AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 21, 2004
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 20-F/A
(AMENDMENT NO. 1)
[_] REGISTRATION STATEMENT PURSUANT TO SECTION 12(B) OR (G) OF THE SECURITIES
EXCHANGE ACT OF 1934
OR
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to ________
COMMISSION FILE NUMBER 0-28878
TEFRON LTD.
(Exact name of Registrant as specified in its charter)
ISRAEL
(Jurisdiction of incorporation or organization)
28 CHIDA STREET, BNEI-BRAK 51371, ISRAEL
(Address of principal executive offices)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
- ---------------------------- ------------------------------------------------
ORDINARY SHARES, NEW YORK STOCK EXCHANGE
NIS 1.0 PAR VALUE PER SHARE
Securities registered or to be registered pursuant to Section 12(g) of the Act:
NONE
(Title of Class)
Securities for which there is a reporting obligation pursuant to
Section 15(d) of the Act:
NONE
(Title of Class)
Indicate the number of outstanding shares of each of the issuer's classes of
capital or common stock as of the close of the period covered by the annual
report:
12,412,166 ORDINARY SHARES, NIS 1.0 PAR VALUE PER SHARE
4,500 DEFERRED SHARES, NIS 1.0 PAR VALUE PER SHARE
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [X] NO [_]
Indicate by check mark which financial statement item the registrant has elected
to follow.
ITEM 17 [_] ITEM 18 [X]
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13, or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
NOT APPLICABLE
EXPLANATORY NOTE
THIS AMENDMENT NO. 1 TO FORM 20-F IS BEING FILED FOR THE PURPOSE OF AMENDING AND
RESTATING ITEMS 3A, 5 (SPECIFICALLY, THE "OPERATING RESULTS" SUBSECTION), 18 AND
19 TO (i) REFLECT THE RESTATEMENT OF OUR CONSOLIDATED FINANCIAL STATEMENTS FOR
THE YEAR ENDED DECEMBER 31, 2003 TO CORRECT AMOUNTS PREVIOUSLY REPORTED FOR THE
AMORTIZATION OF GOVERNMENT GRANTS AND (ii) PROVIDE ADDITIONAL DETAILS TO OUR
DISCLOSURES IN THE ORIGINAL ANNUAL REPORT ON FORM 20-F IN RESPONSE TO COMMENTS
WE RECEIVED FROM THE STAFF OF THE U.S. SECURITIES AND EXCHANGE COMMISSION
("SEC") IN CONNECTION WITH ITS REVIEW OF OUR FORM F-2 THAT WE FILED ON MAY 12,
2004. IT IS ALSO FILED FOR THE PURPOSE OF CORRECTING ACCOUNTANT FEE INFORMATION
IN ITEM 16C.
ALTHOUGH ONLY THE "OPERATING RESULTS" SUBSECTION OF ITEM 5 HAS BEEN AMENDED, FOR
CONVENIENCE THE ENTIRE ITEM 5, WITH THE AMENDMENTS, IS BEING FILED IN ITS
ENTIRETY.
THIS AMENDMENT NO. 1 DOES NOT REFLECT EVENTS OCCURRING AFTER THE FILING OF THE
ORIGINAL FORM 20-F AND DOES NOT MODIFY OR UPDATE THE DISCLOSURE THEREIN IN ANY
WAY OTHER THAN FOR THE PURPOSES SET FORTH ABOVE. AS A RESULT, THIS AMENDMENT NO.
1 CONTINUES TO SPEAK AS OF APRIL 1, 2004.
TABLE OF CONTENTS
Page
PART I
ITEM 3. KEY INFORMATION 2
A. Selected Financial Data 2
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS 4
PART II
ITEM 16C. ACCOUNTANTS' FEES AND SERVICES 17
PART III
ITEM 18. FINANCIAL STATEMENTS 18
ITEM 19. EXHIBITS 19
i
INTRODUCTION
As used in this Annual Report on Form 20-F, references to "we", "our",
"us", "Tefron" or the "Company" are references to Tefron Ltd., a company
organized under the laws of the State of Israel, and its wholly-owned
subsidiaries, unless indicated otherwise.
Our consolidated financial statements have been prepared in United States
dollars and in accordance with accounting principles generally accepted in the
United States, or US GAAP. See Note 2 of the Notes to our Consolidated Financial
Statements. All references in this Annual Report to "US dollars," "dollars" or
"$" are to United States dollars and all references in this Annual Report to
"NIS" or "shekels" are to New Israeli Shekels. Unless otherwise indicated, and
when no date is specified, NIS amounts have been translated into US dollars at
NIS 4.379 to $1.00, the representative rate of exchange published by the Bank of
Israel, the Israeli central bank, for December 31, 2003. The representative
exchange rate between the NIS and the dollar as published by the Bank of Israel
for March 30, 2004 was NIS 4.516 to $1.00.
All references in this Annual Report to "Victoria's Secret" are both to the
Victoria's Secret stores and Victoria's Secret Catalog owned and operated by
Intimate Brands, Inc., a subsidiary of The Limited, Inc., and to Mast Industries
Inc., a wholly-owned subsidiary of The Limited, which imports and distributes
women's intimate apparel and related products on behalf of Victoria's Secret
stores, Victoria's Secret Catalog, Cacique and Abercrombie & Fitch. All
references in this Annual Report to "Warnaco/Calvin Klein" are to Warnaco Inc.,
the owner worldwide of the Calvin Klein trademarks, rights and business for
women's intimate apparel and men's underwear.
FORWARD-LOOKING STATEMENTS
This Annual Report contains forward-looking statements within the meaning
of the U.S. Securities Act of 1933, as amended, the U.S. Securities Exchange Act
of 1934, as amended, and the safe harbor provisions of the United States Private
Securities Litigation Reform Act of 1995. These forward-looking statements
involve risks and uncertainties and relate to our future plans, objectives,
expectations and intentions. The use of words such as "may," "will," "expect,"
"anticipate," "intend," "plan," "estimate," "believe," "continue" or other
similar expressions often identify forward-looking statements but are not the
only way we identify these statements. These forward-looking statements reflect
our current expectations and assumptions as to future events that may not prove
to be accurate. Our actual results are subject to a number of risks and
uncertainties and could differ materially from those discussed in these
statements. Factors that could contribute to these differences include, but are
not limited to, those discussed under "Item 3. Key Information," "Item 4.
Information on the Company" and "Item 5. Operating and Financial Review and
Prospects" and elsewhere in this Annual Report.
In light of the many risks and uncertainties surrounding our business and
operations, you should keep in mind that we cannot guarantee that the
forward-looking statements described in this Annual Report will transpire. In
addition, you should note that our past financial and operation performance is
not necessarily indicative of future financial and operational performance. We
undertake no obligation to update any forward-looking statements, whether as a
result of new information, future events or otherwise.
1
PART I
ITEM 3. KEY INFORMATION
3A. SELECTED FINANCIAL DATA
The following selected financial data as of December 31, 2002 and 2003 and
for each of the three years ended December 31, 2001, 2002 and 2003 have been
derived from, and should be read in conjunction with, our consolidated financial
statements and notes thereto appearing elsewhere in this Annual Report. The
selected financial data as of December 31, 1999, 2000 and 2001 and for each of
the years ended December 31, 1999 and December 31, 2000 have been derived from
our audited financial statements not included in this Annual Report. Operating
results of Alba-Waldensian, Inc., referred to in this Annual Report as Alba,
subsequent to the date of its acquisition on December 13, 1999 and through
December 31, 1999 are not material to us and accordingly are not included in the
consolidated financial statements for the year ended December 31, 1999.
Operating results of Alba are included in our consolidated financial statements
since January 1, 2000.
YEAR ENDED DECEMBER 31,
1999(3) 2000(1)(3) 2001 2002 2003(3)
--------- --------- --------- --------- ---------
(In thousands, except per share data)
STATEMENT OF INCOME DATA:
Sales, net $ 128,826 $ 223,602 $ 188,949 $ 190,305 $ 163,086
Cost of sales 111,969 199,186 169,173 151,385 139,422
Restructuring costs -- -- -- 1,550 --
--------- --------- --------- --------- ---------
Gross profit 16,857 24,416 19,776 37,370 23,644
Selling, general and administrative
expenses 5,300 20,574 20,140 18,358 20,323
Restructuring costs -- -- -- 3,793 --
--------- --------- --------- --------- ---------
Operating income (loss) 11,557 3,842 (364) 15,219 3,341
Financing expenses (income),
net 794 10,292 9,396 5,457 5,628
Other expenses, net -- -- 843 2,293 (228)
--------- --------- --------- --------- ---------
Income (loss) before taxes on income 10,763 (6,450) (10,603) 7,469 (2,059)
Taxes on income (tax benefit) 2,432 (2,142) (837) 4,979 (424)
--------- --------- --------- --------- ---------
Income (loss) after income
taxes 8,331 (4,308) (9,766) 2,490 (1,635)
Equity in losses of affiliate
company -- -- (240) (1,172) (183)
Minority interest in earnings of a
subsidiary -- -- -- (822) (2,550)
Pre-acquisition loss of subsidiary
since April 1, 2003 -- -- -- -- (85)
--------- --------- --------- --------- ---------
Income (loss) before cumulative effect
of change in accounting principles 8,331 (4,308) (10,006) 496 (4,453)
Cumulative effect of change in
accounting principle -- -- -- (17,994) --
--------- --------- --------- --------- ---------
Net income (loss) 8,331 (4,308) (10,006) (17,498) (4,453)
Basic and diluted net earnings (loss)
per share
Earnings (loss) per share before
cumulative effect of change in
accounting principles 0.67 (0.35) (0.81) 0.04 (0.36)
========= ========= ========= ========= =========
Loss per share from cumulative effect
of change in accounting principle -- -- -- (1.45) --
========= ========= ========= ========= =========
Earnings (loss) per share basic and
diluted 0.67 (0.35) (0.81) (1.41) (0.36)
========= ========= ========= ========= =========
Ordinary Shares 12,433 12,412 12,412 12,412 12,412
========= ========= ========= ========= =========
2
AT DECEMBER 31,
-------------------------------------------------------------------------------
1999 2000(1) 2001 2002 2003
--------- --------- --------- --------- ---------
(in thousands)
Cash and cash equivalents $ 15,759 $ 4,419 $ 5,078 $ 6,742 $ 6,877
Working capital (deficit) 30,542 14,404 (6,958) (6,167) (14,524)
Total assets 246,930 258,571 229,065 197,743 202,721
Total debt(2) 115,587 143,918 131,609 98,890 100,254
Shareholders' equity 72,304 67,697 58,588 41,108 36,655
- ----------
(1) Consolidated with the financial statements of Alba-Waldensian Inc. since
January 1, 2000.
(2) Total debt consists of total bank debt, other loans received and capital
lease obligations.
(3) Restated
3
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
GENERAL
OUR BUSINESS; DEVELOPMENTS
We manufacture intimate apparel, active-wear and swim-wear sold throughout
the world by name-brand marketers as well as well known American retailers and
designer labels. Through the utilization of manufacturing technologies and
techniques developed or refined by us, we are able to mass-produce quality
garments featuring unique designs tailored to our customers' individual
specifications at competitive prices. Our product line includes knitted briefs,
bras, tank tops, boxers, leggings, crop, T-shirts, nightwear, bodysuits, swim
wear, beach wear and active-wear.
We have three divisions: Cut & Sew, Seamless (also called Hi-Tex) and
Healthcare. Our Cut & Sew Division, which manufactures intimate apparel,
active-wear and swim-wear products, generated approximately 32% of our revenues
during 2003. Our Seamless Division, which manufactures intimate apparel and
active-wear products, generated approximately 45% of our revenues during 2003.
Our Healthcare Division generated approximately 23% of our revenues during 2003.
We are known for the technological innovation of our Hi-Tex and Cut-and-Sew
manufacturing processes. Our cut and sew manufacturing process involves a
vertically integrated production process and automated production techniques
using our automatic knitting machines. We are involved in all steps in the
process, from the design of the product to the knitting, dyeing, cutting and
sewing of the product. The manufacturing for our Cut & Sew Division is mainly in
Israel and Jordan.
Our Hi-Tex manufacturing process also involves a vertically integrated
production process, from the design of the product to the knitting, dyeing and
sewing of the product. However, our Hi-Tex manufacturing process utilizes
state-of-the-art technology that eliminates a significant number of stages of
the manufacturing process while enabling our Hi-Tex Division to produce a
substantially wider range of fabrics, styles and product lines at a consistently
high level of comfort, quality and durability. The Hi-Tex manufacturing process
was developed in-house through the adaptation and configuration of machinery and
equipment purchased from third parties. Although developed for our exclusive
use, most of these adaptations and configurations are not patented. The
manufacturing for our Hi-Tex Division takes mainly in Israel, where we operated
approximately 675 fully equipped Santoni knitting machines as of December 31,
2003.
Our Healthcare Division manufactures a range of textile healthcare
products, which are manufactured in the United States, Mexico and Sri Lanka.
In the end of 2002 and in 2003, we implemented strategic steps in order to
focus on our core business of apparel, consolidate our seamless manufacturing
facilities and expand our sale of new products, including active-wear products.
In September 2002, we sold approximately 52% of our interest in Alba's
Healthcare Division. In the fourth quarter of 2002, we commenced the shifting of
manufacturing of Alba's Seamless Division to our Hi-Tex Division's manufacturing
facility in Israel, which was completed in the second quarter of 2003. In
addition, during 2003, we invested significant efforts to develop and expand our
sales of new products, including active-wear products, to diversify our product
line and our client base.
The shifting of manufacturing to Israel, together with the manufacturing in
that facility of new, more complicated active-wear products in shorter
production runs, adversely affected the operational efficiency of our Hi-Tex
Division manufacturing facility in Israel for a longer period of time than
expected. This also entailed extra productions costs and selling expenses for
air shipments. The lower operational efficiencies compared to 2002, the extra
costs, coupled with lower sales to our major customer and the strengthening of
the NIS compared to the USD, were the main reasons for the decrease in our
operating income in 2003 compared to 2002.
4
CURRENCY; REVENUES; RAW MATERIALS
The currency of the primary economic environment in which our business is
conducted is the United States dollar. Consequently, we use the dollar as our
functional currency. Transactions and balances denominated in dollars are
presented at their dollar amounts. Transactions and balances in other currencies
are converted into dollars in accordance with the principles set forth in
Statement No. 52 of the Financial Accounting Standards Board and resulting gains
and losses are included in the statement of income. The financial information
below reflects our operations on a consolidated basis.
Substantially all of our revenues are derived from the sale of our
products, primarily in the United States. We recognize revenues from the sale of
our products upon shipment. Our payment terms vary based on customer and length
of relationship. We do not have any long-term supply obligations.
We purchase our raw materials from several international and domestic
suppliers and historically have not experienced any difficulty in obtaining raw
materials to meet production requirements. Raw materials are generally purchased
against actual orders, although we have a policy of maintaining a minimum level
of those raw materials that are in repeated demand. From time to time, when
market conditions are favorable, we have entered into contracts with various
suppliers of basic cotton for delivery over a period of three to six months.
OPERATING RESULTS
The following table sets forth our results of operations expressed as a
percentage of total sales for the periods indicated:
YEAR ENDED DECEMBER 31,
-----------------------------
2001 2002 2003(*)
----- ----- -----
Sales 100.0% 100.0% 100.0%
Cost of sales 89.5 80.4 85.5
----- ----- -----
Gross profit 10.5 19.6 14.5
Selling, general and administrative
expenses 10.7 11.6 12.5
----- ----- -----
Operating income before financing
expenses (0.2) 8.0 2.0
Financing income (expense), net (5.0) (2.9) (3.5)
Other income (expenses) (0.4) (1.2) 0.2
----- ----- -----
Income (loss) before income taxes (5.6) 3.9 (1.3)
Income tax expense (benefit) (0.4) 2.6 (0.3)
----- ----- -----
Income (loss) after income taxes (5.2) 1.3 (1.0)
Equity in losses of affiliated company (0.1) (0.6) (0.1)
Minority interests -- (0.4) (1.6)
----- ----- -----
Net income (loss) from ordinary activities (5.3) 0.3 (2.7)
===== ===== =====
Cumulative effect of change in accounting principle -- (9.5) --
Net income (loss) (5.3)% (9.2)% (2.7)%
===== ===== =====
(*) Restated
5
YEAR ENDED DECEMBER 31, 2003 COMPARED WITH YEAR ENDED DECEMBER 31, 2002
SALES
CONSOLIDATED. Sales for the year ended December 31, 2003 were $163.1
million, 14.3% below the sales of $190.3 million for the year ended December 31,
2002. Our sales of intimate apparel (other than to our major customer) decreased
from $51.5 million in 2002 to $46.8 million in 2003, while our sales of
active-wear and swimwear products increased from $6.5 million in 2002 to $15.8
million in 2003. Below is a table that describes our 2003 and 2002 sales of
intimate apparel, active-wear and swimwear products:
SALES
-------------------------------- --------------------------------
2002 2003
-------------------------------- --------------------------------
(Dollars in thousands)
CUT & CUT &
SEW SEAMLESS TOTAL SEW SEAMLESS TOTAL
Intimate Apparel 64,363 81,897 146,260 46,575 62,423 108,998
Active-wear 1,836 4,627 6,463 1,638 10,433 12,071
Swimwear 0 0 0 3,731 0 3,731
Total 66,199 86,524 152,723 51,944 72,856 124,800
Alba Health 37,582 38,286
190,305 163,086
CUT & SEW - ISRAEL. Sales for the year ended December 31, 2003 for
this segment were $51.9 million, 21.5% below the sales of $66.2 million for
the year ended December 31, 2002. This decrease in sales was due primarily
to a decrease in sales to our major customer resulting mainly from an
acceleration of orders to the fourth quarter of 2002 from the first quarter
of 2003 in expectation of the war in Iraq; transfer of orders from Israel
to manufacturers in other countries in expectation of the war in Iraq and
other factors; decreased prices in particular projects due to increased
competition; and decreased demand for some our products in the stores of
our major customer.
SEAMLESS. Sales for the year ended December 31, 2003 for this segment
were $72.9 million, 15.8% below the sales of $86.5 million for the year
ended December 31, 2002. This decrease in sales was due primarily to a
decrease in sales to our major customer resulting mainly from an
acceleration of orders to the fourth quarter of 2002 from the first quarter
of 2003 in expectation of the war in Iraq and decreased demand for some our
products in the stores of our major customer.
HEALTHCARE-USA. Sales for the year ended December 31, 2003 for this
segment were $38.3 million, a slight increase above the sales of $37.6
million for the year ended December 31, 2002. As a whole, our business and
customer base for this segment remained stable during this period.
6
COST OF SALES
Cost of sales consists primarily of materials, certain salaries and related
expenses, subcontracting expenses and other overhead expenses related to our
manufacturing operations. Cost of sales decreased by 7.9% to $139.4 million (as
restated) in 2003 as compared to $151.4 million in 2002 (excluding restructuring
costs of $1.6 million in 2002) primarily due to the decrease in sales, although
the decrease in cost of sales was offset by an increase in cost of sales due to
operating inefficiencies and extra costs resulting from the consolidation of
manufacturing facilities and the expansion of sales of active-wear products. As
a percentage of sales, cost of sales increased to 85.5% in 2003 as compared to
79.6% in 2002 (excluding restructuring costs of $1.6 million in 2002) primarily
due to our decreased sales, the operating inefficiencies referred to above and
the strengthening of the NIS compared to the USD. Although we believe that our
efficiency will improve as we continue to manufacture our new product lines, we
cannot assure that we will be able to return to our previous efficiency levels
in the future.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses consist primarily of costs
relating to salaries to employees engaged in sales, marketing, distribution,
administration and management activities, freight and other administrative
costs. Selling, general and administrative expenses increased by 10.7% to $20.3
million in 2003 as compared to $18.4 million in 2002 (excluding restructuring
costs of $3.8 million in 2002). As a percentage of sales, selling, general and
administrative expenses increased to 12.5% in 2003 as compared to 9.6% in 2002
(excluding restructuring costs of $3.8 million in 2002). This increase was due
to air freight charges of approximately $2 million due to delays in supplying
orders to customers resulting from the operating inefficiencies referred to
above. We believe that our air freight charges in 2004 will be less than 2003
due to improvements in our operating efficiencies, although we cannot assure
that substantially all such air freight charges will be eliminated.
OPERATING INCOME
CONSOLIDATED. Operating income for the year ended December 31, 2003 was
$3.3 million (as restated) (2.0% of sales), compared to operating income of
$15.2 million (8% of the sales) for the year ended December 31, 2002. This
decrease in operating income was due to the changes in sales, cost of sales and
selling, general and administrative expenses discussed above.
