AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 29, 2007
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 20-F
[_] 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, 2006
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ________ TO ________
OR
[_] SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
DATE OF EVENT REQUIRING THIS SHELL COMPANY REPORT ________
COMMISSION FILE NUMBER 0-28878
TEFRON LTD.
(Exact name of Registrant as specified in its charter)
ISRAEL
(Jurisdiction of incorporation or organization)
INDUSTRIAL CENTER TERADYON, P.O. BOX 1365, MISGAV 20179, 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:
20,750,168 ORDINARY SHARES, NIS 1.0 PAR VALUE PER SHARE
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act.
YES [_] NO [X]
If this report is an annual or transition report, indicate by check mark if the
registrant is not required to file reports pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934.
YES [_] NO [X]
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 whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
LARGE ACCELERATED FILER [_] ACCELERATED FILER [X] NON-ACCELERATED FILER [_]
Indicate by check mark which financial statement item the registrant has elected
to follow.
ITEM 17 [_] ITEM 18 [X]
If this is an annual report, indicate by check mark whether the registrant is a
shell company (as defined in Rule 12b-2 of the Exchange Act).
YES [_] NO [X]
ii
TABLE OF CONTENTS
Page
PART I 3
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS 3
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE 3
ITEM 3. KEY INFORMATION 3
A. Selected Financial Data 3
B. Capitalization and Indebtedness 4
C. Reasons for the Offer and Use of Proceeds 4
D. Risk Factors 5
ITEM 4. INFORMATION ON THE COMPANY 16
A. History and Development of the Company 16
B. Business Overview 17
C. Organizational Structure 26
D. Property, Plants and Equipment 26
ITEM 4A UNRESOLVED STAFF COMMENTS 28
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS 29
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES 42
A. Directors and Senior Management 42
B. Compensation 45
C. Board Practices 47
D. Employees 50
E. Share Ownership 51
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS 54
A. Major Shareholders 54
B. Related Party Transactions 55
C Interests of Experts and Counsel 58
ITEM 8. FINANCIAL INFORMATION 58
ITEM 9. THE OFFER AND LISTING 59
A. Offer and Listing Details 59
B. Plan of Distribution 60
C. Markets 60
D. Selling Shareholders 60
E. Dilution 60
F. Expenses of the Issue 60
ITEM 10. ADDITIONAL INFORMATION 61
A. Share Capital 61
B. Memorandum and Articles of Association 61
C. Material Contracts 63
D. Exchange Controls 73
E. Taxation 73
F. Dividends and Payment Agents 78
G. Statements by Experts 78
H. Documents on Display 78
I. Subsidiary Information 78
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 79
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES 80
iii
PART II 81
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES 81
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY
HOLDERS AND USE OF PROCEEDS 81
ITEM 15T. CONTROLS AND PROCEDURES 81
ITEM 16. [RESERVED] 82
ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT 82
ITEM 16B. CODE OF ETHICS 82
ITEM 16C. ACCOUNTANTS' FEES AND SERVICES 82
ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDI
COMMITTEES 83
ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND
AFFILIATED PURCHASERS 83
PART III 84
ITEM 17. FINANCIAL STATEMENTS 84
ITEM 18. FINANCIAL STATEMENTS 84
ITEM 19. EXHIBITS 85
iv
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 U.S. GAAP. See Note 2 of the Notes to our Consolidated
Financial Statements. All references in this Annual Report to "U.S. 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
U.S. dollars at NIS 4.225 to $1.00, the representative rate of exchange
published by the Bank of Israel, the Israeli central bank, for December 31,
2006. The representative exchange rate between the NIS and the dollar as
published by the Bank of Israel for March 15, 2007 was NIS 4.212 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 and Cacique. 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. All references in this Annual Report to "Nike" are to Nike,
Inc.
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. The uncertainties that may cause differences include, but are not
limited to:
o our customers' continued purchase of our products in the same volumes
or on the same terms;
o the cyclical nature of the clothing retail industry;
o the competitive nature of the markets in which we operate, including
the ability of our competitors to enter into and compete in the
seamless market in which we operate;
o the potential adverse effect on our business resulting from our
international operations, including increased custom duties and import
quotas (e.g., in China, where we manufacture for our swimwear
division);
1
o the potential adverse effect on our future operating efficiency
resulting from our expansion into new product lines with more
complicated products and different raw materials;
o the purchase of new equipment that may be necessary as a result of our
expansion into new product lines;
o dependence on our suppliers for our machinery and the maintenance of
our machinery;
o the fluctuating costs of raw materials;
o our dependence on subcontractors in connection with our manufacturing
process;
o our failure to generate sufficient cash from our operations to pay our
debt;
o fluctuations in inflation and currency rates; and
o political, economic and social risks associated with international
business and relating to operations in Israel.
In addition, you should note that our past financial and operational
performance is not necessarily indicative of future financial and operational
performance.
We undertake no obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise.
In light of these risks, uncertainties and assumptions, the forward-looking
events discussed in this annual report might not occur.
2
PART I
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
Not Applicable.
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
Not Applicable.
ITEM 3. KEY INFORMATION
3A. SELECTED FINANCIAL DATA
The following selected financial data as of December 31, 2005 and 2006 and
for each of the three years ended December 31, 2004, 2005 and 2006 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, 2002, 2003, and 2004 and for each of
the years ended December 31, 2002 and December 31, 2003 have been derived from
our audited financial statements not included in this Annual Report.
We sold our ownership interest in AlbaHealth in April 2006. Accordingly,
the financial statements of AlbaHealth are accounted for as discontinued
operations, and the financial results and information described below do not
include the financial results of AlbaHealth. We ceased to consolidate the
financial statements of AlbaHealth commencing April 27, 2006.
2002 2003 2004 2005 2006
---------- ---------- ---------- ---------- ----------
STATEMENT OF INCOME DATA:
Sales $ 177,986 $ 124,800 $ 148,620 $ 171,336 $ 188,104
Cost of sales 142,904 113,622 136,424 141,621 145,144
Restructuring costs 1,550 - - - -
---------- ---------- ---------- ---------- ----------
Gross profit 33,532 11,178 12,196 29,715 42,960
Selling, and marketing expenses 10,601 9,285 11,309 8,984 11,573
General and administrative expenses 6,151 5,017 5,603 4,595 5,504
Restructuring costs 3,793 - - - -
---------- ---------- ---------- ---------- ----------
Operating income (loss) 12,987 (3,124) (4,716) 16,136 25,883
Financing expenses, net 5,030 4,019 3,888 3,189 1,912
Loss on issuance of subsidiary's shares to
third party 2,082 - - - -
---------- ---------- ---------- ---------- ----------
Income (loss) before taxes on income 5,875 (7,143) (8,604) 12,947 23,971
Taxes on income (tax benefit) 4,979 (616) 83 4,297 5,711
Equity in losses (earnings) of affiliated
companies 1,172 (183) - - -
Pre-acquisition earnings of subsidiary
since April 1, 2003 through May 5,
2003 - (85) - - -
---------- ---------- ---------- ---------- ----------
Income (loss) before cumulative effect of
change in accounting principle (276) (6,795) (8,687) 8,650 18,260
Cumulative effect of change in accounting
principle 17,994 - - - -
---------- ---------- ---------- ---------- ----------
Income (loss) from continuing operations (18,270) (6,795) (8,687) 8,650 18,260
Income (loss) from discontinued
operations, net of taxes (including
impairment and other costs related to
the exercise of the put option) 772 2,342 1,822 (5,357) 120
---------- ---------- ---------- ---------- ----------
Net income (loss) $ (17,498) $ (4,453) $ (6,865) $ 3,293 $ 18,380
Basic and diluted net earnings (losses)
per share from continuing operations:
Basic net earnings (losses) per share (1.47) (0.55) (0.56) 0.49 0.90
========== ========== ========== ========== ==========
Diluted net earnings (losses) per share (1.47) (0. 55) (0.56) 0.47 0.88
---------- ---------- ---------- ---------- ----------
Basic and diluted net earnings (loss) per
share from discontinued operations:
Basic net earnings (losses) per share 0.06 0.19 0.12 (0.30) 0.01
---------- ---------- ---------- ---------- ----------
Diluted net earnings (losses) per share 0.06 0.19 0.12 (0.29) 0.01
---------- ---------- ---------- ---------- ----------
Basic and diluted net earnings (loss) per
share:`
Basic net earnings (losses) per share (1.41) (0.36) (0.44) 0.19 0.91
---------- ---------- ---------- ---------- ----------
Diluted net earnings (losses) per share (1.41) (0.36) (0.44) 0.18 0.89
---------- ---------- ---------- ---------- ----------
Weighted average number of shares used for
computing basic earnings (losses) per
share 12,409,929 12,412,166 15,603,904 17,719,275 20,210,722
---------- ---------- ---------- ---------- ----------
Weighted average number of shares used for
computing diluted earnings (losses)
per share 12,409,929 12,412,166 15,603,904 18,542,618 20,754,566
========== ========== ========== ========== ==========
3
AT DECEMBER 31,
----------------------------------------------------------------
2002 2003 2004 2005 2006*
--------- --------- --------- --------- ---------
(in thousands)
Cash and cash equivalents $ 5,376 $ 3,784 $ 2,462 $ 7,652 $ 3,966
Working capital (deficit) (6,600) (14,944) (8,524) 7,296 35,270
Total assets 196,411 201,591 191,531 186,514 164,656
Total debt(1) 81,122 84,224 66,507 56,621 25,270
Shareholders' equity 40,108 36,655 46,744 54,685 82,230
Share Capital 5,575 5,575 6,582 6,810 7,411
Additional paid in capital 62,810 62,810 79,243 83,069 101,684
- ------------------
(1) Bank debt consists of total bank debt, other loans received and
capital lease obligations.
