SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 6-K
Report of Foreign Private Issuer Pursuant to Rule 13a-16 or 15d-16 of
The Securities Exchange Act of 1934
For the month of August, 2010
TEFRON LTD.
(Translation of registrant's name into English)
IND. CENTER TERADYON, P.O. BOX 1365, MISGAV 20179, ISRAEL
(Address of principal executive offices)
Indicate by check mark whether the registrant files or will file annual reports
under cover Form 20-F or Form 40-F.
Form 20-F [X] Form 40-F [_]
Indicate by check mark if the registrant is submitting the Form 6-K in paper as
permitted by Regulation S-T Rule 101(b)(1): ____
Indicate by check mark if the registrant is submitting the Form 6-K in paper as
permitted by Regulation S-T Rule 101(b)(7): ____
Indicate by check mark whether the registrant by furnishing the information
contained in this form is also thereby furnishing the information to the
Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.
Yes [_] No [X]
If "Yes" is marked, indicate below the file number assigned to the registrant in
connection with Rule 12g3-2(b): 82- N/A
Attached hereto and incorporated by reference herein is an unofficial English
translation of the Registrant's interim unaudited consolidated financial
statements as of June 30, 2010, which have been filed with the Israeli
Securities Authority.
This Form 6-K is hereby incorporated by reference into Tefron Ltd.'s
Registration Statement on Form F-3 (Registration No. 333-128847) and its
Registration Statements on Form S-8 (Registration Nos. 333-139021 and
333-111932).
2
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
TEFRON LTD.
(Registrant)
By: /s/ Eran Rotem
---------------------------
Name: Eran Rotem
Title: Chief Financial Officer
By: /s/ Hanoch Zlotnik
---------------------------
Name: Hanoch Zlotnik
Title: Treasurer
Date: August 24, 2010
3
TEFRON LTD.
QUARTERLY REPORT
AS OF JUNE 30, 2010
AUGUST 17, 2010
TEFRON LTD.
PART A'
SIGNIFICANT CHANGES AND INNOVATIONS
WHICH OCCURRED IN THE
CORPORATION'S BUSINESS
QUARTERLY REPORT
AS OF JUNE 30, 2010
SIGNIFICANT CHANGES AND INNOVATIONSWHICH OCCURRED IN THE CORPORATION'S BUSINESS
DURING THE SIX MONTHS ENDED JUNE 30, 1010.
In accordance with Regulation 39a of the Securities Regulations (Periodic and
Immediate Reports) - 1970 the following are details of the significant changes
or innovations, which occurred in Tefron Ltd.'s business (hereinafter: "TEFRON"
or "THE COMPANY") during the second quarter of 2010 until the date of publishing
this report. The following updates relate to the Company's periodic report for
2009 which was published on March 29, 2010 (document No: 436011-01-210) and
updated on April 18, 2010 (document No: 453498-01-2010) (hereinafter: "THE
PERIODIC REPORT") and the Company's quarterly report for the period of three
months ended March 31, 2010 which was published on May 20, 2010 (document No:
487875-01-2010) and updated on July 7 (document No: 547956-01-2010). The
following terms will have the meaning given to them in the periodic report
unless specifically stated otherwise.
This chapter of the quarterly report was prepared on the assumption that the
reader has before him the chapter describing the Company's business for the year
ended December 31, 2009 and for the three months ended March 31, 2010. The
following updates are presented in accordance with order of the items in the
Periodic Report.
1. CLAUSE 4.8 OF THE PERIODIC REPORT - HUMAN CAPITAL
1.1 Appointment of a new Chairman of the Board of Directors - Mr. Arnon
Tieberg.
On May 5, 2010 Mr. Arnon Tieberg was appointed to the position of
Chairman of the Company's Board of Directors instead of Mr. Yaakov
Gelbart, who ended his position as Chairman of the Company's Board of
Directors on July 5, 2010, under circumstances which do not need to be
presented to the public. For additional details about Mr. Arnon
Tieberg and the terms of his employment as Chairman of the Company's
Board of Directors see the Company's Immediate Report of July 5, 2010
(documents No: 545331-01-2010 and 545337-01-2010, respectively).
1.2 CHANGES IN THE OFFICERS IN THE COMPANY
1.2.1 On January 11, 2010 the VP Technology and Development , Mr.
Michael Bergman ended his period of service. See Immediate Report
of January 11, 2010 (document No: 341096-01-2010) which is
presented by way of reference.
1.2.2 On January 21, 2010 Mr. Amit Meridor started serving in the
position of the Company's CEO. See Immediate Report of January
21, 2010 (document No: 361182-01-2010) and Immediate Report of
January 23, 2010 (document No: 362682-01-2010) regarding the
terms of employment which are presented by way of reference.
1.2.3 On June 20, 2010 the VP Operations and Customers Support, Mr.
Ilan Gilboa started his period of service. For additional details
see the Immediate Report of May 20, 2010 (document No:
487785-01-2010) which is presented by way of reference.
1.2.4 On July 1, 2010 the Head of a Division Mr. Meir Kupershmit ended
his period of service. For additional details see the Immediate
Report dated May 20, 2010 (document No: 487770-01-2010) presented
by way of reference.
1.2.5 On July 5, 2010 the Chairman of the Company's Board of Directors
Mr. Yaakov Gelbart ended his period of service. For additional
details see the Immediate Report of July 5, 2010 (document No:
545307-01-2010) presented by way of reference.
1.2.6 On July 14, 2010 the service of the External Director Mr. Yaakov
Elinav ended as required by law. Accordingly the period of
service of Mr. Yaakov Elinav in the various Board of Directors
committees also ended: The Audit Committee and the Balance Sheet
Committee). The Company recognized Mr. Elinav as a Director with
accounting and financial expertise. For additional details see
the Immediate Report dated July 25, 2010 (document No:
563838-01-2010) presented by way of reference.
It should be stated that the Company published an Immediate
Report regarding the convening of a meeting of the Company's
shareholders, at which on the agenda was inter alia, appointment
of Mr. Aviram Lahav as an External Director of the Company
instead of Mr. Yaakov Elinav. The Company's Board of Directors
determined that Mr. Aviram Lahav has accounting and financial
experience, as set forth in the Company's Regulations (Conditions
and tests for a director with accounting and financial expertise
as a director with professional qualifications) - 2005 and this
based on the declaration signed by Mr. Aviram Lahav, given in
accordance with section 241 of the Companies Law - 1999,
according to which all the conditions required for the
appointment as an external director exists.
1.2.7 Mr. Amit Tal will discontinue serving as the VP Business
Development on September 1, 2010. For additional details see the
Immediate Report of May 30, 2010 (document No: 487791-01-2010)
presented by way of reference.
2. CLAUSE 4.12.1 TO THE PERIODIC REPORT - AGREEMENT WITH THE COMPANY'S
FINANCING BANK RELATING TO THE COMPANY'S CREDIT LINES
2.1 RECEIVING A WAIVER FROM THE BANK LENDERS
On July 11, 2010 the Company received a waiver from the three
financing banks according to which the financing banks gave their
agreement, that the aim of the EBITDA for 2010 as determined in the
framework of the agreement signed between the three financing banks
and the Company on March 2, 2010 (hereinafter: "THE AGREEMENT WITH THE
BANKS") will not be less than minus 2.1 million dollars (compared to a
positive EBITDA target stated in the framework of the agreement with
the banks). There is no change in the other provisions with the banks,
including those relating to the financial covenants.
3. CHANGES IN THE HOLDINGS OF INTERESTED PARTIES
3.1 On March 30, 2010 Mivtach Shamir Holdings Ltd. started to be an
interested party in the Company. Mivtach Shamir Holdings Ltd.
purchased 149,124 shares of NIS 10 par value in the framework of a
rights issue, which comprises 4.27% of the Company's share capital
fully diluted.
3.2 On March 30, 2010 Ta Top Limited Partnership started being an
interested party in the Company. Ta Top Limited Partnership purchased
a quantity of 149,124 shares of NIS 10 par value, in the framework of
a rights issue, comprising 4.27% of the Company's share capital fully
diluted.
3.3 The following is a table summarizing the changes in the rates of
holdings of the interested parties as a result of the issue of rights,
correct as of June 20, 2010:
- ---------------------------------- ----------------------------- ----------------------------------------------------------
NAME OF INTERESTED PARTY BEFORE THE ISSUE OF RIGHTS AFTER THE ISSUE OF RIGHTS AND THE PRIVATE PLACEMENT
- ---------------------------------- ----------------------------- ----------------------------- ---------------------------
QTY OF IN QTY OF IN QTY OF IN
SECURITIES CAPITAL AND SECURITIES CAPITAL AND SECURITIES CAPITAL AND
HELD VOTING HELD VOTING HELD VOTING
- ---------------------------------- -------------- -------------- -------------- ------------- ------------- -------------
Fully diluted
- ---------------------------------- -------------- -------------- -------------- ------------- ---------------------------
Norfet Limited Partnership 461,308 21.76% 461,308 14.53% 461,308 13.20%
- ---------------------------------- -------------- -------------- -------------- ------------- ------------- -------------
Ta Top - 0.00% 149,124 4.70% 149,124 4.27%
- ---------------------------------- -------------- -------------- -------------- ------------- ------------- -------------
Mivtach Shamir - 0.00% 149,124 4.70% 149,124 4.27%
- ---------------------------------- -------------- -------------- -------------- ------------- ------------- -------------
Yaakov Gelbard 47,650 2.25% 81,540 2.57% 111,540 3.19%
- ---------------------------------- -------------- -------------- -------------- ------------- ------------- -------------
Fimi Opportunities fund Limited
Partnership 318 0.01% 318 0.01% 318 0.01%
- ---------------------------------- -------------- -------------- -------------- ------------- ------------- -------------
Fimi Israel Opportunities fund
Limited Partnership 1,649 0.08% 1,649 0.05% 1,649 0.05%
- ---------------------------------- -------------- -------------- -------------- ------------- ------------- -------------
Rimon Investment master fund L.P 101,227 4.77% 173,038 5.45% 173,038 4.95%
- ---------------------------------- -------------- -------------- -------------- ------------- ------------- -------------
Analyst IMS Management of Trust
Funds Ltd. 114,727 5.41% 208,375 6.57% 208,375 5.96%
- ---------------------------------- -------------- -------------- -------------- ------------- ------------- -------------
Analyst Pension Fund Ltd. 3,000 0.14% 8,132 0.26% 8,134 0.23%
- ---------------------------------- -------------- -------------- -------------- ------------- ------------- -------------
TEFRON LTD.
PART B
BOARD OF DIRECTORS' REPORT ON
THE STATE OF THE COMPANY'S BUSINESS
AS OF JUNE 30, 2010
CHAPTER B - BOARD OF DIRECTORS' REPORT ON THE STATE OF THE COMPANY'S BUSINESS
The Company's Board of Directors is pleased to present the Board of Directors'
report of Tefron Ltd. and its subsidiaries (hereinafter: "TEFRON" or "THE
COMPANY") for the period of six months ended June 30, 2010 (hereinafter: "THE
PERIOD OF REPORT" or "the half - year"), according to the Securities Regulations
(Periodic and Immediate Reports) - 1970.
The Board of Directors' report is attached to the Company's financial statements
relating to the period of report and prepared on the assumption that the reader
has a copy of the Board of Directors report as of December 31, 2009.
1. GENERAL
The Company was established in 1977 as a private company in Israel and is
one of the leading companies in the world in the development, production,
marketing and sale of intimate apparel, active wear, swimwear and beachwear
sold throughout the world. The Company's customers are those with leading
brands such as: Victoria's Secret, Calvin Klein, GAP, Lululemon, Patagonia,
Reebok, JC Penney, Wall-Mart, Hanes brands industries as well as other well
known retailers and designers labels in the US and Europe.
In 1997 an initial public offer was made to the public of the Company's
shares on the New York Stock Exchange ("NYSE"), and the Company became a
public company whose shares were listed for trading on the NYSE. In
September 2005, the Company listed its shares for trading on the Tel Aviv
Stock Exchange and this parallel with the trading of its shares on the
NYSE.
On December 22, 2008, the Company's shares were delisted from trading on
the NYSE due to a decline in the Company's market value to below 25 million
dollars. A short time thereafter, the Company's shares started trading on
the OCT(1). Accordingly, as from March 1, 2009, the Company reports under
Chapter F of the Securities Exchange Law, and this concurrently with
reporting in accordance with the reporting requirements of the US
Securities Exchange Act of 1934 relating to a foreign issuer whose
securities are held by the public (a Foreign Private Issuer).
During the first quarter of 2010, the Company started implementing a
turnaround plan with a view to improving its results. For additional
details see clause 6.1 below.
On March 2, 2010, the Company signed a final agreement with the banks,
which includes a financial reorganization of the credit that the banks
provide the Company. For additional details regarding the final agreement
with the banks and events with the banks prior to this agreement, see Note
4b to the interim financial statements as of June 30, 2010 and clause 6.4
below.
On March 25, 2010, the prospectus for a right offering was closed and
immediately thereafter the private placement was completed. In the
framework of the issue, the Company raised 4 million dollars, gross. For
additional details regarding the prospectus on the issue of rights and the
private issue and the shelf prospectus, see clause 6.3 below.
----------------------------
(1) The OTC is an electronic quoting system which presents in real time quotes,
prices and trading volumes of securities traded over the counter and not on
one of the stock exchanges in the US.
- 2 -
THE COMPANY'S CONSOLIDATED RESULTS IN THE REPORTING PERIOD:
The Company's revenues in the second quarter of 2010 aggregated
approximately $24.9 million, compared with $25.3 million in the equivalent
period in the previous year.
The operating loss in the second quarter of 2010 aggregated approximately
$2.3 million, compared with approximately $5.7 million during the
equivalent period in the previous year, constituting an improvement of
approximately $3.4 million in the operating results, based on a similar
volume of sales.
The loss in the second quarter aggregated approximately $2.0, compared with
a loss of approximately $4.6 million during the equivalent period in the
previous year.
The EBITDA (Earnings before financing, depreciation and amortization)
aggregated a positive figure approximately $12 thousand, compared with a
negative EBITDA of approximately $3.3 million in the equivalent quarter in
the previous year.
The cash flows used for operating activities aggregated approximately $1.7
million in the second quarter, compared with approximately $284 thousand
used for operating activities during the equivalent period in the previous
year.