CUT & SEW - ISRAEL. Operating income for the year ended December 31,
2003 for this segment was $0.7 million (as restated) (1.4% of sales),
compared to operating income of $10.6 million (16% of the sales) for the
year ended December 31, 2002. The decrease in operating income resulted
primarily from a decrease in our gross margin from 22.9% in 2002 to 13.9%
in 2003 and from an increase in selling, general and administrative
expenses due to air freight charges due to delays in supplying orders to
customers. The decrease in our gross margin was mainly caused by the
decrease in our sales described above and decreased prices in particular
projects due to increased competition.
SEAMLESS. Operating loss for the year ended December 31, 2003 for this
segment was $4.1 million (as restated) (5.6% of sales), compared to
operating loss of $2.8 million (3.2% of the sales) for the year ended
December 31, 2002. The operating loss in 2002 included restructuring costs
of $5.3 million. This increase in operating loss was due primarily to a
decrease in our gross margin from 13% to 5.4%. This decrease in gross
margin was primarily due to operating inefficiencies and extra costs
resulting from the consolidation of manufacturing facilities and the
expansion of sales of active-wear products.
HEALTHCARE-USA. Operating income for the year ended December 31, 2003
for this segment was $6.7 million, a slight decrease from the operating
income of $7.4 million for the year ended December 31, 2002. This slight
decrease was due primarily to decreased prices resulting from increased
competition.
7
FINANCING EXPENSES, NET
Financing expenses slightly increased to $5.6 million in 2003 as compared
to $5.5 million in 2002. Financing expenses were relatively unchanged from 2002
because the principal amount of bank debt, capital lease and other loans
remained at approximately at the same level as in 2002, and there was no
material change in the interest rate paid by us on this debt from 2002 to 2003.
We believe that following the closing of the contemplated equity financings
described in "Item 10. Additional Information - 10C. Material Contracts" our
financing expenses will be reduced by approximately $800,000 annually.
INCOME TAXES
Tax benefit for 2003 was $0.4 million (as restated) as compared to tax
expenses of $5.0 million for 2002, as a result of $2.1 million pretax loss this
period compared to pretax income of $7.5 million for the same period last year.
Commencing from 2002, we ceased to record tax benefits with respect to losses in
Alba. In 2003, we reduced our deferred taxes in Alba by $1 million as a result
of an adjustment of our expected utilization of deferred taxes in light of
expected future earnings. Although we currently estimate that we will be able to
utilize the remaining balance of the deferred taxes in Alba, we cannot assure
that we will be able to do so.
YEAR ENDED DECEMBER 31, 2002 COMPARED WITH YEAR ENDED DECEMBER 31, 2001
SALES
CONSOLIDATED. Sales for the year ended December 31, 2002 were $190.3
million, slightly higher than the $188.9 million reported for the year ended
December 31, 2001.
CUT & SEW - ISRAEL. Sales for the year ended December 31, 2002 for
this segment were $66.2 million, 20.8% above the sales of $54.8 million for
the year ended December 31, 2001. This increase in sales was due primarily
to an increase in sales to our major customer resulting mainly from a
greater demand for our products in their stores.
SEAMLESS. Sales for the year ended December 31, 2002 for this segment
were $86.5 million, 9.6% below the sales of $95.7 million for the year
ended December 31, 2001. This decrease in sales was due primarily to a
decrease in sales to certain brands and mass market customers.
HEALTHCARE-USA. Sales for the year ended December 31, 2002 for this
segment were $37.6 million, a slight decrease from the sales of $38.4
million for the year ended December 31, 2001. As a whole, our business and
customer base for this segment remained stable during this period
COST OF SALES
Cost of sales consists primarily of materials, certain salaries and related
expenses, subcontracting expenses and other overhead expenses related to our
manufacturing operations. Although sales slightly increased, cost of sales
decreased by 10.5% to $151.4 million in 2002 (excluding restructuring costs of
$1.6 million) as compared to $169.2 million in 2001. As a percentage of sales,
cost of sales decreased to 79.6% in 2002 (excluding restructuring costs of $1.6
million) as compared to 89.5% in 2001. This decrease was primarily due to
improvement in material consumption and efficiency, continuing shifting of
sewing operations to lower labor cost facilities in Jordan and reduction of
other manufacturing and operating costs.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses consist primarily of costs
relating to salaries to employees engaged in sales, marketing, distribution,
administration and management activities, freight and other administrative
costs. Selling, general and administrative expenses decreased by 8.8% to $18.4
million in 2002 (excluding restructuring costs of $3.8 million) as compared to
$20.1 million in 2001. As a percentage of sales, selling, general and
administrative expenses decreased to 9.6% in 2002 (excluding restructuring costs
of $3.8 million) as compared to 10.7% in 2001. This decrease was primarily due
to the implementation of cost saving procedures, on-time delivery and, due to
the adoption of the SFAS 142 that resulted in no goodwill amortization during
this period.
8
OPERATING INCOME
CONSOLIDATED. Operating income for the year ended December 31, 2002 was
$15.2 million (8% of sales), compared to operating loss of $364,000 (0.2% of the
sales) for the year ended December 31, 2001. This change in the operating income
was due to the changes in sales, cost of sales and selling, general and
administrative expenses discussed above.
CUT & SEW - ISRAEL. Operating income for the year ended December 31,
2002 for this segment was $10.6 million (16% of sales), compared to
operating income of $2.4 million (4.4% of the sales) for the year ended
December 31, 2001. The increase in operating income resulted primarily from
an increase in our gross margin from 11% in 2001 to 22.9% in 2002. The
increase in our gross margin was mainly caused by increased sales,
decreased sewing costs due to the shifting of sewing from Israel to Jordan
and decreased production costs.
SEAMLESS. Operating loss for the year ended December 31, 2002 for this
segment was $2.8 million (3.2% of the sales), compared to operating loss of
$9.6 million (10% of the sales) for the year ended December 31, 2001. The
decrease in operating loss in 2002 primarily resulted from an increase in
our gross margin from 2.1% to 13%. This increase in gross margin resulted
mainly from a significant decrease in the percentage of manufacture of
products of unusable quality, offset by restructuring costs of $5.3 million
incurred in 2002.
HEALTHCARE-USA. Operating income for the year ended December 31, 2002
for this segment was $7.4 million, a slight increase from the operating
income of $6.9 million for the year ended December 31, 2001. As a whole,
our business and customer base for this segment remained stable during this
period.
RESTRUCTURING COST
On December 4, 2002, we announced our intention to shift manufacturing of
the Hi-Tex products from the Alba Consumer Division located in Valdese, North
Carolina to our facility in Israel during the first quarter of 2003. Marketing
and distribution will remain in the U.S. In connection with this shift and in
accordance with EITF Issue 94-3, "Liability Recognition of Certain Employee
Termination Benefits and Other Cost to Exit an Activity", we recorded in the
fourth quarter of 2002 restructuring charges of $5.3 million (of which $1.5
million were recorded in cost of sales and $3.8 million in Selling, General and
Administrative Expenses).
OTHER EXPENSES, NET
We incurred a capital loss of $2.3 million for 2002, most of which is
attributable to costs and accounting fees associated with the sale of 52% of
Alba's Health Products Division.
9
FINANCING EXPENSES, NET
Financing expenses decreased to $5.5 million in 2002 as compared to $9.4
million in 2001. This decrease is primarily attributable to a significant
decrease in bank debt, capital lease and other loans from $131.6 million as of
December 31, 2001 to $98.9 million as of December 31, 2002, and a decline in the
average rate of the LIBOR interest from an average rate of 4.5% in 2001 to an
average rate of 1.75% in 2002.
INCOME TAXES
Tax expenses for 2002 were $5.0 million as compared to $0.8 million for
2001, as a result of $7.5 million pretax income this period compared to pretax
loss of $10.6 million for the same period last year. Commencing from 2002, we
ceased to record tax benefits with respect to losses in Alba. As a result, in
2002 no tax benefit was recorded with respect to the $8.8 million loss before
taxes in Alba (mostly derived from the restructuring costs). In addition, in
2002 Alba recorded $0.4 million tax expenses which relate to previous years.
EXTRAORDINARY EXPENSE
To comply with the new Statement of Financial Accounting Standards,
Goodwill and Other Intangible Assets (SFAS) 142, we recorded a goodwill
impairment loss of $17.9 million in 2002 that was reported as cumulative effect
of change in accounting principle as of January 1, 2002. As of January 1, 2002,
we had unamortized goodwill in the amount of $48.7 million. In connection with
SFAS No. 142's annual goodwill impairment evaluation, we performed an assessment
of whether there is an indication that the goodwill is impaired as of January 1,
2002. To accomplish this, we identified our reporting units and determined,
through an independent expert, the carrying value of each reporting unit by
assigning assets and liabilities, including existing goodwill and intangible
assets, to those reporting units as of January 1, 2002. As a result, the
goodwill identified with one of the business units, which has a carrying amount
of $17.9 million, has been impaired.
LIQUIDITY AND CAPITAL RESOURCES
2003 SOURCES AND USES OF CASH
During 2003, we generated approximately $2.9 million in cash from operating
activities. This cash flow, together with short term borrowings of approximately
$15.6 million, enabled us to repay a net amount of $15.8 million of bank loans
and capital leases in 2003, pay a dividend of $1.2 million to minority
shareholders in one of our subsidiaries and finance our $1.5 million investment
in fixed assets, net of government grants and proceeds from the sale of fixed
assets. During 2003, we received government grants in the approximate amount of
$1.9 million and received proceeds from the sale of fixed assets of $0.5
million, which were used to finance part of our $3.9 million investments in
fixed assets. At December 31, 2003, we had cash and cash equivalents of $6.9
million, as compared to $6.7 million a year earlier.
DURING 2003, OUR CASH FLOW DECREASED IN COMPARISON TO 2002 MAINLY DUE TO A
DECREASE IN OUR OPERATING INCOME, AN INCREASE IN OUR ACCOUNTS RECEIVABLE DUE TO
A CHANGE IN THE MIX OF OUR CUSTOMERS, AN INCREASE IN OUR INVENTORY AND DUE TO
PAYMENTS FOR EXPENSES RECORDED IN 2002 RELATED TO THE SHIFT OF MANUFACTURING FOR
ALBA'S CONSUMER DIVISION TO ISRAEL.
10
CONTRACTUAL AND OTHER COMMITMENTS
We have various commitments primarily related to long-term debt, capital
lease obligations and short term debt. The following tables provides details
regarding our contractual cash obligations and other commercial commitments
subsequent to December 31, 2003:
CONTRACTUAL OBLIGATIONS TOTAL 2004 2005 2006 2007 +
- ---------------------------- ---------- ----------- ------- -------- -------------
Long-Term Bank Debt $65.8 $ 9.8 $24.4 $20.1 $11.5
Capital Lease Obligations $ 1.7 $ 1.4 $ 0.3 - -
Other Long-Term Obligations $ 1.0 $ 0.5 $ 0.5 - -
TOTAL CONTRACTUAL CASH
OBLIGATIONS $68.5 $11.7 $25.2 $20.1 $11.5
Other Commercial Commitments TOTAL AMOUNTS COMMITTED 2004
- ---------------------------- ---------------------------- -----------------------------
Lines of Credit $29.1 $29.1
Short Term Bank Debt $ 2.7 $ 2.7
Guarantees/Letters of Credit $ 3.8 $ 3.8
TOTAL COMMERCIAL COMMITMENTS $35.6 $35.6
- ----------
These credit line facilities are not limited in time. These amounts currently
mature on December 31, 2004.
LOAN FACILITIES
At December 31, 2003, outstanding borrowings from banks and other financial
institutions totaled approximately $98.6 million, comprised of approximately
$66.8 million of long term-debt, including current maturities of $10.3 million,
and approximately $31.8 million of short-term debt. The bank loans bear interest
at LIBOR plus 1.25% to 4.5%, and are scheduled to mature during the next six
years.
Long-term loans include a term loan facility with Bank Hapoalim B.M. and
Israel Discount Bank of New York entered into in connection with the acquisition
of Alba, in the outstanding amount of $25.6 million payable in 5 semi-annual
installments (the last four in installments of approximately $6 million each)
commencing January 17, 2005. The term loan facility and a related revolving
credit facility are secured by a floating lien on all the personal property of
Alba and its subsidiaries, pledges of all non-margin stock of Alba owned by our
U.S. subsidiary, Tefron U.S. Holdings Corp., and all subsidiary stock then owned
by Alba, and guaranties made by us, Tefron U.S. Holdings Corp. The bank loan
agreements contain various covenants which require, among others, that we
maintain certain financial ratios related to shareholders' equity and operating
results. In addition, the terms prohibit Alba from incurring certain additional
indebtedness, limit certain investments, advances or loans and restrict
substantial asset sales, cash dividends and other payments to shareholders of
Alba. These covenants and restrictions could hinder us in its operations and
growth.
Our shareholders equity as of December 31, 2003 was $36.7 million and our
ratio of shareholders'equity to total assets was 18.1%. These figures were below
the minimum level of approximately $67 million for shareholders' equity and the
minimum percentage of 30% for our ratio of shareholders' equity to total assets
required by the covenants under our credit facility with Bank Hapoalim B.M. and
Israel Discount Bank of New York. Bank Hapoalim has agreed to amend the minimum
shareholders' equity requirement to $36.5 million and the ratio of shareholders'
equity to total assets to not less than 18% for the period from December 31,
2003 to March 31, 2004 (inclusive). Israeli Discount Bank has agreed to amend
the minimum shareholders' equity requirement to $36.5 million and the ratio of
shareholders equity to total assets to not less than 18% for the period from
December 31, 2003 to March 31, 2004 (not including financial statements as of
March 31, 2004).
11
Subject to their receipt of $15 million from the proceeds of the
contemplated equity investments described below under "Contemplated Equity
Financings", Bank Hapoalim and Israel Discount Bank have agreed to permanently
amend our shareholders' equity requirement to not less than $40 million and our
ratio of shareholders' equity to total assets to not less than 20% and, subject
to receipt of such amounts, have also agreed to extend the repayment schedule of
the long term debt due to them commencing with the payments due for 2005. Under
the agreement, the aggregate amount of $56 million currently due to be paid
during the years 2005-2007 would be spread over the period from 2005-2012, such
that during each such year from 2005 until 2012 we would be obligated to pay
approximately $7 million. In addition to their receipt of the proceeds from the
equity financings, this agreement by the banks is subject to negotiation of
final documentation with us.
On September 9, 2002, we formed a new entity, AlbaHealth, with Encompass
Group, LLC, a Delaware limited liability company and General Electric Capital
Corporation, a Delaware corporation, to operate Alba's health products business.
In connection with the transaction, Alba contributed substantially all of the
assets of its Health Products Division (together with associated liabilities,
including certain existing bank indebtedness) to the capital of AlbaHealth in
exchange for a 48.325% ownership interest in AlbaHealth. Encompass and GE
Capital contributed cash to the capital of AlbaHealth in the amount of $12
million and $1 million, respectively, in exchange for a 48.325% and 3.35%
ownership interest in AlbaHealth. Following the transaction, we repaid $28
million of the term loan facility with Bank Hapoalim B.M. and Israel Discount
Bank of New York. In addition we are no longer guaranteeing a debt of $17.8
million of AlbaHealth. See "Item 10. Additional Information - 10C. Material
Contracts - AlbaHealth Credit Agreement."
Our short-term debt in the amount of approximately $31.8 million consists
of a $3 million term loan due during 2004 and one-year revolving credit
facilities in the aggregate amount of approximately $28.8 million with various
expiration dates during 2004. We expect that the one-year revolving credit
facilities will be renewed beyond their respective expiration dates. However,
the lenders under such revolving credit facilities are under no obligation to
renew such facilities. In the event that these facilities are not renewed, we
may be unable to repay outstanding amounts, and the lenders may, as a result,
declare all amounts borrowed to be due and payable. A default under the
revolving credit facilities may also trigger a default under the long-term loan
facilities described above.
CONTEMPLATED EQUITY FINANCINGS
On February 17, 2004, we announced that we had entered into an agreement
with Norfet, Limited Partnership ("Norfet"), controlled by FIMI Opportunity Fund
and certain other co-investors. Under this agreement, the investor agreed to
invest $15 million in cash in Tefron for approximately 3.53 million ordinary
shares at a base price of $4.25 per share, subject to the fulfillment of certain
terms precedents. In addition, on March 3, 2004, we announced that we has
entered into an additional agreement with a group of investors represented by
Mr. Zvi Limon, under which the investors agreed to invest $5 million in cash in
Tefron for approximately 1.07 million ordinary shares at a base price of $4.65
per share, subject to the closing of the FIMI agreement. See "Item 10.
Additional Information - C. Material Agreements - FIMI Agreements". We expect
that we will apply $15 million of the aggregate amount of $20 million from these
contemplated investments to repay short-term debt.
12
Also, on March 9, 2004, we announced that we had entered into an equity
line credit facility with Brittany Capital Management Ltd. ("Brittany"), an
entity advised by Southridge Capital Management LLC. Under the agreement, we
have an option to call funds of up to the lesser of $15 million or 19.9% of our
outstanding share capital over the next three years. Under the financing
facility, we will be entitled to issue shares to Brittany from time to time, at
our own election, subject to certain minimum and maximum limitations, but in no
event will Brittany be obligated to own more than 4.99% of our ordinary shares
at any one time. The price to be paid by Brittany will be at a discount of 6% to
the market price of our ordinary shares (as calculated under the agreement)
during a period prior to the issuance of the shares. Before drawing on the
equity line, we must satisfy certain closing conditions, including the
effectiveness of a registration statement that we must file relating to the
shares to be issued to Brittany. See "Item 10. Additional Information - C.
Material Agreements - Equity Line Credit Facility ". We expect that we will
apply any proceeds from the equity line credit facility for investments in
equipment and for working capital.
OUTLOOK
We currently believe that our cash flow from ongoing operations, our
available bank credit and proceeds from equity financings will be sufficient to
finance all of our ongoing costs and our planed investment in our business
through 2004. However, we may not generate sufficient cash from operations to
finance our ongoing costs and service our high level of debt. See "Item 3. Key
Information - 3D. Risk Factors," in particular "- We depend on a small number of
principal customers who have in the past bought our products in large volumes,"
"Our principal customers are in the retail industry, which is subject to
substantial cyclical variations" and "- Our markets are highly competitive and
some of our competitors have numerous advantages over us; we may not be able to
compete successfully." In the event sufficient cash from operations are not
generated, we may need to renegotiate the terms of the debt, refinance the debt,
obtain additional financing, postpone capital expenditures or sell assets. If
the lenders decline to renegotiate the terms of the debt, the lenders could
declare all amounts borrowed to be due and payable. If we are unable to repay
the debt, the lenders could foreclose on our assets that are subject to liens
and sell the assets to satisfy the debt. See "Item 3. Key Information - 3D. Risk
Factors - Our debt obligations may hinder our growth and put us at a competitive
disadvantage," "We require a significant amount of cash to pay our debt " and
"Due to restrictions in our loan agreements, we may not be able to operate our
business as we desire." See "Item 10. Additional Information - 10C. Material
Contracts - Credit Agreement."
SIGNIFICANT ACCOUNTING POLICIES
We prepare our consolidated financial statements in conformity with
accounting principles generally accepted in the U.S. As such, we are required to
make certain estimates, judgments and assumptions that we believe are reasonable
based upon the information available. These estimates and assumptions affect the
reported amounts of assets and liabilities at the date of the financial
statements and the reported amounts of the periods presented. To fully
understand and evaluate our reported financial results, we believe it is
important to understand the following accounting policies:
INVENTORY
We manufacture products against orders from our customers and in most
cases, purchase raw materials against these orders. We hold basic levels of
inventory for raw materials that are in repeated demand. From time to time, we
estimate the excess inventory of products and raw materials which are not
designated for existing orders as well as inventory that is not of saleable
quality, estimate their market value and reduce their carrying value
accordingly. Misjudgment in planning the basic levels of inventory or in the
assessment of the market value of the excess raw materials and products may
require us to record an inventory mark down.
PROPERTY, PLANT AND EQUIPMENT
Our property, plant and equipment are reviewed for impairment in accordance
with Statement of Financial Accounting Standard No. 144 "Accounting for the
Impairment or Disposal of Long-Lived Assets", whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to the future undiscounted cash
flows expected to be generated by the assets. If such assets are considered to
be impaired, the impairment to be recognized is measured by the amount by which
the carrying amount of the assets exceeds the fair value of the assets. Assets
to be disposed of are reported at the lower of the carrying amount or fair value
less costs to sell.