* In 2006, dividends declared per share amounted to $0.4851. No dividends
were declared in the years 2002 - 2005.
3B. CAPITALIZATION AND INDEBTEDNESS
Not Applicable.
3C. REASONS FOR THE OFFER AND USE OF PROCEEDS
Not Applicable.
4
3D. RISK FACTORS
WE DEPEND ON A SMALL NUMBER OF PRINCIPAL CUSTOMERS WHO HAVE IN THE
PAST BOUGHT OUR PRODUCTS IN LARGE VOLUMES. WE CANNOT ASSURE THAT THESE
CUSTOMERS OR ANY OTHER CUSTOMER WILL CONTINUE TO BUY OUR PRODUCTS IN THE
SAME VOLUMES OR ON THE SAME TERMS.
Our sales to Victoria's Secret accounted for approximately 47.4% of our
total sales in 2004, 40.3% of our total sales in 2005 and 38.6% of our total
sales in 2006. Our sales to Nike accounted for approximately 8.3% of our total
sales in 2004, 25.8% of our total sales in 2005 and 28.8% of our total sales in
2006. Our sales to Target, Banana Republic and The Gap, J.C. Penny and Calvin
Klein accounted in the aggregate for approximately, 32.3% of our total sales in
2004, 22.4% of our total sales in 2005 and 18.6% of our total sales in 2006. We
do not have long-term purchase contracts with our customers, and our sales
arrangements with our customers do not have minimum purchase requirements. We
cannot assure that Victoria's Secret, Nike, Target, Banana Republic and The Gap,
J.C Penny, Calvin Klein or any other customer will continue to buy our products
at all or in the same volumes or on the same terms as they have in the past.
Their failure to do so may significantly reduce our sales. In addition, we
cannot assure that we will be able to attract new customers. For comparison
purposes, all data provided above excludes AlbaHealth, in which we sold our
ownership in April 2006.
A material decrease in the quantity of sales made to our principal
customers, a material adverse change in the terms of such sales or a material
adverse change in the financial conditions of our principal customers could
significantly reduce our sales.
OUR BUSINESS MAY BE MATERIALLY AFFECTED IF ANY OF OUR PRINCIPAL
CUSTOMERS DEFAULTS ON ITS PAYMENT TO US.
A significant part of our sales is made to a limited number of customers.
Our two largest customers accounted for 67.4% of our sales in 2006, and our
largest seven customers accounted for approximately 86.0% of our sales in 2006.
We generally do not require and do not receive collateral from those customers.
We maintain an allowance for doubtful debts based upon factors surrounding the
credit risk of specific customers, historical trends and other information which
our management believes adequately covers all anticipated losses in respect of
trade receivables. There can be no assurance that this allowance will be
adequate. In the event that any of our major clients defaults on its payment
obligations to us, this could have a material adverse effect on our operating
results.
OUR PRINCIPAL CUSTOMERS ARE IN THE CLOTHING RETAIL INDUSTRY, WHICH IS
SUBJECT TO SUBSTANTIAL CYCLICAL VARIATIONS. OUR REVENUES WILL DECLINE
SIGNIFICANTLY IF OUR PRINCIPAL CUSTOMERS DO NOT CONTINUE TO BUY OUR
PRODUCTS IN LARGE VOLUMES DUE TO AN ECONOMIC DOWNTURN.
Our customers are in the clothing retail industry, which is subject to
substantial cyclical variations and is affected strongly by any downturn in the
general economy. A downturn in the general economy, a change in consumer
purchasing habits or any other events or uncertainties that discourage consumers
from spending, could have a significant effect on our customers' sales and
profitability. Such downturns, changes, events or uncertainties could result in
our customers having larger inventories of our products than expected. These
events could result in decreased purchase orders from us in the future, which
would significantly reduce our sales and profitability. For example, the
difficult global economic environment and the continuing soft retail market
conditions in the world and specifically in the U.S. both before and especially
after the events of September 11, 2001 were reflected in disappointing clothing
retail sales in the year 2001 compared to the same period in the year 2000, and
consequently decreased our order backlog and production levels. A prolonged
economic downturn could harm our financial condition.
5
THE CLOTHING RETAIL INDUSTRY IS SUBJECT TO CHANGES IN FASHION
PREFERENCES. IF WE OR OUR CUSTOMERS MISJUDGE A FASHION TREND OR THE PRICE
AT WHICH CONSUMERS ARE WILLING TO PAY FOR OUR PRODUCTS, OUR REVENUES COULD
BE ADVERSELY AFFECTED.
The clothing retail industry is subject to changes in fashion preferences.
We design and manufacture products based on our and our customers' judgment as
to what products will appeal to consumers and what price consumers would be
willing to pay for our products. We may not be successful in accurately
anticipating consumer preferences and the prices that consumers would be willing
to pay for our products. If we are not successful, our customers may reduce the
volume of their purchases from us and/or the prices at which we sell our
products will decline, in either case resulting in reduced revenues.
OUR MARKETS ARE HIGHLY COMPETITIVE AND SOME OF OUR COMPETITORS HAVE
NUMEROUS ADVANTAGES OVER US; WE MAY NOT BE ABLE TO COMPETE SUCCESSFULLY.
We compete directly with a number of manufacturers of intimate apparel,
active-wear and swimwear, many of which have a lower cost-base than Tefron,
longer operating histories, larger customer bases, greater geographical
proximity to customers and significantly greater financial and marketing
resources than we do. Increased competition, direct or indirect, could reduce
our revenues and profitability through pricing pressure, loss of market share
and other factors. We cannot assure that we will be able to compete successfully
against existing or new competitors, as the market for our products evolves and
the level of competition increases. Moreover, our competitors, especially those
from the Far East, have established relationships with our customers, which has
caused an erosion of prices of some of the products of our Cut & Sew Division;
current or future relationships between our existing and prospective
competitors, especially from the Far East, with existing or potential customers,
could materially affect our ability to compete. In addition, we cannot assure
that our customers will not seek to manufacture our products through alternative
sources, including directly with our subcontractors, and thereby eliminate the
need to purchase our products. See "Item 4. Information on the Company - 4B.
Business Overview - Competition."
Our customers operate in an intensely competitive retail environment. In
the event that any of our customers' sales decline for any reason, whether or
not related to us or to our products, our sales to such customers could be
materially reduced.
In addition, our competitors may be able to purchase seamless knitting
machines and other equipment similar to, but less expensive than, the Santoni
knitting machines we use to knit garments in our Hi-Tex manufacturing process.
By reducing their production cost, our competitors may lower their selling
prices. If we are forced to reduce our prices and we cannot reduce our
production costs, it will cause a reduction in our profitability. Furthermore,
if there is a weak retail market or a downturn in the general economy,
competitors may be pressured to sell their inventory at substantially depressed
prices. A surplus of intimate apparel at significantly reduced prices in the
marketplace would significantly reduce our sales.
WE FACE SEVERAL RISKS, INCLUDING POLITICAL, ECONOMIC AND SOCIAL RISKS,
ASSOCIATED WITH INTERNATIONAL BUSINESS.
Approximately 90% of our sales in 2004 and in 2005 and 77% of our sales in
2006 were made to customers in North America, and approximately 18% of our sales
during 2006 were made to customers in Europe. (These figures exclude AlbaHealth,
in which we sold our ownership interest in April 2006.) We also had initial
sales to Asia constituting approximately 2% of our sales in 2006. We intend to
continue to expand our sales to customers in the United States, Europe and Asia.
We also aim to sell our products to the Asian market, through the joint venture
which we are in the process of establishing in China. In addition, a substantial
majority of our raw materials are purchased outside of Israel. Furthermore, a
substantial majority of our sewing operation is performed in Jordan, and
products, equipment and machinery of ours are situated in Jordan for that
purpose. Our international sales and purchases are affected by costs associated
with shipping goods and risks inherent in doing business in international
markets, including:
6
o changes in regulatory requirements;
o export restrictions, tariffs and other trade barriers;
o quotas imposed by international agreements between the United States
and certain foreign countries;
o currency fluctuations;
o longer payment cycles;
o difficulties in collecting accounts receivable;
o political instability, hostility and seasonal reductions in business
activities; and
o strikes and general economic problems.
Any of these risks could have a material adverse effect on our ability to
deliver or receive goods on a competitive and timely basis and on our results of
operations. We cannot assure that we will not encounter significant difficulties
in connection with the sale or procurement of goods in international markets in
the future or that one or more of these factors will not significantly reduce
our sales and profitability. See "Item 4. Information on the Company - 4B.
Business Overview - Manufacturing and Production."
In addition, we may enter into joint ventures with third parties or
establish operations outside of Israel that will subject us to additional
operating risks. These risks may include diversion of management time and
resources and the loss of management control over such operations and may
subject us to the laws of such jurisdiction. For instance, due to commercial
disputes that arose between us and the other shareholder of our subsidiary that
managed operations in Madagascar, we no longer have production activities in
Madagascar. In the context of these commercial disputes, the court appointed a
liquidator to sell the company and to use the proceeds to pay third party
creditors. We do not currently expect to incur additional material costs in
connection with the court procedure, although we cannot be certain.
In addition to our production facilities in Israel, we currently have
production facilities in Jordan, we have relationships with manufacturers in
India, China and Cambodia and we are in the process of shifting additional
sewing production out of Israel to benefit from lower labor costs.
We have also contracted with a Chinese company and a Japanese company for
the formation of a Chinese joint venture for the manufacture of seamless
underwear to the Asian market. However, the process of establishment of the
joint venture entity has not yet been concluded.