The Company's revenues in the six months ended June 30, 2010 decreased by
approximately 29.8% and aggregated approximately $50.7 million, compared
with approximately $72.2 million during the equivalent period in the
previous year.
The operating loss in the six months ended June 30, 2010 aggregated
approximately $5.8 million, compared with an operating loss of
approximately $6.0 million during the equivalent period in the previous
year.
The loss in the six months ended June 30, 2010 aggregated approximately
$5.2 million, compared with a loss of approximately $4.5 million during the
equivalent period in the previous year.
The EBITDA (Earnings before interest, depreciation and amortization)
aggregated a negative figure approximately $1.2 million, compared with a
negative EBITDA of approximately $1.4 million during the equivalent period
in the previous year.
The cash flows absorbed by operating activities aggregated approximately
$4.1 million in the six months ended June 30, 2010, compared with
approximately $852 thousand used for operating activities during the
equivalent period in the previous year.
- 3 -
2. ANALYSIS OF THE COMPANY'S FINANCIAL POSITION
CURRENT ASSETS
As of June 30, 2010, the Company's current assets aggregated $36.0 million
compared to $39.9 million on December 31, 2009. The main decline of 9.6%
stems primarily from a decrease of $1.5 million in cash and cash
equivalents, which were used in the financing of the Company's losses in
the half- year and from a decrease of $1.3 million in the inventory item as
a result of the seasonal activities in respect of swimwear products.
NON-CURRENT ASSETS
As of June 30, 2010, the Company's non-current assets aggregated
approximately $55.4 million compared to $59.3 million on December 31, 2009.
The 6.6% decline in the non-current assets stemmed mainly the depreciation
expense in respect of fixed and other assets of $4.5 million in the
reporting period.
CURRENT LIABILITIES
As of June 30, 2010, the Company's current liabilities aggregated
approximately $23.0 million compared to approximately $46.6 million on
December 31, 2009. The decline of $23.6 million stemmed mainly from the
item credit from banking entities. The agreement signed with the banks on
March 2, 2010 included a financial reorganization of the Company's credit
lines. As part of the reorganization of the financial reorganization, the
Company's debts to the banks, and credits which, in the past was classified
as current liabilities, became long-term liabilities which are presented as
part of the Company's non current liabilities.
NON CURRENT LIABILITIES
As of June 30, 2010, the Company's non-current liabilities aggregated $22.5
million compared to $5.6 million on December 31, 2009. The increase of
$16.9 million stems mainly from the financial reorganization mentioned
above, and after setting off a decline of $1.8 million in the balances of
deferred taxes, net, due to the increase in the tax asset for the losses
carry-forwards.
SHAREHOLDERS' EQUITY
As of June 30, 2010, the Group's equity aggregated approximately $45.9
million comprising approximately 50.2% of the total balance sheet compared
to approximately $47.0 million or 47.4% of the total balance sheet on
December 31, 2009.
The decrease as of June 30, 2010 compared to December 31, 2009 stems mainly
from the loss of $5.2 million in the reporting period and after setting of
the raising of capital of $4 million in the framework of a rights offering
and a private placement.
- 4 -
3. RESULTS OF OPERATIONS (DEVELOPMENTS IN THE STATEMENT ON INCOME ITEMS)
THE FOLLOWING IS THE GROUP'S CONDENSED STATEMENT OF INCOME FOR THE FIRST
HALF - YEAR AND FOR THE SECOND QUARTERS OF THE YEARS 2010 AND 2009 IN
THOUSANDS OF DOLLARS:
FOR THE SIX FOR THE THREE
MONTHS ENDED MONTHS ENDED
JUNE 30 JUNE 30
------------------------ ------------------------
2010 2009 2010 2009
-------- -------- -------- --------
Sales $ 50,719 $ 72,245 $ 24,946 $ 25,260
Cost of sales 48,159 68,360 23,330 26,840
-------- -------- -------- --------
Gross profit (loss) 2,560 3,885 1,616 (1,580)
Selling and marketing expenses 6,596 7,787 2,951 3,280
General and administrative expenses 1,798 2,093 924 802
-------- -------- -------- --------
Operating loss (5,384) (5,995) (2,259) (5,662)
Financial income (expenses), net (908) 60 (370) (434)
-------- -------- -------- --------
Loss before taxes on income (6,742) (5,935) (2,629) (6,069)
Tax benefit 1,493 1,460 634 1,476
-------- -------- -------- --------
Net Loss $ (5,249) $ (4,475) $ (1,995) $ (4,620)
======== ======== ======== ========
ANALYSIS OF THE RESULTS FOR THE THREE MONTHS ENDED JUNE 30, 2010 AND 2009
SALES: The Company's sales in the second quarter of 2010 aggregated
approximately $24.9 million, compared with $25.3 million during the
equivalent quarter in the previous year.
THE FOLLOWING IS THE DEVELOPMENT OF SALES IN THE SECOND QUARTER OF 2010 AND
2009 DIVIDED INTO ACCOUNTING SEGMENTS AND PRODUCT LINES:
SALES
--------------------------------------------------------------------
FOR THE THREE MONTHS ENDED JUNE 30
--------------------------------------------------------------------
2010 2009
-------------------------------- --------------------------------
IN THOUSANDS OF DOLLARS IN THOUSANDS OF DOLLARS
-------------------------------- --------------------------------
CUT & SEW SEAMLESS TOTAL CUT & SEW SEAMLESS TOTAL
-------- -------- -------- -------- -------- --------
Intimate apparel 2,471 9,787 12,258 4,123 8,652 12,775
Active wear 809 2,352 3,161 558 4,647 5,205
Swim and beachwear 9,527 - 9,527 7,280 - 7,280
TOTAL 12,807 12,139 24,946 11,961 13,299 25,260
- 5 -
COST OF SALES - in the second quarter of 2010, cost of sales aggregated
$23.3 million (93.5% of sales) compared to $26.8 million (106.3% of sales)
in the second quarter of 2009.
The improvement in the cost of sales in the second quarter of 2010
equivalent quarter in the previous year stemmed from improvements that were
made following the implementation of the turnaround program, as detailed in
clause 6.1 below, and including, inter alia, a significant reduction in the
level of waste, increased efficiency on the production floor, the vacating
of a building and the signing on a new agreement with the owners of the
property that is used by the Company, including a reduction in the rental
fees and the lowering of the Company's purchasing costs, primarily in the
field of raw materials and finishing materials.
GROSS PROFIT (LOSS) - in the second quarter of 2010, gross profit
aggregated $1.6 million (6.5% of sales) compared a gross loss of $1.6
million in the second quarter of 2009. The transition from a gross loss to
a gross profit stems from the implementation of the turnaround program, as
detailed above.
SELLING AND MARKETING EXPENSES - in the second quarter of 2010, selling and
marketing expenses aggregated $3.0 million (11.8% of sales) compared to
$3.3 million (13.0% of sales) in the equivalent quarter of 2009. The
decline at a rate of 10.0% stems from the reduction of the costs associated
with the maintenance of sales offices overseas, as the result of the
efficiency measures taken by the Company in the overseas sales offices and
the closure of the sales office in Germany, in addition to the recording of
lower amortization on the surplus cost of an intangible asset, which is
being amortized under the reducing balance method.
GENERAL AND ADMINISTRATIVE EXPENSES - in the second quarter of 2010,
general and administrative expenses aggregated $0.9 million (3.7% of sales)
compared to $0.8 million (3.2% of sales) in the second quarter of 2009. The
increase at a rate of 15.2% in the second quarter stemmed, inter alia, from
the recording of a provision for doubtful debts, compared to the equivalent
quarter in the previous year in which the provision for doubtful debts was
reduced, reducing the expenses, accordingly. The increase in the general
and administrative expenses in the quarter was partially offset by a
reduction in salary expenses, which stemmed from the turnaround plan, as
detailed in clause 6.1 below.
OPERATING LOSS - in the second quarter of 2010, the operating loss
aggregated $2.3 million compared to an operating loss of $5.7 million in
the equivalent quarter of 2009. The EBITDA item (earnings before interest,
tax, depreciation and amortization) amounted to a positive amount of
approximately $12 thousand, compared to negative EBITDA of $3.3 million in
the equivalent quarter of 2009.
FINANCIAL EXPENSES - in the second quarter of 2010, net financial expenses
aggregated $370 thousand compared to net financial expenses of $434
thousand in the second quarter of 2009. The decrease in the financial
expenses, at a rate of 14.7%, derived from: (1) the revaluation of the
US.Dollar vs. the Shekel, by comparison to the equivalent quarter, in which
the US. Dollar was devalued against the Shekel, (2) a sharp decrease in the
LIBOR interest rate on long-term loans, net and after offsetting (1)
financial costs as the result of the increase in the short-term bank credit
and (2) the increase in the interest rates on long-term loans from LIBOR +
1% to a range of between LIBOR + 2.15% to LIBOR + 2.85%, as determined
within the framework of the financial re-organization, as detailed in
clause 6.1 below.
- 6 -
TAXES BENEFITS - in the second quarter of 2010, the Company recorded tax
benefits of $0.6 million compared to tax benefits of $1.5 million in the
equivalent quarter of 2009. The Company has business losses for tax
purposes that are available to be carried forwards, which on June 30, 2010
aggregated approximately $41.3 million, which can be utilized in an future
periods, without restriction. For these balances and for other temporary
differences which can be deducted for benefits to employees and a
provisions for doubtful debts deferred taxes of approximately $9,959
thousand have been recorded (due to the expectation of utilizing them as a
result of the existence of reserve for deferred taxes of approximately
$10,033, mainly for fixed assets and as a result of the expectation of
realizing them in the consolidated company against taxable income).
According to the provisions of Standard IAS 12 "Taxes on income", balances
of deferred taxes of every legal entity are presented net in the framework
of non-current assets and non-current liabilities.
THE LOSS FOR THE PERIOD - the loss for the second quarter of 2010
aggregated $2.0 million compared to a loss of $4.6 million in the
equivalent quarter of 2009. The fully diluted basic loss per share is
approximately $0.6 in the second quarter of 2010, compared to $2.2in the
equivalent quarter of 2009.
ANALYSIS OF THE RESULTS FOR THE SIX MONTHS ENDED JUNE 30, 2010 AND 2009
SALES: The Company's sales in the reporting period aggregated approximately
$50.7 million, a decrease of 29.8% compared with $72.2 million during the
equivalent period in the previous year. The decrease stems from a decrease
of approximately $7.5 million in sales of intimate apparel in both sectors,
primarily to the customer Victoria's Secret. The Company sold various
projects to this customer in the first quarter of 2009, for which no
continuation orders were received. There was a decrease of approximately
$5.5 million in sales of swim and beachwear, primarily as the result of the
termination of the relationship with three customers at the beginning of
2009. These customers delivered sales of approximately $5.7 million in the
first half of 2009. A further significant decrease of approximately $8.5
million occurred in sales of sports products. The decrease in the Cut & Sew
segment is in respect of the "Pro Core" project for Nike products, for
which no significant continuation orders have been executed since the first
quarter of 2009. The decrease in the Seamless segment is mainly in respect
of the "Ultimate" project for Nike products, for which no significant
continuation orders have been executed since the first quarter of 2009.
THE FOLLOWING IS THE DEVELOPMENT OF SALES IN THE FIRST HALF OF 2010 AND
2009 DIVIDED INTO ACCOUNTING SEGMENTS AND PRODUCT LINES:
SALES
--------------------------------------------------------------------
FOR THE SIX MONTHS ENDED JUNE 30
--------------------------------------------------------------------
2010 2009
-------------------------------- --------------------------------
IN THOUSANDS OF DOLLARS IN THOUSANDS OF DOLLARS
-------------------------------- --------------------------------
CUT & SEW SEAMLESS TOTAL CUT & SEW SEAMLESS TOTAL
-------- -------- -------- -------- -------- --------
Intimate apparel 5,882 19,390 25,272 8,959 23,833 32,792
Active wear 1,317 4,173 5,490 2,831 11,117 13,948
Swim and beachwear 19,957 - 19,957 25,505 - 25,505
TOTAL 27,156 23,563 50,719 37,295 34,950 72,245
- 7 -
COST OF SALES - in the reporting period, cost of sales aggregated $48.2
million (95.0% of sales) compared to $68.4 million (94.6% of sales) in
equivalent period of 2009.
The decrease in the cost of sales in the first half of 2010 stemmed from
the decrease in the volume of production as a result of the decrease in
sales.
GROSS PROFIT (LOSS) - in the reporting period, gross profit aggregated $2.6
million (5.0% of sales) compared to $3.9 million (5.4% of sales) in the
equivalent period of 2009. The reason for the decrease in the profitability
is the sharp decrease in the Company's sales turnover, which was not
accompanied by an equivalent reduction in the fixed costs. The Company is
engaged in a labor intensive industry with a significant investment in
plant and accordingly the structure of its expenses includes a significant
element of fixed costs, such as the rental for the buildings, insurance,
the wages of indirect labor and etcetera.
SELLING AND MARKETING EXPENSES - selling and marketing expenses aggregated
$6.6 million (13.0% of sales) compared to $7.8 million (10.8% of sales) in
the equivalent period of 2009. The decline at a rate of 15.3% stems from
the reduction of the selling and marketing expenses as the result of the
decrease in the sales turnover in the half year and as a result of the
turnaround program that the Company has implemented. The main impact of the
program on the selling and marketing expenses has been a reduction in
salary expenses as the result of the reduction in the number of employees
in the Company and the reduction of salaries as well as the efficiency
measures taken by the Company in the overseas sales offices, including,
inter alia, the closure of the sales office in Germany. The increase in the
ratio of selling expenses to sales stems primarily from the existence of
fixed costs, such as salaries, maintenance of the sales offices and agents'
commissions, for which the efficiency measures that the Company is taking
in order to reduce such costs have not yet matched the rate of the decrease
in sales.
GENERAL AND ADMINISTRATIVE EXPENSES - in the reporting period, general and
administrative expenses aggregated $1.8 million (3.5% of sales) compared to
$2.1 million (2.9% of sales) in the first half of 2009. The decrease at a
rate of 14.1% stemmed primarily from a decrease in salary expenses, in
accordance with the turnaround program.
OPERATING LOSS - in the reporting period, the operating loss aggregated
$5.8 million compared to an operating loss of $6.0 million in the
equivalent period of 2009.