13
GOODWILL
Goodwill represents excess of the costs over the net assets of businesses
acquired. Goodwill that arose from acquisitions prior to July 1, 2001 was
amortized until December 31, 2001 on a straight-line basis over forty years.
Under Statement of Financial Accounting Standard No. 142, goodwill acquired in a
business combination for which date is on or after July 1, 2001 shall not be
amortized.
SFAS No.142 requires goodwill to be tested for impairment on adoption and
at least annually thereafter or between annual tests in certain circumstances,
and written down when impaired, rather than being amortized as previous
accounting standards required. Goodwill attributable to each of the reporting
units is tested for impairment by comparing the fair value of each reporting
unit with its carrying value.
The carrying value of goodwill recorded in our financial statement is
related to the AlbaHealth reporting unit. In preparation of the financial
statements for the year 2003, we completed our most recent review performed by
an independent expert of this reporting unit, which determined that its fair
value is greater than its carrying value, and therefore no impairment was
required in the recorded goodwill for this period. The review process uses the
income method and is based on a discounted future cash flow approach that uses
estimates for cash flow, growth of sales, profits and cost of capital, among
others, for the AlbaHealth reporting unit. We may incur charges for the
impairment of goodwill in the future if AlbaHealth fails to meet our assumed
cash flow, growth of sales and profits, or if interest rates increase
significantly.
INCOME TAXES
The Company and its subsidiaries account for income taxes in accordance
with Statement of Financial Accounting Standards No.109, "Accounting for Income
Taxes" ("SFAS No.109"). This Statement prescribes the use of the liability
method whereby deferred tax assets and liability account balances are determined
based on differences between financial reporting and tax bases of assets and
liabilities and are measured using the enacted tax rates and laws that will be
in effect when the differences are expected to reverse. The Company and its
subsidiaries provide a valuation allowance, if necessary, to reduce deferred tax
assets to their estimated realizable value.
We must assess the likelihood that we will be able to recover our deferred
tax assets. We review the balance of deferred taxes in relation to our
anticipated profits and if we estimate that it is not likely that our
anticipated profits will materialize, we record a valuation allowance against
the deferred tax assets accordingly. A future decrease in our profits or
anticipated profits may result in an additional adjustment to the carrying
amount of our deferred taxes.
In addition, the calculation of our tax liabilities involves dealing with
uncertainties in the application of complex tax regulations, particularly under
the Law for Encouragement of Capital Investments, 1959, or the Investments Law.
We estimate our tax liabilities under the various investment programs under the
Investments Law based on a complex mix of factors, including our estimates of
our future growth of revenues, the particular investment program under which
revenue will be generated and the location where such revenues will be
generated. We may need to record a charge for tax if our estimates are
inaccurate.
DESIGN AND DEVELOPMENT OF PRODUCTS
Our design and development of products department continually strives to
improve technologies and products and develop new lines of products. We estimate
that we invested approximately $2.0 million to $2.5 million in 2000, $2.5
million to $3 million in 2001, $3.5 million to $4.0 million in 2002, and $4
million to $4.5 million in 2003 on design and development of products, including
Alba.
14
IMPACT OF INFLATION AND CURRENCY FLUCTUATIONS
Because most of our revenues in the foreseeable future are expected to
continue to be generated in U.S. dollars and a significant portion of our
expenses are expected to continue to be incurred in NIS, we are exposed to the
risk of appreciation of the NIS vis-a-vis the U.S. dollar. This appreciation
would cause an increase in our NIS expenses as recorded in our U.S. dollar
denominated financial reports even though the expenses denominated in NIS will
remain unchanged. A portion of our NIS denominated expenses is linked to changes
in the Israeli cost of living index, a portion is linked to increases in NIS
payments under collective bargaining agreements and a portion is unlinked.
The dollar cost of our operations in Israel is influenced by the extent to
which any increase in the rate of inflation in Israel is (or is not) offset, or
is offset on a lagging basis, by the devaluation of the NIS in relation to the
dollar. Unless inflation in Israel is offset by a devaluation of the NIS, such
inflation will have a negative effect on our profitability because we receive
most of our payments in dollars or dollar-linked NIS, but incur a portion of our
expenses in NIS and NIS linked to the CPI. See "Item 11. Quantitative and
Qualitative Disclosures about Market Risk - Foreign Currency Risk" and
"-Interest Rate Risk."
In 2001 and 2002, the rate of devaluation of the NIS vis-a-vis the dollar
exceeded the inflation rate in Israel. During 2001 and 2002, the rate of
inflation was 1.4% and 6.5%, respectively, while NIS devalued against the U.S.
dollar by 9.3% and 7.3% in 2001 and 2002. During 2003, the rate of inflation was
(1.9)%, while NIS appreciated against the U.S. dollar by 7.6%. However, to the
extent in the future that the rate of inflation in Israel exceeds the rate of
devaluation of the NIS in relation to the dollar or if the timing of such
devaluation lags behind inflation in Israel, we may be adversely affected.
A devaluation of the NIS in relation to the dollar would have the effect of
decreasing the dollar value of any assets or receivables denominated in NIS
(unless such receivables are linked to the dollar). Such a devaluation would
also have the effect of reducing the dollar amount of any of our expenses or
liabilities which are denominated in NIS (unless such expenses or payables are
linked to the dollar). Conversely, any increase in the value of the NIS in
relation to the dollar will have the effect of increasing the dollar value of
any of our unlinked NIS assets and the dollar amounts of any of our unlinked NIS
liabilities and expenses. During 2003, we incurred expenses of approximately
$1.5 million due to the appreciation of the NIS in relation to the dollar. This
appreciation may continue in 2004.
Because exchange rates between the NIS and the dollar fluctuate
continuously (albeit with a historically declining trend in the value of the
NIS), exchange rate fluctuations and especially larger periodic devaluations
will have an impact on our profitability and on period-to-period comparisons of
our results. This impact is recorded in our consolidated financial statements in
accordance with applicable accounting principles. We may from time to time
utilize derivative financial instruments to manage risk exposure to movements in
foreign exchange rates. . We do not engage in any speculative or profit
motivated hedging activities. See "Item 3. Key Information - 3D. Risk Factors.
Since most of our revenues are generated in US dollars and a large part of our
expenses are in Israeli currency, we are subject to fluctuations in inflation
and currency rates."
EFFECTIVE CORPORATE TAX RATE
The taxable income of Israeli corporations is generally subject to
corporate tax at the statutory rate of 36%, which has been in effect since 1996.
However, most of our manufacturing facilities in Israel have been granted
Approved Enterprise status under the Investment Law, and consequently income
derived from such facilities is eligible, subject to compliance with certain
requirements, for certain tax benefits beginning when such facilities first
generate taxable income. We have derived most of our income from our Approved
Enterprise facilities. Subject to compliance with applicable requirements,
income derived from our Approved Enterprise facilities will be subject to
corporate tax at a rate of 25% for the earlier between: (i) ten years beginning
in the year that we had taxable income, (ii) twelve years from commencement of
production, or (iii) fourteen years from the date of approval.
15
In addition, should the percentage of foreign investment exceed 25%,
Approved Enterprises would qualify for reduced tax rates for an additional three
years beyond the initial seven-year period. The benefit period under each of our
Approved Enterprises will in any event expire 14 years following the date of the
approval of such Approved Enterprise by the Investment Center or 12 years after
production commences, whichever is earlier. In the event that the percentage of
foreign investment is between 49% and 74%, we would be subject to a corporate
tax rate of 20% on income derived from our Approved Enterprises. The proportion
of foreign investment is measured annually based on the lowest level of foreign
investment during the year. In addition, pursuant to the Investment Law,
Approved Enterprises related to investment programs from January 1997 onwards in
designated areas which include the location of our primary plants are exempt
from tax for the first two years of the Benefit Period commencing in the first
year in which taxable income is generated.
There can be no assurance that we will obtain approval for additional
Approved Enterprises, or that the provisions of the Investment Law will not
change, or that the above-mentioned foreign investment in our shares will be
reached for any subsequent year. See "Item 3. Key Information - 3D. Risk Factors
- - We are affected by conditions to and possible reduction of government programs
and tax benefits."
GOVERNMENT PROGRAMS
We benefit from certain Israeli government programs, particularly as a
result of the Approved Enterprise status of substantially all of our existing
production facilities in Israel. This status has enabled us to receive
investment grants with respect to certain of its capital expenditures. The
Government of Israel has reduced the investment grants available to us from 38%
of eligible annual capital expenditures in 1996 to 24% of eligible annual
capital expenditures (for projects not exceeding investments of 140 million
shekels in any year) since 1997. Commencing in 2001, such investment grants were
reduced by the Government of Israel to 20% of eligible annual capital
expenditures. There can be no assurance that the Israeli government will not
further reduce such investment grants. The termination or reduction of certain
programs (particularly benefits available to us as a result of the Approved
Enterprise status of certain of our facilities) would increase the costs of
acquiring machinery and equipment for its production facilities which could have
a material adverse effect on us. See "Item 3. Key Information - 3D. Risk Factors
- - We are affected by conditions to and possible reduction of government programs
and tax benefits."
EXCHANGE RATES
The following table sets forth the representative rates of exchange
published by the Bank of Israel based on US dollar- NIS transactions for the
periods and dates indicated.
YEAR ENDED DECEMBER 31, AVERAGE RATE HIGH LOW PERIOD END
- ----------------------- ------------ ---- --- ----------
(NIS PER $1.00)
1997 3.45 3.59 3.24 3.54
1998 3.80 4.37 3.54 4.16
1999 4.14 4.29 4.01 4.15
2000 4.08 4.20 3.97 4.04
2001 4.21 4.42 4.04 4.42
2002 4.74 4.99 4.42 4.74
2003 4.54 4.92 4.28 4.38
16
16C. ACCOUNTANTS' FEES AND SERVICES
Kost Forer Gabbay & Kasierer, a member of Ernst & Young Global, has served
as our independent public accountants for each of the fiscal years in the
two-year period ended December 31, 2003, for which audited financial statements
appear in this Annual Report on Form 20-F.
The following table presents the aggregate fees for professional services
and other services rendered by Kost, Forer Gabbay & Kasierer in Israel and by
Ernst & Young and by McGladrey & Pullen, LLP in the United States to Tefron in
2003 and 2002.
US$ 2003 US$ 2002
-------- --------
Audit Fees (1) $106,577 $121,361
Audit-related Fees (2) 101,168 67,021
Tax Fees (3) 123,528 62,172
All Other Fees (4) 1,275 0
TOTAL 332,548 250,554
Audit Fees consist of fees billed for the annual audit services engagement
and other audit services, which are those services that only the external
auditor can reasonably provide, and include the group audit; statutory audits;
comfort letters and consents; attest services; and assistance with and review of
documents filed with the SEC.
Audit-related Fees consist of fees billed for assurance and related
services that are reasonably related to the performance of the audit or review
of our financial statements or that are traditionally performed by the external
auditor, and include consultations concerning financial accounting and reporting
standards; internal control reviews of new systems, programmes and projects;
review of security controls and operational effectiveness of systems; review of
plans and control for shared service centers, due diligence related to
acquisitions; accounting assistance and audits in connection with proposed or
completed acquisitions; and employee benefit plan audits.
Tax Fees include fees billed for tax compliance services, including the
preparation of original and amended tax returns and claims for refund; tax
consultations, such as assistance and representation in connection with tax
audits and appeals, tax advice related to mergers and acquisitions, transfer
pricing, and requests for rulings or technical advice from taxing authority; tax
planning services; and expatriate tax planning and services.
All Other Fees include fees billed for training; forensic accounting; data
security reviews; treasury control reviews and process improvement and advice;
and environmental, sustainability and corporate social responsibility advisory
services.
AUDIT COMMITTEE PRE-APPROVAL POLICIES AND PROCEDURES
Below is a summary of the current Policies and Procedures.
Tefron's audit committee's main role is to assist the Board of Directors in
fulfilling its responsibility for oversight of the quality and integrity of the
accounting, auditing and reporting practices of the Company. The Audit Committee
oversees the appointment, compensation, and oversight of the public accounting
firm engaged to prepare or issue an audit report on the financial statements of
the Company. The audit committee's specific responsibilities in carrying out its
oversight role include the approval of all audit and non-audit services to be
provided by the external auditor and quarterly review the firm's non-audit
services and related fees. These services may include audit services,
audit-related services, tax services and other services, as described above. The
audit committee approves in advance the particular services or categories of
services to be provided to the Company during the following yearly period and
also sets forth a specific budget for such audit and non-audit services.
Additional services may be pre-approved by the audit committee on an individual
basis during the year.
17
During 2003, none of Audit-related Fees, Tax Fees or Other Fees provided to
us by Kost, Forer Gabbay & Kasierer in Israel or by Ernst & Young or McGladrey &
Pullen, LLP in the United States were approved by the Audit Committee pursuant
to the de minimis exception to the pre-approval requirement provided by
paragraph (c)(7)(i)(C) of Rule 2-01 of Regulation S-X.
ITEM 18. FINANCIAL STATEMENTS
Our Consolidated Financial Statements beginning on pages F-1 through F-35,
as set forth in the following index, are hereby incorporated herein by
reference. These Consolidated Financial Statements are filed as part of this
Annual Report.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Index to Consolidated Financial Statements F-1
Reports of Independent Auditors F-2 - F-3
Consolidated Balance Sheets F-4 - F-5
Consolidated Statements of Operations F-6
Statements of Changes in Shareholders' Equity F-7
Consolidated Statements of Cash Flow F-8 - F-9
Notes to the Consolidated Financial Statements F-10 - F-49
Report of Independent Auditors for 2002 Financial Statements F-50
Reports of Independent Auditors for subsidiary of Tefron, Alba Health LLC, for
2002 and 2003 Financial Statements F-51 - F-52
18
ITEM 19. EXHIBITS
1.1. Memorandum of Association of the Company (incorporated by reference to
Exhibit 3.1 to the Company's Registration Statement on Form F-1 (No.
333-7538) filed on August 29, 1997).
1.2. Restated Articles of Association of the Company (incorporated by reference
to Exhibit 1.2 to the Company's Annual Report on Form 20-F for the fiscal
year ended December 31, 2002).
2.1. Form of Credit Agreement, dated as of December 13, 1999, among AWS
Acquisition Corp., Israel Discount Bank of New York and Bank Hapoalim B.M.,
New York Branch as Administrative Agent (incorporated by reference to
Exhibit 99(b)(2) to Amendment No. 2 to Schedule 14D-1 in respect of
Alba-Waldensian, Inc. filed by the Company on December 13, 1999).
2.2. Letter, dated February 28, 2001, from Bank Hapoalim to the Company
regarding Commitments dated December 19, 1999 (incorporated by reference to
Exhibit 2.2 to the Company's Annual Report on Form 20-F for the fiscal year
ended December 31, 2000).
2.3. Letter Agreement, dated as of March 3, 2001, between Israeli Discount Bank
Ltd., Israeli Discount Bank of New York and the Company (incorporated by
reference to Exhibit 2.3 to the Company's Annual Report on Form 20-F for
the fiscal year ended December 31, 2000).
2.4. Letter, dated November 12, 2001, from the Company to Bank Hapoalim
regarding Commitments dated December 14, 1999 (incorporated by reference to
Exhibit 2.4 to the Company's Annual Report on Form 20-F for the fiscal year
ended December 31, 2001).
2.5. Letter, dated November 13, 2001, from the Company to the Israeli Discount
Bank Ltd. regarding Commitments dated December 14, 1999 (incorporated by
reference to Exhibit 2.5 to the Company's Annual Report on Form 20-F for
the fiscal year ended December 31, 2001).
2.6 Letter, dated July 30, 2002, from Bank Hapoalim to the Company regarding
shareholders equity requirements under the Credit Agreement (incorporated
by reference to Exhibit 2.6 to the Company's Annual Report on Form 20-F for
the fiscal year ended December 31, 2002).
2.7 Letter, dated August 12, 2002, from Israel Discount Bank Ltd. to the
Company regarding shareholders equity requirements under the Credit
Agreement (incorporated by reference to Exhibit 2.7 to the Company's Annual
Report on Form 20-F for the fiscal year ended December 31, 2002).
2.8 Letter, dated March 2, 2004, from Israel Discount Bank Ltd. to the Company
regarding shareholders' equity requirements under the Credit Agreement
(incorporated by reference to Exhibit 2.8 to the Company's Annual Report on
Form 20-F for the fiscal year ended December 31, 2003 filed on April 1,
2004).
2.9 Letter, dated March 2, 2004, from Bank Hapoalim to the Company regarding
shareholders' equity requirements under the Credit Agreement (incorporated
by reference to Exhibit 2.9 to the Company's Annual Report on Form 20-F for
the fiscal year ended December 31, 2003 filed on April 1, 2004).
19
2.10 Letter, dated February 16, 2004, from Israel Discount Bank to the Company
regarding revised repayment schedule and revised shareholders' equity
requirements under the Credit Agreement (incorporated by reference to
Exhibit 2.10 to the Company's Annual Report on Form 20-F for the fiscal
year ended December 31, 2003 filed on April 1, 2004).
2.11 Letter, dated February 15, 2004, from Bank Hapoalim to the Company
regarding revised repayment schedule under the Credit Agreement
(incorporated by reference to Exhibit 2.11 to the Company's Annual Report
on Form 20-F for the fiscal year ended December 31, 2003 filed on April 1,
2004).
2.12 Letter, dated March 31, 2004, from Bank Hapoalim to the Company regarding
revised shareholders' equity requirements under the Credit Agreement
(incorporated by reference to Exhibit 2.12 to the Company's Annual Report
on Form 20-F for the fiscal year ended December 31, 2003 filed on April 1,
2004).
2.13 Credit Agreement, dated September 6, 2002, among AlbaHealth LLC, as
borrower, the other borrower signatory thereto, the lenders signatory,
thereto from time to time, and General Electric Capital Corporation, as
Agent and a Lender. (incorporated by reference to Exhibit 2.8 to the
Company's Annual Report form 20-F for the fiscal year ended December 31,
2002).
2.14 Security Agreement, dated as of September 6, 2002, among the Grantor
signatory thereto, from time to time, and General Electric Capital
Corporation, as Agent for the benefit of itself and the lenders from time
to time party to the Credit Agreement (referred to in Exhibit 2.13).
2.15 Borrower Stockholders Pledge Agreement, dated as of September 6, 2002, by
and among the pledgors signatory thereto, from time to time, and General
Electric Capital Corporation, as Agent for the benefit of itself and the
lenders from time to time party to the Credit Agreement (referred to in
Exhibit 2.13).
2.16 The total amount of long-term debt securities of the Company authorized
under any instrument, other than as exhibited hereto, does not exceed 10%
of the total assets of the Company on a consolidated basis. The Company
hereby agrees to furnish to the SEC, upon request, a copy of any instrument
defining the rights of holders of long-term debt of the Company or of its
subsidiaries for which consolidated or unconsolidated financial statements
are required to be filed.
3.1 Shareholders Agreement, dated as of September 17, 1997, between Macpell
Industries Ltd., Discount Investment Company Ltd., PEC Israel Economic
Corporation, Tabriz Anstalt Ltd. and Oranim (Securities) Ltd. (incorporated
by reference to Exhibit A to the General Statement of Beneficial Ownership
of the Company on Schedule 13D filed by Arwol Holdings Ltd., Arie Wolfson,
Sigi Rabinowicz, Riza Holdings Ltd. and Macpell Industries Ltd. on February
17, 2000).
3.2. Shareholders Agreement, dated as of December 28, 1999, between Arwol
Holdings Ltd. and Avi Ruimi (incorporated by reference to Exhibit D to the
General Statement of Beneficial Ownership of the Company on Schedule 13D
filed by Arwol Holdings Ltd., Arie Wolfson, Sigi Rabinowicz, Riza Holdings
Ltd. and Macpell Industries Ltd. on February 17, 2000).
3.3. Purchase Agreement, dated as of December 30, 1999, by and among Arwol
Holdings Ltd. and Riza Holdings Ltd. (incorporated by reference to Exhibit
99.E to the General Statement of Beneficial Ownership of the Company on
Schedule 13D filed by Arwol Holdings Ltd., Arie Wolfson, Sigi Rabinowicz,
Riza Holdings Ltd. and Macpell Industries Ltd. on February 17, 2000).
20
3.4 Agreement, dated February 17, 2004, by and among Arwol Holdings Ltd.,
Macpell Industries Ltd. and Norfet, Limited Partnership (incorporated by
reference to Exhibit 3.4 to the Company's Annual Report on Form 20-F for
the fiscal year ended December 31, 2003 filed on April 1, 2004).