Our ability to benefit from the lower labor costs will depend on the
political, social and economic stability of these countries and in the Middle
East, Asia and Africa in general. We cannot assure that the political, economic
or social situation in these countries or in the Middle East, Asia and Africa in
general will not have a material adverse effect on our operations, especially in
light of the potential for hostilities in the Middle East. The success of the
production facilities also will depend on the quality of the workmanship of
laborers and our ability to maintain good relations with such laborers, in these
countries. We cannot guarantee that our operations in China, Cambodia, Jordan or
any newer locations outside of Israel will be cost-efficient or successful.
OUR EXPANSION INTO NEW PRODUCT LINES WITH MORE COMPLICATED PRODUCTS
AND DIFFERENT RAW MATERIALS REDUCED OUR OPERATING EFFICIENCY DURING 2003
AND 2004 AND WE MAY ALSO FACE OPERATING EFFICIENCY DIFFICULTIES IN THE
FUTURE.
In recent years, we have invested significant efforts to develop and expand
new product lines, including active-wear products and swimwear, to diversify our
product line and our client base. The manufacturing of new, more complicated
products with different raw materials reduced our operating efficiency in 2003
and 2004. Although our operating efficiency improved in 2005 and 2006, our
continued efforts to develop and expand new product lines may result in
additional reductions in operating efficiency in the future.
7
OUR EXPANSION INTO NEW PRODUCT LINES, IN PARTICULAR ACTIVE-WEAR
BUSINESS PRODUCTS, INVOLVES THE MANUFACTURE OF NEW PRODUCTS, WHICH HAS AND
MAY REQUIRE US TO PURCHASE ADDITIONAL MACHINERY ADAPTED TO MANUFACTURE SUCH
PRODUCTS. THE ADDITIONAL CAPITAL EXPENDITURES INCURRED IN CONNECTION WITH
THESE PURCHASES MAY REDUCE OUR FUTURE CASH FLOW.
In recent years, we have invested significant efforts to develop and expand
our new product lines, in particular active-wear products, to diversify our
product line and our client base. Active-wear products that we manufacture are
made in bigger sizes than intimate apparel, both because our active-wear
products are intended for both men and women, and because our active-wear
products involve the manufacture of more tops. As a result, we have purchased
and may need to purchase additional knitting machines and other equipment
adapted to manufacture new products. In addition, the manufacture of active-wear
products at times requires equipment with new technologies. The additional
capital expenditures that may be incurred in connection with these purchases may
reduce our future cash flow.
WE DEPEND ON OUR SUPPLIERS FOR MACHINERY AND THEIR MAINTENANCE. WE MAY
EXPERIENCE DELAYS OR ADDITIONAL COSTS SATISFYING OUR PRODUCTION
REQUIREMENTS DUE TO OUR RELIANCE ON THESE SUPPLIERS.
We purchase machinery and equipment used in our Hi-Tex manufacturing
process from a sole supplier. If our supplier is not able to provide us with
maintenance, additional machinery or equipment as needed, we might not be able
to maintain or increase our production to meet any demand for our products.
OUR RESULTS OF OPERATIONS WOULD BE MATERIALLY AND ADVERSELY AFFECTED
IN THE EVENT WE ARE UNABLE TO OPERATE OUR PRINCIPAL PRODUCTION FACILITIES
IN SEGEV, ISRAEL.
All of our knitting process with respect to our Seamless Division, which
includes the major portion of our manufacture of our active-wear products, is
performed in a complex of production facilities located in Segev, which is in
northern Israel. These facilities also contain a significant portion of our
machinery and equipment, including Santoni machines and adaptations and
configurations that we have made to the machinery and equipment, as well as
infrastructure that we have built tailored to our needs. We have no effective
back-up for these operations and, in the event that we are unable to use the
production facilities located in Segev, Israel as a result of damage or for any
other reason, our ability to manufacture a major portion of our products and our
relationships with customers could be significantly impaired and this would
materially and adversely affect our results of operation. During the third
quarter of 2006, our revenues were affected by the loss of production due to
hostilities in the northern part of Israel, and there is the risk that further
hostilities would also impact our production in the future, leading to a
reduction in revenues.
WE ARE SUBJECT TO FLUCTUATING COSTS OF RAW MATERIALS.
We use cotton yarn, lycra, spandex, various polymeric yarn and elastic as
primary materials for manufacturing our products. Our financial performance
depends, to a substantial extent, on the cost and availability of these raw
materials. The capacity, supply and demand for such raw materials are subject to
cyclical and other market factors and may fluctuate significantly. As a result,
our cost in securing raw materials is subject to substantial increases and
decreases over which we have no control except by seeking to time our purchases
of cotton and polymeric yarns, which are our principal raw materials, to take
advantage of favorable market conditions. For example, in 2004 and 2005 the cost
of synthetic fibers increased due to rising energy costs, and there may be a
similar increase in the future. We cannot assure that we will be able to pass on
to customers the increased costs associated with the procurement of raw
materials. Moreover, there has in the past been, and there may in the future be,
a time lag between the incurrence of such increased costs and the transfer of
such increases to customers. To the extent that increases in the cost of raw
materials cannot be passed on to customers or there is a delay in passing on the
increased costs to customers, we are likely to experience an increase in the
cost of raw materials which may materially reduce our margin of profitability.
8
WE DEPEND ON SUBCONTRACTORS IN CONNECTION WITH OUR MANUFACTURING
PROCESS, IN PARTICULAR THE SEWING, DYEING AND FINISHING PROCESS; WE MAY
EXPERIENCE DELAYS OR ADDITIONAL COSTS SATISFYING OUR PRODUCTION
REQUIREMENTS AND WE MAY BE PREVENTED FROM MEETING OUR CUSTOMERS' ORDERS DUE
TO OUR RELIANCE ON THESE SUBCONTRACTORS.
We depend on subcontractors who render services to us that are an integral
part of our manufacturing process, and in particular sewing services. If such
subcontractors do not render the required services, we may experience delays or
additional costs to satisfy our production requirements. We depend on a
subcontractor who performs a major part of the dyeing and finishing of our
Hi-Tex manufacturing process, which is an essential part of our manufacturing
process. If that subcontractor breaches its commitments toward us or is
otherwise not able to supply the required services, we would have difficulty
meeting our customer orders until we find an alternative source.
AN INCREASE IN THE MINIMUM WAGE IN ISRAEL AND IN JORDAN MAY ADVERSELY
AFFECT OUR OPERATING RESULTS.
Many of our employees earn the minimum wage payable under law. The current
minimum monthly wage in Israel is approximately NIS 3,585 and in Jordan is
approximately JD 110. It is currently expected that the minimum monthly wage in
Israel will increase to approximately NIS 3,850 effective as of December 1,
2007. Such increase in the minimum wage will increase our labor costs, and
unless we can obtain alternative labor in lower cost markets, this increase
could adversely affect our operating results.
WE REQUIRE A SIGNIFICANT AMOUNT OF CASH TO SATISFY OUR DEBT
OBLIGATIONS. IF WE FAIL TO GENERATE SUFFICIENT CASH FLOW FROM OPERATIONS,
WE MAY NEED TO RENEGOTIATE OR REFINANCE OUR DEBT, OBTAIN ADDITIONAL
FINANCING, POSTPONE CAPITAL EXPENDITURES OR SELL ASSETS.
We depend mainly on our cash generated by continuing operating activities
to make payments on our debts. The cash generated by continuing operating
activities was approximately $17.8 million and $27.3 million in 2005 and 2006,
respectively. We cannot assure that we will generate sufficient cash flow from
operations to make the scheduled payments on our debt. We have repayment
obligations on our long-term debt of approximately $5.9 million in 2007, $5.9 in
2008 and the balance of $13.4 million from 2009 until 2012. Our ability to meet
our debt obligations will depend on whether we can successfully implement our
strategy, as well as on economic, financial, competitive and technical factors.
Some of the factors are beyond our control, such as economic conditions in the
markets where we operate or intend to operate, changes in our customers' demand
for our products, and pressure from existing and new competitors.
If we cannot generate sufficient cash flow from operations to make
scheduled payments on our debt obligations, we may need to renegotiate the terms
of our debt, refinance our debt, obtain additional financing, delay planned
capital expenditures or sell assets. Our ability to renegotiate the terms of our
debt, refinance our debt or obtain additional financing will depend on, among
other things:
o our financial condition at the time;
o restrictions in agreements governing our debt; and
o other factors, including market conditions.
If our lenders decline to renegotiate the terms of our debt in these
circumstances, the lenders could declare all amounts borrowed and all amounts
due to them under the agreements due and payable. If we are unable to repay the
debt in these circumstances, the lenders could foreclose on our assets that are
subject to liens and sell our assets to satisfy the debt. See "Item 5. Operating
and Financial Review and Prospects" and "Item 10. Additional Information -10C
Material Contracts - Credit Agreement."
9
OUR BUSINESS MAY BE IMPACTED BY INFLATION AND U.S. DOLLAR, NIS AND
EURO EXCHANGE RATE FLUCTUATIONS.
Exchange rate fluctuations between the U.S. dollar and the NIS and between
the Euro and the U.S. dollar, and inflation in Israel, may negatively affect our
earnings. A substantial majority of our revenues and a substantial portion of
our expenses are denominated in U.S. dollars and a portion of our revenues is
denominated in Euros. However, a significant portion of the expenses associated
with our Israeli operations, including personnel and facilities-related
expenses, are incurred in NIS. Consequently, inflation in Israel will have the
effect of increasing the dollar cost of our operations in Israel, unless it is
offset on a timely basis by a devaluation of the NIS relative to the U.S.
dollar. We cannot predict any future trends in the rate of inflation in Israel
or the rate of devaluation of the NIS against the U.S. dollar. In addition, 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. In addition, exchange rate fluctuations in
currency exchange rates in countries other than Israel where we operate and do
business may also negatively affect our earnings. See "Item 11. Quantitative and
Qualitative Disclosures about Market Risk - Foreign Currency Risk."
