounting to $262 thousand.
b. On December 18, 2008, the Company granted its former CEO
30,000 options which may be exercised at an exercise price
of $40.0 per share. The options vest in installments over
three years starting on September 1, 2009 and expire 10
years from the grant date or 24 months from termination of
employment, whichever is sooner. The market price of the
Company's shares on the grant date was $0.33. The fair value
of the aforementioned stock option grant amounts to $4
thousand. Therefore, the Company recorded expenses amounting
to $1 thousand in 2008. This expense was presented in the
statements of income under "general and administrative
expenses".
F - 56
Tefron Ltd.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Note 19: SHARE-BASED PAYMENT (Cont.)
b. SHARE-BASED PAYMENT PLAN TO COMPANY EMPLOYEES AND EXECUTIVES (Cont.)
3. STOCK OPTIONS FOR THE CHAIRMAN OF THE BOARD OF DIRECTORS
In July 2008, the Company granted the Chairman of the Board of
Directors 30,000 options which may be exercised at an exercise
price of $2.07 per share. The options vest in installments over a
three-year period starting in July 2008 and expire 5 years from
the grant date. The market price of the Company's shares on the
grant date was $2.07. The fair value of the aforementioned stock
option grant amounts to $270 thousand. Therefore, in 2008 and
2009, the Company recorded expenses amounting to $72 thousand and
126$ thousand, in accord. This expense was presented in the
statements of income under "general and administrative expenses".
4. STOCK OPTIONS GRANTED TO AN EMPLOYEE OF A SUBSIDIARY
On June 11, 2008, the Company granted to an employee of a
subsidiary options to purchase 62,800 shares of the subsidiary at
an exercise price of $11.94 per share. All of these options
vested immediately and could be exercised as of the grant date.
The options expire four years from the grant date. The Company
recorded expense amounting to $247 thousand in the statements of
income in 2008. This expense is presented under "general and
administrative expenses. On May 28, 2009, the Company's Board of
Directors approved a change in the employment agreement with a
senior employee in a subsidiary. Pursuant to this agreement, all
of the options to purchase the shares of the subsidiary, which
were granted to the employee on December 27, 2007, were
forfeited. In addition, the employee's salary conditions were
updated. On July 7, 2009 this senior employee notified ceasing
his connection with the Company. The Company assigned a
substitute for his position since July 8, 2009.
c. MOVEMENT DURING THE YEAR
The following table lists the number of share options, the weighted
average exercise prices of share options and modification in employee
option plans during the current year:
AS OF DECEMBER 31, 2009 AS OF DECEMBER 31, 2008
------------------------ ------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
NUMBER OF STOCK NUMBER OF EXERCISE
STOCK OPTIONS OPTIONS($) EXERCISE PRICE PRICE($)
-------- -------- -------- --------
Outstanding at January 1 195,857 46.1 139,703 50.3
Granted during the year 54,000 5.3 60,000 30.4
Forfeited or expired during the year (29,628) 57.5 (3,846) 45.0
Exercised during the year - - - -
-------- -------- -------- --------
Outstanding at December 31 220,229 32.7 195,857 46.1
======== ======== ======== ========
Exercisable at December 31 131,229 44.2 113,536 49.0
======== ======== ======== ========
F - 57
Tefron Ltd.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Note 19: SHARE-BASED PAYMENT (Cont.)
d. The weighted average remaining contractual term of the stock options
as of December 31, 2009 is approximately 3.4 years (2008 - 3.5 years).
e. The range of exercise prices of the stock options as of December 31,
2009 was $ 5.3 - $15.0 (2008 -$ 2.1-$15.0).
f. MEASURING OF THE FAIR VALUE OF EQUITY-SETTLED SHARE OPTIONS
The fair value of stock options granted is estimated at the date of
grant using the Black-Scholes option pricing model taking into account
the terms and conditions upon which the options were granted. The
measurement was made at the grant date of equity-settled share options
since the options were granted to employees.
The following table lists the inputs used for the fair value
measurement of equity-settled share options, according to
Black-Scholes option pricing model, for the above plan:
2009
---------------
Dividend yield (%) 0.0
Expected volatility of the share prices (%) 53.2
Risk-free interest rate (%) 2.6
Expected life of share options (years) 6
Weighted average share price ($) 5.1
Based on the above inputs, the fair value of the options was
determined at $73 thousand at the grant date.