4.1. Agreement and Plan of Merger, dated as of November 8, 1999, by and among
Tefron U.S. Holdings Corp., AWS Acquisition Corp. and Alba-Waldensian, Inc.
(incorporated by reference to Exhibit (c)(1) to Schedule 14D-1 in respect
of Alba-Waldensian, Inc. filed by the Company on November 12, 1999)
4.2. Employment Agreement, dated as of August 5, 2002, between the Company and
Sigi Rabinowicz (incorporated by reference to Exhibit 4.2 to the Company's
Annual Report on Form 20-F for the fiscal year ended December 31, 2002).
4.3. Consulting and Management Services Agreement, dated as of August 5, 2002,
between the Company, New York Delights Ltd., and Arie Wolfson (incorporated
by reference to Exhibit 4.3 to the Company's Annual Report on Form 20 F for
the fiscal year ended December 31, 2002).
4.4. Management and Services Agreement, effective as of July 30, 2003, between
the Company, Yosef Shiran and Shiran & Partners - Consulting,
Entreprenuership, and Financing (incorporated by reference to Exhibit 4.4
to the Company's Annual Report on Form 20-F for the fiscal year ended
December 31, 2003 filed on April 1, 2004).
4.5. Lease Agreement dated as of August 12, 1997, between the Company and New
Net Assets (1994) Ltd. and an Assignment Agreement dated as of December 25,
1998 between the Company and Hi-Tex Founded by Tefron Ltd. The Company
and/or its subsidiary, Hi-Tex Founded by Tefron Ltd., have entered in to
similar lease agreements with New Net Assets (1994) Ltd. (incorporated by
reference to Exhibit 4.5 to the Company's Annual Report on Form 20-F for
the fiscal year ended December 31, 2001).
4.6 Contribution Agreement, dated as of September 6, 2002, between AlbaHealth,
LLC, Alba-Waldensian, Inc., Encompass Group, L.L.C. and General Electric
Capital Corporation (incorporated by reference to Exhibit 4.6 to the
Company's Annual Report on Form 20 F for the fiscal year ended December 31,
2002).
4.7 The Limited Liability Company Agreement of AlbaHealth LLC, dated as of
September 6, 2002, by and among AlbaHealth, LLC, Alba-Waldensian, Inc.,
Encompass Group, L.L.C. and General Electric Capital Corporation
(incorporated by reference to Exhibit - to the Company's Annual Report on
Form 20 F for the fiscal year ended December 31, 2002).
4.8 Put Option Agreement, dated as of September 6, 2002, by and among
AlbaHealth, LLC, Alba-Waldensian, Inc., Encompass Group, L.L.C. and General
Electric Capital Corporation (incorporated by reference to Exhibit 4.8 to
the Company's Annual Report on Form 20 F for the fiscal year ended December
31, 2002).
4.9 Share Purchase Agreement dated February 17, 2004, by and between the
Company and Norfet Limited Partnership, including related Registration
Rights Agreement attached as a schedule (incorporated by reference to
Exhibit 4.9 to the Company's Annual Report on Form 20-F for the fiscal year
ended December 31, 2003 filed on April 1, 2004).
4.10 Share Purchase Agreement, made as of March 3, 2004, by and between Tefron
and Leber Partners, L.P, including related Registration Rights Agreement
attached as a schedule (incorporated by reference to Exhibit 4.10 to the
Company's Annual Report on Form 20-F for the fiscal year ended December 31,
2003 filed on April 1, 2004).
21
4.11 Private Equity Credit Agreement, dated as of March 9, 2004, by and between
the Company and Brittany Capital Management Limited (incorporated by
reference to Exhibit 4.11 to the Company's Annual Report on Form 20-F for
the fiscal year ended December 31, 2003 filed on April 1, 2004).
4.12 Registration Rights Agreement, dated as of March 9, 2004, by and between
the Company and Brittany Capital Management Limited (incorporated by
reference to Exhibit 4.12 to the Company's Annual Report on Form 20-F for
the fiscal year ended December 31, 2003 filed on April 1, 2004).
8.1 List of subsidiaries of the Company (incorporated by reference to Exhibit
8.1 to the Company's Annual Report on Form 20-F for the fiscal year ended
December 31, 2003 filed on April 1, 2004).
12.(a).1 Certification by CEO pursuant to Rule 13a-14(a) or Rule 15d-14(a) of
the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of
the Sarbanes Oxley Act of 2002.
12.(a).2 Certification by CFO pursuant to Rule 13a-14(a) or Rule 15d-14(a) of
the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of
the Sarbanes Oxley Act of 2002.
13.(a).1 Certification of CEO and CFO pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
14.(a).1 Consent of Kost, Forer Gabbay & Kasierer.
14.(a).2 Consent of McGladrey & Pullen, LLP with respect to 2002 report
(incorporated by reference to Exhibit 14.(a).2 to the Company's Annual
Report on Form 20-F for the fiscal year ended December 31, 2003 filed on
April 1, 2004) .
14.(a).3 Consent of McGladrey & Pullen, LLP with respect to 2003 report.
14.(a).4 Notice Regarding Lack of Consent of Arthur Andersen LLP (incorporated
by reference to Exhibit 14.(a).4 to the Company's Annual Report on Form
20-F for the fiscal year ended December 31, 2003 filed on April 1, 2004).
22
TEFRON LTD.
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2003
U.S. DOLLARS IN THOUSANDS
INDEX
Page
-------------
REPORTS OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM F - 2 - F - 3
CONSOLIDATED BALANCE SHEETS F - 4 - F - 5
CONSOLIDATED STATEMENTS OF OPERATIONS F - 6
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY F - 7
CONSOLIDATED STATEMENTS OF CASH FLOWS F - 8 - F - 9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F - 10 - F - 49
- - - - - - - - - - - - - -
ERNST & YOUNG
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
TO THE SHAREHOLDERS OF
TEFRON LTD.
We have audited the accompanying consolidated balance sheets of Tefron Ltd.
("the Company") and its subsidiaries as of December 31, 2003 and 2002, and the
related consolidated statements of operations, changes in shareholders' equity
and cash flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits. We did not audit the
financial statements of Alba Health LLC ("Alba Health") a subsidiary, which
statements reflect total assets constituting 23.4% and 24% as of December 31,
2003 and 2002, respectively, and total revenues constituting 23.5% and 6.5% for
the years ended December 31, 2003 and for the period from September 6, 2002 to
December 31, 2002, respectively of the related consolidated totals. Those
statements were audited by other auditors whose reports have been furnished to
us, and our opinion, insofar as it relates to amounts included for Alba Health,
is based solely on the reports of the other auditors. The financial statements
of Tefron Ltd. for the year ended December 31, 2001, were audited by other
auditors who have ceased operations. Those auditors expressed an unqualified
opinion on those statements in their report dated March 25, 2002.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States of America). Those standards
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management as well
as evaluating the overall financial statement presentation. We believe that our
audits and the reports of other auditors provide a reasonable basis for our
opinion.
In our opinion, based on our audits and the report of other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of the Company and its
subsidiaries as of December 31, 2003 and 2002, and the results of their
operations and their cash flows for the years then ended, in conformity with
accounting principles generally accepted in the United States.
As discussed in Note 1g, of the notes to the consolidated financial
statements, the accompanying financial statements have been restated to correct
amounts previously reported for the amortization of government grants.
As discussed in Note 2(g) to the consolidated financial statements, on
January 1, 2002, the Company adopted SFAS 142 "Goodwill and Other Intangible
Assets".
Tel-Aviv, Israel KOST FORER GABBAY & KASIERER
September 14, 2004 A Member of Ernst & Young Global
F - 2
THIS IS A COPY OF THE PREVIOUSLY ISSUED INDEPENDENT PUBLIC ACCOUNTANTS REPORT
OF ARTHUR ANDERSEN.
THE REPORT HAS NOT BEEN REISSUED BY ARTHUR ANDERSEN.
ANDERSEN
LUBOSHITZ KASIERER
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of
TEFRON LTD.
We have audited the accompanying consolidated balance sheets of TEFRON LTD. (an
Israeli corporation) as of December 31, 2000 and 2001, and the related
consolidated statements of operations, changes in shareholders' equity and cash
flows for each of the three years in the period ended December 31, 2001. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States and in Israel, including those prescribed under the
Auditors' Regulations (Auditor's Mode of Performance), 1973. Those standards
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of TEFRON
LTD. as of December 31, 2000 and 2001, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 2001, in
conformity with accounting principles generally accepted in the United States.
/s/ LUBOSHITZ KASIERER
----------------------
Luboshitz Kasierer
Arthur Andersen
Tel-Aviv, Israel.
March 25, 2002
F - 3
TEFRON LTD. AND ITS SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
DECEMBER 31,
---------------------
NOTE 2002 *) 2003
-------- --------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 6,742 $ 6,877
Trade receivables (net of allowance for doubtful debts) 4 21,421 24,917
Other accounts receivable and prepaid expenses 5 5,459 6,166
Inventories 6 26,206 31,676
-------- --------
Total current assets 59,828 69,636
-------- --------
SEVERANCE PAY FUNDS 13 433 217
-------- --------
PROPERTY, PLANT AND EQUIPMENT:
Cost 7 150,632 157,734
Less - accumulated depreciation 50,801 60,261
-------- --------
Property, plant and equipment, net 99,831 97,473
-------- --------
OTHER ASSETS:
Goodwill 3 30,743 30,865
Deferred taxes 20 3,961 3,428
Investment in affiliated companies 8 354 296
Advance to supplier of equipment 14d 1,374 -
Other 1,219 806
-------- --------
Total other assets 37,651 35,395
-------- --------
Total assets $197,743 $202,721
======== ========
*) Restated, see Note 1g.
The accompanying notes are an integral part of the consolidated financial
statements
F - 4
TEFRON LTD. AND ITS SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE DATA
DECEMBER 31,
------------------------
NOTE 2002 *) 2003
---- --------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term bank credit 9 $ 14,767 $ 31,761
Current maturities of long-term debt:
Loans from banks and others 12 16,290 10,328
Capital leases 12 1,455 1,367
Trade payables 10 24,078 29,558
Other accounts payable and accrued expenses 11 9,405 11,146
--------- ---------
Total current liabilities 65,995 84,160
--------- ---------
LONG-TERM LIABILITIES:
Loans from banks and others 12 64,623 56,471
Capital leases 12 1,755 327
Deferred taxes 20 8,449 7,570
Accrued severance pay 13 2,123 2,486
--------- ---------
Total long-term liabilities 76,950 66,854
--------- ---------
MINORITY INTEREST 13,690 15,052
--------- ---------
Total liabilities 156,635 166,066
--------- ---------
LIENS, CONTINGENCIES AND COMMITMENTS 14
SHAREHOLDERS' EQUITY: 15
Share capital
Ordinary shares of NIS 1 par value:
Authorized - 50,000,000 shares
Issued and outstanding - 13,409,566 shares 5,575 5,575
Deferred shares of NIS 1 par value:
Authorized, issued and outstanding - 4,500 shares 1 1
Additional paid-in capital 62,810 62,810
Accumulated deficit (19,870) (24,323)
--------- ---------
48,516 44,063
Less - 997,400 Ordinary shares in treasury, at cost (7,408) (7,408)
--------- ---------
Total shareholders' equity 41,108 36,655
--------- ---------
Total liabilities and shareholders' equity $ 197,743 $ 202,721
========= =========
*) Restated, see Note 1g.
The accompanying notes are an integral part of the consolidated financial
statements
F - 5
TEFRON LTD. AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA
YEAR ENDED DECEMBER 31,
---------------------------------------
NOTE 2001 2002 **) 2003 *)
---- --------- --------- ---------
Sales, net 16 $ 188,949 $ 190,305 $ 163,086
Cost of sales 17 169,173 151,385 139,422
Restructuring costs 1e - 1,550 -
--------- --------- ---------
Gross profit 19,776 37,370 23,664
Selling, general and administrative expenses 20,140 18,358 20,323
Restructuring costs 1e - 3,793 -
--------- --------- ---------
Operating income (loss) (364) 15,219 3,341
Financial expenses, net 18 9,396 5,457 5,628
Other expenses (income), net 19 843 2,293 (228)
--------- --------- ---------
Income (loss) before taxes on income (10,603) 7,469 (2,059)
Taxes on income (tax benefit) 20 (837) 4,979 (424)
--------- --------- ---------
Income (loss) after income taxes (9,766) 2,490 (1,635)
Equity in losses of affiliated companies 8 (240) (1,172) (183)
Minority interest in earnings of a subsidiary - (822) (2,550)
Pre-acquisition earnings of subsidiary since April 1, 2003 1d - - (85)
--------- --------- ---------
Income (loss) before cumulative effect of change in
accounting principles (10,006) 496 (4,453)
Cumulative effect of change in accounting principles 3 - (17,994) -
--------- --------- ---------
Net loss $ (10,006) $ (17,498) $ (4,453)
========= ========= =========
Basic and diluted net earnings (loss) per share
earnings (loss) per share before cumulative effect of
change in accounting principles $ (0.81) $ 0.04 $ (0.36)
Loss per share from cumulative effect of change in
accounting principles - (1.45) -
--------- --------- ---------
Basic and diluted net loss per share $ (0.81) $ (1.41) $ (0.36)
========= ========= =========
*) Restated, see Note 1g.
**) Reclassified.
The accompanying notes are an integral part of the consolidated financial
statements
F - 6
TEFRON LTD. AND ITS SUBSIDIARIES
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
- --------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE DATA
ORDINARY SHARES DEFERRED SHARES ADDITIONAL
------------------------- ------------------------- PAID-IN
NUMBER **) AMOUNT NUMBER AMOUNT CAPITAL
---------- ---------- ---------- ---------- ----------
Balance as of January 1, 2001 12,412,166 $ 5,575 4,500 $ 1 $ 62,810
Foreign currency translation
adjustments - - - - -
Amortization of deferred stock
compensation - - - - -
Net loss - - - - -
---------- ---------- ---------- ---------- ----------
Balance as of December 31, 2001 12,412,166 5,575 4,500 1 62,810
Foreign currency translation
adjustments - - - - -
Amortization of deferred stock
compensation - - - - -
Net loss - - - - -
---------- ---------- ---------- ---------- ----------
Balance as of December 31, 2002 12,412,166 5,575 4,500 1 62,810
Net loss - - - - -
---------- ---------- ---------- ---------- ----------
Balance as of December 31, 2003 12,412,166 $ 5,575 4,500 $ 1 $ 62,810
========== ========== ========== ========== ==========
RETAINED ACCUMULATED
EARNINGS OTHER
(ACCUMULATED DEFERRED COMPREHENSIVE TREASURY
DEFICIT)*) COMPENSATION INCOME SHARES TOTAL *)
---------- ---------- ---------- ---------- ----------
Balance as of January 1, 2001 $ 7,634 $ (137) $ - $ (7,408) $ 68,475
Foreign currency translation
adjustments - - 50 - 50
Amortization of deferred stock
compensation - 69 - - 69
Net loss (10,006) - - - (10,006)
---------- ---------- ---------- ---------- ----------
Balance as of December 31, 2001 (2,372) (68) 50 (7,408) 58,588
Foreign currency translation
adjustments - - (50) - (50)
Amortization of deferred stock
compensation - 68 - - 68
Net loss (17,498) - - - (17,498)
---------- ---------- ---------- ---------- ----------
Balance as of December 31, 2002 (19,870) - - (7,408) 41,108
Net loss (4,453) - - - (4,453)
---------- ---------- ---------- ---------- ----------
Balance as of December 31, 2003 $ (24,323) $ - $ - $ (7,408) $ 36,655
========== ========== ========== ========== ==========
*) Restated, see Note 1g.
**) Net of 997,400 Ordinary shares in treasury held by a subsidiary.
The accompanying notes are an integral part of the consolidated financial
statements
F - 7
TEFRON LTD. AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
YEAR ENDED DECEMBER 31,
------------------------------------
2001 2002 2003 *)
-------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(10,006) $(17,498) $ (4,453)
Adjustments to reconcile net loss to net cash provided by
operating activities (a) 25,203 43,344 7,329
-------- -------- --------
Net cash provided by operating activities 15,197 25,846 2,876
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in property, plant and equipment (6,475) (2,977) (3,948)
Investment grants received 5,732 1,659 1,868
Investment in affiliated companies (1,487) (279) (125)
Proceeds from sale of property, plant and equipment - 218 499
Cash arising on acquisition of subsidiary (b) - - 300
-------- -------- --------
Net cash used in investing activities (2,230) (1,379) (1,406)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Receipt of long-term bank loans - 25,772 8,500
Repayment of long-term bank loans and other loans (8,110) (53,980) (22,614)
Payments under capital lease (3,146) (1,831) (1,691)
Increase (decrease) in short-term bank credit, net (1,052) (3,908) 15,636
Payment under issuance of shares to minority shareholders - (1,214) -
Proceeds from issuance of shares to minority shareholders - **)12,358 -
Dividend paid to minority interest in subsidiary - - (1,166)
-------- -------- --------
Net cash used in financing activities (12,308) (22,803) (1,335)
-------- -------- --------
Increase in cash and cash equivalents 659 1,664 135
Cash and cash equivalents at the beginning of the year 4,419 5,078 6,742
-------- -------- --------
Cash and cash equivalents at the end of the year $ 5,078 $ 6,742 $ 6,877
======== ======== ========
*) Restated, see Note 1g.
**) Net of issuance costs in the amount of $ 642.
The accompanying notes are an integral part of the consolidated financial
statements.
F - 8
TEFRON LTD. AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
YEAR ENDED DECEMBER 31,
------------------------------------
2001 2002 2003 *)
-------- -------- --------
(a) ADJUSTMENTS TO RECONCILE NET LOSS TO NET CASH PROVIDED BY
OPERATING ACTIVITIES
Depreciation and amortization $ 10,944 $ 9,722 $ 9,005
Increase (decrease) in accrued severance pay, net 458 1,285 (692)
Decrease (increase) in deferred income taxes, net (837) 4,571 (621)
Equity in losses of affiliated companies 240 1,172 183
Loss (gain) on disposal of property and equipment, net 915 8 (199)
Minority interest in earnings of a subsidiary - 822 2,550
Loss from issuance of shares in subsidiary to third party - 2,082 -
Pre-acquisition earnings of a subsidiary - - 85
Decrease (increase) in trade receivables, net 3,964 2,019 (3,006)
Decrease (increase) in other accounts receivable and
prepaid expenses 5,655 (343) (469)
Decrease (increase) in inventories 7,875 (2,634) (4,482)
Increase (decrease) in trade payables (1,200) 4,227 3,911
Increase (decrease) in other accounts payable and accrued
expenses (2,811) (1,753) 1,064
Goodwill write-off - 17,994 -
Restructuring cost:
Write-down of long-lived assets - 2,622 -
Inventory mark down - 1,550 -
-------- -------- --------
$ 25,203 $ 43,344 $ 7,329
======== ======== ========
(b) CASH ARISING ON ACQUISITION OF SUBSIDIARY
Working capital deficiency, net $ - $ - $ 692
Property and equipment, net - - (369)
Goodwill - - (122)
Accrued severance pay, net - - 99
-------- -------- --------
$ - $ - $ 300
======== ======== ========
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING
ACTIVITIES:
Purchase of property, plant and equipment on credit $ - $ 740 $ 2,346
======== ======== ========
CASH PAID DURING THE YEAR IN RESPECT OF:
Interest $ 10,813 $ 5,962 $ 3,538
======== ======== ========
Income taxes, net of refunds received $ - $ (37) $ 60
======== ======== ========
*) Restated, see Note 1g.
The accompanying notes are an integral part of the consolidated financial
statements.
F - 9
TEFRON LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
NOTE 1:- GENERAL
a. Tefron Ltd, a company organized under the laws of the State of Israel
("the Company") and its subsidiaries are engaged in the design,
manufacture and sale of knitted intimate apparel, beachwear and
activewear, which are manufactured using two different techniques
(seamless and cut and sew) and products for the health care industry
(see also Note 21). The Company's principal market is the United
States.
The Company's significant subsidiaries are Hi-Tex Founded by Tefron
Ltd. ("Hi-Tex"), which commenced operations in 1997, Alba-Waldensian,
Inc. ("Alba"), which was purchased in December 1999, New-Net
Industries Ltd. ("New-Net") New-Pal Ltd. ("New-Pal"), which commenced
operations in April 1999, and Macro Clothing Ltd. ("Macro") which was
purchased in April, 2003.
b. Acquisition of Macro Clothing Ltd.:
In April 2003 the Company agreed to acquire 100% of the outstanding
Ordinary shares of Macro Clothing Ltd. ("Macro")from Macpell
Industries Ltd. ("Macpell") , upon the satisfaction of certain
conditions. Pursuant to the terms of the agreement, the Company
assumed certain guarantees to the bank granted by Macpell for the
benefit of Macro in the aggregate amount of approximately $ 530.