OUR DEBT OBLIGATIONS MAY HINDER OUR GROWTH AND PUT US AT A COMPETITIVE
DISADVANTAGE.
We have a considerable amount of bank debt mainly as a result of our
acquisition of Alba Walsensian, Inc., or Alba, in December 1999 and the
investments made in our Hi-Tex Division. As of December 31, 2006, we had
approximately $25.3 million of long term loans outstanding (including current
maturities of $5.9 million). Our substantial debt obligations could have
important consequences. For example, they could:
o require us to use a substantial portion of our operating cash flow to
repay the principal and interest on our loans, which would reduce
funds available to grow and expand our business, invest in machinery
and equipment and for other purposes;
o place us at a competitive disadvantage compared to our competitors
that have less debt;
o make us more vulnerable to economic and industry downturns and reduce
our flexibility in responding to changing business and economic
conditions;
o limit our ability to pursue business opportunities; and
o limit our ability to borrow money for operations or capital in the
future.
Because our loans bear interest at floating rates, an increase in interest
rates could reduce our profitability. A ten percent change on our floating
interest rate long-term loans outstanding at December 31, 2006, would have an
annual impact of approximately $0.2 million on our interest cost. See "Item 5.
Operating and Financial Review and Prospectus - Liquidity and Capital Resources"
and "Item 11. Quantitative and Qualitative Disclosures about Market Risk."
10
DUE TO RESTRICTIONS IN OUR LOAN AGREEMENTS, WE MAY NOT BE ABLE TO
OPERATE OUR BUSINESS AS WE DESIRE.
Our loan agreements contain a number of conditions and limitations on the
way in which we can operate our business, including limitations on our ability
to raise debt, sell or acquire assets and pay dividends. Our loan agreements
also contain various covenants which require that we maintain certain financial
ratios related to shareholder's equity and operating results. These limitations
and covenants may force us to pursue less than optimal business strategies or
forgo business arrangements which could have been financially advantageous to us
and our shareholders. See "Item 5. Operating and Financial Review and Prospects
- - Liquidity and Capital Resources." Our failure to comply with the covenants and
restrictions contained in our loan agreements could lead to a default under the
terms of these agreements. For instance, during 2004 and the second quarter of
2005, our former subsidiary, AlbaHealth, failed to comply with certain financial
covenants contained in its credit facility with GE Capital, including a minimum
EBITDA requirement. In April 2006, we sold our ownership interest in AlbaHealth.
See "Item 10. Additional Information - 10C. Material Contracts - Disposition of
Interest in AlbaHealth."
If a default occurs and we are unable to renegotiate the terms of our debt,
the lenders could declare all amounts borrowed and all amounts due to them under
the agreements 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 our assets to
satisfy the debt. See "Item 10. Additional Information - 10C. Material Contracts
- - Credit Agreement."
WE ARE AFFECTED BY CONDITIONS TO, AND POSSIBLE REDUCTION OF,
GOVERNMENT PROGRAMS AND TAX BENEFITS.
We benefit from certain Israeli Government programs and tax benefits,
particularly as a result of the "Approved Enterprise" status of substantially
all of our existing production facilities in Israel. As a result of our
"Approved Enterprise" status, we have been able to receive significant
investment grants with respect to our capital expenditures. In addition,
following our exhaustion of our net operating loss carry forwards, we have been
able to benefit from a reduced tax rate of 25% on earnings derived from these
investments for which the benefit period has not expired. To maintain
eligibility for these programs and tax benefits, we must continue to meet
certain conditions, including making certain specified investments in fixed
assets and conducting our operations in specified "Approved Enterprise" zones in
Israel. If we fail to meet such conditions in the future, we could be required
to refund tax benefits and grants already received, in whole or in part, with
interest linked to the Consumer Price Index, or CPI, in Israel from the date of
receipt. We have granted a security interest over all of our assets to secure
our obligations to fulfill these conditions.
The Government of Israel has reduced the available amount of investment
grants from up to 38% of eligible capital expenditures in 1996 to up to 24% of
eligible capital expenditures (for projects not exceeding investments of 140
million shekels that are submitted in any year) and up to 20% of eligible
capital expenditures (for projects exceeding investments of 140 million shekels
that are submitted in any year) since 1997. There can be no assurance that the
Israeli Government will not further reduce the availability of investment
grants, and there can be no assurance that there will be any government budget
for such grants. The termination or reduction of certain programs and tax
benefits, particularly benefits available to us as a result of the "Approved
Enterprise" status of some of our existing facilities in Israel, would increase
the costs of acquiring machinery and equipment for our production facilities and
increase our effective tax rate which, in the aggregate, could significantly
reduce our profitability. In addition, income attributed to certain programs is
tax exempt for a period of two years and is subject to a reduced corporate tax
rate of 10% - 25% for an additional period of five to eight years, based on the
percentage of foreign investment in the Company. We cannot assure that we will
obtain approval for additional Approved Enterprises, or that the provisions of
the Law for the Encouragement of Capital Investments, 1959, as amended, will not
change or that the 25% foreign investment percentage will be reached for any
subsequent year. See "Item 4. Information on the Company - 4B. Business Overview
- - Israeli Investment Grants and Tax Incentives."
We also benefit from exemptions from customs duties and import quotas due
to our locations in Israel and Jordan (Qualified Industrial Zone), and the free
trade agreements Israel maintains with the United States, Canada, the European
Union, or EU, and the European Free Trade Association, or EFTA. If there is a
change in such benefits or if any such agreements were terminated, our
profitability may be reduced. Recently, there has been a worldwide trend to
reduce quotas and customs in order to promote free trade. If other countries
enter into similar free trade agreements and obtain similar benefits, the price
of apparel products, including our products, may decline and our profitability
may be reduced.
11
OUR ANNUAL AND QUARTERLY OPERATING RESULTS MAY VARY WHICH MAY CAUSE
THE MARKET PRICE OF OUR ORDINARY SHARES TO DECLINE.
We may experience significant fluctuations in our annual and quarterly
operating results which may be caused by, among other factors:
o the timing, size and composition of orders from customers;
o varying levels of market acceptance of our products;
o the timing of new product introductions by us, our customers or their
competitors;
o economic conditions in the geographical areas in which we operate or
sell products; and
o operating efficiencies.
When we establish a relationship with a new customer, initial sales to such
customer are often in larger quantities of goods (to build its initial
inventory) and we may be required to replenish such inventory from time to time
afterwards. As a result, after a customer builds its initial inventory, our
sales to such customer may decrease. We cannot assure that our sales to any of
our customers will continue at the current rate. See "Item 5. Operating and
Financial Review and Prospects."
Our operations are affected by our principal customers' businesses, which
businesses are subject to substantial cyclical variations. If demand for our
products is significantly reduced, our profits will be reduced, and we may
experience slower production, lower plant and equipment utilization and lower
fixed operating cost absorption.
Additionally, if, in any year, there is a significant number of Christian,
Druse, Jewish or Muslim holidays in a particular quarter, we will have fewer
days of operation which will result in lower levels of production and sales
during such quarter. In certain years, a significant number of such holidays
have occurred during the second quarter, but the dates of many of those holidays
are based on the lunar calendar and vary from year to year.
IF OUR ORDINARY SHARES ARE DELISTED FROM THE NEW YORK STOCK EXCHANGE,
THE LIQUIDITY AND PRICE OF OUR ORDINARY SHARES AND OUR ABILITY TO ISSUE
ADDITIONAL SECURITIES MAY BE SIGNIFICANTLY REDUCED.
In order to maintain the listing of our Ordinary Shares on the NYSE and the
TASE (where our Ordinary Shares began trading on September 28, 2005), we are
required to meet specified maintenance standards. In addition, the NYSE has
amended its continued listing criteria to require, among other things, either a
minimum stockholders' equity of $75 million or a minimum market capitalization
of $75 million. As of March 15, 2007, our market capitalization was
$205.3 million, and as of December 31, 2006, we had shareholders' equity of
$82.2 million.
In the event we fail to meet any current or revised listing criteria of the
NYSE and the TASE, our Ordinary Shares may be delisted from trading on the NYSE
and/or the TASE, respectively. We cannot assure that we will meet all the
listing criteria in the future. Delisting of our Ordinary Shares would result in
limited availability of market price information and limited news coverage. In
addition, delisting could diminish investors' interest in our Ordinary Shares as
well as significantly reduce the liquidity and price of our Ordinary Shares.
Delisting may also make it more difficult for us to issue additional securities
or secure additional financing.
12
WE MAY NOT BE ABLE TO PROTECT OUR INTELLECTUAL PROPERTY.
Our success is substantially dependent upon the adaptations and
configurations we make to the machinery and equipment that we purchase and upon
the manufacturing technologies, methods and techniques that we have developed
for our exclusive use. Only a part of the adaptations, configurations,
technologies or techniques used in our manufacturing process is patented.
Moreover, we purchase our machinery and equipment from third parties and we
cannot assure that a competitor will not adapt, configure or otherwise utilize
machinery or equipment in substantially the same manner as we do. In addition,
our subcontractors have access to proprietary information, including regarding
our manufacturing processes, and from time to time we also lend machinery and
equipment to subcontractors, and there is a chance that subcontractors may
breach their confidentiality undertakings toward us. Any replication of our
manufacturing process by an existing or future competitor would significantly
reduce our sales and profitability.
WE FACE POTENTIAL COMPETITION BY OUR FORMER EMPLOYEES.
Our trade secrets are well known to some of our employees. In the event one
or more of our current or former employees exploit our trade secrets in
violation of their non-competition and confidentiality obligations, we may be
adversely affected in the competitive market and in our relationships with our
customers and suppliers.