FINANCIAL EXPENSES - in the first half of 2010, net financing expenses
aggregated $908 thousand compared to net financial income of $60 thousand
in equivalent period of 2009. The transition from financing income to
financing expenses derived from: (1) the devaluation of the Dollar against
the Shekel, (2) an increase in financial costs as the result of the
increase in the short-term bank credit and (3) the increase in the interest
rates on long-term loans from LIBOR + 1% to a range of between LIBOR +
2.15% to LIBOR + 2.85%, as determined within the framework of the financial
re-organization, as detailed in clause 6.1 below and after setting-off the
decrease in the LIBOR interest on long-term loans, net.
TAXES BENEFITS - in the first half of 2010, the Company recorded tax
benefits of $1.5 million compared to tax benefits of $1.5 million in the
equivalent period of 2009. The Company has business losses for tax purposes
that area available to be carried forwards, which on June 30, 2010
aggregated approximately $41.3 million which can be utilized in an future
periods, without restriction. For these balances and for other temporary
differences which can be deducted for benefits to employees and a
provisions for doubtful debts deferred taxes of approximately $9,959
thousand have been recorded (due to the expectation of utilizing them as a
result of the existence of reserve for deferred taxes of approximately
$10,033, mainly for fixed assets and as a result of the expectation of
realizing them in the consolidated company against taxable income).
According to the provisions of Standard IAS 12 "Taxes on income", balances
of deferred taxes of every legal entity are presented net in the framework
of non-current assets and non-current liabilities.
- 8 -
THE LOSS FOR THE PERIOD - the loss for the reporting period aggregated
approximately $5.2 million compared to a loss of $4.5 million during the
equivalent period of 2009. The fully diluted basic loss per share is
approximately $2.0 in the reporting period, compared to $2.10 in the
equivalent period of 2009.
4. LIQUIDITY
CASH FLOWS USED FOR OPERATING ACTIVITIES in the second quarter of 2010
aggregated $1.7 million compared to cash flows used for operating
activities of $0.3 million in the first quarter of 2009. The main use of
the cash flows from operating activities during the quarter was for the
Company's working capital requirements.
CASH FLOWS GENERATED FROM INVESTING ACTIVITIES in the second quarter of
2010 aggregated approximately $17 thousand compared to cash flows used for
investing activities of $87 thousand in the second quarter of 2009. The
cash investments in fixed assets and other assets, net, aggregated in the
second quarter of 2010 to $20 thousand compared to $87 thousand in the
second quarter of 2009.
CASH FLOWS GENERATED FROM FINANCING ACTIVITIES in the second quarter of
2010 aggregated approximately $1.8 million compared to cash flows generated
from financing activities of approximately $1.0 million in the equivalent
quarter of 2009.
Cash balances as of June 30, 2010 aggregated at $0.4 million compared to
$1.9 million on December 31, 2009.
5. SOURCES OF FINANCING
In the second quarter of 2010, the Company financed its operations through
shareholders' equity, suppliers' credit, bank credit and non-banking credit
via factoring companies.
The bank credit is divided as follows:
Short-term credit balances from the banks on June 30, 2010 aggregated $4.8
million compared to $14.2 million on December 31, 2009. This main bank
credit is Dollar denoted and bears average interest of Libor +1.75 %.
The balances of long-term loans on June 30, 2010 aggregated approximately
$19.8 million. Interest on these loans is between Libor + 2.15% and Libor
+2.85%.
- 9 -
On June 30, 2010, the Company's credit line from the banks stood at
approximately $30.7 million. Out of all the credit lines correct as of June
30, 2010, approximately $27.1 million were utilized through loans, letters
of credits and guarantees.
At the end of March 2010 the Company raised $4 million in the framework of
a right offering described in clause 6.3 below.
6. SIGNIFICANT DATA IN THE FRAMEWORK OF THE DESCRIPTION OF THE CORPORATION'S
BUSINESS
In addition to the events in the period that are described above, the
following events have occurred in the Company:
6.1 TURNAROUND PLAN
During the first quarter of 2010 the Company started implementing a
turnaround plan with a view to return it to profitability, with all
the Company's management devoting itself and establishing professional
teams in key fields detailed below, setting detailed operative and
commercial targets and current follow-up of the progress in all fields
of operations. The Company's program mainly includes the following
subjects:
1. A significant improvement in the level of meeting supply times of
customers' orders, by cross company handling the processes with
planning, management focusing on the customer's targets, handling
the main basic problems in the quality of products and operative
bottlenecks.
2. A continued handling and reduction in the level of production
waste, which includes quality waste and logistic waste. This
handling includes an analysis for identifying the basic problems
in the fields of knitting, fixation, dyeing and sewing, an
improvement in quality control in the early stages of production,
measurement and managing waste on the production floor level, and
in the various work stations and improving optimization of
planning quantities to reduce logistic waste.
3. Efficiency steps on the Company's production floor by improving
levels of efficiency and output mainly in the stages of knitting
and sewing. The efficiency measures include measuring employee
incentives on the production lines according to the relevant
indices and targets, changes in work processes, training
employees and increasing control over the production process.
4. Reducing purchasing costs , mainly in the field of purchasing raw
materials and auxiliary materials, through locating additional
alternative suppliers mainly from south eastern Asia countries to
increase competition between the suppliers, through the
development of products with cheaper alternative raw materials.
In addition, the Company would examine the fields of transport,
conveying and forwarding which are a significant component in the
Company's operations.
5. Saving and efficiency measures in general and administrative
expenses. In the framework of this clause, the Company signed
agreements with the landlord where the plant operates inter alia,
as mentioned in clause 6.5 below. The agreement with a landlord
and vacating a building will lead to a saving of over NIS 4
million a year. Concurrently, the Company is examining all the
expense items in order to reduce them as far as possible.
- 10 -
6. Carrying out an examination and an improvement in the costing
process and the mix of products and customers in order to prevent
an erosion in selling prices, and stopping production of products
and small customers with a low profitability and contribution.
7. Recruiting key personnel in the textile and clothing field to
expand the Company's know-how basis. As part of this clause Mr.
Arnon Tieberg was recruited to serve as Chairman of the Company's
Board of Directors. Similarly, Mr. Amit Meridor was recruited as
the Company's CEO. Amit brings with him decades of management
experience, of which 15 years in the Nilit Textile Factory, a
manufacturer of high quality yarns.
8. Reorganization of the Company's debt structure with the banks. As
mentioned in clause 6.4 below, the Company signed an agreement
which reorganizes the structure of the Company's debts to the
banks, and improves the flow of the Company's expenses from
financing activities.
6.2 APPOINTMENT OF A NEW CEO
On January 17, 2010, the Company's Board of Directors approved the
Company's engagement in an employment contract with the incoming
Company's CEO, Mr. Amit Meridor, as from January 21, 2010.
6.3 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 rights offering prospectus with the Israel Securities Authority
and the Tel Aviv Stock Exchange. The prospectus included a rights
offering 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.
After Norfet announced to the Company that it will not be able to
participate in the issue of rights due to regulatory constraints, the
Company chose to raise funds through a combined process of an issue of
rights and a supplementary private placement to Norfet, and/or on
anyone on its behalf (hereinafter: "Norfet"), where Norfet undertook
to invest in the Company against the private placement of shares, an
amount which will supplement the total amount of raising by the
Company in the framework of the issue of rights and a private
placement to Norfet to 4 (four) million dollars.
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:
(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.
- 11 -
(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 papers (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.
6.4 THE FINAL AGREEMENT WITH THE COMPANY'S FINANCING BANKS RELATING TO THE
COMPANY'S CREDIT LINES
On March 2, 2010, the Company signed a final agreement with the banks
(hereinafter: "the final agreement") which includes a financial
reorganization of the credit that the banks provide the Company. For
additional details regarding the final agreement, see Note 4b to the
interim financial statements as at June 30, 2010.
Under the final agreement, the company 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 short-term debt, and loans of $5 million for
a period of 6 years, and loans of $15 million for a period of 10
years. Said loans totaling $20 million are repayable one after the
other, from the third year after providing the loans, and up to the
ninth year, with an annual principal repayment of $1.25 million. The
$11.25 million balance of principal will be repayable at the end of
the 10th year from the date of providing the loans. Said restructuring
grants the company a grace period of three years without any principal
repayments, and another seven years when only $1.25 million will be
repaid vis-a-vis annual principal repayments of $4 million during 2008
and 2009. Said loans repayment also reduces the company's negative
cash flows from financing activities vis-a-vis previous years.
Prior to signing the final agreement on December 2, 2009 the Chairman
of the Company's Board of Directors and its VP Finance received verbal
notices from the three banks with whom the Company is engaged in
financing agreements, according to which each of the banks decided to
stop the utilization of the Company's credit line.
To the best of the Company's knowledge, the banks decision regarding
stopping utilization of the Company's credit lines is a result of the
banks evaluations that the Company will continue to present losses in
the coming periods. The banks decision was received suddenly, despite
the fact that for the purpose of the Company's financial statements as
at December 31, 2008 and June 30, 2009 and June 30, 2009 the banks
gave the Company a letter of waiver on their right for immediate
repayment of the credit provided to the Company, despite the Company's
losses and the Company not meeting one of the financial covenants
(relating to EBITDA) set forth in the financing agreements between the
Company and the banks.
- 12 -
It should be mentioned that in the interim financial statements as of
June 30, 2010 the auditors draw attention to Note 1b to the interim
financial statements regarding the Company's business and its
losses(2) that are described in Note 4b in the financial statements
regarding the agreement with the financing banks as described above
and the new financial criteria in the course of 2010. The auditors
also state, in the framework of their drawing attention, that the
ability of the Company to meet its financial obligations is subject to
meeting the new financial covenants is subject to the compliance with
the business plan, as detailed in Note 1 b to the interim financial
statements, in the cash flow forecast that is derived from it, on the
continuation of the making available of the credit line by the banks
and on compliance with the new financial criteria in the course of
2010.
It should be emphasized that the Company's evaluations in all matters
relating to the compliance with the turn-around plan are forward
looking information, within the definition of that term in the
Securities Law. Forward looking information is uncertain information
in respect of the future, which is based on the information that
exists in the Company at the reporting date, and which contains the
Company's evaluations or its intentions as of the reporting date or
which are not dependent solely on the Company. It is possible that
this information, in whole or in part, will not be realized or will be
realized differently, inter alia, for the following reasons: financing
difficulties, difficulties in the implementation of the turn-around
plan, changes in the economic and financial fields, including in the
interest rates, a lack of agreement between the Company and the banks,
non-compliance with the terms of the agreement between the Company and
the banks, difficulties with other creditors of the Company and so on.
6.5 LEASE AGREEMENT WITH REIT 1:
On March 21, 2010 the company signed an agreement with REIT 1 Ltd.
("REIT 1"), which holds the rights to three industrial buildings in
the Teradion industrial area ("buildings") on which the company's
plant and headquarters are located. According to the aforesaid in the
agreement the Company paid the full debt to REIT 1, vacated the
headquarters building and will continue to lease the Hi-tex 1 and 2
buildings until December 31, 2019. The agreement was which was signed
and the repayment of all the debts resulted in the end of the dispute
which existed between the parties. For additional details see clause
4d to the Company's interim financial statements as at June 30, 2010.
--------------------------------
(2) THE FOLLOWING IS THE WORDING OF THE SUB CLAUSE B TO NOTE 1 OF THE COMPANY'S
FINANCIAL STATEMENTS AS AT JUNE 30, 2010:
a. The Company had losses of $5,249 thousand for the period of three
months ended June 30, 2010. Moreover, during the period of six months
period ended June 30, 2010 the Group had negative cash flows from
operating activities of $4,189 thousand.
Due to the global economic crisis, the decline in demand and the
continued accumulation of considerable losses, the Company requires
additional sources of financing. During March 2010 the Company raised,
through a rights offering to its shareholders and a private placement,
as mentioned in Note 4c, a gross amount of 4 million dollars. In
addition, the Company on March 2, 2010 signed an agreement with the
banks regarding the reorganization of the credit lines and new
undertakings to the banks, as detailed in Note 4b. In addition, the
Company is examining the possibility of off- bank financing, such as
the start of working with factoring companies which enable advances of
payments from customers. There is no certainty that the Company will
be successful regarding coming to an agreement and starting work with
these factoring companies.
- 13 -
7. EVENTS SUBSEQUENT TO THE BALANCE SHEET DATE
7.1 THE APPOINTMENT OF A NEW CHAIRMAN OF THE BOARD OF DIRECTORS
On July 5, 2010, Mr. Arnon Tieberg was appointed to serve as Chairman
of the Company's Board of Directors. Mr. Ya'akov Gelbard, the previous
Chairman of the Board of Directors, completed his term of office on
July 5, 2010.
7.2 THE RECEIPT OF WAIVER FROM THE BANK LENDERS
On July 11, 2010, the Company received a waiver from the three bank
lenders. Within the framework of the letter of waiver, the banks
informed the Company that the EBITDA target has been changed from a
target of a positive EBITDA for 2010 to an EBITDA that is not to fall
below minus $2.1 million for 2010.
8. EXPOSURE TO MARKET RISKS AND THE METHODS OF THEIR MANAGEMENT
8.1 THE PERSON RESPONSIBLE FOR MANAGING MARKET RISKS IN THE CORPORATION
The management of market risk in the Company is carried out according
to a risks management policy which was determined by the Company's
Board of Directors. The person responsible for managing the Company's
market risk, correct as of the date of this report, is Mr. Eran Rotem,
the Company's CFO.
8.2 DESCRIPTION OF THE MARKET RISKS TO WHICH THE COMPANY IS EXPOSED
The Group is exposed in its operations to a number of market risks,
including: fluctuations in the rates of exchange, changes in the
prices of raw materials and increases in transport (mainly due to the
exposure to price increases of transport costs), changes in the rates
of dollar interest, slowdown in the global markets and the level of
economic stability of its business partners, customers and suppliers.
The effects of the financial crisis from which global markets are
presently suffering, see clause 9 of this chapter.