Macpell agreed to pay the Company the amount of $ 300 to assume the
aforementioned guarantees. In addition, Macpell agreed to assign to
the Company its rights to a loan granted to Macro in the amount of
approximately $ 522. The closing day of the agreement was May 5, 2003.
Macro manufactures, markets and sells swimsuits and beachwear. The
purchase will diversify the Company's line of products.
The acquisition was accounted for as a purchase. The excess of the
consideration received over the estimated fair value of net
liabilities assumed totaled $ 122. This goodwill is not deductible for
tax purposes. See Appendix (b) to the consolidated statements of cash
flows for the fair values assigned to all assets (including goodwill)
received and liabilities assumed in the acquisition of Macro.
The operating results of Macro were consolidated for reasons of
convenience effective April 1, 2003. The operating results for the
period prior to the acquisition (from April 1, 2003 through May 5,
2003), amounting to an income of $ 85, were deducted from the
Company's consolidated results of operations.
F - 10
TEFRON LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
NOTE 1:- GENERAL (CONT.)
c. R.M.D. Robotics Ltd. ("RMD"): RMD was incorporated on May 16, 1999, in
order to develop technology products for the textile industry. RMD's
shareholders were: the Company - 25.05%, Macpell - 25.05%, and Mr.
Meir Azulai - 49.9%.
In accordance with the agreement for establishing RMD, the Company had
control over the financial and operating policies of RMD and, as a
result, its financial statements were consolidated with those of the
Company.
In 2001 RMD ceased operations. In 2002, the Company paid Mr. Azulai $
400 for his interest in the technology developed by RMD. On March 13,
2003, Mr. Azulai transferred his holdings in RMD in consideration for
the token amount of 1 U.S. Dollar. On October 9, 2003, the Company
acquired Macpell's interest in RMD in consideration for $ 200. As a
result, the Company acquired ownership of 100% of RMD's technology
that it uses in its production processes.
d. On September 6, 2002, the Health Products Division of Alba Waldensian,
Inc. ("Alba") a wholly-owned subsidiary of Tefron U.S. Holdings Corp.,
a wholly-owned subsidiary of the Company, formed a new entity with
Encompass Group, LLC, a Delaware limited liability company
("Encompass") and General Electric Capital Corporation, a Delaware
corporation ("GE Capital"), to operate Alba's health products business
through AlbaHealth, LLC, a newly formed Delaware limited liability
company ("AlbaHealth").
In connection with the formation of AlbaHealth, Alba contributed
substantially all of the assets of its health products division
(together with associated liabilities, including certain existing bank
indebtedness collateralized by such assets) to AlbaHealth in exchange
for a 48.325% ownership interest in AlbaHealth. Both Encompass and GE
Capital contributed cash to AlbaHealth in the amount of $ 12,000 and $
1,000, in exchange for a 48.325% and 3.35% ownership interest in
AlbaHealth, respectively.
For a period of three years commencing September 6, 2004, Alba and GE
Capital each is permitted to sell all, but not less than all, of their
interest in AlbaHealth (Common Units representing a 48.325% and a
3.35% interest in AlbaHealth, respectively) to Alba Health, in
exchange for its fair value, which will be determined based on a
formula set forth in the agreement.
In light of the fact that the Company has control over the financial
and operating policies of AlbaHealth (through the right to appoint the
majority of AlbaHealth's directors), the Company consolidates
AlbaHealth's financial statements with its financial statements.
As a result of the transaction and the decrease in the ownership
interest in the net assets contributed to AlbaHealth, the Company
recorded a loss of $ 2,082 (including transaction costs, amounting to
$ 1,572).
F - 11
TEFRON LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
NOTE 1:- GENERAL (CONT.)
e. On December 4, 2002, the Company announced that it would shift the
manufacturing of products from Alba located in Valdese, North Carolina
("Alba Consumer") to its facility in Israel during the first quarter
of 2003. Marketing and distribution will remain in the U.S. The
company completed the restructuring plan during 2003.
In connection with the aforementioned and in accordance with EITF
Issue 94-3, "Liability Recognition of Certain Employee Termination
Benefits and Other Costs to Exit an Activity" and SAB-100
"Restructuring and Impairment Charges", the Company recorded in the
fourth quarter of 2002 restructuring charges of $ 5,343.
The major components of the fiscal 2002 restructuring charges were as
follows:
YEAR ENDED
DECEMBER 31, 2002
-----------------
Write-down of long-lived assets $2,621
Inventory mark-down 1,550
Employee termination and severance costs 1,172
------
$5,343
======
The cash and the non-cash elements of the expenses of the
restructuring plan amounted to approximately $ 1,200 and $ 4,100,
respectively. As a result of the restructuring, 250 positions were
eliminated in Alba. The liability in respect of the employee
termination and severance costs as of December 31, 2003 and 2002
amounted to $ 214 and $ 1,172 respectively. The change in the
aforementioned liability during 2003 resulted from payment of
severance pay to the terminated employees.
f. The percentage of sales to major customers (see Note 16 for revenues
to major customers) in the United States was 75.7%, 80.5% and 75.2% in
2001, 2002 and 2003, respectively. The Company's arrangements with its
customers do not contain minimum purchase requirements and there can
be no assurance that the principal customers will continue to purchase
the Company's products in the same volumes or on the same terms as
they have done in the past. A material decrease in the quantity of
purchases made by the major customers or a material adverse change in
the terms of such purchases could have a material adverse effect on
the Company's results of operations.
g. Restatement of financial statements:
In order to present financial statements in accordance with accounting
principles generally accepted in the United States, the Company has
restated its financial statements as detailed below, in respect of
amortization of government grants relating to machinery and equipment,
which grants were received in prior years.
F - 12
TEFRON LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
To adjust for an understatement of accumulated amortization of
government grants due to the Company not recording certain
amortization of these grants in the years 1996-2000, the Company
previously recorded a one-time adjustment in 2003 (reduction of
depreciation expense) in the amount of $ 1,332. IN THESE FINANCIAL
STATEMENTS, THE ONE-TIME ADJUSTMENT, NET OF TAXES OF $332,HAS BEEN
REVERSED AND RETAINED EARNINGS AS OF JANUARY 1, 2001, HAS BEEN
INCREASED BY A CORRESPONDING AMOUNT.
THE FOLLOWING TABLE SHOWS A RECONCILIATION OF ALL AMOUNTS AS
PREVIOUSLY REPORTED AND AS RESTATED:
YEAR ENDED
DECEMBER 31, 2003
---------------------------------------
AS PREVIOUSLY
REPORTED RESTATEMENT AS RESTATED
-------- ----------- -----------
Cost of sales 138,090 1,332 139,422
Gross profit 24,996 (1,332) 23,664
Operating income 4,673 (1,332) 3,341
Loss before taxes on income (727) (1,332) (2,059)
Tax benefit (92) (332) (424)
Net loss (3,453) (1,000) (4,453)
Basic and diluted net loss per share (0.28) (0.08) (0.36)
YEAR ENDED
DECEMBER 31, 2003
-----------------------------------
AS PREVIOUSLY
REPORTED RESTATEMENT AS RESTATED
-------- ----------- -----------
Cash flows from operating activities:
Net loss (3,453) (1,000) (4,453)
Depreciation and amortization 7,673 1,332 9,005
Decrease (increase) in deferred taxes,
net (289) (332) (621)
Adjustments to reconcile net loss to net
cash provided by operating activities 6,329 1,000 7,329
F - 13
TEFRON LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
DECEMBER 31, 2002
--------------------------------------
AS PREVIOUSLY
REPORTED RESTATEMENT AS RESTATED
-------- ----------- -----------
Property, plant and equipment:
Accumulated depreciation (52,133) 1,332 (50,801)
Property, plant and equipment, net 98,499 1,332 99,831
Total assets 196,411 1,332 197,743
Deferred tax liabilities (8,117) (332) (8,449)
Total long-term liabilities (76,618) (332) (76,950)
Total liabilities (156,303) (332) (156,635)
Accumulated deficit (20,870) 1,000 (19,870)
Total shareholders' equity 40,108 1,000 41,108
JANUARY 1, 2001
-----------------------------------
AS PREVIOUSLY
REPORTED RESTATEMENT AS RESTATED
-------- ----------- -----------
Retained earnings 6,734 1,000 7,634
Total shareholders' equity 67,475 1,000 68,475
F - 14
TEFRON LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements have been prepared in conformity with
accounting principles generally accepted in the United States of America
("U.S. GAAP"). The significant accounting policies followed in the
preparation of the financial statements, applied on a consistent basis,
are:
a. The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes. Actual
results could differ from those estimates.
b. The accompanying consolidated financial statements have been prepared
in U.S. dollars, as the currency of the primary economic environment
in which the operations of the Company and its subsidiaries are
conducted is the U.S. dollar. The majority of sales is made in U.S.
dollars, and a significant portion of purchases of materials and
property, plant and equipment is in denominated U.S. dollars. Thus,
the functional and the reporting currency of the Company is the U.S.
dollar.
Transactions and balances in currencies other than U.S. dollar are
remeasured into U.S dollars in accordance with principles set forth in
Statement of Financial Accounting Standards ("SFAS") No. 52 of the
Financial Accounting Standards Board of the United States ("FASB").
The representative exchange rate at December 31, 2003 was $ 1. = 4.379
new Israeli shekels ("NIS"), (December 31, 2001 and 2002 - NIS 4.416
and NIS 4.737, respectively).
c. Principles of consolidation:
The consolidated financial statements include the accounts of the
Company and those of its wholly-owned subsidiaries and AlbaHealth (See
Note 1d). Intercompany balances and transactions have been eliminated
in consolidation.
d. Cash and cash equivalents:
Cash equivalents are short-term highly liquid investments that are
readily convertible to cash with maturities of three months or less at
the date acquired.
e. Inventories:
Inventories are stated at the lower of cost or market value. Inventory
write-offs are provided to cover risks arising from slow-moving items,
discontinued products, and items with a market price that is lower
than cost.
F - 15
TEFRON LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)
Cost is determined as follows:
Raw materials, accessories - "First-in, first-out" method.
and packaging materials
Work-in-progress and - Using standard costs which approximate
finished products actual costs.
f. Property, plant and equipment, net:
Property, plant and equipment are stated at cost, net of accumulated
depreciation and investment grants. Investment grants are recorded at
the time the Company is entitled to such grants. Depreciation is
calculated by the straight-line method over the estimated useful lives
of the assets at the following annual rates:
%
------
Buildings 2.5
Machinery and equipment 7
Installations and leasehold improvements 5 - 10
Motor vehicles 15
Furniture and office equipment 6 - 25
Leasehold improvements are amortized over the term of the lease,
including renewal options, or the useful lives of the assets,
whichever is shorter.
F - 16
TEFRON LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)
The Company's property, plant and equipment are reviewed for
impairment in accordance with Statement of Financial Accounting
Standard No.144, "Accounting for the Impairment or Disposal of
Long-Lived Assets", whenever events or changes in circumstances
indicate that the carrying amount of the assets may not be
recoverable. Recoverability of assets to be held and used is measured
by a comparison of the carrying amount of an asset to the future
undiscounted cash flows expected to be generated by the assets. If
such assets are considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying amount of
the assets exceeds the fair value of the assets. Assets to be disposed
of are reported at the lower of the carrying amount or fair value less
costs to sell.
g. Goodwill:
Goodwill represents the excess of the purchase price over the fair
value of the net assets of businesses acquired. Under Statement of
Financial Accounting Standard No.142, "Goodwill and Other Intangible
Assets" ("SFAS No. 142"), goodwill acquired in a business combination
on or after July 1, 2001, was not amortized. Goodwill that arose from
acquisitions prior to July 1, 2001, was amortized until December 31,
2001, on a straight-line basis over 40 years.
SFAS No.142 requires goodwill to be tested for impairment on adoption
and at least annually thereafter or between annual tests in certain
circumstances, and written down when impaired, rather than being
amortized as previous accounting standards required. Goodwill
attributable to each of the reporting units is tested for impairment
by comparing the fair value of each reporting unit with its carrying
value.
Goodwill was tested for impairment upon adoption of FAS 142 based on a
valuation by an independent expert. The valuation is updated annually.
h. Investments in affiliated companies:
Affiliated companies are companies (which are not subsidiaries) in
which the Company holds 20% or more of the voting interest, or
companies held less than 20%, in which the Company can exercise
significant influence over the operating and financial policies of the
affiliate. The investment in affiliated companies is accounted for by
the equity method. Income from intercompany sales, not realized
outside the Group, is eliminated.
The excess of the purchase price over the fair value of net assets
acquired has been attributed to goodwill.
The Company's investments in affiliated companies are evaluated for
evidence of an other than temporary impairment of in value. When
relevant factors indicate a impairment of in value that is other than
temporary, a provision for the decline in value is recorded. During
2003, based on management's most recent analysis, no impairment losses
have been identified (see Note 8).
F - 17
TEFRON LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)
i. Severance pay:
The Company's liability for severance pay in Israel is calculated
pursuant to Israel's Severance Pay Law based on the most recent salary
of the employees multiplied by the number of years of employment as of
the balance sheet date. Employees are entitled to one month's salary
for each year of employment or a portion thereof. The Company's
liability for all of its Israeli employees, is fully provided by
monthly deposits with insurance policies, pension and severance pay
funds and by an accrual. The value of the severance pay funds is
recorded as an asset in the Company's balance sheet. The deposited
funds include profits accumulated up to the balance sheet date. The
deposited funds may be withdrawn only upon the fulfillment of the
obligation pursuant to Israel's Severance Pay Law or labor agreements.
The value of the deposited funds is based on the cash surrendered
value of these funds.
j. Stock-based compensation:
The Company has elected to follow Accounting Principles Board Opinion
No.25 "Accounting for Stock Issued to Employees" ("APB 25") and FASB
Interpretation No.44 "Accounting for Certain Transactions Involving
Stock Compensation" ("FIN 44") in accounting for its employee stock
option plans. Under APB 25, when the exercise price of the Company's
share options is higher than or equal to the market price of the
underlying shares on the date of grant, no compensation expense is
recognized.
In 2002, the FASB issued FAS 148 "Accounting for Stock-Based
Compensation - Transition and Disclosure an amendment of FASB
Statement No. 123" ("SFAS 148"). SFAS 148 provides alternative methods
of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. FAS 148 also
requires that disclosures of the pro forma effect of using the fair
value method of accounting for stock-based employee compensation be
displayed more prominently and in a tabular format. The Company
continues to apply the provisions of APB 25 in accounting for share
based compensation.
Had compensation cost been determined under the alternative fair value
accounting method provided for under SFAS No. 123, the Company's loss
and loss per share would have been increased to the following pro
forma amounts:
F - 18
TEFRON LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)
YEAR ENDED DECEMBER 31,
-----------------------------------------
2001 2002 2003 *)
---------- ---------- ---------
Net loss: As reported $(10,006) $ (17,498) $ (4,453)
Add (1) $ 69 $ 68 $ -
Deduct (2) $ (1,329) $ (923) $ (911)
---------- ---------- ---------
Pro forma net
loss $(11,266) $ (18,353) $ (5,364)
========== ========== =========
Basic and diluted net
income (loss) per share:
Before cumulative effect
of change in accounting
principles: As reported $ (0.81) $ 0.04 $ (0.36)
Pro forma $ (0.91) $ 0.01 $ (0.43)
Net loss per share: As reported $ (0.81) $ (1.41) $ (0.36)
Pro forma $ (0.91) $ (1.47) $ (0.43)
*) Restated, see Note 1g.
(1) Stock based employee compensation expense determined under the
intrinsic value method, net of related tax effects.
(2) Total stock-based employee compensation expense determined under
the fair value based method for all awards, net of related tax
effects.
The fair value for these options was estimated at the date of grant
using a Black-Scholes option-pricing model with the following
weighted-average assumptions for 2003, 2002 and 2001:
2001 2002 2003
---- ---- ----
Risk-free interest rate 1.75% 2% 1.5%
Expected Dividend Yield 0% 0% 0%
Expected Volatility 123% 94.5% 94.2%
Expected lives 2 2 2
k. Revenue recognition:
Revenues from sales are recognized in accordance with Staff Accounting
Bulletin No. 104 "Revenue Recognition in Financial Statements", ("SAB
No. 104"), when delivery has occurred, persuasive evidence of an
agreement exists, the vendor's fee is fixed or determinable, no
further obligation exists and collectability is probable.
F - 19
TEFRON LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)
The Company's subsidiary maintains a provision for product returns, in
accordance with Statement of Financial Accounting Standard No. 48,
"Revenue Recognition When A Right Of Return Exists". The provision is
deducted from revenues and amounted to $843, $ 634 and $ 550 for the
years ended December 31, 2001, 2002 and 2003, respectively.
l. Shipping and handling costs and revenues.
Shipping and handling amounts that are billed to customers in sales
transactions, are classified as revenues.
Shipping costs to these customers, in the amount of $ 3,130 in 2003
(2002 - $ 2,046, 2001- $ 1,139), have been recorded as selling
expenses.
m. Allowance for doubtful accounts:
The allowance for doubtful accounts comprises specific accounts the
collectibility of which, based upon management's estimate, is
doubtful.
n. Income taxes:
The Company and its subsidiaries account for income taxes in
accordance with Statement of Financial Accounting Standards No.109,
"Accounting for Income Taxes". This Statement prescribes the use of
the liability method whereby deferred tax assets and liability account
balances are determined based on the differences between the financial
reporting and tax bases of assets and liabilities and are measured
using the enacted tax rates and laws that will be in effect when the
differences are expected to reverse. The Company and its subsidiaries
provide a valuation allowance, if necessary, to reduce deferred tax
assets to their estimated realizable value.
o. Fair value of financial instruments:
The carrying amount reported in the balance sheet for cash and cash
equivalents, trade receivables, short-term credit and trade payables
approximates their fair values due to the short-term maturities of
such instruments.
Values of long-term loans approximate their fair values due to the variable
interest rates on these loans.
F - 20
TEFRON LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)
Capital lease obligations are estimated by discounting the future cash
flows using current interest rates for leases of similar terms and
maturities. The carrying amount of the capital lease obligations
approximates their fair value since such obligations bear interest at
a rate which approximates market rate.
p. Derivative financial instruments:
Effective January 1, 2001, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 133 "Accounting for Derivative
Instruments and Hedging Activities".
The Company's derivative financial instruments consist of foreign
currency forward exchange and option contracts. These contracts are
utilized by the Company, from time to time, to manage risk exposure to
changes in foreign exchange rates. In 2002, a forward exchange
contract was designated as a hedging instrument, which met the
conditions for special hedge accounting. This contract was recognized
as an asset on the balance sheet at its fair value, which is the
estimated amount at which it could have been sold based on market
prices or dealer quotes. Changes in fair value are recognized in the
statement of operations together with the changes in the fair value of
the hedged item.
q. Loss per share:
Basic net loss per share is computed based on the weighted average
number of Ordinary shares outstanding during each year. Diluted net
loss per share is computed based on the weighted average number of
Ordinary shares outstanding during each year, plus dilutive potential
Ordinary shares considered outstanding during the year, in accordance
with Statement of Financial Standard No.128, "Earnings Per Share".
In all reported periods, no diluted loss per share was presented
because the effect of all outstanding options was antidilutive
(1,138,474, 1,755,874 and 1,809,323 outstanding options as of December
31, 2001, 2002 and 2003, respectively).
r. Concentrations of credit risk:
Financial instruments that potentially subject the Company and its
subsidiaries to concentrations of credit risk consist principally of
cash and cash equivalents and trade receivables.
Cash and cash equivalents are invested mainly in U.S. dollars with
major banks in Israel. Accordingly, the Company's management believes
that minimal credit risk exists with respect to cash and cash
equivalents.
Trade receivables are derived from sales to major customers located
primarily in the U.S. The Company performs ongoing credit evaluations
of their customers and obtains letters of credit for certain
receivables. An allowance for doubtful accounts is determined with
respect to those amounts that were determined to be doubtful of
collection.
F - 21
TEFRON LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)
As of the balance sheet date there are no significant
off-balance-sheet concentration of credit risk such as foreign
exchange contracts, option contracts or other foreign hedging
arrangements.
r. Impact of recently issued accounting standards:
In April 2002, the FASB issued Statement of Financial Accounting
Standard No. 145, "Rescission of FASB Statements No. 4, 44, and 64,
Amendment of FASB Statement No. 13, and Technical Corrections" ("SFAS
No. 145"), which rescinds SFAS No. 4, "Reporting Gains and Losses from
Extinguishment of Debt" and an amendment of that Statement, and SFAS
No. 64, "Extinguishments of Debt Made to Satisfy Sinking-Fund
Requirements." SFAS No. 145 also rescinds SFAS No. 44, "Accounting for
Intangible Assets for Motor Carriers." SFAS No. 145 amends SFAS No.