WE FACE POTENTIAL CONFLICTS OF INTEREST CAUSED BY INVESTOR INFLUENCE.
Our principal shareholders have a great deal of influence over the
constitution of our Board of Directors and over matters submitted to a vote of
the shareholders. As of March 15, 2007, Norfet, Limited Partnership had voting
power over approximately 21.8% of the outstanding Ordinary Shares of Tefron
(excluding 997,400 Ordinary Shares held by our wholly-owned subsidiary). In
addition, as of March 15, 2007 and based on available public information, Meir
Shamir, one of our directors, owned approximately 40.0% in Mivtach-Shamir, which
at such date was an approximately 34.5-% holder in Norfet. As a result, the
corporate actions of Tefron may be significantly influenced by Mr. Shamir.
Furthermore, as of March 15, 2007, Ishay Davidi, the Chairman of our Board of
Directors, served as CEO of FIMI 2001 Ltd., which controls the general partner
of Norfet, one of the Norfet limited partners (which is managed by FIMI 2001
Ltd.) as well as the other Norfet limited partners by virtue of an irrevocable
power of attorney. As a result, the corporate actions of Tefron may be
significantly influenced by Mr. Davidi.
As of March 15, 2007, Arie Wolfson, one of our directors, had direct voting
power (through Arwol Holdings Ltd., an Israeli company wholly-owned by Mr.
Wolfson) over approximately 4.7% of the outstanding Ordinary Shares of Tefron
(excluding 997,400 Ordinary Shares held by our wholly owned subsidiary). Mr.
Wolfson is also the Chairman and a significant shareholder of Macpell Industries
Ltd., an Israeli company that owned approximately 13.5% of the outstanding
Ordinary Shares of Tefron (excluding 997,400 Ordinary Shares held by our
wholly-owned subsidiary) as of March 15, 2007. The controlling shareholders of
Macpell have entered into a shareholders' agreement regarding corporate actions
of Macpell, including the process by which Macpell votes its Ordinary Shares of
Tefron to elect our Directors. As a result, the corporate actions of Tefron may
be influenced significantly by Mr. Wolfson and by the other controlling
shareholders of Macpell.
In connection with the acquisition of Tefron Ordinary Shares by Norfet,
Limited Partnership from the Company, Arwol Holdings Ltd. and from Macpell, each
of Norfet, Arwol and Macpell agreed to vote all of the Tefron Ordinary Shares
owned or controlled by each of them for the election to the Company's
nine-member Board of Directors of: (i) two members plus one independent director
and one external director nominated by Norfet, Limited Partnership, (ii) two
members plus one independent director and one external director nominated by
Arwol and Macpell, and (iii) the Company's chief executive officer.
13
We are party to consulting and management services agreements with each of
(i) Mr. Wolfson and a company controlled by him and (ii) Norfet, pursuant to
which each of them agreed to provide consultancy and management services to
Tefron. We also lease various properties from an affiliate of Macpell. See "Item
6. Directors, Senior Management and Employees - 6A. Directors and Senior
Management," "Item 7. Major Shareholders and Related Party Transactions," and
Note 17 of the Notes to the Consolidated Financial Statements.
Israeli law imposes procedures, including, for certain material
transactions, a requirement of shareholder approval, as a precondition to
entering into interested party transactions. These procedures may apply to
transactions between Macpell and us and between Norfet and us. However, we
cannot assure that we will be able to avoid the possible detrimental effects of
any such conflicts of interest by complying with the procedures mandated by
Israeli law. See "Item 6. Directors, Senior Management and Employees - 6A.
Directors and Senior Management," "- 6C. Board Practices," and "Item 7. Major
Shareholders and Related Party Transactions."
A DETERIORATION IN ISRAEL'S RELATIONSHIP WITH NEIGHBORING COUNTRIES IN
WHICH TEFRON HAS PRODUCTION FACILITIES COULD INTERRUPT TEFRON'S PRODUCTION
AND HARM ITS FINANCIAL RESULTS.
A significant portion of our manufacturing process is performed in Jordan.
Our operations in Jordan depend largely on its relationship with the State of
Israel. In the past, there have been hostilities between Israel and Jordan. In
addition, since October 2000, there has been an increase in hostilities between
Israel and the Palestinians. A deterioration in Israel's relations with Jordan
could interrupt our manufacturing operations and would adversely affect our
business.
WE ARE SUBJECT TO VARIOUS RISKS RELATING TO OPERATIONS IN ISRAEL.
We are incorporated under the laws of, and our main offices and
manufacturing facilities are located in, the State of Israel. We are directly
influenced by the political, economic and security conditions in Israel. Since
the establishment of the State of Israel in 1948, a number of armed conflicts
have taken place between Israel and its Arab neighbors and a state of hostility,
varying in degree and intensity, has led to security and economic concerns for
Israel. Any major hostilities involving Israel, the interruption or curtailment
of trade between Israel and its trading partners or a significant downturn in
the economic or financial condition of Israel could have a material adverse
effect on our operations. The establishment in 2006 of a government in the
Palestinian Authority by representatives of the Hamas militant group has created
additional unrest and uncertainty in the region. Further, during the summer of
2006, Israel was engaged in an armed conflict with Hezbollah, a Lebanese
Islamist Shiite militia group, which involved thousands of missile strikes and
disrupted most day-to-day civilian activity in northern Israel. This conflict
adversely affected our sales and increased our costs. We cannot assure that
ongoing or revived hostilities or other factors related to Israel will not have
a material adverse effect on us or our business.
Generally, all male adult citizens and permanent residents of Israel under
the age of 54, unless exempt, are obligated to perform up to 36 days of annual
military reserve duty. Additionally, all such residents are subject to being
called to active duty at any time under emergency circumstances. Some of our
officers and employees are currently obligated to perform annual reserve duty.
No assessment can be made as to the full impact of such requirements on our
workforce or business, and no prediction can be made as to the effect of any
expansion or reduction of such military obligations on our business. See "Item
4. Information on the Company - 4B. Business Overview - Conditions in Israel."
Perry, please have this reviewed by your office.
14
During 2004, a general strike at Israel's ports caused a shortage of raw
materials and resulted in a loss to the Company of sales of approximately $2.5
million. This shortage also resulted in a decrease in production volume and an
increase in operating costs, which affected our ability to achieve greater
operating efficiencies. Although Israel's Ministry of Finance, the Histadrut
(General Federation of Labor in Israel), and the Israel Ports Authority signed
an agreement in February 2005 which is intended to ensure five years without
labor strikes, a further strike or labor disruption at Israel's ports may occur
and have an adverse effect on us or our business.
YOU MAY NOT BE ABLE TO ENFORCE CIVIL LIABILITIES IN THE UNITED STATES
AGAINST OUR OFFICERS AND OUR DIRECTORS.
Most of our officers and all of our directors reside outside the United
States. Service of process upon them may be difficult to effect within the
United States. Furthermore, because the majority of our assets are located
outside the United States, any judgment obtained in the United States against us
or any of our directors and officers may not be collectible within the United
States.
15
ITEM 4. INFORMATION ON THE COMPANY
4A. HISTORY AND DEVELOPMENT OF THE COMPANY
Tefron Ltd. was incorporated under the laws of the State of Israel on March
10, 1977. Our principal executive offices are located at Ind. Center Teradyon,
P.O. Box 1365, Misgav 20179, Israel and our telephone number is 972-4-9900-881.
We are subject to the provisions of the Israeli Companies Law, 1999. Our agent
for service of process in the United States is CSC Corporation Service Company,
2711 Centerville Rd. Suite 400, Wilmington, DE 19808.
Below is a summary of significant events in our development:
1990 First bodysize cotton panty with applicated elastics
1997 Formation of Hi-Tex Founded by Tefron Ltd. and production of
first seamless panty.
Initial public offering of our Ordinary Shares on the NYSE.
1998 Acquisition of a dyeing and finishing facility to achieve
greater vertical integration of our business.
1999 Acquisition of Alba, a manufacturer of seamless apparel and
healthcare products.
2001 Initial significant shifting of sewing production to Jordan.
2001 Launch of a turn-around program, including significant cost
reduction, downsizing and consolidation of operations.
2002 Reorganization of Alba, including a spin-off of the Health
Product Division and the formation of the AlbaHealth joint
venture with a strategic investor, and the initial
consolidation of the seamless production activity in Hi-Tex
in Israel which was completed in the second quarter of 2003.
2003 Acquisition of all of the outstanding ordinary shares of
Macro Clothing Ltd., an entity that manufactures, markets
and sells swimsuits and beachwear.
Implementation of strategic steps to expand our product
line, including active-wear products, to diversify our
product line and client base.
2004 Closing of equity investments with two groups of investors
in the aggregate amount of $20 million.
2004 Launch of a new business division, Sports Innovation
Division, or SID, devoted to our growing US customer base in
the performance active-wear market.
2005 Listing of our Ordinary Shares for trading on the TASE (in
addition to the listing on the NYSE).
16
2006 Closing of a public offering of Ordinary Shares and option
certificates on the TASE for aggregate net proceeds of $13.8
million. We subsequently received approximately $5.7 million
from the exercise of the option certificates, primarily in
2007.
Disposition of our ownership interest in AlbaHealth.
2006 Launch of a joint Center of Excellence with Nike, located at
Nike's world headquarters in Beaverton, Oregon.
2006 Signing of an agreement to form a joint venture in China
with Langsha Knitting Co., Ltd, a Chinese company, and
Itochu Corporation, a Japanese company, aimed at
manufacturing seamless underwear for the Asian market.