The expected life of the share options is based on historical data and
is not necessarily indicative of the exercise patterns of share
options that may occur in the future.
The expected volatility of the share prices reflects the assumption
that the historical volatility of the share prices is reasonably
indicative of expected future trends.
F - 58
Tefron Ltd.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
NOTE 20: SUPPLEMENTARY INFORMATION TO STATEMENTS OF INCOME ITEMS
FOR THE YEAR ENDED DECEMBER 31,
------------------------------------------
2009 2008 2007
--------- --------- ---------
$ IN THOUSANDS
------------------------------------------
a. COST OF SALES, NET (*)
Materials (**) $ 64,649 $ 93,705 $ 75,694
Payroll and benefits 17,615 26,193 24,776
Sub-contracted work 10,733 18,432 16,254
Depreciation 8,260 8,284 7,944
Other production expenses 13,681 20,256 18,866
--------- --------- ---------
114,938 166,870 143,534
Decrease (increase) in work-in-progress and finished goods
inventories 4,401 687 (4,389)
--------- --------- ---------
119,339 167,557 139,145
========= ========= =========
(*) Including development cost, net (less a governmental
grant of $167 thousand in 2009) 8,242 8,058 7,053
========= ========= =========
(**) Including provision for inventories write off 2,808 4,523 1,260
========= ========= =========
b. SELLING AND MARKETING EXPENSES
Payroll and benefits 5,854 5,831 5,025
Shipping, export and distribution 3,114 6,336 3,921
Overseas office maintenance 1,911 1,095 880
Others 2,963 3,697 2,617
--------- --------- ---------
13,842 16,959 12,443
========= ========= =========
Payroll and benefits 2,021 3,264 2,450
Office maintenance 384 535 508
Consulting 1,054 1,109 1,528
Allowance for doubtful accounts 4 814 (11)
Others 316 684 715
--------- --------- ---------
3,779 6,406 5,190
========= ========= =========
d. OTHER EXPENSES (INCOME) - LOSS (LOSS REVERSAL) DUE TO AN
IMPAIRMENT OF PROPERTY, PLANT AND EQUIPMENT (496) 2,135 -
========= ========= =========
e. FINANCIAL INCOME (EXPENSES)
FINANCIAL INCOME
Interest income from bank deposits 249 102 1,213
Net change in fair value of financial assets
available-for-sale - 200 31
Net foreign exchange gain 1,388 17 -
Realized gain from cash flow hedges transferred from
shareholders equity 110 - 157
--------- --------- ---------
1,747 319 1,401
========= ========= =========
FINANCIAL EXPENSES
Financial expenses in respect of short-term credit 62 402 183
Interest expense on financial liabilities measured at
amortized cost 816 1,126 1,574
Net loss from change in foreign exchange rates - - 593
Net change in fair value of financial assets available for
sale - 553 -
Bank expenses, hedging-related expenses and other expenses 1,381 1,266 340
--------- --------- ---------
$ 2,259 $ 3,347 $ 2,690
========= ========= =========
F - 59
Tefron Ltd.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Note 21: EARNINGS (LOSS) PER SHARE
a. DETAILS OF NUMBER OF SHARES AND EARNINGS (LOSS) USED TO CALCULATE
EARNINGS (LOSS) PER SHARE:
FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------------------------
2009 2008 2007
--------------------- -------------------------- -------------------------
LOSS LOSS NET
WEIGHTED ATTRIBUTED WEIGHTED ATTRIBUTED TO WEIGHTED INCOME
AVERAGE TO EQUITY AVERAGE EQUITY AVERAGE ATTRIBUTED TO
NUMBER OF HOLDERS OF NUMBER OF HOLDERS OF NUMBER OF EQUITY HOLDERS
SHARES THE PARENT SHARES THE PARENT SHARES OF THE PARENT
--------- --------- --------- --------- --------- ---------
$ IN $ IN $ IN
THOUSANDS THOUSANDS THOUSANDS THOUSANDS THOUSANDS THOUSANDS
--------- --------- --------- --------- --------- ---------
Amounts used in calculation
of basic earnings (loss) per
share 2,120 $ (17,393) 2,120 $ (17,579) 2,119 $ 582
========= ========= ========= ========= ========= =========
Impact of potentially
dilutive ordinary shares
Amounts used in calculation
of diluted earnings (loss)
per share - - - - 44 -
--------- --------- --------- --------- --------- ---------
2,120 $(17,393) 2,120 $ (17,579) 2,163 $ 582
========= ========= ========= ========= ========= =========
b. The calculation of basic and diluted earnings (loss) per share
reflects the affect of the reverse-split, see Note 18a.