13, "Accounting for Leases," to eliminate an inconsistency between the
required accounting for sale-leaseback transactions and the required
accounting for certain lease modifications that have economic effects
that are similar to sale-leaseback transactions. SFAS No. 145 also
amends other existing authoritative pronouncements to make various
technical corrections, clarify meanings, or describe their
applicability under changed conditions. SFAS No. 145 is effective for
fiscal years beginning after May 15, 2002. The adoption of SFAS No.
145 has not had a material impact on the Company's results of
operations or financial position.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" ("SFAS 146"). SFAS 146
requires that a liability for a cost associated with an exit or
disposal activity be recognized and measured, initially at fair value,
only when the liability is incurred; therefore, nullifying Emerging
Issues Task Force Issue No. 94-3, "Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity
(Including Certain Costs Incurred in a Restructuring)" ("EITF 94-3")
that required a liability for an exit cost to be recognized at the
date of an entity's commitment to an exit plan. The adoption of SFAS
146 is expected to result in delayed recognition for certain types of
costs as compared with the provisions of EITF 94-3, especially for
facility closure costs. The provisions of SFAS 146 are effective for
exit or disposal activities that are initiated after December 31,
2002. The adoption of SFAS No. 146 has not had a material impact on
the Company's results of operations or financial position.
F - 22
TEFRON LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)
In April 2003, the FASB issued SFAS No. 149 ("SFAS 149"), "Amendment
of Statement 133 on Derivative Instruments and Hedging Activities."
SFAS 149 amends and clarifies (1) the accounting guidance on
derivative instruments (including certain derivative instruments
embedded in other contracts) and (2) hedging activities that fall
within the scope of FASB Statement No. 133 ("SFAS 133"), "Accounting
for Derivative Instruments and Hedging Activities." SFAS 149 amends
SFAS 133 to reflect decisions made (1) as part of the Derivatives
Implementation Group ("DIG") process that effectively required
amendments to SFAS 133, (2) in connection with other projects dealing
with financial instruments, and (3) regarding implementation issues
related to the application of the definition of a derivative. SFAS 149
is effective (1) for contracts entered into or modified after June 30,
2003, with certain exceptions, and (2) for hedging relationships
designated after June 30, 2003. The guidance is to be applied
prospectively.
Generally, SFAS 149 improves financial reporting by (1) requiring that
contracts with comparable characteristics be accounted for similarly
and (2) clarifying when a derivative contains a financing component
that warrants special reporting in the statement of cash flows. SFAS
149 is not expected to have a material impact on the Company's
financial statements.
In November 2002, the FASB issued FASB Interpretation No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others, an
Interpretation of FASB Statements No. 5, 57, and 107 and Rescission of
FASB Interpretation No. 34" ("FIN No. 45"). FIN No. 45 elaborates on
the disclosures to be made by a guarantor in its interim and annual
financial statements about its obligations under certain guarantees
that it has issued. It also clarifies that a guarantor is required to
recognize, at the inception of a guarantee, a liability for the fair
value of the obligation undertaken in issuing the guarantee. FIN No.
45 does not prescribe a specific approach for subsequently measuring
the guarantor's recognized liability over the term of the related
guarantee. It also incorporates, without change, the guidance in FASB
Interpretation No. 34, "Disclosure of Indirect Guarantees of
Indebtedness of Others," which is being superseded. The disclosure
provisions of FIN No. 45 are effective for financial statements of
interim or annual periods that end after December 15, 2002, and the
provisions for initial recognition and measurement are effective on a
prospective basis for guarantees that are issued or modified after
December 31, 2002, irrespective of a guarantor's year-end. The
adoption of FIN No. 45 did not have a material impact on the results
of operations or financial position.
F - 23
TEFRON LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)
In January 2003, the FASB issued Interpretation No. 46, "Consolidation
of Variable Interest Entities" ("FIN 46"). The objective of FIN 46 is
to improve financial reporting by companies involved with variable
interest entities. A variable interest entity is a corporation,
partnership, trust, or any other legal structure used for business
purposes that either (a) does not have equity investors with voting
rights or (b) has equity investors that do not provide sufficient
financial resources for the entity to support its activities. FIN 46
requires a variable interest entity to be consolidated by a company if
that company is subject to a majority of the risk of loss from the
variable interest entity's activities or entitled to receive a
majority of the entity's residual returns or both. FIN 46 also
requires disclosures about variable interest entities that the company
is not required to consolidate but in which it has a significant
variable interest. The consolidation requirements of FIN 46 apply
immediately to variable interest entities created after January 31,
2003. The consolidation requirements apply to older entities in the
first fiscal year or interim period ending after March 15, 2004.
Certain of the disclosure requirements apply in all financial
statements issued after January 31, 2003, regardless of when the
variable interest entity was established. As of December 31, 2003, the
Company does not expect the adoption of FIN 46 to have a material
impact on its consolidated financial statements.
s. Reclassification:
Certain prior year amounts were reclassified to conform with current
year financial statement presentation.
NOTE 3:- GOODWILL
On December 13, 1999, AWS Acquisition Corp. ("AWS"), a wholly-owned
subsidiary of Tefron U.S. Holdings Corp. ("Holdings"), a wholly-owned
subsidiary of the Company, completed its tender offer for 100% of the
outstanding Common stock of a U.S. company, Alba-Waldensian Inc. ("Alba")
which manufactures seamless apparel and specialty knitted health care
products. AWS and Holdings were formed in connection with the purchase of
Alba's stock and, immediately following the purchase, AWS was merged into
Alba, as the surviving corporation. The acquisition, which was accounted
for as a purchase, included the purchase of outstanding shares of Common
stock of Alba at $ 18.50 per share that, in addition to acquisition costs
of $ 3,273, resulted in a total purchase price of $ 63,418. The goodwill
arising on the acquisition amounted to $ 51,302.
F - 24
TEFRON LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA
NOTE 3:- GOODWILL (CONT.)
On January 1, 2002, the Company adopted SFAS 142. Accordingly, the Company,
based on a valuation by an independent expert, compared the fair value of
each reporting unit to its carrying amount. Based on the aforementioned
valuation, one reporting unit's carrying amount exceeded its fair value
and, as a result, the goodwill identified with that reporting unit, which
had a carrying amount of $ 17,994, was written off under the provisions of
SFAS No. 142. The transitional impairment loss was recognized as a
cumulative effect of a change in accounting principle as of January 1,
2002, in the Company's statement of operations.
After performing the annual impairment test for 2003, the Company concluded
that no additional impairment loss needed to be recognized in respect of
the recorded goodwill.
The changes in the carrying value of goodwill for the years ended December
31, 2002 and 2003 are as follows:
CUT AND HEALTH CARE-
SEW - ISRAEL SEAMLESS USA TOTAL
-------- -------- -------- --------
Balance as of January 1, 2002 (1) - 17,994 30,743 48,737
Impairment losses - (17,994) - (17,994)
-------- -------- -------- --------
Balance as of December 31, 2002 $ - $ - $ 30,743 $ 30,743
Investment in Macro (see Note 1b) 122 - - 122
-------- -------- -------- --------
Balance as of December 31, 2003 $ 122 $ - $ 30,743 $ 30,865
======== ======== ======== ========
(1) See Note 21 for a description of the Company's segments.
F - 25
TEFRON LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA
NOTE 3:- GOODWILL (CONT.)
The following transitional information is presented to reflect net income
(loss) and earnings (loss) per share for all periods prior to January 1,
2002, adjusted to exclude amortization of goodwill:
YEAR ENDED DECEMBER 31,
------------------------------------------
2001 2002 2003 *)
---------- ---------- ----------
Reported net income (loss) from ordinary activities $ (10,006) $ 496 $ (4,453)
Add - goodwill amortization 1,282 - -
---------- ---------- ----------
Adjusted net income (loss) from ordinary activities (8,724) 496 (4,453)
Cumulative effect of change in accounting principles - (17,994) -
---------- ---------- ----------
Adjusted net loss $ (8,724) $ (17,498) $ (4,453)
========== ========== ==========
Basic and dilutive earnings (loss) per share:
Reported net earnings (loss) per share: $ (0.81) $ 0.04 $ (0.36)
Add - goodwill amortization 0.10 - -
---------- ---------- ----------
Adjusted net earnings (loss) per share before
cumulative effect of change in accounting principles (0.71) 0.04 (0.36)
Net loss per share from cumulative effect of change in
accounting principles - 1.45 -
---------- ---------- ----------
Adjusted net loss per share $ (0.71) $ (1.41) $ (0.36)
========== ========== ==========
*) Restated, see Note 1g.
F - 26
TEFRON LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
NOTE 4:- TRADE RECEIVABLES, NET
A. COMPOSITION:
DECEMBER 31
-------------------
2002 2003
------- -------
Foreign
Major customers (see Note 16) $15,539 $14,147
Other customers 5,293 9,727
------- -------
Foreign 20,832 23,874
------- -------
Domestic (Israel) -
Related party (Macpell) 395 718
Others 194 325
------- -------
589 1,043
------- -------
$21,421 $24,917
======= =======
b. The following are changes in the allowance for doubtful debts for
each of the three years in the period ended December 31, 2003:
WRITE-OFF
BALANCE OF
AT CHARGES PREVIOUSLY BALANCE
BEGINNING TO PROFIT RECORDED AT END OF
OF PERIOD AND LOSS EXPENSES PERIOD
------ ------ ------ ------
Year ended December 31, 2003 $ 474 $ 27 $(272) $ 229
Year ended December 31, 2002 $ 749 $ 274 $(549) $ 474
Year ended December 31, 2001 $ 767 $ 428 $(446) $ 749
c. The following are the changes in the provision for product
returns for each of the three years in the period ended December
31, 2003:
DECREASE
BALANCE AT CHARGES TO DUE TO
BEGINNING PROFIT AND ACTUAL BALANCE AT
OF PERIOD LOSS RETURNS END OF PERIOD
--------- --------- --------- -------------
Year ended December 31, 2003 $ 634 $ 3,289 $(3,373) $ 550
Year ended December 31, 2002 $ 843 $ 2,614 $(2,823) $ 634
Year ended December 31, 2001 $ 967 $ 3,083 $(3,207) $ 843
F - 27
TEFRON LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
NOTE 5:- OTHER ACCOUNTS RECEIVABLE AND PREPAID EXPENSES
DECEMBER 31
-----------------
2002 2003
------ ------
Government authorities:
VAT, customs and other levies recoverable $ 987 $2,071
Investment grant receivable 2,021 1,897
Income tax advances, net of accruals 276 92
Deferred income taxes (see Note 20) 314 589
Advances to suppliers 188 303
Prepaid expenses 776 703
Other 897 511
------ ------
$5,459 $6,166
====== ======
NOTE 6:- INVENTORIES
Raw materials, accessories and packaging
materials $ 9,042 $11,128
Work-in progress 8,644 11,214
Finished products 8,520 9,334
------- -------
$26,206 $31,676
======= =======
F - 28
TEFRON LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
NOTE 7:- PROPERTY, PLANT AND EQUIPMENT, NET
Composition of assets grouped by major classifications, are as
follows:
DECEMBER 31
--------------------------
2002 *) 2003
--------- ---------
Cost:
Buildings $ 7,724 $ 7,767
Machinery and equipment (2)
164,952 171,699
Advance to supplier (3) - 1,166
Installation and leasehold improvements 4,490 5,138
Motor vehicles 784 557
Furniture and office equipment 2,969 3,562
Investment grants (30,287) (32,155)
--------- ---------
150,632 157,734
--------- ---------
Accumulated depreciation:
Buildings 584 725
Machinery and equipment 59,243 71,097
Installation and leasehold improvements 3,808 1,830
Motor vehicles 475 402
Furniture and office equipment 1,499 1,853
Investment grants (14,808) (15,646)
--------- ---------
50,801 60,261
--------- ---------
Depreciated cost $ 99,831 $ 97,473
========= =========
(1) Depreciation expense for the years ended December 31, 2001, 2002
and 2003 is $ 9,592, $ 9,722 and $ 8,592*), respectively.
(2) Included in machinery and equipment are assets under capital
leases with a cost of $ 8,464 and $ 6,079 as of December 31, 2002
and 2003, respectively. The capital leases are included in
accordance withStatement of Financial Accounting Standards No.
13, " Accounting for Leases".
(3) December 31, 2003 - Represents an advance payment to a machinery
and equipment supplier in the amount of $ 1,166, which was
exercised at the beginning of 2004 - see Note 14d.
(4) As for liens, see Note 14.
*) Restated, see Note 1g.
F - 29
TEFRON LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
NOTE 8:- INVESTMENT IN AFFILIATED COMPANIES
In June 2001, the Company acquired, through a wholly-owned subsidiary,
49.9% of JBA Production S.A. ("JBA"), a company operating in
Madagascar and engaged in the manufacture of bras, in consideration
for approximately $ 1,300.
As part of the JBA acquisition, the Company invested approximately $
200 for 50.1% ownership interest of a new marketing company, Tefrani
SA, which was designated to be engaged in the marketing of most of
JBA's products.
The investment in Tefrani is accounted for by the equity method
because its operations are immaterial.
During 2002, the Company recorded an impairment loss amounting to $
780 in respect of its investment in JBA.
During the last quarter of 2003, disputes arose between the Company
and the other shareholders in Tefrani SA and JBA. As a result, it
effectively lost its influence over those companies.
The Company's management intends to terminate its partnership with the
other shareholders.
In light of the aforementioned, the investment in Tefrani SA and JBA
is presented since September 30, 2003, on a cost basis. The balance of
the investment reflects the cash balances that, in management's
opinion, with the liquidation of operations, there is a high degree of
certainty that these balances will be paid.
a. Investment in JBA:
DECEMBER 31,
-----------------
2002 2003
----- -----
Equity, net (1) $ 194 11
Long-term loan (2) 279 382
----- -----
Total investments in JBA $ 473 393
===== =====
(1) Net equity is as follows:
Net equity as of the purchase date $ 507 507
Accumulated net losses (313) (496)
----- -----
$ 194 11
===== =====
(2) The Company granted to JBA a loan linked to the U.S. dollar and
bearing no interest. A maturity date has not yet been determined.
b. Investment in Tefrani SA:
DECEMBER 31
------------------
2002 2003
----- -----
Net equity as of the purchase date $ 200 200
Accumulated net losses (319) (297)
----- -----
Equity, net $(119) (97)
===== =====
F - 30
TEFRON LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
NOTE 9:- SHORT-TERM BANK CREDIT
WEIGHTED AVERAGE
INTEREST RATE %
-------------------
DECEMBER 31, DECEMBER 31,
------------------- -------------------
2002 2003 2002 2003
-------- -------- -------- -------
Short-term loans and overdrafts in
U.S. dollars (1) 3.2 3.3 $12,018 $30,291
Loans and overdrafts in NIS 10.4 9.0 2,749 1,470
------- -------
$14,767 $31,761
======= =======
(1) As of December 31, 2003, the Company fully utilized its short-term
credit facilities.
(2) Collateral - see Note 14.
NOTE 10:- TRADE PAYABLES
DECEMBER 31
---------------------
2002 2003
------- -------
Foreign $11,034 $12,869
Domestic (Israel) 13,044 16,689
------- -------
$24,078 $29,558
======= =======
NOTE 11:- OTHER ACCOUNTS PAYABLE AND ACCRUED
EXPENSES
Employees and payroll accruals $ 5,286 $ 5,298
Accrued expenses 2,254 2,984
Equipment suppliers 693 2,864
Severance costs related to restructuring 1,172 -
------- -------
$ 9,405 $11,146
======= =======
F - 31
TEFRON LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
NOTE 12:- LONG-TERM LOANS
a. Composition
ANNUAL INTEREST RATE %
--------------------------------
DECEMBER 31 DECEMBER 31
--------------------------- ---------------------
2002 2003 2002 2003
---------- ---------- ------- -------
Loans in U.S. dollars:
Banks 2.75 - 6.4 2.375-6.4 $78,874 $65,763
Capital lease obligation 7-9 7-9 3,210 1,694
Other 7-9 7-9 2,039 1,036
------- -------
84,123 68,493
------- -------
Less current maturities:
Loans from banks and others 16,290 10,328
Capital lease obligation 1,455 1,367
------- -------
17,745 11,695
------- -------
$66,378 $56,798
======= =======
b. The loans mature as follows:
DECEMBER 31,
2004 (current maturity) $ 11,695
2005 25,235
2006 20,109
2007 11,454
----------
$ 68,493
==========
c. The bank loan agreements contain various covenants, which
require, among others, that the Company maintain certain
financial ratios related to shareholders' equity and operating
results. In addition, the terms limit capital expenditure. As of
December 31, 2003, the Company was not in compliance with these
financial ratios. However, the Company received a waiver from the
banks regarding the financial ratios with which it was not in
compliance for this period.
In addition, the banks have agreed to new financing arrangements
with the Company that will become effective upon the closing of
the Share Purchase Agreement with the investor controlled by FIMI
(see Note 23). Such new financing arrangements contain different
financial covenants and ratiosfrom those in the Company's current
bank loan agreements.
d. As for collateral, see Note 14.
F - 32
TEFRON LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
NOTE 13:- SEVERANCE PAY FUNDS
Under Israeli law, the Company and its subsidiaries in Israel are
required to make severance payments to terminated employees. The
calculation is based on the employee's latest salary and the period of
employment. For certain employees, including officers, the obligation
for severance pay is covered by payment of premiums to insurance
companies under approved plans and by regular payments to pension
funds. For commitments that are not covered by such payments, an
amount of $ 2,486 (2002 - $ 2,123) has been accrued.
Severance pay expenses (in respect of Israeli and non-Israeli
employees) amounted to $ 1,471, $ 1,285 and $ 357 for the years ended
December 31, 2001, 2002 and 2003, respectively (in 2002, includes $
1,172, which was recorded as restructuring charges).
NOTE 14:- LIENS, CONTINGENCIES AND COMMITMENTS
a. All bank debt is collateralized by a floating charge (a
continuing charge on the Company's present and future assets but
permitting the Company to dispose of such assets in the ordinary
course of business) on all of the assets of the Company and its
subsidiaries.
b. In accordance with the provisions of the Law for the
Encouragement of Capital Investments, 1959, the Company and its
subsidiaries in Israel received grants from the State of Israel
in respect of investments in their plants (see Note 20). The
conditions in the letters of approval extending the grants from
the State of Israel primarily include the requirements that the
investments be made according to the approved plan and that at
least 30% of the investments be financed by outstanding share
capital. Non-fulfillment of these conditions would require the
refund of the grants linked to the Consumer Price Index in Israel
from the date of receipt plus interest. To guarantee fulfillment
of the conditions for receipt of the grants, the Company and its
subsidiaries have recorded floating charges on all of their
assets in favor of the State of Israel. In the opinion of
management, as of December 31, 2003, the Company and its
subsidiaries are meeting the required conditions.
c. The facilities of the Company and most of its Israeli
subsidiaries are located in buildings leased for various periods
ending between 2004 and 2012.
The Company has renewal options for additional periods.
The significant leases are with a related party, a company
controlled by the principal shareholders, ending between 2008 and
2024 (including renewal options) at an annual rental of $ 2,475.
Half of the basic rental payments is linked to Israel's CPI and
half is linked to the U.S. cost of living index.
The remaining lease payments are in, or linked to, the U.S.
dollar.
F - 33
TEFRON LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE DATA
NOTE 14:- LIENS, CONTINGENCIES AND COMMITMENTS (CONT.)
The aggregate minimum rental, commitments under non-cancelable
leases, based on the above agreements as of December 31, 2003,
are as follows:
2004 $ 3,032
2005 $ 2,800
2006 $ 2,241
2007 $ 2,154
2008 $ 2,154
2009 and thereafter $ 6,765
Rental expense for 2001, 2002 and 2003, amounted to $ 3,165, $
3,348 and $ 3,121, respectively.
d. Advance to supplier of fixed assets:
The Company has committed to purchase machinery in the amount of
approximately $ 4,660. At December 31, 2002, an amount of $ 1,374
has been paid as a 30% advance on this commitment. The advance is
linked to the Euro (December 31, 2003 - (euro)1 = $ 0.79,
December 31, 2002 - (euro)1 = $ 0.95). The advance was fully
realized at the beginning of 2004 when the Company ordered 30
machines and machinery parts in consideration for (euro) 2
million ($ 2.5 million). As a result, as of December 31, 2003,
the advance was classified to property, plant and equipment (see
also Note 7).
e. Legal proceedings:
Except as described below, there are no material pending legal
proceedings, other than ordinary routine litigation incidental to
the business to which the Company or any of its subsidiaries are
subject.