8.3 RISKS OF CHANGES IN THE RATES OF EXCHANGE
The fluctuations in the rate of exchange of the Shekel against the
Euro and against the Dollar, affect the Company on two levels:
a. The effects on salary expenses and the cost of purchasing raw
materials - a considerable part of the salary and purchasing raw
materials costs, is in Shekels. The average rate of exchange of
the Dollar against the Shekel in the first half of 2010 declined
by about 7.6% compared to the equivalent period in the previous
year. In the first half of 2009 the Company recorded salary
expenses and raw material purchase expenses denominated in NIS of
approximately $17 million. As a result of the devaluation of the
average rate of exchange of the Dollar against the Shekel,
expenses increased in the first half of 2010 by approximately
$1.3 million compared to the equivalent period in the previous
year.
b. The effect on the Company's sales - in the first half of 2010
approximately 7.9% of the Company's sales were denominated in
Euros. In the first half of 2010 the average rate of exchange of
the Euro against the Dollar appreciated by approximately 0.7%
compared to the equivalent period in the previous year, and
therefore the Company's sales in Dollar terms increased by
approximately $30 thousand. During the second quarter of 2010,
there was a weakening in the rate of exchange of the Euro against
the Dollar, inter alia, because of the economic crisis which
affected the Euro block.
A further weakening in the rate of the Euro against the Dollar
will cause a decline in the Company's sales in Europe in Dollar
terms.
- 14 -
The exposure to rates of exchange of the Shekel and the Euro against
the Dollar include an exposure to the surplus of receipts over
payments in foreign currency or linked to it, an exposure to the
surplus of assets linked to the Dollar over the liabilities. In past
the Company used to examine the feasibility of purchasing hedging for
these exposures in accordance with its hedging policy. According to
the agreement with the banks described in clause 6.4 above, and the
agreement of understanding with the banks of January 6 2010, the
Company closed all its open positions for forward transactions. But
the Company may use its existing credit lines in order to carry out
forward transactions. Correct as of the date of this report, the start
of opening of positions by the Company is subject to receiving the
approval of the banks.
8.4 INTEREST RISKS
The Group is exposed to risks in respect of changes in the market
interest rate for long-term and short-term loans received and which
bear variable interest (linked to LIBOR interest and to prime interest
rates). The balance of the Company's long-term loans as of June 30,
2010 was $19.8 million. The balance of the Company's short-term credit
lines aggregated approximately $3.6 million as of June 30, 2010.
The Dollar LIBOR interest rate for three months has declined
significantly from a level of 1.8% at the end of 2008 to 0.53% as at
June 30, 2010 and on the date of publication of this report, if this
trend continues, it will cause a reduction in the Company's financing
expenses.
8.5 CREDIT RISKS
The Company does not have any significant concentrations of credit
risks. A credit risks is likely to occur due to an engagement in a
number of financial instruments with one body or as a result of an
engagement with a number of groups of receivables with similar
economic characteristics, whose ability to meet their obligations is
expected to be similarly effected by changes in economic or other
conditions . The Group's revenues are mainly from customers in the US
and Europe. In the second quarter of 2010, 63.6% of the Company's
sales were to its four largest customers. A change for the worse in
the credit days of each of these customers is likely to significantly
detrimentally affect the Company's level of liquidity. The Company is
currently following the debts of the customers and taking steps to
expand the customer base, in order to reduce its credit risks, as far
as possible.
8.6 THE CORPORATION'S POLICY IN MANAGING CREDIT RISKS
The management of credit risk is carried out by the Company according
to a policy approved by the Board of Directors. The Board of Directors
sets forth principles for managing risks, as well as specific policies
for certain exposures to risks, as described below.
Regarding financial assets and financial liabilities in currencies
which are not the Company's functional currency, the Company's policy
is to reduce the exposure by using various hedging instruments, as
detailed below.
- 15 -
Regarding sales, the expenses and costs of materials which are not in
the Company's functional currency, the Company's policy is to carry
out hedging on the rates of exchange through various hedging
instruments, as detailed below. The forum handling the subject
includes the Company's CFO and Treasurer, who periodically examine
together with financial consultants, the level of existing hedging
transactions of the Company for exposures to the rates of exchange and
determine whether there is a need to change the level of existing
hedging transaction at that time. The hedging is carried out through
various financial instruments, mainly forward transactions. For
additional details regarding forward transactions see clause 8.3
above. In 2010 the Company closed all of the open positions in respect
of forward transactions, in accordance with the agreement on the
understandings with the banks. However, the Company is entitled to use
the existing credit line in order to execute forward transactions.
As of the date of this report the opening of positions by the Company
is conditional upon the receipt of approval from the banks.
Regarding the credit risk, most of the Company's sales are carried out
to customers in North America (in the first half of 2010 about 81.0%
of total sales were sales to customers in North America), and the
Company is taking steps to reduce the exposure caused to it as a
result of the limited dispersal of the sales.
The following are data relating to the distribution of the Company's
sales according to geographic targets.
FOR THE SIX MONTHS
ENDED JUNE 30,
---------------------
2010 2009
------- -------
DOLLAR IN THOUSANDS
---------------------
North America $41,058 $60,046
Europe 7,530 8,662
Israel 2,113 3,475
Other 18 62
------- -------
$50,719 $72,245
======= =======
The Company does not have a policy for managing interest risks.
The Company routinely monitors the exposures that are created for it
from changes in the exchange and interest rates. As of the time of
this report, the Company invests in financial instruments, including
hedging transactions (against the exposure to exchange rates and
etcetera).
8.7 MEANS OF SUPERVISING AND IMPLEMENTING THE POLICY
Correct as of the date of the report, Mr. Eran Rotem, the Company's
CFO, is responsible for carrying out the policy that the Company's
Board of Directors has outlined. In the framework of meetings of the
Board of Directors and its committees, from time to time discussions
take place on the subject on matters of market risk or alternatively,
should an exceptional event occur, discussions are held in connection
with the balance sheet and cash flow exposures. The Board of Directors
considers from time to time, the need for taking financial or
strategic steps in order to reduce the exposure risks.
- 16 -
8.8 BASIC LINKAGE REPORT
The following are the terms of linkage of the financial balances from
the Company's balance sheet, as at June 30, 2010 and December 31,
2009:
JUNE 30, 2010
--------------------------------------------------------------------------
NON -
IN IN OTHER MONETARY
DOLLARS IN NIS IN EUROS CURRENCIES BALANCES TOTAL
------- ------- ------- ------- ------- -------
DOLLAR IN THOUSANDS
--------------------------------------------------------------------------
ASSETS
Cash and cash equivalents 318 - 58 63 439
Short-term investments in available for
sale securities 700 - - - - 700
Trade receivables 10,771 952 1,028 883 - 13,634
Other receivables 1,667 1,165 9 24 - 2,865
Inventory - - - - 18,451 18,451
Deferred taxes - - - - 1,181 1,181
Fixed assets and other assets - - - - 54,203 54,203
------- ------- ------- ------- ------- -------
Total assets 13,456 2,117 1,095 970 73,835 91,473
------- ------- ------- ------- ------- -------
LIABILITIES
Credit from banks 4,029 713 - 18 - 4,760
Trade payables 4,525 8,564 901 58 - 14,048
Other payables 1,283 2,916 - - - 4,199
Liabilities for benefits to employees, net - 430 - - - 430
Long-term loans from banking entities 19,802 - - - - 19,802
Long-term institutions - 1,053 1,053
Deferred taxes, net - - - - 1,233 1,233
------- ------- ------- ------- ------- -------
Total liabilities 29,639 13,676 901 76 1,233 45,525
======= ======= ======= ======= ======= =======
Surplus of assets over liabilities (16,183) (11,559) 194 894 72,602 45,948
======= ======= ======= ======= ======= =======
- 17 -
DECEMBER 31, 2009
--------------------------------------------------------------------------
NON
IN IN OTHER MONETARY
DOLLARS IN NIS IN EUROS CURRENCIES BALANCES TOTAL
------- ------- ------- ------- ------- -------
DOLLAR IN THOUSANDS
--------------------------------------------------------------------------
ASSETS
Cash and cash equivalents 1,465 270 34 135 - 1,904
Short-term investments in available for
sale securities 737 - - - - 737
Trade receivables 11,577 2,026 632 362 - 14,597
Other receivables 53 2,827 12 - - 2,892
Inventory - - - - 19,778 19,778
Deferred taxes - - - - 1,409 1,409
Fixed assets and other assets - - - - 57,880 57,880
------- ------- ------- ------- ------- -------
Total assets 13,832 5,123 678 497 79,067 99,197
------- ------- ------- ------- ------- -------
LIABILITIES
Credit from banks 25,548 299 - - - 25,847
Trade payables 1,085 12,931 951 75 - 15,042
Other payables 2,105 3,561 - - - 5,666
Liabilities for benefits to employees, net - 729 - - - 729
Institutions for long-term credits - 1,838 - - - 1,838
Deferred taxes, net - - - - 3,080 3,080
------- ------- ------- ------- ------- -------
28,738 19,358 951 75 3,080 52,202
======= ======= ======= ======= ======= =======
Surplus of assets over liabilities (14,906) (14,235) (273) 422 75,987 46,995
======= ======= ======= ======= ======= =======
- 18 -
8.9 SENSITIVITY ANALYSES
The reporting is mainly quantitative and in addition to it there is
qualitative reporting when necessary. The reporting includes
sensitivity analyses to fair value of the recognized components. In
the framework of the sensitivity analyses, the effect of the change in
the market prices over the fair value of the said components is
examined. In the framework of the sensitivity analyses, tests are
carried out - as a result of changes above and below certain rates in
market prices. The items which are exposed to various risks (e.g.:
rate of exchange (interest) was presented a number of times in order
to examine the sensitivity to every risk separately.
All sensitivity analyses were done in relation to the fair value of
the financial instruments as of June 30, 2010 and December 31, 2009.
The sensitivity analysis was prepared for financial instruments whose
sensitivity to changes in the different factors is significant.
THE FOLLOWING ARE THE SENSITIVITY ANALYSES AS OF JUNE 30, 2010:
SENSITIVITY TO CHANGES IN THE RATES OF EXCHANGE OF THE DOLLAR/SHEKEL
PROFIT (LOSS) FROM CHANGES IN PROFIT (LOSS) FROM CHANGES IN
FAIR VALUE FAIR VALUE FAIR VALUE
--------------------------------- ------------------------------- ---------------- -------------------------------
5% 1% -1% -5%
--------------------------------- --------------- --------------- ---------------- --------------- ---------------
Expected rate of exchange $1=NIS 4.07 $1=NIS 3.91 $1=NIS 3.88 $1=NIS 3.84 $1=NIS 3.68
--------------------------------- --------------- --------------- ---------------- --------------- ---------------
DOLLARS IN THOUSANDS
--------------------------------- --------------------------------------------------------------------------------
Trade receivables (48) (10) 952 10 48
--------------------------------- --------------- --------------- ---------------- --------------- ---------------
Other receivables (59) (11) 1,165 11 59
--------------------------------- --------------- --------------- ---------------- --------------- ---------------
Short-term bank credit 36 7 (713) (7) (36)
--------------------------------- --------------- --------------- ---------------- --------------- ---------------
Trade payables 428 86 (8,564) (86) (428)
--------------------------------- --------------- --------------- ---------------- --------------- ---------------
Other payables 146 29 (2,916) (29) (146)
--------------------------------- --------------- --------------- ---------------- --------------- ---------------
Liabilities for benefits to
employees, net 22 4 (430) (4) (22)
--------------------------------- --------------- --------------- ---------------- --------------- ---------------
Institutions for long-term
credit 53 11 (1,053) (11) (53)
--------------------------------- --------------- --------------- ---------------- --------------- ---------------
TOTAL 578 116 (11,559) (116) (578)
--------------------------------- --------------- --------------- ---------------- --------------- ---------------
SENSITIVITY TO CHANGES IN THE RATE OF THREE MONTH LIBOR DOLLAR
INTEREST RATE
All of the Company's long-term loans bear interest at a fixed margin
from the LIBOR. The following table presents the impact of a change of
0.5% or 1% in the interest rate on the fair value of the long-term
loans. The following calculation relates to the cash flow exposure and
not to changes in the fair value in respect of long-term loans of
$19,802 thousand.
AN INCREASE AN INCREASE OF A DECREASE OF A DECREASE OF
OF 1% IN THE 0.5% IN THE 1% IN THE 0.5% IN THE
INTEREST RATE INTEREST RATE INTEREST RATE INTEREST RATE
--------------------------------- --------------- ----------------- ----------- ---------------- -----------------
PROFIT (LOSS) FROM THE CHANGES FAIR VALUE PROFIT (LOSS) FROM THE CHANGES
--------------------------------- --------------------------------- ----------- ----------------------------------
DOLLARS IN THOUSANDS DOLLARS IN THOUSANDS
--------------------------------- --------------------------------- ----------- ----------------------------------
Forecast long-term loans (1,434) (717) 19,802 717 1,434
--------------------------------- --------------- ----------------- ----------- ------------------ ---------------
- 19 -
THE FOLLOWING ARE THE SENSITIVITY ANALYSES AS OF DECEMBER 31, 2009:
SENSITIVITY TO CHANGES IN THE RATE OF EXCHANGE OF THE DOLLAR/SHEKEL
PROFIT (LOSS) FROM CHANGES IN PROFIT (LOSS) FROM CHANGES IN
FAIR VALUE FAIR VALUE FAIR VALUE
--------------------------------- --------------- --------------- ---------------- --------------- ---------------
5% 1% -1% -5%
--------------------------------- --------------- --------------- ---------------- --------------- ---------------
Expected rate of exchange $1=NIS 3.96 $1=NIS 3.81 $1=NIS 3.78 $1=NIS 3.74 $1=NIS 3.58
--------------------------------- --------------- --------------- ---------------- --------------- ---------------
$ THOUSANDS
--------------------------------- --------------- --------------- ---------------- --------------- ---------------
Cash and cash equivalents (14) (3) 270 3 14
--------------------------------- --------------- --------------- ---------------- --------------- ---------------
Trade receivables (101) (20) 2,026 20 101
--------------------------------- --------------- --------------- ---------------- --------------- ---------------
Other receivables (141) (28) 2,827 28 141
--------------------------------- --------------- --------------- ---------------- --------------- ---------------
Short-term bank credit 15 3 (299) (3) (15)
--------------------------------- --------------- --------------- ---------------- --------------- ---------------
Trade payables 647 129 (12,931) (129) (647)
--------------------------------- --------------- --------------- ---------------- --------------- ---------------
Other payables 178 36 (3,561) (36) (178)
--------------------------------- --------------- --------------- ---------------- --------------- ---------------
Liabilities for benefits to
employees, net 36 7 (729) (7) (36)
--------------------------------- --------------- --------------- ---------------- --------------- ---------------
Institutions for long-term
credit 92 18 (1,838) (18) (92)
--------------------------------- --------------- --------------- ---------------- --------------- ---------------
TOTAL 712 142 (14,235) (142) (712)
--------------------------------- --------------- --------------- ---------------- --------------- ---------------
SENSITIVITY TO CHANGES IN THE RATE OF THREE MONTH LIBOR DOLLAR
INTEREST RATE
All of the Company's long-term loans bear interest at a fixed margin
from the LIBOR. The following table presents the impact of a change of
0.5% or 1% in the interest rate on the fair value of the long-term
loans. The following calculation relates to the cash flow exposure and
not to changes in the fair value in respect of long-term loans of
$11,601 thousand.