DISPOSITION OF INTEREST IN ALBAHEALTH LLC
In April 2006, we sold our ownership interest in AlbaHealth for
consideration of approximately $13 million, consisting of approximately $10
million paid in cash and $3 million pursuant to the terms of an unsecured
subordinated promissory note, the principal amount of which is due August 31,
2009. The note bears annual interest at LIBOR plus 3%, and the payment of the
note is subordinated in favor of AlbaHealth's senior bank lenders. See "Item 10.
Additional Information - 10C. Material Contracts - Disposition of Interest in
AlbaHealth."
CAPITAL EXPENDITURES
Our capital expenditures for fixed assets (net of grants from the
Government of the State of Israel) were $3.5 million, $4.5 million and $7.7
million for the years ended December 31, 2006, 2005 and 2004, respectively. The
2006 expenditures were primarily made in Israel to purchase new knitting
machines, dyeing and finishing machines, sewing machines and other equipment.
See Consolidated Statements of Cash Flows in the Consolidated Financial
Statements.
Our current capital expenditures include investments in equipment,
machinery and leasehold improvements in our facilities in Israel and Jordan. See
Note 6 of the Notes to the Consolidated Financial Statements. We expect to incur
capital expenses primarily to acquire new knitting machines, dyeing and
finishing machines, and other equipment for our Hi-Tex Division and to shift
more labor intensive manufacturing processes of our Hi-Tex division out of
Israel to Jordan and other locations to take advantage of lower labor costs.
As of the date of this Annual Report, we estimate that our capital
expenditures for 2007 will be approximately $8.0 million. We expect to finance
these investments primarily from cash generated from operations and from cash on
hand. However, the actual amount of our capital expenditures will depend on a
variety of factors, including general economic conditions, changes in demand for
our products, increase in the sales growth of our new products, the risks and
uncertainties involved in doing business in Jordan and our ability to generate
sufficient cash from operations. See "Item 3. Key Information - 3D. Risk
Factors."
4B. BUSINESS OVERVIEW
OVERVIEW
We manufacture intimate apparel, active-wear and swimwear sold throughout
the world by such name-brand marketers as Victoria's Secret, Nike, Target,
Warnaco/Calvin Klein, The Gap, Banana Republic, J.C. Penney, lululemon
athletica, Puma, Patagonia, Reebok, Swimwear Anywhere, El Corte Englese and
other 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. Our product line includes knitted briefs,
bras, tank tops, boxers, leggings, crop, T-shirts, daywear, nightwear,
bodysuits, swimwear, beach-wear, active-wear and accessories.
17
We seek to apply our manufacturing technologies and techniques to meet the
fashion and merchandising needs of our customers. With product innovation made
possible by our manufacturing capabilities, we invest our marketing efforts to
become a principal supplier to a more select customer base, representing some of
the leaders in the intimate apparel and active-wear industries. As a result of
this strategy, we successfully entered the United States market for quality,
competitively priced intimate apparel, active-wear and swimwear.
We are known for the technological innovation of our Hi-Tex manufacturing
process. Our Hi-Tex manufacturing process was implemented as part of our
strategy to streamline our manufacturing process and improve the design and
quality of our products. The Hi-Tex manufacturing process involves the
utilization of a single machine that transforms yarn directly into a nearly
complete garment, replacing the knitting, cutting, and significant sewing
functions which, in traditional manufacturing, are performed sequentially on
separate machines at separate workstations. Following this single-machine
operation, all the Hi-Tex manufacturing process requires to complete the garment
is dyeing and a reduced amount of sewing and finishing. Our Hi-Tex manufacturing
process enables us to produce a substantially wider range of fabrics, styles and
product lines, resulting in a consistently high level of comfort, quality and
durability. Our fabric engineering, product design and the comfort of our
products provide us with an opportunity to expand our sales of active-wear
products.
We believe that our collaboration with our customers in the design and
development of our products strengthens our relationships with our customers and
improves the quality of our products. We began our relationship with Victoria's
Secret in 1991, with Banana Republic and The Gap in 1993, with Warnaco/Calvin
Klein in 1994 and with Nike and J.C. Penny in 2000. In 2000, we also began our
relationship with Target, which was an existing customer of Alba Waldensian,
Inc., which name was changed to Tefron USA, Inc., or Tefron USA. These customers
accounted for approximately 88.5% and 86.0% of our total sales in 2005 and in
2006, respectively. We enjoy several strategic advantages by reason of our
location in Israel and Jordan. Israel is one of the few countries in the world
that has free trade agreements with the United States, Canada, the EU, and the
EFTA. These agreements permit us to sell our products in the United States,
Canada and the member countries of the EU and the EFTA free of customs duties
and import quotas. Due to our locations in Israel and in Jordan we benefit from
exemptions from customs duties and import quotas. We also currently benefit from
substantial investment grants and tax incentives provided by the Government of
Israel and from the availability in Israel of both skilled engineers and
unskilled workers. See "- Israeli Investment Grants and Tax Incentives" and "-
Conditions in Israel -Trade Agreements."
PRODUCTS
In close collaboration with our customers, we design and manufacture
intimate apparel, active-wear and swimwear. Through our efficient capability, we
produce garments made of cotton and synthetic fibers for large-volume marketers
who, in recent years, have increased retail consumer interest for quality
intimate apparel and active-wear at affordable prices. We believe that our
advanced technology and manufacturing processes enable us to deliver intimate
apparel and active-wear that is comfortable to wear, fits well, fashionable,
made of high-quality fabric and difficult to imitate. Our product line includes
knitted briefs, bras, tank tops, boxers, leggings, crop, T-shirts, daywear,
nightwear, bodysuits, swimwear, beach-wear, active-wear and accessories.
18
The principal markets for our products are the United States and Europe.
For a breakdown of our sales by geographic area and operating segments, see Note
16c. of the Notes to the Consolidated Financial Statements.
MANUFACTURING AND PRODUCTION
We have developed manufacturing innovations for various stages of the
production process, including improvements in the knitting of fabric as well as
the cutting and sewing of individual garments. Our manufacturing technologies
and techniques allow us to provide our customers with mass-produced quality
merchandise at competitive prices. In May 1997, we introduced our Hi-Tex
manufacturing process which consolidates a large portion of the production steps
into a single machine, the Santoni knitting machine, and has enabled us to
produce a substantially wider range of fabrics, styles and product lines at a
consistently higher level of comfort, quality and durability. The Santoni
knitting machines are seamless knitting machines that use state-of-the-art
computer controlled circular knitting technology.
We manufacture products principally to fill firm orders and, therefore,
maintain limited inventory of finished goods. Customers typically send projected
product requirements to us between six and 12 months in advance of the delivery
requirements and place firm orders between three and six months prior to the
desired delivery date. This lead time allows us to coordinate raw material
procurement with its usage and to adjust production levels in order to meet
demand.
We currently produce intimate apparel, active-wear and swimwear products in
different style, color and yarn combinations. We manufacture cotton knit
products using our advanced proprietary manufacturing techniques and also
produce fine products from synthetic fibers, including micro-fibers, using our
cut-and-sew manufacturing process and our highly automated Hi-Tex manufacturing
process.
A significant portion of the manufacturing process for our swimwear
products is outsourced to subcontractors, mostly in China and Cambodia, but also
in Israel, that manufacture the products based on our development, design and
specifications. In many cases, these subcontractors manufacture the complete
garment and deliver directly to our customers. Our quality assurance and quality
control personnel work with our subcontractors to maximize product quality
standards.
MANUFACTURING PROCESS
We utilize vertically integrated production processes and automated
production techniques. These processes involve the following steps:
o PRODUCT DESIGN - Traditionally, manufacturers produce several samples
of a garment from which apparel marketers can select. In contrast, our
sophisticated technology enables us to collaborate with our customers
earlier in the design process to develop customized garments. In
addition, we work independently to develop new products, to increase
sales to existing customers and to exploit market opportunities and
increase penetration where we can establish a competitive advantage.
o RAW MATERIAL DEVELOPMENT - After a design is developed, raw materials
for the production of the product are purchased. Our raw materials
include cotton yarns, blends of cotton and synthetic yarn (E.G.,
cotton-spandex, cotton-lycra and cotton-viscose), micro-fiber nylons
and blends of micro-fiber nylon with lycra/spandex and elastic. We
purchase our raw materials from several international and domestic
Israeli 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 yarns for delivery over a period of three to six months. The
costs of our raw materials are subject to fluctuations. See "Item 3.
Key Information - 3D. Risk Factors - We are subject to fluctuating
costs of raw materials."
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o KNITTING (ONLY CUT & SEW) - The knitting needs of our Cut & Sew
Division are provided by subcontractors in Israel that currently
supply substantially all of our fabric needs in Israel. Our
subcontractors utilize advanced and automated technology to knit
tubular fabric, including bodysize fabrics. Bodysize fabrics, which
are required for bodysize garments, enable maximum use of fabric and
minimize waste during cutting. We operate 115 automatic knitting
machines, which have capacity to produce approximately 300 tons of
fabric per month (depending on the type of fabric). During 2006, we
produced approximately 94 tons of fabric per month.
o DYEING AND FINISHING - Our Cut & Sew Division's dyeing and finishing
facility can satisfy a significant portion of its dyeing and finishing
needs in-house. The remainder is outsourced to dyeing and finishing
subcontractors in Israel. Almost all of the dyeing and finishing needs
of our Hi-Tex Division are provided by a subcontractor in Israel. We
have established testing procedures which examine all fabric upon
return to us to ensure the color consistency, stability and durability
of our dyed fabric.
o CUTTING (ONLY CUT & SEW) - Traditionally, manufacturers manually cut
multiple layers of fabric on a cutting table. To modernize the
production process, manufacturers have used computerized, automatic
cutting equipment. We use both this equipment and highly advanced
machines that automatically and continuously lay and cut tubular
knitted fabric to specified sizes, minimizing fabric waste and the
amount of sewing required, which results in a more consistent and
comfortable garment.
o SEWING (ONLY CUT & SEW) - Cut fabrics are sewn to complete the
garment, including the addition of accessories such as elastic waist
and leg bands as well as labels. Working with computerized equipment
and robotics, our employees and subcontractors sew garments with far
greater precision than if sewn entirely by hand. Our Cut & Sew
Division operates a sewing facility in Jordan and also subcontracts
sewing in Israel, China and Jordan.
o TESTING AND QUALITY CONTROL - We place significant emphasis on quality
control and use quality assurance teams at each stage of the
manufacturing process.