On March 5, 2003, a lawsuit was filed by a former employee of the
Company, in the Tel-Aviv Labor Court, suing for compensation
relating to the termination of his employment with the Company in
2002, in an aggregate amount of $ 1,150. The Company does not
except this lawsuit to have a material adverse effect on its
business or financial condition and, therefore, no provision has
been recorded in respect thereof.
F - 34
TEFRON LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE DATA
NOTE 15:- SHAREHOLDERS' EQUITY
a. Composition:
DECEMBER 31
2002 AND 2003
------------------------
NUMBER OF SHARES
------------------------
Ordinary shares of NIS 1 par value:
Authorized 50,000,000
Issued and outstanding 13,409,566
Treasury stock *) 997,400
Issued and outstanding less
treasury shares 12,412,166
Deferred shares of NIS 1 par value **)
Authorized, issued and outstanding 4,500
*) Relates to the Company's stock held by a wholly-owned subsidiary.
**) The deferred shares are non-transferable and entitle their
holders upon liquidation of the Company to the par value of the
shares. These shares do not have voting, dividend or any other
rights.
The Company's shares are traded on the New York Stock Exchange. (See
also Note 23).
F - 35
TEFRON LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE DATA
NOTE 15:- SHAREHOLDERS' EQUITY (CONT.)
b. Stock options:
In September 1997, the Company's Board of Directors adopted a
Share Option Plan in which 1,166,049 Ordinary shares were
reserved for issuance to directors, officers and employees of the
Company. At general meetings of shareholders in August 1999 and
July 2001, it was resolved to increase the number of shares
reserved for issuance under the Share Option Plan by 600,000 and
500,000 Ordinary Shares, respectively. The options vest over a
period of three years and expire on the tenth anniversary from
the grant date or at termination of employment.
As of December 31, 2003 448,726 options were available for future
grants under the aforementioned plan.
Most options have been issued in accordance with Section 102 of
the Income Tax Ordinance in Israel. This provided certain tax
benefits to employee participants and restricted the disposal of
the shares under the plan for a period of two years from the
grant date.
A summary of the Company's share option activity under the plan
is as follows:
WEIGHTED WEIGHTED
AVERAGE AVERAGE FAIR
NUMBER OF EXERCISE VALUE ON
SHARES PRICE GRANT DATE
---------- ---------- ----------
Outstanding January 1, 2001 1,081,533 $12.29
Granted 619,500 $ 3.53 $ 1.61
Forfeited (562,559) $13.23
----------
Outstanding December 31, 2001 1,138,474 $ 7.04
Granted 838,553 $ 3.52 $ 1.70
Forfeited (221,153) $10.31
----------
Outstanding December 31, 2002 1,755,874 $ 3.14
Granted 160,284 $ 3.5 $ 1.67
Forfeited (98,835) $10.11
----------
Outstanding December 31, 2003 1,817,323 $ 4.54
==========
F - 36
TEFRON LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
NOTE 15:- SHAREHOLDERS' EQUITY (CONT.)
The following table summarizes information about options
outstanding and exercisable at December 31, 2003:
OPTIONS
EXERCISABLE
---------------
OPTIONS WEIGHTED AVERAGE OPTIONS
OUTSTANDING AS OF REMAINING OUTSTANDING AS OF
DECEMBER 31, CONTRACTUAL DECEMBER 31,
EXERCISE PRICES 2003 LIFE (YEARS) 2003
- --------------- -------- ------------ ---------
$ 15.00 59,000 6.46 59,000
$ 9.50 100,000 5.37 100,000
$ 8.13 128,000 5.32 128,000
$ 3.89 40,000 8.59 13,333
$ 3.59 15,000 8.6 5,000
$ 3.56 300,000 7.01 300,000
$ 3.50 214,000 7.78 142,667
$ 3.50 50,000 7.92 33,333
$ 3.50 751,039 8.50 250,346
$ 3.50 160,284 9.37 -
--------- ---------
1,817,323 1,031,679
========= =========
The following table summarizes information about options
outstanding and exercisable at:
WEIGHTED AVERAGE
NUMBER OF SHARES EXERCISE PRICE
December 31, 2001 397,086 11.07
December 31, 2002 641,804 7.65
December 31, 2003 1,031,679 5.53
F - 37
TEFRON LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
NOTE 15:- SHAREHOLDERS' EQUITY (CONT.)
NOTE 16:- SALES, NET
Sales to major customers:
YEAR ENDED DECEMBER 31,
-------------------------------------------
2001 2002 2003
-------- ---------- ----------
%
-------------------------------------------
A 43.0 49.8 38.2
B 8.4 8.8 11.0
C 6.9 5.3 9.1
D 3.8 3.9 5.8
E 9.5 8.3 5.6
F 4.1 4.4 5.5
-------- ---------- ----------
75.7 80.5 75.2
======== ========== ==========
NOTE 17:- COST OF SALES
Materials $ 69,911 $ 70,274 $ 64,322
Salaries and related expenses 49,691 42,327 39,878
Subcontracting 12,811 13,750 10,673
Other production costs 21,340 18,855 19,141
Depreciation 9,224 9,060 8,048*)
-------- ---------- ----------
Total manufacturing costs 162,977 154,266 142,062*)
Decrease (increase) in work-in progress and finished
goods 6,196 (2,881) (2,640)
-------- ---------- ----------
$169,173 $ 151,385 $ 139,422*)
======== ========== ==========
*) Restated, see Note 1g.
F - 38
TEFRON LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
NOTE 18:- FINANCIAL EXPENSES, NET
YEAR ENDED DECEMBER 31,
-------------------------------------
2001 2002 2003
------- ------- -------
Expenses:
Interest on long-term loans $ 8,306 $ 3,942 $ 3,319
Interest on short-term loans 855 727 1,042
Exchange rate differences, net (28) 480 682
Bank expenses and other, net 354 335 585
------- ------- -------
9,487 5,484 5,628
Interest income on bank deposits (91) (27) -
------- ------- -------
$ 9,396 $ 5,457 $ 5,628
======= ======= =======
NOTE 19:- OTHER EXPENSES (INCOME), NET
Loss on issuance of subsidiary's shares to third
parties $ - $ 2,082 $ -
Other losses (gains) 843 211 (228)
------- ------- -------
$ 843 $ 2,293 $ (228)
======= ======= =======
NOTE 20:- TAXES ON INCOME (TAX BENEFIT)
a Composition:
Current taxes $ - $ - $ 197
Deferred taxes (837) 4,571 (621)*)
Taxes in respect of prior years - 408 -
------- ------- -------
$ (837) $ 4,979 $ (424)*)
======= ======= =======
Domestic $ (837) $ 4,571 $(1,582)*)
======= ======= =======
Foreign $ - $ 408 $ 1,158
======= ======= =======
*) Restated, see Note 1g.
b Applicable tax laws:
The Company and most of its significant subsidiaries in Israel
are subject to the Income Tax Regulations (Rules Relating to the
Maintenance of Books of Account by Foreign Investment Companies
and Certain Partnerships and the Determination of their Taxable
Income) 1986, and accordingly, maintain books for tax purposes in
U.S. dollars.
The Company and its subsidiaries in Israel are "industrial
companies" in conformity with the Law for the Encouragement of
Industry (Taxes) 1969. The principal benefits to which the
companies are entitled under this Law are accelerated rates of
depreciation, consolidated tax returns and a deduction for tax
purposes, over a three year period, of costs incurred in listing
shares for trade.
F - 39
TEFRON LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
NOTE 20:- TAXES ON INCOME
c. Tax benefits under the Law for the Encouragement of Capital
Investments, 1959 ("the Law"):
Seven expansion programs of the Company have been granted an
"Approved Enterprise" status, under the Law. For these expansion
programs, the Company has elected alternative benefits, waiving
grants in return for tax exemptions. Pursuant thereto, the income
of the Company derived from the following "Approved Enterprise"
expansion programs is tax-exempt for the periods stated below and
will be eligible for reduced tax rates thereafter (such reduced
tax rates are dependent on the level of non-Israeli investments
in the Company), as described below.
1. Income derived from the first to the fifth programs, whose
benefit periods commenced in 1997 and are to expire from
2003 to 2006, was tax-exempt for the two-year period ended
December 31, 1999, and subject to a reduced tax rate of 25%
for the subsequent years.
2. Income derived from the sixth program, whose benefit period
commenced in 1998 and is to expire in 2007, was tax-exempt
for the two-year period ended December 31, 2000 and subject
to a reduced tax rate of 25% for the subsequent years.
3. The seventh program has not yet commenced.
The entitlement to the above benefits is conditional upon the
Company fulfilling the conditions stipulated by the above law,
regulations published thereunder and the letters of approval for
the specific investments in "approved enterprises". In the event
of failure to comply with these conditions, the benefits may be
canceled and the Company may be required to refund the amount of
the benefits, in whole or in part, including interest. As of
December 31, 2003, management believes that the Company is
meeting all of the aforementioned conditions.
The period of tax benefits, detailed above, is subject to limits
of the earlier of 12 years from the commencement of production,
or 14 years from receiving the approval.
Since the Company is operating under more than one approval and
since part of its taxable income is not entitled to tax benefits
under the abovementioned law and is taxed at the regular tax rate
of 36%, its effective tax rate is the result of a weighted
combination of the various applicable tax rates and tax
exemptions, and the computation is made for income derived from
each program on the basis of formulas specified in the law and in
the approvals.
By virtue of this law, the Company is entitled to claim
accelerated depreciation on equipment used by the "Approved
Enterprise" during five tax years.
F - 40
TEFRON LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
NOTE 20:- TAXES ON INCOME (CONT.)
Shareholders are subject to tax at a rate of 15% on dividends
distributed out of income of approved enterprises and 25% on
dividends distributed from other sources of income, unless tax
treaties state otherwise.
The tax-exempt income attributable to the "Approved Enterprise"
cannot be distributed to shareholders without imposing tax
liability on the companies. As of December 31, 2003, tax exempt
profits included in retained earnings of the Company and its
subsidiary are immaterial.
If the retained tax-exempt income is distributed, it would be
taxed at the corporate tax rate applicable to such profits as if
the Company had not elected alternative tax benefits (currently -
25%) and an income tax liability would be incurred.
d. Effective tax:
A reconciliation between the theoretical tax expense, assuming
all income is taxed at the statutory tax rate applicable to
income of the Company and the actual tax expense as reported in
the statement of operations, is as follows:
YEAR ENDED DECEMBER 31,
------------------------------------------
2001 2002 2003 *)
-------- -------- --------
Income (loss) before taxes, as reported in the
consolidated statements of operations $(10,603) $ 7,469 $ (2,059)
======== ======== ========
Statutory tax rate 36% 36% 36%
======== ======== ========
Theoretical tax expense (benefit) on the above
amount at the Israeli statutory tax rate $ (3,817) $ 2,689 $ (741)
Increase (decrease) in taxes resulting from
"Approved Enterprise" benefits 504 (1,303) 198
Deferred taxes on losses for which valuation
allowance was provided 2,715 2,633 533
Exempt income (15) - -
Nondeductible expenses - 45 40
Change in tax rate used for computation of
deferred taxes - - (469)
Taxes in respect of prior years - 408
Other (224) 507 15
-------- -------- --------
Actual tax expenses (benefit) $ (837) $ 4,979 $ (424)
======== ======== ========
*) Restated, see Note 1g.
F - 41
TEFRON LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
NOTE 20:- TAXES ON INCOME (CONT.)
e. Income (loss) before taxes on income is comprised as follows:
YEAR ENDED DECEMBER 31,
-------------------------------------
2001 2002 2003*)
------- ------- -------
DOMESTIC (3,937) 17,038 (2,049)
FOREIGN (6,666) (9,569) (10)
------- ------- -------
TOTAL (10,603) 7,469 (2,059)
======= ======= =======
*) Restated, see Note 1g.
f. Deferred taxes:
Deferred income taxes reflect the net tax effect of temporary
differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used
for income tax purposes. Significant components of the Company's
deferred tax liabilities and assets are as follows:
DECEMBER 31
------------------------
2002*) 2003
-------- --------
Asset (liability) in respect of:
Property, plant and equipment $(18,063) $(17,569)
Allowances and provisions 5,601 4,427
Net operating loss carryforwards 17,177 19,011
-------- --------
Net deferred tax assets before valuation allowance 4,715 5,869
Valuation allowance (1) (8,889) (9,422)
-------- --------
Net deferred tax liability $ (4,174) $ (3,553)
======== ========
Presented in balance sheet:
Long-term liability $ (8,449) $ (7,570)
Long-term assets 3,961 3,428
Other receivables 314 589
-------- --------
Net deferred tax liability $ (4,174) $ (3,553)
======== ========
Domestic $ (8,135) $ (6,553)
Foreign 3,961 3,000
-------- --------
Net deferred tax $ (4,174) $ (3,553)
======== ========
*) Restated, see Note 1g.
(1) The net change in the total valuation allowance for the years
ended December 31, 2001, 2002 and 2003 is $ 6,196, $ 2,693 and $
533, respectively.
(2) The deferred taxes are computed based on enacted tax rates
expected to apply at the time of reversal (average rate of 22%
for Israeli companies and 37% for a subsidiary located in the
U.S.).
F - 42
TEFRON LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
NOTE 20:- TAXES ON INCOME (CONT.)
f. As of December 31, 2003 the Company's subsidiary in the U.S. had
estimated aggregate available carryforward tax losses of
approximately $ 35,000 to offset against future taxable profits,
which expire between 2020 and 2023. A valuation allowance for an
amount of $ 8,000 was recorded due to the uncertainty of the tax
asset's future realization.
As of December 31, 2003 the Company and its Israeli subsidiaries
had tax loss carryforwards of approximately $ 17,000.
Carryforward tax losses in Israel may be carryforward
indefinitely and may be offset against future taxable income.
g. Final tax assessments:
The Company and New-Net have received final tax assessments
through December 31, 1996 and 1999, respectively. Other
subsidiaries have not received a tax assessment since inception.
The Company is negotiating with Israel's tax authorities with
respect to final tax assessmentsfor the years 1997-1999. The
Company cannot predict the impact of these negotiations on the
results of operations.
F - 43
TEFRON LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
NOTE 21:- SEGMENT REPORTING
a. General information:
FABS Statement No. 131 "Disclosures about Segment of an
Enterprise and Related Information" requires companies to provide
certain information about their operating segments.
The Company has three production lines: Knitted apparel ("Cut and
Sew") Seamless apparel ("Seamless") and health care products.
Unlike the Cut and Sew process, the Seamless process includes the
utilization of a single machine, that transforms yarn directly
into a nearly complete garment.
The company has three reportable segments:
- Intimate apparel and activewear manufactured using the
Seamless process ("Seamless").
- Intimate apparel and activewear manufactured using the Cut
and Sew process located in Israel ("Cut and Sew").
- Health production, located in Tennessee, U.S. (Healthcare).
The accounting policies of the reportable segments are the same
as those described in Note 2, "Summary of significant accounting
policies". Selling, general and administrative expenses are
allocated according to management's assessment.
Management evaluates performance based upon operating income
(loss) before interest and income taxes.
F - 44
TEFRON LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
NOTE 21:- SEGMENT REPORTING (CONT.)
b. Reportable segments:
YEAR ENDED DECEMBER 31, 2003
-----------------------------------------------------------------------------
CUT &
SEW - HEALTHCARE
ISRAEL SEAMLESS USA ADJUSTMENTS CONSOLIDATED
--------- --------- --------- ----------- ---------
Sales to unaffiliated customers $ 51,944 $ 72,856 $ 38,286 $ - $ 163,086
Inter-segmental sales 1,469 - - (1,469) -
--------- --------- --------- ----------- ---------
Total sales $ 53,413 $ 72,856 $ 38,286 $ (1,469) $ 163,086
========= ========= ========= =========== =========
Operating income (loss) *) $ 704 $ (4,056) $ 6,693 $ - $ 3,341
========= ========= ========= ===========
Financial expenses, net 5,628
Other income, net (228)
---------
Loss before income taxes $ 2,059
=========
Depreciation and amortization *) $ 2,131 $ 6,452 $ 422 $ - $ 9,005
========= ========= ========= =========== =========
Identifiable and total assets at
December 31, 2003 $ 39,628 $ 101,202 $ 44,392 $ - $ 185,222
========= ========= ========= ===========
Corporate assets 17,499
---------
Total assets $ 202,721
=========
YEAR ENDED DECEMBER 31, 2002
-----------------------------------------------------------------------------
CUT &
SEW - HEALTHCARE
ISRAEL SEAMLESS USA ADJUSTMENTS CONSOLIDATED
--------- --------- --------- ----------- ---------
Sales to unaffiliated customers $ 66,199 $ 86,524 $ 37,582 $ - $ 190,305
Inter-segmental sales - 1,308 - (1,308) -
--------- --------- --------- ---------- ---------
Total sales $ 66,199 $ 87,832 $ 37,582 $ (1,308) $ 190,305
========= ========= ========= ========== =========
Operating income (loss) $ 10,611 $ (2,760) $ 7,368 $ - $ 15,219
========= ========= ========== =========
Financial expenses, net 5,457
Other expenses, net 2,293
---------
Income before income taxes $ 7,469
=========
Depreciation and amortization $ 2,989 $ 6,321 $ 412 $ - $ 9,722
========= ========= ========= ========== =========
Identifiable and total assets at
December 31, 2002 *) $ 35,297 $ 98,309 $ 44,904 $ - $ 178,510
========= ========= ========= =========
Corporate assets 19,233
---------
Total assets $ 197,743
=========
F - 45
TEFRON LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
NOTE 21:- SEGMENT REPORTING (CONT.)
YEAR ENDED DECEMBER 31, 2001
--------------------------------------------------------------
CUT & SEW HEALTHCARE
- ISRAEL SEAMLESS - USA ADJUSTMENTS CONSOLIDATED
--------- --------- --------- --------- ---------
Sales to unaffiliated customers $ 54,785 $ 95,740 $ 38,424 $ - $ 188,949
Inter-segmental sales - 1,634 - (1,634) -
--------- --------- --------- --------- ---------
Total sales $ 54,785 $ 97,374 $ 38,424 $ (1,634) $ 188,949
========= ========= ========= ========= =========
Operating income (loss) $ 2,385 $ (9,570) $ 6,872 $ (51) $ (364)
========= ========= ========= =========
Financial expenses, net 9,396
Other expenses, net 843
---------
Loss before tax benefit $ (10,603)
=========
Depreciation and amortization $ 2,970 $ 7,026 $ 948 $ - $ 10,944
========= ========= ========= ========= =========
Identifiable and total assets at
December 31, 2001 *) $ 39,715 $ 132,059 $ 37,818 $ (221) $ 209,371
========= ========= ========= =========
Corporate assets 19,694
---------
Total assets $ 229,065
=========
*) Restated, see Note 1g.
c. The Company's sales by geographic area are as follows:
YEAR ENDED DECEMBER 31,
----------------------------------
2001 2002 2003
-------- -------- --------
North America $177,539 $186,348 $154,696
Europe 6,326 1,809 4,350
Israel 2,000 1,709 2,782
Other 3,084 439 1,258
-------- -------- --------
$188,949 $190,305 $163,086
======== ======== ========
F - 46
TEFRON LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
NOTE 21:- SEGMENT REPORTING (CONT.)
d. The Company's long-lived assets by geographic area are as follows:
DECEMBER 31,
---------------------
2002*) 2003
-------- --------
Israel $ 78,415 $ 76,882
Foreign countries 54,752 51,096
-------- --------
$133,167 $127,978
======== ========
*) Restated, see Note 1g.
e. Revenues are generated by the following products
YEAR ENDED DECEMBER 31,
----------------------------------
2001 2002 2003
-------- -------- --------
Intimate apparel $144,687 $146,260 $108,998
Active wear 5,838 6,463 12,071
Swimwear - - 3,731
Healthcare products 38,424 37,582 38,286
-------- -------- --------
$188,949 $190,305 $163,086
======== ======== ========
NOTE 22:- RELATED PARTIES
a. Transactions with related parties (shareholders and companies
controlled by shareholders):
YEAR ENDED DECEMBER 31,
---------------------------------
2001 2002 2003
------- ------- -------
Sales to related parties $ 694 $ 1,019 $ 1,155
Cost of sales (1) $(2,517) $(2,475) $(2,667)
Selling, general and administrative expenses $ (550) $ (362) $ (703)
(1) Including primarily rental payments to a company controlled by
shareholders.
b. During 2003, the Company acquired Macpell's interest in RMD, in
consideration for $ 200. (See Note 1c).