PROFIT (LOSS) FROM CHANGES IN PROFIT (LOSS) FROM CHANGES IN
FAIR VALUE FAIR VALUE FAIR VALUE
--------------------------------- ------------------------------- ---------------- -------------------------------
1% 0.5% -0.5% -1%
--------------------------------- --------------- --------------- ---------------- --------------- ---------------
Expected rate of interest 2.25% 1.75% 1.25% 0.75% 0.25%
--------------------------------- --------------- --------------- ---------------- --------------- ---------------
DOLLARS THOUSANDS DOLLARS THOUSANDS
--------------------------------- ------------------------------- ---------------- -------------------------------
Long-term loans (43) (33) 33 43
--------------------------------- --------------- --------------- ---------------- --------------- ---------------
SENSITIVITY TO CHANGES IN SHEKEL PRIME RATES
Occasionally, the Company takes loan with interest linked to the
short-term prime rate. Correct as of June 30, 2010, the Company has an
overdraft balance linked to prime interest of approximately NIS 2,803
thousand. Moreover, on June 30, 2010 the Company did not have the
short term loan linked to the prime interest rate. As the Company
sometimes takes loans linked to the short-term prime interest rate for
small amounts and has the ability to change the mix of overdraft and
short-term loans between the prime-linked tracks and the foreign
currency linked tracks with Libor interest rate, the Company does not
identity any significant risks likely to result as a result of
fluctuations in the prime interest rate.
- 20 -
9. THE CRISIS IN THE FINANCIAL MARKETS
The global economic crisis and the real slowdown in economic activities,
which developed in 2008, results, inter alia, in severe harm to global
financial markets to very considerable declines and fluctuations in stock
exchanges around the world and in Israel, to a worsening of the credit
crisis, to declines in the value of assets held by the Company and to a
significant slowdown and uncertainties in economic activities. As a result,
various economies in the world, including the US and many countries in
Europe, suffered a recession and indications of a recession were also
identified in Israel.
As from the second half of 2009, there was a certain recovery in most of
the financial and real markets, a recovery which continued also in the
first half of 2010. But nevertheless the signs of a financial crisis and
its consequences are still expressed mainly the euro block, which is still
characterized by a lack of economic stability. Signs of the crisis and its
consequences caused, inter alia, considerable fluctuations in financial
markets, including in the prices of securities and other currencies, and a
continued shortage of credit among certain firms, and considerable
uncertainty in economic operations.
In the Israel economy and in the Israel capital market, over the said
period, similar signs were shown to those which appeared in the global
markets, although it seems that the recovery signs in the Israeli economy
are more definite. As from the second quarter of 2009, the recovery trend
which was shown in most branches in the Israeli economy even increased.
The economic situation in the markets and the recession in these markets
are likely to have an effect on consumers' consumption habits in the
Company's field of operations and the level of consumption. The Company
operates to balance the distribution of the economic burden and the
commercial risk between it and between its suppliers and customers by
making demands on its suppliers to impose certain commercial conditions on
the Company's engagement with it, which is similar to the commercial
conditions that the customers demand from the Company. Correct as of the
date of publishing this report, it is not possible to estimate whether the
crisis in the financial markets has ended, what is the extent of the direct
and indirect economic consequences in the world and in Israel, and what
will be the results of these consequences - if any.
As a result of the global recession, the Company has formulated an
efficiency plan at the beginning of 2009. During the first quarter of 2010,
the Company started a turnaround plan, as mentioned in clause 6.1 above.
10. THE COMPANY'S INTERNAL AUDITOR
There has been no change in the details in respect of the Internal Auditor,
as presented in the periodic report for the year ended December 31, 2009.
A report was presented and discussed in March on the subject of purchasing
and raw and ancillary materials. On March 25, 2010 a discussion on the
report by the Internal Auditor was held in the Audit Committee.
Moreover, additional subjects that will be audited during the course of
2010 are: (1) inventory of work in progress and the inventory of finished
goods and (2) collections from customers. As of the time of this report,
the Internal Auditor has begun the audit of those subjects.
- 21 -
11. THE PROCESS OF APPROVING THE INTERIM AND ANNUAL FINANCIAL STATEMENTS
The Company's Board of Directors is the organ that discusses the quarterly
and annual financial statements and approves it after the Balance Sheet
Committee meets before the Board of Directors' meeting on the subject,
examines the draft of the financial statements together with the Company's
management and its auditors, and issues its recommendations.
The following are details of the composition of the Balance Sheet
Committee:
NAME POSITION
----------------------------- ---------------------------
Ya'akov Elinav (*) External Director
----------------------------- ---------------------------
Eli Admoni External Director
----------------------------- ---------------------------
Shirit Kasher Director
----------------------------- ---------------------------
Avi Ziegelman Director
----------------------------- ---------------------------
(*) Mr. Ya'akov Elinav completed his period of office on July 15, 2010. The
appointment of Mr. Aviram Lahav as an External Director will be presented
to the general meeting of the Company's shareholders on August 26, 2010 for
approval.
The professional material which is brought for discussion to the Balance
Sheet Committee and at the meeting of the Board of Directors, including the
financial statements, are sent to the members of the Committee and to the
members of the Board of Directors a reasonable time prior to convening the
meetings. The members of the Board of Directors direct questions, should
they deem it necessary, and request clarifications from the Company's CFO
and/or the Company's CEO.
During meetings of the Balance Sheet Committee and of the Board of
Directors, the CFO reviews the main financial statements and the main
topics in the financial reporting, as discussed in the Audit Committee.
At meetings of the Board of Directors and of the Balance Sheet Committee,
where the quarterly and annual financial statements are discussed, the
Company's auditor is invited and is present, and reviews the main questions
which arose during the review of the statements or the audit of these
statements, whichever relevant, and is at the disposal of the members of
the Balance Sheet Committee and Board of Directors for any questions and
clarifications regarding the statements prior to their approval.
On August 15, 2010, a meeting of the Balance Sheet Committee took place
where the financial statements were discussed for the period ended June 30,
2010. The following members participated in the meeting of the Board of
Directors: Messrs Eli Admoni, Avi Ziegelman and Shirit Kasher.
12. THE COMPANY'S PREPARATION ON THE SUBJECT OF THE EFFECTIVENESS OF THE
INTERNAL CONTROLS ON FINANCIAL REPORTING AND DISCLOSURE
On November 24, 2009, the Finance Committee of the Knesset approved the
proposal of the Securities Authority to adopt regulations which deal with
the internal control system on financial reporting and on disclosure of a
corporation, so that they will supply a reasonable level of certainty
regarding the reliability of the statements and their meeting the
provisions of the law - Securities Regulations (Periodic and Immediate
Report) (Amendment No. 3) - 2009 (hereinafter: "the Amendment"). The
amendment was published in the Government Gazette in December 2009. The
purpose of the regulations is to improve the quality of financial reporting
and disclosures in reporting corporations through three maim elements:
- 22 -
a. Issuing a Company's Board of Directors and Management Report relating
to the implementation of the internal control on financial reporting
and disclosure.
b. Providing personal declarations of the CEO and the most senior
executive in the financial field of the Company, according to which,
inter alia, in their opinion, the financial statements and other
financial information which are included in the statements do not
include any incorrect presentation of a significant fact and do not
lack any presentation of a significant fact required in order for the
presentations including in them not to be misleading and, in their
opinion, the financial statements and other financial information
included in the statements properly reflect, from all significant
aspects the financial position, results of operations and cash flows
of the Company, and that they evaluate the effectiveness of the
internal control on the financial reporting and disclosure, to the
extent that it relates to the financial statements and the other
financial information which are included in the statements.
c. Adding to the periodic report and to the auditor's opinion regarding
the effectiveness of the internal control on the financial reporting
of the Company and relating to the significant weaknesses it
discovered in this control.
The starting time for these provisions will be for the period report as at
December 31, 2010 (hereinafter: "the starting date"). Notwithstanding the
aforesaid, according to the provisions of the regulations, during the
period from the date of publishing the amendment until the starting date,
the Board of Directors' report will be given details relating to the stages
of the Corporation's preparedness and progress in implementing the
provisions of the amendment (hereinafter: "implementing the project").
Disclosure regarding the steps which the Company took to implement the
project until the date of this report:
The person responsible in the Company for implementing the project is Mr.
Eran Rotem, the Company's CFO.
We would note that by virtue of the Company being traded on a US stock
exchange, it is subject to the provisions of the "Sarbanes-Oxley Act" (SOX)
in general, including Section 302 relating to the examining the suitability
and quality of the controls in the organization, Section 404 relating to
the management's declaration and Section 906 which states the criminal
liability for breaching the provisions of this Act. The main points of the
Act relate to increasing reporting and disclosure, powers and obligations
of the Audit Committee, managers' liability, enforcement, sanctions and
penalties, and increasing the independence of external auditors.
In order to report on internal controls, the Company took the following
steps:
a. The main processes in financial reporting and disclosure were mapped
and the existing controls and related procedures were documented.
b. The risks in financial reporting and disclosures were identified,
while identifying the significant control procedures which give a
response to these risks.
c. Differences between existing controls and the desirable controls were
mapped and solutions were determined for their amendment.
- 23 -
Out of the total processes which were mapped, the processes which were
defined as very significant for financial reporting and disclosure are:
1. The process of closing the financial statements
2. ELC - Entity Level Control - controls over the organizational level
3. ITGC - Controls over the information systems
4. Revenues process
5. Purchasing process
6. Inventory process
During the years 2007-2009 during which the above activities were carried
out, a weakness was found in the controls in connection with the process of
closing the financial statements, as a result of the cut-off in recording
expenses from purchasing products of a subsidiary. The error was amended
retrospectively in the statements for the period of three months which
ended March 31, 2009. As a result of this error, the Company increased its
internal control system connected with supervising the reporting received
from subsidiaries.
13. CRITICAL ACCOUNTING ESTIMATES
In the preparation of the financial statements in accordance with the IFRS
standards, the Company's management is required use estimates and to make
assumptions in respect of transactions or matters, whose impact on the
financial statements cannot be accurately determined at the time of their
preparation. The estimates and the judgments are tested continually and are
based on past experience and on other factors, including expectations in
relation to future events, which are considered to be reasonable in the
light of the existing circumstances.
The Company determines estimates and assumptions in respect of the future.
By the very nature of things, it is rare for the accounting estimates that
are made to be identical to the actual results. The estimates and
assumption in respect of which significant risk exists of the need to make
significant adjustments to the carrying values in the accounting records in
respect of assets and liabilities in the course of the following financial
year are detailed in Note 2 b to the consolidated financial statements,
which are included in the periodic report for the year 2009.
------------------------- -------------------------
------------------------- -------------------------
ARNON TIEBERG AMIT MERIDOR -
CHAIRMAN OF THE BOARD CEO
MISGAV, AUGUST 17, 2010
- 24 -
TEFRON LTD
INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 2010
UNAUDITED
TEFRON LTD
INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 2010
UNAUDITED
CONTENTS
PAGE
Review of the interim consolidated financial statements F-1
Consolidated statements of financial position F-2
Consolidated statements of income F-3
Consolidated statement of comprehensive income F-4
Consolidated statements of changes in shareholders' equity F-5-F-6
Consolidated statements of cash flows F-7-F-8
Notes to the interim consolidated financial statements F-9-F-22
ERNST & YOUNG
KOST FORER GABBAY & KASIERER
REVIEW REPORT OF THE AUDITORS TO THE SHAREHOLDERS OF TEFRON LTD.
PREFACE
We have reviewed the attached financial information of Tefron Ltd. and its
subsidiaries (hereinafter - the Group) which includes the condensed consolidated
balance sheet as of June 30, 2010 and the condensed consolidated statements of
income, comprehensive income, changes in shareholders equity and cash flows for
the periods of six months and three months then ended. The Board of Directors
and Management are responsible for the preparation and presentation of the
financial information for these interim periods in accordance with International
Accounting Standard IAS 34 - "Financial Reporting for Interim Periods", and they
are responsible and they are responsible for the preparation of financial
information for these interim periods under Chapter D' of the Securities
Regulations (Periodic and Immediate Reports) - 1970. Our responsibility is to
express a conclusion on the financial information for these interim periods,
based on our review.
SCOPE OF THE REVIEW
We performed our review in accordance with Review Standard 1 of the Institute of
Certified Public Accountants in Israel "Review of Financial Information for
Interim Periods Prepared by the Entity's Auditor". A review of financial
information for interim periods comprises clarifications, mainly with the people
responsible for financial and accounting matters, and applying other analytical
review procedures. A review is considerably more limited in scope than an audit
carried out in accordance with generally accepted auditing standards in Israel,
and therefore does not enable us to achieve with sufficient certainty that we
will be aware of all significant matters which could have been identified in an
audit. Consequently we are not expressing an opinion of an audit.
CONCLUSION
Based on our review, we are not aware of any fact which would cause us to think
that the above financial information has not been prepared, in all significant
aspects, in accordance with International Accounting Standard IAS 34.
In addition to the aforesaid in the previous paragraph, based on our review, we
are not aware of anything which could cause us to think that the above financial
information does not meet, from all significant aspects, the disclosure
provisions under Chapter D of the Securities Regulations (Periodic and
Immediate Reports) - 1970.
Without qualifying our above conclusions, we direct attention to Note 1c of the
financial statements, regarding the Company's business and losses and to Note 4
of the financial statements regarding significant events during the period of
report which include, INTER ALIA, a financing arrangement with the banks. The
Company's ability to meet its financial obligations is conditional on meeting
new financial covenants during 2010 as set forth in Note 4. In addition we
direct attention to Note 1 the turnaround plan that the Company is implementing,
and in the opinion of the Company's Management and Board of Directors, there are
good chances improvements in its framework.