HI-TEX MANUFACTURING PROCESS
In an effort to streamline and automate the manufacturing process further,
we developed the Hi-Tex manufacturing process, which utilizes state-of-the-art
technology that eliminates most stages of the manufacturing process while
increasing efficiency, consistency and quality. We have successfully combined
existing hosiery and apparel technologies to create this new manufacturing
process. The Hi-Tex process includes the utilization of a single machine, the
Santoni knitting machine, that transforms yarn directly into a nearly complete
garment, replacing the knitting, cutting, sewing and accessorizing functions
which, in traditional manufacturing, are performed sequentially on separate
machines at separate workstations. Following this single-machine operation, all
the Hi-Tex process requires to complete the garment is dyeing and a limited
amount of sewing and finishing, which are conducted using our proprietary
techniques. In addition to providing a higher level of manufacturing efficiency,
Hi-Tex has enabled us to produce a substantially wider range of fabrics, styles
and product lines at a consistently higher level of comfort, quality and
durability. This is made possible, in large part, because the Hi-Tex process
knits a garment directly, rather than cutting it from fabric, allowing for the
production of any size, pattern or design with even greater precision than
previously available.
20
The Hi-Tex manufacturing process is currently being used to produce
knit-to-size intimate apparel, active-wear and outerwear. We operate our Hi-Tex
knitting process in our principal production facilities in Segev, Israel. We
operate our Hi-Tex sewing process in one sewing facility in Israel and also
subcontract sewing in Israel and in Jordan. See "Item 4. Information on the
Company - 4D. Property, Plants and Equipment." At December 31, 2006, we had a
total of 756 fully equipped Santoni Knitting machines at the Hi-Tex facilities
in Israel. We also have 144 fully equipped Santoni Knitting machines at Tefron
USA in Valdese, North Carolina, which are currently not operated, and we intend
to transfer these machines to China as part of our contribution to the joint
venture that we are constituting in China.
We believe that the Hi-Tex manufacturing process represents an innovative
combination of cutting-edge technology and technical expertise and has further
strengthened our reputation within the industry as a leader in automated
manufacture and design. In addition, with both the Hi-Tex manufacturing process
and the traditional cut-and-sew process, we are able to produce garments made
from synthetic fibers in addition to existing lines of cotton products. We
specialize in developing and using performance yarns. 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 its
exclusive use, only a part of these adaptations and configurations is patented.
SALES AND MARKETING
Our marketing strategy focuses on selling quality products to large U.S.
marketers of intimate apparel, active-wear and swimwear. We market our products
directly to major retailers, which sell them under their own labels and to
several companies that market nationally advertised brands. We have sales
offices which are located in Portland, Oregon, in New York, New York, in London,
England and in Israel.
We see the active-wear market as an added opportunity to promote our
innovative production and design capabilities. Our office in Portland, Oregon,
and the Center Of Excellence office located inside Nike's campus in Beaverton,
Oregon, serve to advance our active-wear sales, to strengthen the communication
with our active-wear customers, and to improve our services. In addition, we
have dedicated a separate development and sales team in Israel for the
active-wear customers.
INTELLECTUAL PROPERTY
Only a part of the adaptations, configurations, technologies and techniques
used in our manufacturing process is patented. See "Item 3. Key Information -
3D. Risk Factors - We may not be able to protect our intellectual property."
However, we have obtained patents for certain aspects of our manufacturing
process and for certain products, such as the "millennium bra," the "bonded bra"
and the "ultrasonic bra," whose fabric is joined without sewing.
We emphasize the development of new technologies that will enable the
manufacture of products that have an advantage over the products currently
existing in the market.
SEASONALITY
Although our operations are affected by the substantial cyclical variations
of our principal customers' businesses, downturns in the general economy, a
change in consumer purchasing habits and other events, we have not identified a
clear seasonal pattern to our general business, other than with respect to our
swimwear products. In the swimwear segment, most of our sales are consummated
between December and May.
CUSTOMERS
Our customers represent some of the leading marketers of intimate apparel,
active-wear and swimwear in the world. More than 80% of our sales in 2006 were
derived from the worldwide sale of our products to our four largest apparel
customers, Victoria's Secret, Nike, Target, and Banana Republic and The Gap. In
2006, we strengthened our business relationships with our largest active-wear
customer, Nike, and started working with a new customer, lululemon athletica,
and maintained our business relationships with other active-wear customers, such
as Patagonia and Reebok. In the swimwear area, we strengthened our business
relationship with our largest swimwear customers, Swimwear Anywhere and Target,
while we maintained our business relationships with other swimwear customers. We
also further penetrated the European swimwear market by serving new European
customers.
21
The following table outlines the dollar amount and percentage of total
sales to our customers:
CUSTOMER 2004 2005 2006
---------------- ---------------- -----------------
(Dollars in millions)
Victoria's Secret (1) $ 70.4 47.4% $ 69.0 40.3% $ 72.6 38.6%
Nike $ 12.4 8.3% $ 44.1 25.8% $ 54.2 28.8%
Target $ 24.9 16.7% $ 18.5 10.8% $ 18.9 10.0%
The Gap/Banana Republic $ 11.5 7.7% $ 9.2 5.4% $ 7.9 4.2%
Others $ 29.4 19.9% $ 30.5 17.7% $ 34.5 18.4%
Total $148.6 100.0% $171.3 100% $188.1 100%
(1) Includes sales to Mast Industries, Inc. on behalf of Victoria's Secret,
Victoria's Secret Catalog, Cacique and Abercrombie & Fitch.
We established our relationship with our largest customer, Victoria's
Secret, in 1991. Currently, we manufacture underwear, nightwear, loungewear,
bodysuits and bras for Victoria's Secret. We continue to seek to expand and
strengthen our relationship with Victoria's Secret by providing the retailer
with a continuing line of new products. However, we cannot assure that
Victoria's Secret will continue to buy our products in the same volumes or on
the same terms as they did in the past. For instance, during the past few years
we have been asked by Victoria's Secret to reduce the prices of Victoria's
Secret's Logo program. See "Item 3. Key Information - 3D. Risk Factors - We
depend on a small number of principal customers who have in the past purchased
our products in large volumes. We cannot assure that these customers or any
other customer will continue to buy our products in the same volumes or on the
same terms."
We began our working relationship with Nike in 2000. Currently, we supply
them with active-wear for men and women.
We began our relationship with Target in 2000, which was an existing
customer of Tefron USA. Currently, we supply them with underwear for men and
women, bras, active-wear and swimwear products.
We began our working relationship with Banana Republic and The Gap in 1993.
Currently, we supply Banana Republic and The Gap with underwear and sleepwear.
When we establish a relationship with a new customer in the normal course
of business, our initial sales to that customer are typically in larger
quantities of goods (to build the customer's initial inventory) and we may be
required to replenish such inventory from time to time thereafter. After a
customer builds its initial inventory, the rate of growth of our sales to the
customer may decrease. The volume of products ordered by customers are subject
to the cyclical variations in their business. See "Item 3. Key Information - 3D.
Risk Factors - Our principal customers are in the clothing retail industry,
which is subject to substantial cyclical variations. Our revenues will decline
significantly if our principal customers do not continue to buy our products in
large volumes due to an economic downturn."
22
We depend on a small number of principal customers. Our principal customers
are in the retail industry, which is subject to substantial cyclical variations.
Our annual and quarterly results may vary which may cause our profits and/or the
market price of our Ordinary Shares to decline. Consequently, there can be no
assurance that sales to current customers will continue at the current rate.
BACKLOG
Our backlog of orders during 2006 ranged from $49.4 million to $63.3
million, as compared to a range of $45.8 million to $64.2 million during 2005.
This backlog is comprised of firm orders that represent the average production
volume mainly for the subsequent three to six months. Backlog data and any
comparison thereof as of different dates may not necessarily indicate future
sales.
ISRAELI INVESTMENT GRANTS AND TAX INCENTIVES
The Israeli government has established investment and tax incentive
programs for enterprises that invest and do business in Israel. Israeli
government support is provided primarily to industrial and tourism companies
that help fulfill certain economic objectives of the Israeli government, such as
creating employment in selected locations in Israel, competing in international
markets, utilizing innovative technologies, producing value-added products and
generating income in foreign currency.
LAW FOR THE ENCOURAGEMENT OF CAPITAL INVESTMENTS, 1959
Certain of our production and development facilities have been granted
Approved Enterprise status pursuant to the Law for the Encouragement of Capital
Investments, 1959 (the "Investment Law") under the grant track. The Investment
Law provides that a capital investment in eligible facilities may, upon
application to the Investment Center of the Ministry of Industry and Trade of
the State of Israel, known as the Investment Center, be designated an Approved
Enterprise. Each certificate of approval for an Approved Enterprise relates to a
specific investment program delineated both by its financial scope, including
its capital sources, and by its physical characteristics, e.g., the equipment to
be purchased and utilized pursuant to the program. The tax benefits derived from
any such certificate of approval relate only to taxable income attributable to
the specific Approved Enterprise. To date, we have enjoyed Israeli government
grants with respect to such programs for significant amounts of our capital
expenditures. Such grants were available from 1997 to 2006 for an amount equal
to 24% of the eligible annual capital expenditures for programs not exceeding
investments of NIS140 million in any year, and for an amount equal to 20% of the
eligible annual capital expenditures for projects exceeding investments of
NIS140 million. Following the exhaustion of our net operating loss carry
forwards in 1997, we began to benefit from certain tax incentives as a result of
the Approved Enterprise status of certain of our facilities. 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 the taxable income is generated.