Note 22: OPERATING SEGMENTS
a. GENERAL
Group companies are engaged in two business segments:
Seamless apparel ("Seamless") - Design, development, manufacturing and
sale of intimate apparel, swimwear and
active wear using the "seamless"
method.
Knitted apparel ("Cut & Sew") - Design, development, manufacturing and
sale of intimate apparel and active
wear using the "cut & sew" method.
Design and manufacturing are mostly
carried out in Israel, in Jordan and
in the far east, and finished goods
are mostly sold in the USA and Europe.
The Company's two business segments are carried out in a number of
principle geographic areas in the world. In Israel, where the Company
and its subsidiaries Hi-Tex and Macro are located, the design,
development, manufacturing and sale activities of intimate apparel,
active wear and swimwear are carried out. In the subsidiaries Tefron
USA and Teforn UK marketing and selling activities are carried out.
The Company reports the information by IFRS 8 based on information
that is reviewed by the Chief operating decision maker ("CODM") to
make decisions about resources to be allocated and assess its
performance. The Chief operating decision maker is the Company's CEO.
Accordingly, based on criteria set in IFRS 8, and the available
financial information reviewed by the CEO, the Company determined that
it operates in two sectors of activity reported.
Group financing (including financial costs and incomes) and taxes on
income are managed on a group basis and are not allocated to segments.
F - 60
Tefron Ltd.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Note 22: OPERATING SEGMENTS (Cont.):
b. REPORTING ON OPERATING SEGMENTS:
FOR THE YEAR ENDED DECEMBER 31, 2009
--------------------------------------
SEAMLESS CUT & SEW TOTAL
--------- --------- ---------
$ IN THOUSANDS
--------------------------------------
External revenues $ 62,306 $ 53,232 $ 115,538
========= ========= =========
Segment results $ (13,197) $ (7,729) $ (20,926)
========= ========= =========
Loss from early repayment of subordinated
note receivable $ (1,285)
Financial expenses, net $ (512)
Tax benefit $ 5,330
Total $ (17,393)
=========
Segment assets $ 74,431 $ 24,766 $ 99,197
========= ========= =========
Segment liabilities $ 35,169 $ 17,033 $ 52,202
========= ========= =========
Capital expenditure $ 457 $ 229 $ 686
========= ========= =========
Depreciation and amortization $ 6,419 $ 2,837 $ 9,256
========= ========= =========
FOR THE YEAR ENDED DECEMBER 31, 2008
----------------------------------------
SEAMLESS CUT & SEW TOTAL
--------- --------- ---------
$ IN THOUSANDS
----------------------------------------
External revenues $ 86,265 $ 87,564 $ 173,829
========= ========= =========
Segment results $ (15,804) $ (3,424) $ (19,228)
========= ========= =========
Financial expenses, net $ (3,028)
Tax benefit 4,677
Total $ (17,579)
=========
Segment assets $ 99,012 $ 32,720 $ 131,732
========= ========= =========
Segment liabilities $ 40,721 $ 27,266 $ 67,987
========= ========= =========
Capital expenditure $ 2,497 $ 877 $ 3,374
========= ========= =========
Depreciation and amortization $ 6,833 $ 2,092 $ 8,925
========= ========= =========
F - 61
Tefron Ltd.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Note 22: OPERATING SEGMENTS (Cont.):
b. REPORTING ON OPERATING SEGMENTS (Cont.):
FOR THE YEAR ENDED DECEMBER 31, 2007
---------------------------------------
SEAMLESS CUT & SEW TOTAL
--------- --------- ---------
$ IN THOUSANDS
---------------------------------------
External revenues $ 81,594 $ 77,020 $ 158,614
========= ========= =========
Segment results $ (433) $ 2,269 $ 1,836