Haifa, KOST, FORER, GABBAY & KASIERER
August 17, 2010 CERTIFIED PUBLIC ACCOUNTANTS
F - 1
TEFRON LTD
CONSOLIDATED BALANCE SHEET
- --------------------------------------------------------------------------------
AS OF
DECEMBER
AS OF JUNE 30, 31,
--------------------------- ---------
2010 2009 2009
--------- --------- ---------
$ IN THOUSANDS
---------------------------------------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 439 $ 837 $ 1,904
Short-term investments 700 1,188 737
Trade receivables, net 13,634 24,123 14,597
Other current assets 2,865 3,616 2,892
Inventories 18,451 21,452 19,778
--------- --------- ---------
36,089 51,216 39,908
--------- --------- ---------
NON-CURRENT ASSETS
Deferred taxes, net 1,181 2,100 1,409
Property, plant and equipment, net 53,446 60,643 56,920
Goodwill and other intangible assets, net 757 1,710 960
--------- --------- ---------
55,384 64,453 59,289
--------- --------- ---------
$ 91,473 $ 115,669 $ 99,197
========= ========= =========
LIABILITIES AND EQUITY
CURRENT LIABILITIES
Short-term loans (including current portion of long term - loans) $ 4,760 $ 25,259 $ 25,847
Trade payables 14,048 16,875 15,042
Other current liabilities 4,199 5,619 5,666
--------- --------- ---------
23,007 47,753 46,555
========= ========= =========
NON-CURRENT LIABILITIES
Long-term loans 19,802 - -
Employee benefits, net 430 1,550 729
Deferred taxes, net 1,053 1,166 3,080
Other non-current liabilities 1,233 5,429 1,838
--------- --------- ---------
22,518 8,145 5,647
--------- --------- ---------
EQUITY ATTRIBUTABLE TO OWNERS OF THE PARENT
Share capital 10,351 7,518 7,518
Additional paid-in capital 108,852 107,460 107,522
Accumulated deficit (65,915) (48,214) (60,666)
Treasury shares (7,408) (7,408) (7,408)
Other capital reserves 68 415 29
--------- --------- ---------
TOTAL 45,948 59,771 46,995
--------- --------- ---------
$ 91,473 $ 115,669 $ 99,197
========= ========= =========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE INTERIM
CONSOLIDATED FINANCIAL STATEMENTS
F - 2
TEFRON LTD
CONSOLIDATED STATEMENTS OF INCOME
- --------------------------------------------------------------------------------
SIX MONTHS ENDED THREE MONTHS ENDED YEAR ENDED
JUNE 30, JUNE 30, DECEMBER 31
--------------------------- --------------------------- ---------
2010 2009 2010 2009 2009
--------- --------- --------- --------- ---------
UNAUDITED AUDITED
--------------------------------------------------------------- ---------
IN DOLLARS THOUSANDS
---------------------------------------------------------------------------------
(EXCLUDING LOSS PER SHARE)
---------------------------------------------------------------------------------
Sales $ 50,719 $ 72,245 $ 24,946 $ 25,260 $ 115,538
Cost of sales 48,159 68,360 23,330 26,840 119,339
--------- --------- --------- --------- ---------
Gross profit (loss) 2,560 3,885 1,616 (1,560) (3,801)
Selling and marketing expenses 6,596 7,787 2,951 3,280 13,842
General and administrative expenses 1,798 2,093 924 802 3,779
Other revenues - - - - (496)
--------- --------- --------- --------- ---------
Operating loss (5,834) (5,995) (2,259) (5,662) (20,926)
--------- --------- --------- --------- ---------
Loss from the early repayment of a
subordinated note receivable - - - - (1,285)
Financial income 271 2,155 271 332 1,747
Financing expenses (1,179) (2,095) (641) (766) (2,259)
--------- --------- --------- --------- ---------
Financial income (expenses), net (908) 60 (370) (434) (512)
========= ========= ========= ========= =========
Loss before taxes on income (6,742) (5,935) (2,629) (6,096) (22,723)
Tax benefit 1,493 1,460 634 1,476 5,330
--------- --------- --------- --------- ---------
Loss $ (5,249) $ (4,475) $ (1,995) $ (4,620) $ (17,393)
========= ========= ========= ========= =========
Basic and diluted loss $ (2.0) $ (2.1) $ (0.6) $ (2.2) $ (8.1)
========= ========= ========= ========= =========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE INTERIM
CONSOLIDATED FINANCIAL STATEMENTS
F - 3
TEFRON LTD
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
- --------------------------------------------------------------------------------
SIX MONTHS ENDED THREE MONTHS ENDED YEAR ENDED
JUNE 30, JUNE 30, DECEMBER 31
------------------------- ------------------------- --------
2010 2009 2010 2009 2009
-------- -------- -------- -------- --------
UNAUDITED AUDITED
----------------------------------------------------------- --------
IN DOLLARS THOUSANDS
----------------------------------------------------------------------------
Net loss for the period $ (5,249) $ (4,475) $ (1,995) $ (4,620) $(17,393)
-------- -------- -------- -------- --------
Other comprehensive loss
(net of the tax effect):
Realized loss (gain) on cash flow hedges, net (115) (23) 100 21 (23)
Unrealized gain from cash flow hedges, net - 74 - 586 115
Unrealized loss on available for sale secuReities (36) 341 (36) 39 (86)
Actuarial loss due to defined benefit program - - - - 466
-------- -------- -------- -------- --------
Total other comprehensive income (loss), net (151) 392 64 646 472
-------- -------- -------- -------- --------
Total comprehensive loss relating to the
Company' shareholders $ (5,400) $ (4,083) $ (1,931) $ (3,974) $(16,921)
======== ======== ======== ======== ========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE INTERIM
CONSOLIDATED FINANCIAL STATEMENTS
F - 4
TEFRON LTD
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
- --------------------------------------------------------------------------------
ATTRIBUTE TO EQUITY HOLDERS OF THE PARENT
-------------------------------------------------------------------------------------------------------------
CAPITAL
RESERVE FOR
CAPITAL TRANSACTIONS
ADDITIONAL CAPITAL RESERVE RESERVE FOR WITH A
PAID-IN ACCUMULATED TREASURY FOR AVAILABLE CASH FLOW CONTROLLING TOTAL
SHARE CAPITAL CAPITAL DEFICIT SHARES FOR SALE HEDGES SHAREHOLDER EQUITY
------- ------- ------- ------- ------- ------- ------- -------
DOLLARS THOUSANDS
-------------------------------------------------------------------------------------------------------------
BALANCE AS OF JANUARY 1, 2010 (AUDITED) 7,518 107,522 (60,666) (7,408) (86) 115 - 46,995
Total comprehensive loss - - (5,249) - (36) (115) - (5,400)
Share-based payment to employees - 350 - - - - - 350
Rights offering (less issue expenses net of $187 thousand) 2,833 980 - - - - - 3,813
Capital benefit from a transaction with a controlling shareholder - - - - - - 190 190
------- ------- ------- ------- ------- ------- ------- -------
BALANCE AS OF JUNE 30, 2010 (UNAUDITED) 10,351 108,852 (65,915) (7,408) (122) - 190 45,948
======= ======= ======= ======= ======= ======= ======= =======
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE INTERIM
CONSOLIDATED FINANCIAL STATEMENTS
F - 5
TEFRON LTD
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
- --------------------------------------------------------------------------------
ATTRIBUTE TO EQUITY HOLDERS OF THE PARENT
-------------------------------------------------------------------------------------------------------------
CAPITAL
ADDITIONAL RESERVE FOR OPTIONS FOR
PAID-IN ACCUMULATED TREASURY HEDGING SHARES IN A TOTAL
SHARE CAPITAL CAPITAL DEFICIT SHARES TRANSACTIONS TOTAL SUBSIDIARY CAPITAL
------- ------- ------- ------- ------- ------- ------- -------
AUDITED
-------------------------------------------------------------------------------------------------------------
DOLLARS THOUSANDS
-------------------------------------------------------------------------------------------------------------
Balance as of January 1, 2009 (audited) 7,518 107,104 (43,739) (7,408) 23 63,498 247 63,745
Total comprehensive income (loss) - - (4,475) - 392 (4,083) - (4,083)
Share-based payment - 356 - - - 356 - 356
Cancellation of options to an employee in a subsidiary - - - - - - (247) (247)
------- ------- ------- ------- ------- ------- ------- -------
Balance as of June 30, 2009 (unaudited) 7,518 107,460 (48,214) (7,408) 415 59,771 - 59,771
======= ======= ======= ======= ======= ======= ======= =======
ATTRIBUTE TO EQUITY HOLDERS OF THE PARENT
-------------------------------------------------------------------------------------------------------------
CAPITAL CAPITAL
RESERVE FOR RESERVE FOR
FINANCIAL CAPITAL TRANSACTIONS
ADDITIONAL ASSETS RESERVE FOR WITH
SHARE PAID-IN ACCUMULATED TREASURY AVAILABLE FOR HEDGING CONTROLLING
CAPITAL CAPITAL DEFICIT SHARES SALE TRANSACTIONS SHARE-HOLDERS TOTAL CAPITAL
------- ------- ------- ------- ------- ------- ------- -------
DOLLARS THOUSANDS
-------------------------------------------------------------------------------------------------------------
Balance as of April 1, 2010 (Unaudited) 10,351 108,782 (63,920) (7,408) (86) (100) 190 47,809
Total comprehensive income (loss) - - (1,995) - (36) 100 - (1,931)
Share-based payment - 70 - - - - - 70
------- ------- ------- ------- ------- ------- ------- -------
Balance as of June 30, 2010 (Unaudited) 10,351 108,852 (65,915) (7,408) (122) - 190 45,948
======= ======= ======= ======= ======= ======= ======= =======
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE INTERIM
CONSOLIDATED FINANCIAL STATEMENTS
F - 6
TEFRON LTD
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
- --------------------------------------------------------------------------------
ATTRIBUTE TO EQUITY HOLDERS OF THE PARENT
---------------------------------------------------------------------------------------------------------------------
ADDITIONAL OPTIONS FOR
PAID-IN ACCUMULATED TREASURY OTHER CAPITAL SHARES IN A
SHARE CAPITAL CAPITAL DEFICIT SHARES RESERVES TOTAL SUBSIDIARY TOTAL EQUITY
-------- -------- -------- -------- -------- -------- -------- --------
DOLLARS THOUSANDS
---------------------------------------------------------------------------------------------------------------------
Balance as of April 1, 2009 (audited) 7,518 107,161 (43,594) (7,408) 231 63,446 247 63,693
Total comprehensive income (loss) - - (4,620) - 646 (3,974) - (3,974)
Share-based payment - 299 - - - 299 - 299
Cancellation of options to an employee in a subsidiary - - - - - - (247) (247)
-------- -------- -------- -------- -------- -------- -------- --------
Balance as of June 30, 2009 (unaudited) 7,518 107,460 (48,214) (7,408) 415 59,771 - 59,771
======== ======== ======== ======== ======== ======== ======== ========
RELATING TO THE COMPANY'S SHAREHOLDERS
----------------------------------------------------------------------------------------------------------------------------
CAPITAL
RESERVE FOR
FINANCIAL CAPITAL
ADDITIONAL ASSETS RESERVE FOR OPTIONS FOR
PAID-IN ACCUMULATED TREASURY AVAILABLE FOR HEDGING SHARES IN A TOTAL
SHARE CAPITAL CAPITAL DEFICIT SHARES SALE TRANSACTIONS TOTAL SUBSIDIARY EQUITY
------- ------- ------- ------- ------- ------- ------- ------- -------
AUDITED
----------------------------------------------------------------------------------------------------------------------------
DOLLARS THOUSANDS
----------------------------------------------------------------------------------------------------------------------------
Balance as of April 1, 2009 (audited) 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 payment - 171 - - - - 171 - 171
Cancellation of options to an employee in a subsidiary - 247 - - - - 247 (247) -
------- ------- ------- ------- ------- ------- ------- ------- -------
Balance as of June 30, 2009 (unaudited) 7,518 107,460 (60,666) (7,408) (86) 115 46,995 - 46,995
======= ======= ======= ======= ======= ======= ======= ======= =======
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE INTERIM
CONSOLIDATED FINANCIAL STATEMENTS
F - 7
TEFRON LTD
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
FOR THE YEAR
FOR THE SIX MONTHS FOR THE THREE MONTHS ENDED
ENDED JUNE 30, ENDED JUNE 30, DECEMBER 31
---------------------- --------------------- -------
2010 2009 2010 2009 2009
------- ------- ------- ------- -------
UNAUDITED AUDITED
---------------------------------------------------- -------
IN DOLLARS THOUSANDS
-------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Loss (5,249) (4,475) (1,995) (4,620) (17,393)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Adjustments to the profit or loss items:
Depreciation of fixed assets and intangible assets 4,541 4,481 2,201 2,268 9,256
Impairment (reversal of impairment) of property, plant
and equipment and intangible assets - - - - (496)
Inventories wReite-off 666 860 369 380 2,808
Extinguishment of contingent consideration (A) - - - - (399)
Share-based payments 140 109 70 52 171
Loss (gain) on sale of property, plant and equipment (31) (17) (27) - (17)
Deferred taxes, net (1,619) (1,468) (634) (1,259) (5,364)
Change in liabilities for benefits to employees, net (299) (619) (218) 137 (850)
Loss from early repayment of a subordinated bond - - - - 1,285
Taxes on income 83 638 51 399 1,427
Financing expenses 543 307 406 51 723
------- ------- ------- ------- -------
4,024 4,291 2,218 2,028 8,544
------- ------- ------- ------- -------
CHANGES IN ITEMS OF ASSETS AND LIABILITIES:
Decrease (increase) in trade receivables 963 (677) 1,340 6,472 8,849
Decrease (increase) in other receivables (79) 1,499 215 1,000 1,497
Decrease in inventory 660 9,813 2,527 4,194 9,730
Decrease in trade payables (994) (8,292) (4,167) (7,894) (10,125)
Decrease in other payables (2,888) (2,160) (1,374) (1,061) (428)
------- ------- ------- ------- -------
(2,338) 183 (1,459) 2,711 9,523
------- ------- ------- ------- -------
CASH PAID AND RECEIVED DURING THE YEAR FOR:
Interest paid (543) (245) (406) (20) (878)
Interest received - 32 - 16 155
Taxes paid (83) (638) (51) (399) (1,427)
------- ------- ------- ------- -------
(626) (851) (457) (403) (2,150)
------- ------- ------- ------- -------
Net cash used for operating activities of the Company (4,189) (852) (1,693) (284) (1,476)
======= ======= ======= ======= =======
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE INTERIM
CONSOLIDATED FINANCIAL STATEMENTS
F - 8
TEFRON LTD
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
FOR THE YEAR
FOR THE SIX MONTHS FOR THE SIX MONTHS ENDED
ENDED JUNE 30, ENDED JUNE 30, DECEMBER 31
---------------------- ---------------------- -------
2010 2009 2010 2009 2009
------- ------- ------- ------- -------
UNAUDITED AUDITED
---------------------------------------------------- -------
IN DOLLARS THOUSANDS
-------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of fixed assets (41) (305) (19) (73) (611)
Acquisition of intangible assets (2) (40) (1) (14) (75)
Pending consideration paid - - - - (271)
Proceeds from realizing fixed assets 41 18 37 - 18
Proceeds from early repayment of a subordinate bond - - - - 1,715
------- ------- ------- ------- -------
Net cash provided by (used for) investing activities (2) (327) 17 (87) 776
------- ------- ------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Purchase of property, plant and equipment (9,486) 2,526 1,789 2,035 4,923
Repayment of long-term loans (11,601) (2,076) - (1,038) (3,885)
Receipt of long-term loans 20,000 - - - -
Proceeds from the issue of rights, net 3,813 - - - -
------- ------- ------- ------- -------
Net cash provided by (used for) financing activities 2,726 450 1,789 997 1,038
======= ======= ======= ======= =======
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (1,465) (729) 113 626 338
BALANCE OF CASH AND CASH EQUIVALENTS AT BEG. OF YEAR 1,904 1,566 326 211 1,566
------- ------- ------- ------- -------
BALANCE OF CASH AND CASH EQUIVALENTS AT END OF YEAR 439 837 439 837 1,904
------- ------- ------- ------- -------
(A) SIGNIFICANT NON CASH TRANSACTIONS
Extinguishment of contingent consideration against
goodwill - - - - 344
======= ======= ======= ======= =======
Granting of options in the framework of
rescheduling of loans 210 - - - -
======= ======= ======= ======= =======
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE INTERIM
CONSOLIDATED FINANCIAL STATEMENTS
F - 9
TEFRON LTD
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1 - GENERAL
a. These financial statements were prepared in a condensed format, as of
June 30, 2010 and for the period of six months then ended (hereinafter
- Interim Consolidated Financial Statements). These statements should
be studied in conjunction with the Company's annual financial
statements as of December 31, 2009 and for the year then ended, and
the notes accompanying them (hereinafter - Annual Financial
Statements).