F - 47
TEFRON LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA
NOTE 23:- SUBSEQUENT EVENTS
a. On February 17, 2004, the Company entered into a Share Purchase
Agreement ("SPA") with a partnership ("the Investor") controlled by
FIMI Opportunity Fund ("FIMI") and certain other co-investors,
including Mivtach Shamir Holding Corporation Ltd. Under the SPA, the
Investor will, subject to the fulfillment of certain preconditions,
invest in the Company $ 15,000 in cash for approximately 3.53 million
Ordinary shares of the Company at a base price of $ 4.25 per share.
In addition to the SPA, the Investor entered into an agreement
("Additional Purchase Agreement") with the major shareholders of the
Company, Macpell Industries Ltd. ("Macpell") and its controlling
shareholder Arwol Holdings Ltd. ("Arwol"), to purchase from them an
additional 1,365,000 Ordinary shares of the Company, at a base price
of $ 5.538 per share at an aggregate purchase price of about $ 7,560.
The Additional Purchase Agreement includes a shareholders' agreement
between the Investor, Macpell and Arwol. Subsequent to the
consummation of all transactions contained in the SPA and in the
Additional Purchase Agreement, the Investor will join the controlling
group of Macpell and Arwol. The controlling group will hold
approximately 60% of the issued share capital of the Company, of which
the Investor will be holding about half.
According to the SPA, the base price per share for the Company and for
Macpell and Arwol will be subject to adjustments and may be increased
or reduced by up to $ 0.75 per share. In the event that a reduction is
required, the Company will have the discretion to issue additional
shares to the Investor or to refund a proportionate amount that was
paid by the Investor to The Company. Similar discretion is provided to
Macpell and Arwol under the Additional Purchase Agreement.
The Investor has also entered into a Registration Rights Agreement
with the Company, identical to that entered into by the Company, Arwol
and Macpell in November 2003, with a change to permit a demand for a
Form F-3 "shelf registration", which will be added to the existing
Registration Rights Agreements.
The execution of the agreement is subject, among other things, to the
approval of the SPA by the shareholders of the Company and new
financing arrangements between the Company and its financing banks,
and the Investor and its financing banks. The Investor may terminate
the agreements in the event that the average closing price of the
Company's shares on NYSE over 30 consecutive trading days immediately
preceding the closing date shall be less than $ 3.14.
Under the Agreement, the parties agree that annual management fees
shall be paid to FIMI in consideration for management services on a
non-exclusive basis, which shall be $ 172 per annum for the period
until the Company's general meeting in 2005, and up to $ 120 per annum
for the subsequent period. It was further agreed that as of the date
on which Mr. Wolfson shall cease to serve as Chairman of the Company's
Board of Directors, the existing consulting agreement between the
Company and a company acting on behalf of Mr. Wolfson shall be amended
so that the consideration to which he shall be entitled for the
consulting services he will continue to provide to the Company
(although not as the Chairmen of its Board of Directors) shall be
reduced from approximately $ 254 to $ 120 per annum.
F - 48
TEFRON LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA
NOTE 23:- SUBSEQUENT EVENTS (CONT.)
b. The Company announced on March 3, 2004 that it has entered into an
additional Share Purchase Agreement with a group of Investors
represented by Mr. Zvi Limon. Under this agreement, the investors
will, subject to the closing of the Share Purchase Agreement made on
February 17, 2004, between the company and FIMI, invest in Tefron $
5,000 in cash for approximately 1.07 million Ordinary shares of the
Company at a base price of $ 4.65 per share. The Company has an option
to issue the investor, within 90 days from the closing of this
transaction, additional shares at the same price and terms for the
total additional investment of up to $ 2,000.
According to the agreement, the base price per share will be subject
to adjustments and may be increased or reduced by up to $ 0.75 per
share. The investor has also entered into a Registration Rights
Agreement with the Company.
The execution of the agreement is subject, among other things to the
execution of the SPA agreement aforementioned.
c. On March 9, 2004 the Company announced that it had entered into a
Private Equity Credit Agreement with funds advised by Southridge
Capital Management LLC ("Southridge"). Under the agreement, the
Company has an option to call funds from an equity credit line
facility provided by Southridge of up to the lesser of $ 15,000 or
19.9% of The Company's outstanding share capital over the next three
years. Under the financing facility, the Company will be entitled to
issue shares to Southridge from time to time, at its own election,
subject to certain minimum and maximum limitations, but in no event
will Southridge be obligated to own more than 4.99% of the Company's
Ordinary shares at any one time. The price to be paid by Southridge
will be at a discount of 6% on the market price of the Company's
Ordinary shares (as calculated under the agreement) during a period
prior to the issuance of the shares. Before drawing on the equity
line, the Company must satisfy certain closing conditions, including
the effectiveness of a registration statement to be filed by the
Company, relating to the shares to be issued to Southridge.
d. In March 2004, the Company granted 650,000 options to Yosef Shiran
(the Company's CEO). The exercise price was set at $ 4.25, and the
vesting periods are spread over 10 years from the date of the grant.
The grant is subject to the shareholders' approval.
F - 49
ERNST & YOUNG
REPORT OF INDEPENDENT AUDITORS
TO THE SHAREHOLDERS OF
TEFRON LTD.
We have audited the accompanying consolidated balance sheets of Tefron Ltd.
("the Company") and its subsidiaries as of December 31, 2002, and the related
consolidated statements of operations, changes in shareholders' equity and cash
flows for the year ended December 31, 2002. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We did not audit the financial statements as of December 31, 2002 and for
the year then ended, of Alba Health LLC ("Alba Health") a subsidiary, which
statements reflect total assets constituting 24% as of December 31, 2002 and
total revenues constituting 6.5% for the year ended December 31, 2002. Those
statements were audited by other auditors whose report has been furnished to us,
and our opinion, insofar as it relates to the amounts include for Alba Health,
is based solely on the report of the other auditors.
The financial statements of Tefron Ltd. as of December 31, 2001 and for the
years ended December 31, 2001 and 2000 were audited by other auditors who have
ceased operations as a foreign associated firm of the Securities and Exchange
Commission Practice Section of the American Institute of Certified Public
Accountants and whose report dated March 25, 2002 expressed an unqualified
opinion on those statements.
We conducted our audit in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management as well as evaluating the overall financial
statement presentation. We believe that our audit and the report of other
auditors provide a reasonable basis for our opinion.
In our opinion, based on our audit and the report of other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of the Company and its
subsidiaries as of December 31, 2002, and the results of their operations and
cash flows for the year ended December 31, 2002, in conformity with accounting
principles generally accepted in the United States.
Tel-Aviv, Israel KOST FORER GABBAY & KASIERER
February 27, 2003 (Formerly KOST FORER & GABBAY)
A Member of Ernst & Young Global
F - 50
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
AlbaHealth, LLC
Valdese, North Carolina
We have audited the accompanying balance sheet of AlbaHealth, LLC as of December
31, 2002, and the related statements of income, members' equity, and cash flows
for the period from September 6, 2002 (date of inception) to December 31, 2002.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of AlbaHealth, LLC as of December
31, 2002, and the results of its operations and its cash flows for the period
from September 6, 2002 (date of inception) to December 31, 2002, in conformity
with accounting principles generally accepted in the United States of America.
As discussed in note 1 of the financial statements, on September 6, 2002 (Date
of inception) The Company adopted Financial Accounting Standards Board Statement
No. 142, GOODWILL AND OTHER INTANGIBLE ASSETS.
/s/ McGladrey & Pullen, LLP
Charlotte, North Carolina
February 6, 2003
F - 51
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
AlbaHealth, LLC
Valdese, North Carolina
We have audited the accompanying balance sheet of AlbaHealth, LLC (the
"Company") as of December 31, 2003, and the related statements of income,
members' equity, and cash flows for the year ended December 31, 2003. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of AlbaHealth, LLC as of December
31, 2003, and the results of its operations and its cash flows for the year
ended December 31, 2003, in conformity with accounting principles generally
accepted in the United States of America.
/s/ McGladrey & Pullen, LLP
Charlotte, North Carolina
January 30, 2004
F - 52
SIGNATURES
The Company hereby certifies that it meets all of the requirements for
filing on Form 20-F and that it has duly caused and authorized the undersigned
to sign this annual report on its behalf.
TEFRON LTD.
By:/S/ Yosef Shiran
-------------------
Yosef Shiran
Chief Executive Officer
By:/S/ Gil Rozen
-------------------
Gil Rozen
Chief Financial Officer
September 21, 2004
EXHIBIT INDEX
1.1. Memorandum of Association of the Company (incorporated by reference to
Exhibit 3.1 to the Company's Registration Statement on Form F-1 (No.
333-7538) filed on August 29, 1997).
1.2. Restated Articles of Association of the Company (incorporated by reference
to Exhibit 1.2 to the Company's Annual Report on Form 20-F for the fiscal
year ended December 31, 2002).
2.1. Form of Credit Agreement, dated as of December 13, 1999, among AWS
Acquisition Corp., Israel Discount Bank of New York and Bank Hapoalim B.M.,
New York Branch as Administrative Agent (incorporated by reference to
Exhibit 99(b)(2) to Amendment No. 2 to Schedule 14D-1 in respect of
Alba-Waldensian, Inc. filed by the Company on December 13, 1999).
2.2. Letter, dated February 28, 2001, from Bank Hapoalim to the Company
regarding Commitments dated December 19, 1999 (incorporated by reference to
Exhibit 2.2 to the Company's Annual Report on Form 20-F for the fiscal year
ended December 31, 2000).
2.3 Letter Agreement, dated as of March 3, 2001, between Israeli Discount Bank
Ltd., Israeli Discount Bank of New York and the Company (incorporated by
reference to Exhibit 2.3 to the Company's Annual Report on Form 20-F for
the fiscal year ended December 31, 2000).
2.4 Letter, dated November 12, 2001, from the Company to Bank Hapoalim
regarding Commitments dated December 14, 1999 (incorporated by reference to
Exhibit 2.4 to the Company's Annual Report on Form 20-F for the fiscal year
ended December 31, 2001).
2.5 Letter, dated November 13, 2001, from the Company to the Israeli Discount
Bank Ltd. regarding Commitments dated December 14, 1999 (incorporated by
reference to Exhibit 2.5 to the Company's Annual Report on Form 20-F for
the fiscal year ended December 31, 2001).
2.6 Letter, dated July 30, 2002, from Bank Hapoalim to the Company regarding
shareholders equity requirements under the Credit Agreement (incorporated
by reference to Exhibit 2.6 to the Company's Annual Report on Form 20-F for
the fiscal year ended December 31, 2002).
2.7 Letter, dated August 12, 2002, from Israel Discount Bank Ltd. to the
Company regarding shareholders equity requirements under the Credit
Agreement (incorporated by reference to Exhibit 2.7 to the Company's Annual
Report on Form 20-F for the fiscal year ended December 31, 2002).
2.8 Letter, dated March 2, 2004, from Israel Discount Bank Ltd. to the Company
regarding shareholders' equity requirements under the Credit Agreement
(incorporated by reference to Exhibit 2.8 to the Company's Annual Report on
Form 20-F for the fiscal year ended December 31, 2003 filed on April 1,
2004).
2.9 Letter, dated March 2, 2004, from Bank Hapoalim to the Company regarding
shareholders' equity requirements under the Credit Agreement (incorporated
by reference to Exhibit 2.9 to the Company's Annual Report on Form 20-F for
the fiscal year ended December 31, 2003 filed on April 1, 2004).
2.10 Letter, dated February 16, 2004, from Israel Discount Bank to the Company
regarding revised repayment schedule and revised shareholders' equity
requirements under the Credit Agreement (incorporated by reference to
Exhibit 2.10 to the Company's Annual Report on Form 20-F for the fiscal
year ended December 31, 2003 filed on April 1, 2004).
2.11 Letter, dated February 15, 2004, from Bank Hapoalim to the Company
regarding revised repayment schedule under the Credit Agreement
(incorporated by reference to Exhibit 2.11 to the Company's Annual Report
on Form 20-F for the fiscal year ended December 31, 2003 filed on April 1,
2004).
2.12 Letter, dated March 31, 2004, from Bank Hapoalim to the Company regarding
revised shareholders' equity requirements under the Credit Agreement
(incorporated by reference to Exhibit 2.12 to the Company's Annual Report
on Form 20-F for the fiscal year ended December 31, 2003 filed on April 1,
2004).
2.13 Credit Agreement, dated September 6, 2002, among AlbaHealth LLC, as
borrower, the other borrower signatory thereto, the lenders signatory,
thereto from time to time, and General Electric Capital Corporation, as
Agent and a Lender. (incorporated by reference to Exhibit 2.8 to the
Company's Annual Report form 20-F for the fiscal year ended December 31,
2002).
2.14 Security Agreement, dated as of September 6, 2002, among the Grantor
signatory thereto, from time to time, and General Electric Capital
Corporation, as Agent for the benefit of itself and the lenders from time
to time party to the Credit Agreement (referred to in Exhibit 2.13).
2.15 Borrower Stockholders Pledge Agreement, dated as of September 6, 2002, by
and among the pledgors signatory thereto, from time to time, and General
Electric Capital Corporation, as Agent for the benefit of itself and the
lenders from time to time party to the Credit Agreement (referred to in
Exhibit 2.13).
2.16 The total amount of long-term debt securities of the Company authorized
under any instrument, other than as exhibited hereto, does not exceed 10%
of the total assets of the Company on a consolidated basis. The Company
hereby agrees to furnish to the SEC, upon request, a copy of any instrument
defining the rights of holders of long-term debt of the Company or of its
subsidiaries for which consolidated or unconsolidated financial statements
are required to be filed.
3.1 Shareholders Agreement, dated as of September 17, 1997, between Macpell
Industries Ltd., Discount Investment Company Ltd., PEC Israel Economic
Corporation, Tabriz Anstalt Ltd. and Oranim (Securities) Ltd. (incorporated
by reference to Exhibit A to the General Statement of Beneficial Ownership
of the Company on Schedule 13D filed by Arwol Holdings Ltd., Arie Wolfson,
Sigi Rabinowicz, Riza Holdings Ltd. and Macpell Industries Ltd. on February
17, 2000).
3.2. Shareholders Agreement, dated as of December 28, 1999, between Arwol
Holdings Ltd. and Avi Ruimi (incorporated by reference to Exhibit D to the
General Statement of Beneficial Ownership of the Company on Schedule 13D
filed by Arwol Holdings Ltd., Arie Wolfson, Sigi Rabinowicz, Riza Holdings
Ltd. and Macpell Industries Ltd. on February 17, 2000).
3.3. Purchase Agreement, dated as of December 30, 1999, by and among Arwol
Holdings Ltd. and Riza Holdings Ltd. (incorporated by reference to Exhibit
99.E to the General Statement of Beneficial Ownership of the Company on
Schedule 13D filed by Arwol Holdings Ltd., Arie Wolfson, Sigi Rabinowicz,
Riza Holdings Ltd. and Macpell Industries Ltd. on February 17, 2000).
3.4 Agreement, dated February 17, 2004, by and among Arwol Holdings Ltd.,
Macpell Industries Ltd. and Norfet, Limited Partnership (incorporated by
reference to Exhibit 3.4 to the Company's Annual Report on Form 20-F for
the fiscal year ended December 31, 2003 filed on April 1, 2004).
4.1. Agreement and Plan of Merger, dated as of November 8, 1999, by and among
Tefron U.S. Holdings Corp., AWS Acquisition Corp. and Alba-Waldensian, Inc.
(incorporated by reference to Exhibit (c)(1) to Schedule 14D-1 in respect
of Alba-Waldensian, Inc. filed by the Company on November 12, 1999)
4.2. Employment Agreement, dated as of August 5, 2002, between the Company and
Sigi Rabinowicz (incorporated by reference to Exhibit 4.2 to the Company's
Annual Report on Form 20-F for the fiscal year ended December 31, 2002).
4.3. Consulting and Management Services Agreement, dated as of August 5, 2002,
between the Company, New York Delights Ltd., and Arie Wolfson (incorporated
by reference to Exhibit 4.3 to the Company's Annual Report on Form 20 F for
the fiscal year ended December 31, 2002).
4.4 Management and Services Agreement, effective as of July 30, 2003, between
the Company, Yosef Shiran and Shiran & Partners - Consulting,
Entreprenuership, and Financing (incorporated by reference to Exhibit 4.4
to the Company's Annual Report on Form 20-F for the fiscal year ended
December 31, 2003 filed on April 1, 2004).
4.5 Lease Agreement dated as of August 12, 1997, between the Company and New
Net Assets (1994) Ltd. and an Assignment Agreement dated as of December 25,
1998 between the Company and Hi-Tex Founded by Tefron Ltd. The Company
and/or its subsidiary, Hi-Tex Founded by Tefron Ltd., have entered in to
similar lease agreements with New Net Assets (1994) Ltd. (incorporated by
reference to Exhibit 4.5 to the Company's Annual Report on Form 20-F for
the fiscal year ended December 31, 2001).
4.6 Contribution Agreement, dated as of September 6, 2002, between AlbaHealth,
LLC, Alba-Waldensian, Inc., Encompass Group, L.L.C. and General Electric
Capital Corporation (incorporated by reference to Exhibit 4.6 to the
Company's Annual Report on Form 20 F for the fiscal year ended December 31,
2002).
4.7 The Limited Liability Company Agreement of AlbaHealth LLC, dated as of
September 6, 2002, by and among AlbaHealth, LLC, Alba-Waldensian, Inc.,
Encompass Group, L.L.C. and General Electric Capital Corporation
(incorporated by reference to Exhibit - to the Company's Annual Report on
Form 20 F for the fiscal year ended December 31, 2002).
4.8 Put Option Agreement, dated as of September 6, 2002, by and among
AlbaHealth, LLC, Alba-Waldensian, Inc., Encompass Group, L.L.C. and General
Electric Capital Corporation (incorporated by reference to Exhibit 4.8 to
the Company's Annual Report on Form 20 F for the fiscal year ended December
31, 2002).
4.9 Share Purchase Agreement dated February 17, 2004, by and between the
Company and Norfet Limited Partnership, including related Registration
Rights Agreement attached as a schedule (incorporated by reference to
Exhibit 4.9 to the Company's Annual Report on Form 20-F for the fiscal year
ended December 31, 2003 filed on April 1, 2004).
4.10 Share Purchase Agreement, made as of March 3, 2004, by and between Tefron
and Leber Partners, L.P, including related Registration Rights Agreement
attached as a schedule (incorporated by reference to Exhibit 4.10 to the
Company's Annual Report on Form 20-F for the fiscal year ended December 31,
2003 filed on April 1, 2004).
4.11 Private Equity Credit Agreement, dated as of March 9, 2004, by and between
the Company and Brittany Capital Management Limited (incorporated by
reference to Exhibit 4.11 to the Company's Annual Report on Form 20-F for
the fiscal year ended December 31, 2003 filed on April 1, 2004).
4.12 Registration Rights Agreement, dated as of March 9, 2004, by and between
the Company and Brittany Capital Management Limited (incorporated by
reference to Exhibit 4.12 to the Company's Annual Report on Form 20-F for
the fiscal year ended December 31, 2003 filed on April 1, 2004).
8.1 List of subsidiaries of the Company (incorporated by reference to Exhibit
8.1 to the Company's AnnualReport on Form 20-F for the fiscal year ended
December 31, 2003 filed on April 1, 2004).
12.(a).1 Certification by CEO pursuant to Rule 13a-14(a) or Rule 15d-14(a) of
the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of
the Sarbanes Oxley Act of 2002.
12.(a).2 Certification by CFO pursuant to Rule 13a-14(a) or Rule 15d-14(a) of
the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of
the Sarbanes Oxley Act of 2002.
13.(a).1 Certification of CEO and CFO pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
14(a).1 Consent of Kost, Forer Gabbay & Kasierer.
14(a).2 Consent of McGladrey & Pullen, LLP with respect to 2002 report
(incorporated by reference to Exhibit 14.(a).2 to the Company's Annual
Report on Form 20-F for the fiscal year ended December 31, 2003 filed on
April 1, 2004).
14(a).3 Consent of McGladrey & Pullen, LLP with respect to 2003 report.
14(a).4 Notice Regarding Lack of Consent of Arthur Andersen LLP (incorporated by
reference to Exhibit 14.(a).4 to the Company's Annual Report on Form 20-F
for the fiscal year ended December 31, 2003 filed on April 1, 2004).