========= ========= =========
Financial expenses, net $ (1,289)
Tax benefit $ 35
Net income $ 582
Segment assets $ 109,557 $ 51,183 $ 160,740
========= ========= =========
Segment liabilities $ 44,856 $ 26,504 $ 71,360
========= ========= =========
Capital expenditure $ 4,561 $ 1,816 $ 6,377
========= ========= =========
Depreciation and amortization $ 6,720 $ 1,848 $ 8,568
========= ========= =========
c. GEOGRAPHIC INFORMATION:
1. Sales by geography (based on customer location):
FOR THE YEAR ENDED DECEMBER 31
--------------------------------------
2009 2008 2007
-------- -------- --------
$ IN THOUSANDS
--------------------------------------
North America $ 97,975 $137,992 $132,521
Europe 11,259 28,038 18,314
Israel 5,335 3,851 4,374
Others 969 3,948 3,405
-------- -------- --------
$115,538 $173,829 $158,614
======== ======== ========
2. Carrying amount of assets and capital expenditures by geography
(based on asset location):
BALANCE OF
NON-CURRENT ASSETS (*) CAPITAL EXPENDITURES
-------------- ------------------------------------------
AS OF DECEMBER 31, FOR THE YEAR ENDED DECEMBER 31
-------------- ------------------------------------------
2009 2008 2009 2008 2007
------- ------- ------- ------- -------
$ IN THOUSANDS
---------------------------------------------------------------
Israel $52,159 $60,521 $ 640 $ 2,665 $ 4,730
North America 3,126 3,583 43 17 167
Others 2,595 2,386 3 692 1,480
------- ------- ------- ------- -------
$57,880 $66,490 $ 686 $ 3,374 $ 6,377
======= ======= ======= ======= =======
(*) Excluding deferred taxes, net and subordinated note
receivable.
F - 62
Tefron Ltd.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Note 22: OPERATING SEGMENTS (Cont.):
d. MAJOR CUSTOMERS
FOR THE YEAR ENDED DECEMBER 31
--------------------------------------
2009 2008 2007
-------- -------- --------
$ IN THOUSANDS
--------------------------------------
Revenues from major customers $ 56,664 $111,711 $120,069
-------- -------- --------
% FROM TOTAL REVENUES
-------------------------------
Customer A 32.7 32.7 39.1
Customer B 6.2 2.3 1.5
Customer C 5.8 23.2 23.6
Customer D 4.3 9.5 11.5
------- ------- -------
49.0% 67.7% 75.7%
======= ======= =======
Note 23: BALANCES AND TRANSACTIONS WITH INTERESTED PARTIES AND RELATED PARTIES
a. BALANCES WITH INTERESTED PARTIES AND RELATED PARTIES
Composition:
AS OF DECEMBER 31, 2009
LINKAGE TERMS RELATED PARTIES KEY EXECUTIVES
---------- --------------- ---------
$ IN THOUSANDS
-------------------------------------------
Trade payables - $ 1,612 $ -
Other current liabilities Unlinked $ - $ 28
AS OF DECEMBER 31, 2008
LINKAGE TERMS RELATED PARTIES KEY EXECUTIVES
---------- --------------- ---------
$ IN THOUSANDS
-------------------------------------------
Trade payables Unlinked $ 1,239 $ 8
Other current liabilities Unlinked $ - $ 8
b. BENEFITS TO INTERESTED PARTIES AND RELATED PARTIES
FOR THE YEAR ENDED DECEMBER 31
--------------------------
2009 2008 2007
---- ---- ----
$ IN THOUSANDS
--------------------------
Payroll and benefits for employees by or on behalf of the Company $491 $678 $348
==== ==== ====
Fees for Board members not employed by or on behalf of the Company $120 $129 $ 91
==== ==== ====
Management fees for those not employed by or on behalf of the
Company $102 $119 $190
==== ==== ====
NUMBER OF BENEFICIARIES OF PAYROLL AND BENEFITS
Related parties employed by or on behalf of the Company 1 2 1
Board members not employed by the Company 10 10 10
---- ---- ----
11 12 11
==== ==== ====
F - 63
Tefron Ltd.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Note 23: BALANCES AND TRANSACTIONS WITH RELATED PARTIES (Cont.)