b. During the fourth quarter, the Company started a turnaround program to
improve its business results (hereinafter: "the turnaround program").
Correct as of signing this report, operating improvements occurred on
the production floor, such as: a shortening of leased time to
customers and a decrease in waste during the production process, a
decline in the costs basis of the Company; such as: in the manpower
clause, rent and transportation. In the opinion of the Company's Board
of Directors, there are good chances to have improvements in the
framework of the turnaround program.
c. The Company had losses of $ 5,249 thousand for the six months period
ended June 30, 2010. Moreover, during the six months period ended June
30, 2010, the Company had negative cash flows from operating
activities of $ 4,189 thousand.
Due to the global economic crisis, the decline in demand and the
continued accumulation of considerable losses, the Company requires
additional financing sources. During March 2010, through an issue of
rights to shareholders and a private placement as mentioned in Note
4c, the Company raised a gross total of $ 4 million. In addition, on
March 2, 2010, the Company signed an agreement with the banks
regarding the reorganization of credit lines and new undertakings to
the banks, as detailed in Note 4b. Furthermore, the Company is
examining off-bank financing possibilities such as the start of
working with factoring companies enabling obtaining advance of
payments from customers. It is uncertain that the Company will succeed
to come to an agreement and start work with these factoring companies
NOTE 2 - SIGNIFICANT ACCOUNTING PRINCIPLES
FORM OF PREPARATION OF INTERIM CONSOLIDATED FINANCIAL STATEMENTS
The interim consolidated financial statements are prepared in accordance with
the generally accepted accounting principles for the preparation of financial
statements for interim periods, as set forth in International Accounting
Standard 34 - Financial Reporting for Interim Periods, and according to the
provisions of the pronouncement according to Chapter D of the SecuReities
Regulations (Periodic and Immediate Report) - 1970.
The significant accounting principles and method of calculation, implemented in
the preparation of the interim consolidated financial statements, are consistent
with those implemented in the preparation of the annual financial statements,
excluding the following:
F - 10
TEFRON LTD
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 2 - SIGNIFICANT ACCOUNTING PRINCIPLES (CONTD.)
IAS 36 - IMPAIRMENT IN VALUE OF ASSETS
The amendment to IAS 36 (hereinafter - the amendment) what the accounting unit
is, which requires goodwill to be allocated to it, in order to examine an
impairment in value of goodwill. According to amendment, the largest unit
possible full allocating goodwill purchased in the business combination is the
operating segment as defined in IFRS 8 - operating segments, prior to
consolidate and import reporting purposes. The amendment is applied `as from the
financial statements for periods starting January 1, 2010.
The amendment did not have a significant effect on the Company's financial
position, results operations and cash flows.
IAS 17 - LEASING
According to the amendment to IAS 17 the specific directive regarding the method
of classifying leasing of land in an operative or financial leasing was
cancelled. Accordingly, there is no longer a demand to classify leasing of land
as an operative leasing. In every case in which the ownership is not expected to
be transferred to the lessee at the end of the lease period, that the
classification of leasing of land must be examined in accordance with the
general directives appearing in IAS 17 which relate to the classification of
operative leasing pool with financial leasing from the date of signing the
original agreement with the Israel Lands Administration, while considering that
land generally has a infinite economic life span. Therefore the leasing of land
from the Israel Lands Administration will be examined while making a comparison
between the present value of the amount recorded as prepaid expenses for the
operative leasing and the fair value of the land.
The amendment did not have an effect on the Company's financial position,
results of operations and cash flows.
FORM OF PREPARATION OF INTERIM CONSOLIDATED FINANCIAL STATEMENTS (contd.)
The Group does not recognize assets and liabilities for future payments which
will apply on exersizing the option to extend the leasing period, as these
payments will be based on the fair value of the land on future realization and
which comprise contingent leasing fees, which in accordance with IAS 17 should
not be taken into account.
DISCLOSURE TO NEW IFRS STANDARDS DURING THE PERIOD PRIOR TO ITS IMPLEMENTATION
IFRS 9 - FINANCIAL INSTRUMENTS
In November 2009, IFRS 9 - Financial Instruments, was published, which is the
first stage of the project of replacing IAS 39 - Financial Instruments:
Recognition and Measurement. IFRS 9 focuses mainly on the classification and
measurement of financial assets and it applies to the financial assets on which
IAS 39 applies.
F - 11
TEFRON LTD
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The Standard stipulates that at the time of first recognition all financial
assets (including hybrid instruments in which the hosting contract is a
financial asset) will be measured at fair value. During subsequent periods, the
debt instrument must be measured at reduced cost only if both following
conditions exist:
- - The asset is held in the framework of a business model, whose purpose is to
hold assets so as to collect the contractual cash flows resulting from
them.
- - According to the contractual terms of the financial asset, the Company may,
on certain dates, receive cash flows comprising only payments of principal
and payments of interest on the on the balance of the principal.
The subsequent measurement of all the other debt instruments and other financial
asset instruments will be at fair value.
Financial assets which are capital instruments will be measured during
subsequent periods at fair value, and the differences will be recorded to the
statement of income or to other comprehensive income (loss), according to the
choice of the accounting principles regarding every single instrument. If this
relates to capital instruments held for trading purposes, it is compulsory to
measure them at fair value through the statement of income. The choice is final
and cannot be changed. Nevertheless, when a company changes its business model
to manage financial assets, it must reclassify all the financial instruments
affected from the change in the business model so as to reflect this change. In
all the other circumstances, no reclassification of financial instruments must
be made.
The date of the start of the Standard is January 1, 2013. Earlier implementation
is possible. First implementation will be done retrospectively by restating the
comparative figures, subject to certain exemptions mentioned in the Standard.
The Company is examining the possible effect of the new standard, although it
will is not able, at this stage, to estimate its effect, if any, on the
financial statements.
F - 12
TEFRON LTD
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 2 - SIGNIFICANT ACCOUNTING PRINCIPLES (CONTD.)
DISCLOSURE TO NEW IFRS STANDARDS DURING THE PERIOD PRIOR TO ITS IMPLEMENTATION
(contd.)
IFRS 7 - FINANCIAL INSTRUMENTS: DISCLOSURE
The amendment to IFRS 7 clarifies the disclosure requirements in the Standard.
In accordance with the Standard, the connection between the quantitative and
qualitative clarifications and the nature and level of risks stemming from
financial instruments is emphasized. Disclosure requirements were minimized
regarding guarantees that the Company holds and the demands for disclosure
regarding cred I it risks were amended. The amendment will be implemented
retrospectively starting from the financial statements for the periods starting
January 1, 2011 - earlier implementation is possible.
I In the Company's opinion, the amendment is not expected to have a significant
effect on the disclosure on the financial statements in the financial
statements.
IAS 1 - PRESENTATION OF THE FINANCIAL STATEMENTS
According to the amendment, it is possible to present the movement between the
opening balance and the closing balance for every component of other
comprehensive income in the statement of changes in capital or in the context of
the notes to the annual financial statements. . The amendment will be
implemented retrospectively starting from the financial statements for the
periods starting January 1, 2011 - earlier implementation is possible.
The amendment is not expected to have a significant effect on the Company's
financial statements.
NOTE 3 - SEASONALITY
The Company's intimate apparel and active wear products are not affected by
seasonality. In the swimwear products, most of the Company's sales are carried
during the months of December to May. The results of operations should be
studied considering this seasonality.
NOTE 4 - SIGNIFICANT EVENTS DURING THE PERIOD OF REPORT
A. THE APPOINTMENT OF A NEW CEO
1. On January 17, 2010, the Company Board of Directors approved the
Company's engagement in the employment contract with the Company
incoming CEO, Mr. Amit Meridor, as from January 21, 2010.
F - 13
TEFRON LTD
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 4 - SIGNIFICANT EVENTS DURING THE PERIOD OF REPORT (CONTD.)
A. THE APPOINTMENT OF A NEW CEO (CONTD.)
2. SHARE-BASED PAYMENT COST
On January 17, 2010, the Company's Board of Directors approved,
further to the approval of the Company's Audit Committee, a grant of
100,000 option warrants which can be exercised to 100,000 ordinary
shares of NIS 10 par value each to the Company's CEO. The allotment of
the option warrants to the CEO was done in accordance with the options
plan for the Company's employees, officers and consultants, which was
approved by the Company's Board of Directors in September 1997 and as
amended in January 2003. The entitlement to exercise the options
occurs over a three-year period from the date of the start of the
employment of the CEO and expires ten years after the granting. The
market value of the Company's share on the date of granting was 4.0
dollars. The exercise price of the option warrants was set at an
amount of 3.80 dollars; therefore, during the period of report, the
Company recorded expenses of 23 thousand dollars which are presented
in general and administrative expenses.
The following are data used for measuring the fair value of the
options per shares:
Dividend yield for the share (%) 0.0
Expected fluctuations in the share prices (%) 53.2
Rate of interest without risk (%) 2.6
The forecasted lifespan of the options for shares (years) 6
will Weighted average of the share prices (dollars) 5.1
B. FINAL AGREEMENT WITH THE BANKS THAT FINANCE THE COMPANY RELATING TO THE
COMPANY'S CREDIT LINES
On March 2, 2010, the Company signed a final agreement with the banks which
includes a reorganization of the credit financing that the banks provide in
favor of the Company. The Company implemented the provisions of IAS 39
(while examining the quantitative and qualitative cReiteria) and handled it
in the new arrangement as a non significant change of conditions
The following is a summary of the main provisions of the signed agreement:
The credit framework which will be provided in favor of the Company will be
divided into the following loans and credit lines:
1. LOAN A'
The principal of Loan A' will be for a total amount of $15,000,000
will be provided by the banks for a ten-year period. The interest on
Loan A' will be paid quarterly and the principal of Loan A' will be
repaid in three equal installments of $1,250,000 each, as from the end
of the seventh, eighth, and ninth year after the date of providing the
loan.
The balance of $11,250,000 will be repaid at the end of the tenth year
after the date of providing Loan A, pro rata between the banks.
F - 14
TEFRON LTD
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 4 - SIGNIFICANT EVENTS DURING THE PERIOD OF REPORT (CONTD.)
B. FINAL AGREEMENT WITH THE BANKS THAT FINANCE THE COMPANY RELATING TO THE
COMPANY'S CREDIT LINES (CONTD.)
1. LOAN A' (contd.)
EARLY REPAYMENT OF LOAN A'
The Company will make an early repayment of the unpaid balance of Loan
A', fully or partly, in those cases conditions and dates as detailed
below:
(1) Future raising of capital - in every case where the Company will
raise capital, then a total comprising 50% (fifty percent) of the
net consideration from raising of capital will be used make an
early repayment.
(2) Sale of assets - in every case where the Company will sell an
asset, not in the normal course of business, then the full net
consideration from the sale of the asset will be used to make an
early repayment.
(3) Surplus cash flows - in every case where the total surplus cash
flows, according to the financial statements, will exceed an
amount set at 8,000,000 dollars, then the total comprising 50% of
the difference between the surplus cash flows and the said total
will be used to make an early repayment, according to the
determining ratio, on account of the last payment of Loan A'.
"Surplus cash flows" - the Company's total EBITDA according to the
financial statements, in every calendar year, less: (a) total interest
costs of the companies for that calendar year; and (b) the total
investment that the Company made in the framework of its operations
and the current maintenance for that calendar year (hereinafter:
"current investments"). The companies will make current investments,
including in the normal course of business, of an annual accumulated
amount, for every company, exceeding $2,000 thousand.