c. TRANSACTIONS WITH RELATED PARTIES
FOR THE YEAR ENDED DECEMBER 31, 2009
RELATED PARTY OF EXECUTIVE
PARTIES INTEREST OFFICERS
------ ------- ------
$ IN THOUSANDS
---------------------------------
Cost of sales, net $ 1,429 $ - $ -
General and administrative expenses $ - $ 102 $ 611
FOR THE YEAR ENDED DECEMBER 31, 2008
RELATED PARTY OF EXECUTIVE
PARTIES INTEREST OFFICERS
------ ------- ------
$ IN THOUSANDS
---------------------------------
Cost of sales, net $ 2,999 $ - $ -
General and administrative expenses $ - $ 119 $ 807
FOR THE YEAR ENDED DECEMBER 31, 2007
PARTY OF EXECUTIVE
INTEREST OFFICERS
------- ------
$ IN THOUSANDS
--------------------
General and administrative expenses $ 190 $ 439
======= ======
d. CONTRACTS
In April 2005, the Company entered into an agreement with another
company, a related party, whereby the Company pays an annual
management fee amounting to $120 thousand.
Note 24: EVENTS SUBSEQUENT TO THE BALANCE SHEET DATE
a. EMPLOYMENT OF A NEW CEO
On January 17, 2010, the Company's Board of Directors authorized the
Company's engagement in an Employment Agreement with the entering
Company's CEO, Mr. Amit Meridor, commencing from January 21, 2010. The
CEO's (gross) monthly salary shall be NIS 80,000 and shall be linked
to the increase in the consumer price index rate, benefits, car and
other expenses refund.
In addition, the CEO will be entitles to six monthly salaries,
pursuant to the extent to which the CEO has complied with the targets
determined for him by the Board based on the Company's achievements
and the CEO's contribution to the Company's said achievements.
F - 64
Tefron Ltd.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Note 24: EVENTS SUBSEQUENT TO THE BALANCE SHEET DATE (Cont.)
a. EMPLOYMENT TERMS OF COMPANY'S CEO (Cont.)
In addition, on January 17, 2010, the Company's Board of Directors
authorized, pursuant to the authorization of the Company's audit
committee, an allocation of 100,000 options (not traded), exercisable
into 100,000 ordinary Company shares par value 10 NIS each. The share
allocation shall be effected pursuant to the Company's 1997 Share
Option Plan, as amended in January 2003.
The vesting period shall be 3 years beginning in the CEO's employment
date.
b. FINAL AGREEMENT WITH THE LENDING BANKS REGARDING THE COMPANY'S CREDIT
LINES
On March 2, 2010 the Company signed a definitive agreement
(hereinafter: "the definitive agreement") with the banks.
The definitive agreement included a re-organization of the current
credit lines of the Company. The following is a summary of the main
points in the agreement:
The loans and credit lines extended to the Company shall be re-divided
as follows:
1. LOAN A
The Banks shall loan the Company, an amount of to $ 15 million
("Loan A"), payable in three equal payments of $ 1.25 million,
each at the end of the seventh, eighth and ninth years from the
date on which Loan A was provided. The Loan A balance of $ 11.25
million shall be payable at the end of the tenth year (the "Last
Capital Payment").
LOAN A SHALL BE PAYABLE, IN WHOLE OR IN PART, UNDER THE FOLLOWING
CIRCUMSTANCES:
a. Future capital raising - In the case of future capital
raising - 50% of the net value obtained as a result of
capital raising, shall be used as Loan pre-payment, on
account of the last principal payment.
b. Sale of assets - In the case of sale of assets, not in the
ordinary course of business, the net consideration for a
sale of assets shall be used for Loan A pre-payment, on
account of the last principal payment.
c. Positive cash flow - In the case of positive cash flow,
according to its consolidated annual financial statements,
in a given calendar year, exceeds the amount of $ 8 million
(the " Surplus Cash Flow") - 50% of the Surplus Cash Flow
amount shall be used for the Loan A pre-payment, on account
of the last principal payment.
d. Positive cash flow" - The EBITDA of the Company, according
to its consolidated annual financial statements, in a given
calendar year, after deduction of interest costs,
investments and maintenance costs.
The Company would not take ongoing investments, including regular
business investments in a cumulative annual amount for all group
companies, greater than $2,000 thousands.
2. LOAN B
The Banks shall loan an amount of $ 5 million to the Company
("Loan B"), which would be payable in four equal capital payments
of $ 1.25 million, each at the end of the third until the sixth
years from the date on which Loan B was provided.
F - 65
Tefron Ltd.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Note 24: EVENTS SUBSEQUENT TO THE BALANCE SHEET DATE (Cont.)
c. FINAL AGREEMENT WITH THE LENDING BANKS REGARDING THE COMPANY'S CREDIT
LINES (Cont.)
3. SHORT-TERM CREDIT LINES (IN ADDITION TO THE LOANS)
The Banks shall provide short-term credit lines, up to one year,
in a total amount of $ 8.95 million (the "Credit Lines"), in the
following conditions:
4. INJECTION OF CAPITAL
The Company has undertaken to perform a rights offering and/or
private placement of shares, within the framework of which the
sum of no less than $3,400 thousand shall be invested in the
Company's equity (after deduction of the issuance expenses) until
March 31, 2010 (hereinafter: "the first capital injection").
In March 28, 2010, the Company had raised through the rights
offering to shareholders and private placement to Norfet, or
anyone on its behalf, a total of $4 million.
5. OTHER CREDIT LINES
Subject to the performance of the Capital Injections, in full and
on the due date, the Banks shall make available to the Companies
additional short-term credit frameworks in total amount of $1,800
thousand (hereinafter: "the additional credit frameworks").
In addition, without derogating from the above, it is agreed
that, at the Company's request, the banks shall provide a part of
the Additional Credit Lines in an amount of up to $1,200 thousand
(hereinafter: the "partial new credit lines") even prior to the
making of the First Capital Injection, subject to the signing by
FIMI 2001 Ltd. and Mivtach Shamir Holdings Ltd.on (hereinafter,
collectively: "the guarantors"), the indirect interested parties
in Norfet letters of continuing guarantee in favor of the Banks
in a total amount of up to $1,200 thousand to guarantee all of
the debts and liabilities of the Company to the Banks. Those
guarantees were provided to banks during March, 2010, and the new
additional short term credit frameworks provided to the Company.
These guarantees expired on March 28, 2010, following the
completion of the rights offering and private placement.
6. OTHER LIABILITIES
The Company has undertaken not to distribute dividends and not to
pay management fees and/ or any other payment of any type
whatsoever, to the shareholders, as long as Loan A and Loan B
have not been repaid in full.
CAPITAL BENEFIT
The Company has undertaken to issue to the Banks, without a
consideration, not later than at the expiration of 30 days from
the date of the signing of the agreement, a total amount of
100,000non-negotiable and non-transferable warrants, that may be
exercised into ordinary shares of NIS 10 par value of the
Company. The warrants may be exercised (in whole or in part)
during a period of 48 months from the date of the signing of the
Agreement, for an exercise price of $4.5 per share. The option
warrants can be exercised (fully or partly) for a 48-month period
from the date of signing the agreement. The Company has
undertaken to perform the allocation of the warrants, as
aforesaid, after receipt of all the approvals as required by law,
not later than April 15, 2010.
F - 66
Tefron Ltd.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Note 24: EVENTS SUBSEQUENT TO THE BALANCE SHEET DATE (Cont.)
c. FINAL AGREEMENT WITH THE LENDING BANKS REGARDING THE COMPANY'S CREDIT
LINES (Cont.)
FINANCIAL COVENANTS
The Banks have granted their consent not to exercise their rights
against the Company following its expected failure to comply with the
financial covenants with which the Company undertook to comply in
2009, pursuant to Tefron's financial statements as of December 31,
2009, only.
In addition, the Company has undertaken to comply, at all times, in
2010, with all of the financial covenants and undertakings, as set
forth below:
1. the Company's EBITDA, pursuant to the Company's consolidated
financial statements for 2010 shall be positive (this financial
covenant was amended by agreement with the bank lenders on July
11, 2010, requiring EBITDA of not more than a negative EBITDA of
$2.1 million); and also -
2. according to the quarterly and annually consolidated financial
statements the Company's shareholders' equity will not be less
than $35 million; and also -
3. The total amount of the cash balances, inventory and accounts
receivable of the Company, pursuant to its consolidated financial
statements (quarterly and annual) will not be less than $33
million; and also -
4. The Company has undertaken that the amount of receivables shall
be no less than $9 million, according to its consolidated
financial statements (quarterly and annual).