2. LOAN B'
The principal of Loan B' will be a total amount of $5,000,000 which
will be provided by the banks for a six-year period. The interest will
be paid quarterly and the principal will be repaid in four equal
installments of $1,250,000, each, at the end of each of the second,
third, fourth, fifth, and sixth years after the provision of Loan B'
by the banks.
3. SHORT-TERM FRAMEWORKS (IN ADDITION TO LOANS A' AND B')
The banks will provide the Company with short-term credit frameworks
of up to a year for a total amount of $8,950,000, under the following
conditions:
F - 15
TEFRON LTD
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 4 - SIGNIFICANT EVENTS DURING THE PERIOD OF REPORT (CONTD.)
B. FINAL AGREEMENT WITH THE BANKS THAT FINANCE THE COMPANY RELATING TO THE
COMPANY'S CREDIT LINES (CONTD.)
4. INFUSION OF CAPITAL
The Company undertook to make an issue of rights and/or a private
placement of shares, in the framework of which an amount of not less
than $4,000,000 (less expenses) will be invested in the Company's
shareholders' equity, and this by June 30, 2010.
Correct as of March 28, 2010, the Company completed the issue of
rights and a private placement to Norfet and/or anyone on its behalf,
in the framework of which it raised $4 million.
5. PROVIDING ADDITIONAL CREDIT FRAMEWORKS
Subject to completing the infusion of capital, fully and in due time,
the banks will provide the Company with additional short-term credit
lines for a total amount of $1,800,000.
6. ADDITIONAL UNDERTAKINGS
In addition to the collateral and the undertakings in the agreement,
the Company undertook, inter alia, that as long as Loan A' and Loan B'
have not yet fully repaid to the banks, it will not pay nor undertake
to pay any dividends to its shareholders without the banks' prior
written agreements.
CAPITAL BENEFIT
The Company undertook to allot to the banks, gratis, not later than
the end of 30 days from the date of signing the agreement a total
quantity of 100,000 option which can be exercised to 100,000 ordinary
shares of NIS 10 par value each of the Company, against a payment of
an exercise price of $4.50 for every share. The options can be
exercised (fully or partly) for a 48-month period from the date of
signing the agreement. A benefit of $ 210 dollars was presented in the
financial statements. On August 17, 2010, the allotment of the
options, as mentioned above.
FINANCIAL COVENANTS
The banks gave their consent not to activate their rights vis-a-vis
the Company due to the Company's expectation not to meet the financial
covenants that it undertook to meet in 2009, according to Tefron's
financial statements of December 31, 2009 only.
F - 16
TEFRON LTD
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 4 - SIGNIFICANT EVENTS DURING THE PERIOD OF REPORT (CONTD.)
B. FINAL AGREEMENT WITH THE BANKS WHICH FINANCE THE COMPANY RELATING TO THE
COMPANY'S CREDIT LINES (CONTD.)
6. ADDITIONAL UNDERTAKINGS (contd.)
In addition, in 2010 the Company undertook to meet at all time all the
financial covenants and undertakings, as detailed below:
1) According to the Company's consolidated financial statements for
2010, the Company's EBITDA will be positive; (this covenant was
changed on July 11, 2010 to EBIDTA which will not be less than
minus $2.1 million); and
2) According to the Company's consolidated financial statements (the
quarterly and the annual) the Company's shareholders' equity will
not be less than 35 million dollars; and
3) According to the Company's consolidated financial statements (the
quarterly and annual), the total amount of cash balances,
inventories, and receivables will not be less than 33 million
dollars; and
4) According to the Company's consolidated financial statements (the
quarterly and annual), the Company's receivable balances will not
be less than 9 million dollars;
5) The CEO and Chairman of the Board in any of the companies of the
Tefron Group will not earn a salary exceeding the CEO's salary or
that of the Board, whichever relevant, in a relevant company, as
exists on the date of signing the agreement, plus linkage
difference to the consumer price index.
By November 30, 2010, the companies and the banks will agree among
themselves what are the additional financial covenants and
undertakings, including relating to the restriction of salaries of
officers of the Company, which the Company must meet as from January
1, 2011. Should the companies and the bank not reach such an agreement
by November 30, 2011, the companies must meet the financial covenants
they undertook to meet prior to the date of signing the agreement. Up
to December 31, 2009, the banks' credit agreement included financial
covenants which contain maintaining the following financial ratios:
1. Shareholders' equity of not less than 40 million dollars.
2. Rate of shareholders' equity to the total balance sheet will not
be less than 20%.
3. The ratio between the Company's total liabilities to banks and
EBITDA will not exceed 9.5.
F - 17
TEFRON LTD
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 4 - SIGNIFICANT EVENTS DURING THE PERIOD OF REPORT (CONTD.)
B. FINAL AGREEMENT WITH THE BANKS WHICH FINANCE THE COMPANY RELATING TO THE
COMPANY'S CREDIT LINES (CONTD.)
6. ADDITIONAL UNDERTAKINGS (contd.)
Prior to singing the final agreement, on December 2, 2009, the
Chairman of the Company's Board of Directors and the Company's CFO
received verbal notices from three banks, with which the Company has
financing agreements, according to which each of the banks decided to
stop utilization of the Company's credit lines.
To the best of the Company's knowledge, the banks' decision regarding
stoppage of utilizing the Company's credit lines is as a result of the
banks' evaluations that the Company will continue to present losses in
the coming periods. The banks' decision was taken suddenly despite the
fact that for the purpose of the Company's financial statements as of
December 31, 2008, as of June 30, 2009 and as of June 30, 2009, the
banks gave the Company a waiver of their right for immediate repayment
of the credit provided in favor of the Company despite the Company's
losses and the Company not meet one of the financial covenants
(relating to the EBITDA) are included in the financial agreement
between the Company and the banks.
According to the provisions of IAS 39, the Company has examined
whether the conditions of the various new debt arrangements are
significantly different from the original financial undertakings. The
changes in the conditions were insignificant and therefore the Company
did not make any change in the value of its financial liabilities in
the books on the date of the change.
C. ISSUE OF RIGHTS TO A PROSPECTUS, A SHELF PROSPECTUS AND A PRIVATE PLACEMENT
On February 26, 2010, the Company published a prospectus for issuing rights
to the SecuReities Exchange Commission in the US, and a prospectus for
issuing rights to the SecuReities AuthoReity and to the Tel Aviv Stock
Exchange. In the prospectus, the Company published an offer to the public
by way of rights of 1,578,975 ordinary shares, of a nominal value of NIS 10
each of the Company, offered at a price of 3.80 dollars per share. The
shares were offered by way of rights to the Company's shareholders,
according to the ratio of 1 credit unit for every 1.406 shares.
After Norfet announced to the Company that it was unable to participate in
the issue of rights due to regulatory constraints, the Company chose to
raise this amount through combined steps of issuing rights and carrying out
a supplementary private placement to Norfet and/or anyone on its behalf
(hereinafter: "Norfet"), where Norfet undertook to invest in the Company
against an allotment of a private placement of shares, an amount which will
supplement the total raising amount of the Company in the framework of the
issue of rights and the allotment of a private placement to Norfet, to 4
(four) million dollars.
F - 18
TEFRON LTD
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 4 - SIGNIFICANT EVENTS DURING THE PERIOD OF REPORT (CONTD.)
C. ISSUE OF RIGHTS PROSPECTUS, A SHELF PROSPECTUS AND A PRIVATE PLACEMENT
(CONTD.)
In the framework of the issue of rights, the Company raised an amount of
2,867 thousand US dollars from its shareholders against the allotment
754,384 ordinary shares of the Company. In the framework of the private
placement, the Company raised an additional amount of $1,133 thousand.
During March 2010, the Company raised a total gross amount of $4 million.
Furthermore, in February 26, 2010, the Company published a shelf prospectus
for:
(a) Up to 3,000,000 ordinary shares of NIS 10 par value each of the
Company;
(b) Up to 10 series of convertible bonds, where each of the series of
these bonds will have a total par value of NIS 500,000,000 and which
are repayable in one payment or in a number of equal installments;
(c) Up to 10 series of option warrants, where each of the series of these
option warrants will include not more than 3,000,000 option warrants
which can be exercised in such a way that each option warrant can be
exercised to 1 ordinary share of NIS 10 par value of the Company
against a cash payment of the exercise price linked to the index;
(d) Up to 10 series of option warrants, where each of the series of these
option warrants will include not more than 200,000,000 option warrants
which can be exercised in such a way that every option warrant can be
exercised to NIS 100 par value of bonds of Series A' to K' of the
Company, against a cash payment of the exercise price linked to the
consumer price index; and of -
(e) Up to 10 series of marketable secuReities (Series 1 to 10) where each
of these marketable secuReities will have a par value of NIS
500,000,000 which are repayable in one or more payments.
D. LEASE AGREEMENT WITH REIT 1
On March 21, 2010, the Company signed an agreement with REIT 1 Ltd.
(hereinafter: "REIT 1") which is the owner of rights in three industrial
buildings in the industrial area of Terodion (hereinafter: "the
buildings"), in which the Company's plants and head office are located.
According to the provisions of the agreement, the Company paid the full
debt to REIT 1, vacated the head office building, continues to lease the 1
and 2 Hi-Tex buildings until December 31, 2019 and on Auguest 17, 2010
allotted Reit 1 60,000 option which can be exercised to 60,000 ordinary
shares of NIS 10 par value each of the Company, against a payment of an
exercise price of $4.50 for every share. Options can be exercised (fully or
partly) for a 48-month period from the date of they were allotted.
F - 19
TEFRON LTD
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 5 - BUSINESS SEGMENTS
A. GENERAL
The companies in the Group are engaged in two operating business segments:
Seamless apparel ("Seamless") - The design, development, production, and
sale of intimate apparel and active wear,
using the "Seamless" method;
Knitted apparel (Cut & Sew) - The design, development, production and
sale of underwear, swimwear and sportswear
using the "Cut & Sew" method. The design
and production are done mainly in Israel,
in Jordan, and in the Far East, while the
sale of the finished product is carried
out mainly in the US and in Europe.
The Company's two operating segments are carried out in a number of main
geographic regions in the world. In Israel, the Company's place of
residence and of its subsidiaries - Hi-tex founded by Tefron Ltd., and
Macro Apparel Ltd. carry out the design, development, production and sale
of underwear, sportswear and swimwear. The subsidiaries Tefron U.S and
Tefron England carry out marketing and selling operations.
The information that the Company reports according to the definitions of
IFRS 9 is based on available financial information which is regularly
reviewed and serves the chief operating decision maker in the Company
(CODM) in order to make decisions regarding resources to be allotted to the
segments and to evaluate the segment's performance. The chief operating
decision maker in the Company is the CEO. Based on the cReiteria in IFRS 8
to determine reportable operating segments and the financial information
available and reviewed by the Company's CEO, the Company decided that it
operates in two reportable operating segments.
The financing of the Group (including financing costs and financing
revenues) and taxes on income are managed on a group basis and do not
related to the operating segments.
F - 20
TEFRON LTD
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 5 - BUSINESS SEGMENTS
B. REPORTING REGARDING OPERATING SEGMENTS
SIX MONTHS ENDED
JUNE 30, 2010
---------------------------------
SEAMLESS CUT & SEW TOTAL
------- ------- -------
UNAUDITED
---------------------------------
DOLLARS THOUSANDS
---------------------------------
External revenues 23,563 27,156 50,719
======= ======= =======
Segment results (5,618) (216) (5,834)
======= ======= =======
Financing expenses, net (908)
=======
Tax benefit 1,493
=======
Loss (5,249)
=======
SIX MONTHS ENDED
JUNE 30, 2009
-------------------------------------
SEAMLESS CUT & SEW TOTAL
------- ------- -------
UNAUDITED
-------------------------------------
DOLLARS THOUSANDS
-------------------------------------
External revenues 34,950 37,295 72,245
======= ======= =======
Segment results (4,780) (1,215) (5,995)
======= ======= =======
Financing income, net 60
=======
Taxes on income 1,460
=======
Net earnings (4,475)
=======
THREE MONTHS ENDED
JUNE 30, 2010
-------------------------------------
SEAMLESS CUT & SEW TOTAL
------- ------- -------
UNAUDITED
-------------------------------------
DOLLARS THOUSANDS
-------------------------------------
External revenues 12,139 12,807 24,946
======= ======= =======
Segment results (2,043) (216) (2,259)
======= ======= =======
Financing expenses, net (370)
=======
Tax benefit 634
=======
Loss (1,995)
=======
F - 21
TEFRON LTD
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 5 - BUSINESS SEGMENTS
B. REPORTING REGARDING OPERATING SEGMENTS
THREE MONTHS ENDED
JUNE 30, 2009
-------------------------------------
SEAMLESS CUT & SEW TOTAL
------- ------- -------
UNAUDITED
-------------------------------------
DOLLARS THOUSANDS
-------------------------------------
External revenues 13,299 11,961 25,260
======= ======= =======
Segment results (3,713) (1,949) (5,662)
======= ======= =======
Financing income, net (434)
=======
Taxes on income 1,476
=======
Net earnings (4,620)
=======
FOR THE YEAR ENDED
DECEMBER 31, 2009
-------------------------------------
SEAMLESS CUT & SEW TOTAL
------- ------- -------
UNAUDITED
-------------------------------------
DOLLARS THOUSANDS
-------------------------------------
External revenues 62,306 53,232 115,538
======= ======= =======
Segment results (13,197) (7,729) (20,926)
======= ======= =======
Other expenses (1,285)
=======
Financing expenses, net (512)
=======
Tax benefit 5,330
=======
Loss (17,393)
=======
NOTE 6 - EVENTS AFTER THE BALANCE SHEET
a. APPOINTMENT OF A NEW CHAIRMAN OF THE BOARD
On July 5, 2010, Mr. Arnon Tieberg was appointed to the position of
Company's Chairman of the Board of directors. Mr. Yaakov Gelbard, the
former Chairman of the Board of directors, ended his function on July 5,
2010.
b. RECEIPT OF A WAIVER FROM THE BANK LENDERS
On July 11, 2010, the Company received a waiver from the three bank
lenders. In the framework of the waiver, the accompanying banks notified
the Company that the objective of the EBITDA was changed, from a positive
EBITDA in 2010 to an EBITDA which will not be less than 2.1 million dollars
for 2010.
F - 22