5. the salary of the CEO and Chairman of the Board of Directors of
the Company will not exceed the salaries on the date of the
Agreement plus linkage differences to the consumer price index.
By November 30, 2010, the Company and the Banks will mutually agree as
to additional financial covenants and undertakings, including
regarding restrictions on salaries of officers in the Company, which
the Company must meet beginning on January 1, 2011. Should such
agreement not be reached by November 30, 2011, the Company must meet
the financial covenants in effect prior to the date on which the
Agreement was signed.
Prior to the signing on the definitive agreement, on December 2, 2009
the Company's chairman on the Board of Directors and the CFO received
verbal announcements from the three banks with whom the Company is
related in financing agreements, according to which each of the banks
decided to terminate the utilization of the Company's credit lines.
To the best of the Company's knowledge, the banks' decision regarding
terminating utilization of the Company's credit lines is the result of
the banks' evaluation that the Company will continue to present losses
during the coming periods. The banks' decision was sudden without
prior notice, and despite the fact that for the purpose of the
Company's financial statements as of December 31, 2008, March 31, 2009
and June 30, 2009, the banks submitted to the Company a letter of
waiver of their right for immediate repayment of the credit provided
to the Company, with regards to the Company not meeting one of the
financial covenants (the EBIDTA ratio) stipulated in the financing
agreements between the Company and the banks.
F - 67
Tefron Ltd.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Note 24: EVENTS SUBSEQUENT TO THE BALANCE SHEET DATE (Cont.)
d. RIGHTS OFFERING PROSPECTUS, SHELF PROSPECTUS, AND A PRIVATE PLACEMENT
On February 26, 2010, the Company published a rights offering
prospectus with the United States Securities and Exchange Commission,
and a prospectus for a rights offering with the Israel Securities
Authority and the Tel Aviv Stock Exchange. The prospectus included a
rights issue of up to 1,578,975 ordinary shares, at a par value of NIS
10 each of the Company, at a price of $3.8 per share. The share rights
offer to shareholders of the Company was at a ratio of 1 unit for each
1.406 shares.
Since Norfet announced that it could not participate in the rights
offering because of regulatory concerns, the Company chose to raise
funds through both a rights offering and a private placement with
Norfet and/or any of its representatives ("Norfet"), under which
Norfet is committed to invest, against a private placement of shares,
an amount that will complement the overall proceeds of the Company
from the rights offering and private placement, up to $4 million.
As part of the rights offering, the Company raised $2,867 thousand
from its shareholders, against an issue of 754,384 ordinary shares of
the Company. Under the private placement, the Company raised an
additional $1,133 thousand, and in total raised $4 million (gross).
In addition, the Company published a shelf prospectus for registration
of:
(A.) up to 3 million ordinary shares, of NIS 10 par value each of the
Company.
(B.) up to 10 series of convertible bonds, with each bond series at a
par value of up to NIS 500 million available for repayment in one
payment or a number of equal payments.
(C.) up to 10 series of options, with each option series including not
more than 3 million options available for conversion in a manner
that each option will be available for conversion into 1 ordinary
share, NIS 10 par value each of the Company, against a payment in
cash of the exercise price linked to an indexation basis.
(D.) up to 10 series of options, with each option series including not
more than 200 million options available for conversion in a
manner that each option will be available for conversion into NIS
100 par value bonds of series A. through T of the Company,
against a payment in cash of the exercise price linked to an
indexation basis.
(E.) up to 10 series of commercial paper (series 1 through 10), with
each series of commercial paper at a par value of up to NIS 500
million available for repayment in one or more payments.
e. LEASE AGREEMENT WITH REIT 1
On March 21, 2010, the Company signed an agreement with Reit 1 Ltd.,
(hereinafter: "Reit 1"), which holds rights in three industrial
buildings in the Tradyon Industrial Area (hereinafter: "the
buildings"), which houses the Company's plants and headquarters.
According to the agreement, the Company will pay its entire debt to
Reit 1, will vacate its headquarters and continue to rent the Hi-Tex
Buildings 1 and 2 (hereinafter: "the agreement"). The details of the
agreement are as follows:
F - 68
Tefron Ltd.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Note 24: EVENTS SUBSEQUENT TO THE BALANCE SHEET DATE (Cont.)
1. The Company will settle its debt to Reit 1 in respect of rent for
the buildings, which as of the end of the first quarter of 2010
amounts to approximately NIS 3.4 million plus statutory Value
Added Tax ("VAT"). Payment of the rental debt shall be effected
in two equal installments, the first on the date of the signing
of the Agreement, and the second on March 28, 2010. Upon payment
of the aforementioned debt, the financial dispute between the
parties will be settled.
2. The rental period of the building housing the Company's
headquarters will terminate on March 31, 2010. The Company and
Reit 1 will sign, within 60 days of the date from the date of
signing of the Agreement, new leases with respect to the other
two buildings housing plants of the Company, for the period from
January 1, 2010 until December 31, 2019, without the possibility
of reducing the rental period and in return for a monthly rent of
approximately NIS 522 thousand plus VAT, linked to changes in the
Israeli Consumer Price Index ("CPI"). In addition, the parties
fixed a mechanism whereby the rent will be updated by NIS 0.50
per sq. m. for each increase of $500 thousand in the EBITDA ratio
over and above a cash flow surplus of $8,000 thousand, pursuant
to the Company's agreement with the banks as mentioned above. The
rental update is limited to an increase of up to NIS 4 per sq.
m., linked to changes in the CPI.
3. In order to secure all of the Company's obligations under the
Agreement, the Company has furnished to Reit 1 an autonomous bank
guarantee in the amount of $500 thousand (hereinafter: "the
guarantee"). The Company has undertaken to increase the amount of
the guarantee by $450 thousand plus statutory VAT, in the manner
of an increase of the guarantee by $150 thousand plus statutory
VAT on January 1 of each of the years 2011, 2012 and 2013.
4. The total annual rent of the Company in the Teradyon Industrial
Area shall amount to approximately NIS 6.3 million per year,
compared to approximately NIS 9.8 million per year in respect of
the buildings, prior to the agreement. The total amount saved as
a result of the aforementioned move, including rent, taxes and
structural maintenance costs, is more than NIS 4 million per
year.
5. Prior to the signing of the agreement with Reit 1, on January 11,
2010 the Company received a letter rom Reit 1's representative,
in which Reit 1 claims that the Company did not transfer the
rental fee for December 2009 and the first quarter of 2010, in
the amount of $877 thousand. Reit 1 also claims that there is a
debt for linkage differences in the amount of NIS 570 thousand.
Reit 1 stated in its letter that if the said debt is not settled
within five days from the letter date, Reit 1 will make
procedures to protect its rights. The Company has attainments for
the claims stated in Reit 1's letter,including the amount of the
claimed debt. The agreement that was signed on March 21, resolves
the aforementioned disputes.
F - 69
Tefron Ltd.
Appendix to Consolidated Financial Statements - List of subsidiaries
- --------------------------------------------------------------------------------
LIST OF SUBSIDIARIES
SHARES CONFERRING VOTING AND DIVIDEND RIGHTS
-------------------------
DECEMBER 31, 2009, 2008 AND 2007
-------------------------
COMPANY NAME
Subsidiaries:
Hi-Tex, founded by Tefron Ltd. 100% 100%
Macro Clothing Ltd. 100% 100%
Tefron USA Inc., wholly-owned by Tefron US Holdings 100% 100%
Tefron UK Ltd., wholly-owned by Macro Clothing Ltd. 100% 100%
El Masira Textile Co., wholly-owned by Tefron USA Inc. 100% 100%
Tefron Holdings (98) Ltd. 100% 100%
Tefron US Holdings Corp. 100% 100%
Tefron Holding Netherlands B.V. 100% 100%
Tefron Macro HK Ltd., wholly-owned by Macro Clothing Ltd 100% 100%
F - 70
SIGNATURES
The Company hereby certifies that it meets all of the requirements for
filing on Form 20-F and that it has duly caused and authorized the undersigned
to sign this annual report on its behalf.
TEFRON LTD.
By: /s/ Amit Meridor
------------------------------
Name: Amit Meridor
Title: Chief Executive Officer
By: /s/ Eran Rotem
------------------------------
Name: Eran Rotem
Title: Chief Financial Officer
July 13, 2010
92