The Company does not intend to distribute any amounts of its undistributed
tax-exempt income derived from an "Approved Enterprise" as a dividend. The
Company intends to reinvest its tax-exempt income and not to distribute such
income as a dividend. No deferred income taxes have been provided on income
attributable to the Company's Approved Enterprise programs as the undistributed
tax exempt income is essentially permanent in duration.
LAW FOR THE ENCOURAGEMENT OF INDUSTRY (TAXES), 1969
Pursuant to the Law for the Encouragement of Industry (Taxes), 1969, a
company qualifies as an "Industrial Company" if it is a resident of Israel and
at least 90% of its gross income in any tax year (exclusive of income from
certain defense loans, capital gains, interest and dividends) is derived from an
"industrial enterprise" it owns. An "industrial enterprise" is defined as an
enterprise whose major activity, in a given tax year, is industrial
manufacturing.
23
We believe that we currently qualify as an Industrial Company. Accordingly,
we are entitled to certain tax benefits, including a deduction of 12.5% per
annum on the purchase of patents or certain other intangible property rights
(other than goodwill) used for the development or promotion of the industrial
enterprise over a period of eight years beginning with the year in which such
rights were first used.
The tax laws and regulations dealing with the adjustment of taxable income
for local inflation provide that an industrial enterprise is eligible for
special rates of depreciation deductions. These rates vary in the case of plant
and machinery according to the number of shifts in which the equipment is being
operated and range from 20% to 40% on a straight-line basis, or 30% to 50% on a
declining balance basis (instead of the regular rates which are applied on a
straight-line basis).
Moreover, industrial enterprises which are Approved Enterprises (see above)
can choose between (a) the special rates referred to above and (b) accelerated
regular rates of depreciation applied on a straight-line basis with respect to
property and equipment, generally ranging from 200% (with respect to equipment)
to 400% (with respect to buildings) of the ordinary depreciation rates during
the first five years of service of these assets, provided that the depreciation
on a building may not exceed 20% per annum. In no event may the total
depreciation exceed 100% of the cost of the asset.
In addition, Industrial Companies may (i) elect to file consolidated tax
returns with additional related Israeli Industrial Companies and (ii) deduct
expenses related to public offerings in equal amounts over a period of
three-years.
Eligibility for benefits under the Encouragement of Industry Law is not
contingent upon the approval of any governmental authority. No assurance can be
given that we will continue to qualify as an Industrial Company, or will avail
ourselves of any benefits under this law in the future or that Industrial
Companies will continue to enjoy such tax benefits in the future.
COMPETITION
The intimate apparel, the active-wear and swimwear markets are highly
competitive. Our products compete with products of other manufacturers in
Israel, Europe, the United States, South and Central America and Asia.
Competition in our markets is generally based on price, quality and customer
service.
Although we have invested in Santoni knitting machines to manufacture our
seamless products, a competitor of the Santoni brand could manufacture similar
machines at lower prices, thereby increasing the competition we would face in
the intimate apparel and active-wear markets. See "Item 3. Key Information - 3D.
Risk Factors - Our markets are highly competitive and some of our competitors
have numerous advantages over us; we may not be able to compete successfully."
In addition, we benefit from Israel's status as one of the few countries in
the world that currently has free trade agreements with the United States,
Canada, the EU and the EFTA which permit us to sell our products in the United
States, Canada and the member countries of the EU and the EFTA free of customs
duties and imports quotas. Finally, government incentives that reduce the cost
of our equipment may not be available to us in other countries. We are also able
to sell our products manufactured at our facilities in Jordan free from customs
duties and import quotas to the United States and Europe under certain
conditions.
24
CONDITIONS IN ISRAEL
We are incorporated under the laws of, and many of our offices and
manufacturing facilities are located in, the State of Israel. Accordingly, we
are directly affected by political, security and economic conditions in Israel.
Our operations would be materially adversely affected if major hostilities
involving Israel should occur or if trade between Israel and its present trading
partners should be curtailed.
POLITICAL CONDITIONS IN ISRAEL
Since the establishment of the State of Israel in 1948, a number of armed
conflicts have taken place between Israel and its Arab neighbors and a state of
hostility, varying from time to time in intensity and degree, has led to
security and economic concerns for Israel. A peace agreement between Israel and
Egypt was signed in 1979, and a peace agreement between Israel and Jordan was
signed in 1994. However, as of the date hereof, Israel has not entered into any
peace agreement with Syria or Lebanon. No prediction can be made as to whether
any other agreements will be entered into between Israel and its neighboring
countries, whether a final resolution of the area's problems will be achieved,
the nature of any such resolution or whether civil unrest will resume and to
what extent such unrest would have an adverse impact on Israel's economic
development or on our operations in the future.
There is substantial uncertainty about how or whether any peace process
will develop or what effect it may have upon us. The establishment in 2006 of a
government in the Palestinian Authority by representatives of the Hamas militant
group has created additional unrest and uncertainty in the region. Further,
Israel was recently engaged in an armed conflict with Hezbollah, a Lebanese
Islamist Shiite militia group, which involved thousands of missile strikes and
disrupted most day-to-day civilian activity in northern Israel. Ongoing violence
between Israel and its Arab neighbors and Palestinians may have a material
adverse effect on our business, financial condition or results of operations.
Certain countries, companies and organizations continue to participate in a
boycott of Israeli firms. We do not believe that the boycott has had a material
adverse effect on us, but there can be no assurance that restrictive laws,
policies or practices directed towards Israel or Israeli businesses will not
have an adverse impact on our business.
Generally, all male adult citizens and permanent residents of Israel under
the age of 54, unless exempt, are obligated to perform up to 36 days of annual
military reserve duty. Additionally, all such residents are subject to being
called to active duty at any time under emergency circumstances. Some of our
officers and employees are currently obligated to perform annual reserve duty.
While we have operated effectively under these requirements since we began
operations, no assessment can be made as to the full impact of such requirements
on our workforce or business, and no prediction can be made as to the effect on
us of any expansion or reduction of such obligations.
ECONOMIC CONDITIONS IN ISRAEL
Israel's economy has been subject to numerous destabilizing factors,
including a period of rampant inflation in the early to mid-1980s, low foreign
exchange reserves, fluctuations in world commodity prices, military conflicts
and civil unrest. The Israeli government has, for these and other reasons,
intervened in various sectors of the economy employing, among other means,
fiscal and monetary policies, import duties, foreign currency restrictions and
control of wages, prices and foreign currency exchange rates. The Israeli
government has periodically changed its policies in all these areas.
25
TRADE AGREEMENTS
Israel is a member of the United Nations, the International Monetary Fund,
the International Bank for Reconstruction and Development, and the International
Finance Corporation. Israel is a signatory to the General Agreement on Tariffs
and Trade, or GATT, which provides for the reciprocal lowering of trade barriers
among its members. In addition, Israel has been granted preferences under the
Generalized System of Preferences from the United States, Australia, Canada and
Japan. These preferences allow Israel to export the products covered by such
program either duty-free or at reduced tariffs. Israel became associated with
the European Economic Community (now known as the European Union) in a Free
Trade Agreement concluded in 1975, which confers certain advantages with respect
to Israeli exports to most European countries and obligates Israel to lower its
tariffs with respect to imports from those countries over a number of years.
In 1985, Israel and the United States entered into an agreement to
establish a Free Trade Area that has eliminated all tariff and certain
non-tariff barriers on most trade between the two countries. On January 1, 1993,
an agreement between Israel and the EFTA established a free trade zone between
Israel and the EFTA nations. In recent years, Israel has established commercial
and trade relations with a number of other nations (including the People's
Republic of China, Russia, India and other nations in Asia and Eastern Europe)
with which Israel had not previously had such relations.
In January 1995, the GATT members entered into an agreement with respect to
Textile and Clothing. According to this agreement, all non-tariff barriers were
gradually decreased since the date of the agreement until their full omission on
January 1, 2005. In 2004, in expectation of this change, the United States
decided to extend the period of barriers relating to products exported from
China.
Israel is a party to Qualified Industrial Zones agreements - since 1998
with Jordan and the United States, and since December 2004, with Egypt and the
United States. These agreements enable us to execute part of our manufacturing
process in defined zones in Jordan or in Egypt, and enjoy exemption from U.S.
custom duties and quotas once exported to the United States.
U.S. GOVERNMENT REGULATION
Our manufacturing and other facilities in USA, Israel, Europe and Jordanare
subject to various local regulations relating to the maintenance of safe working
conditions and manufacturing practices. Management believes that it is currently
in compliance in all material respects with all such regulations.
4C. ORGANIZATIONAL STRUCTURE
Our significant subsidiaries are the following wholly-owned subsidiaries:
(i) Hi-Tex Founded by Tefron Ltd., a company incorporated under the laws of
Israel, (ii) Macro Clothing Ltd., a company formed under the laws of Israel,
(iii) Tefron USA, Inc., a company formed under the laws of Delaware, (iv)
El-Masira Textile Company Ltd., a company incorporated under the laws of Jordan,
and (v) Tefron UK Limited, a company incorporated under the laws of the United
Kingdom.
26
4D. PROPERTY, PLANTS AND EQUIPMENT
ISRAEL
As of December 31, 2006, we maintained manufacturing and administrative
facilities at the following sites in Israel and Jordan
APPROX.
SQUARE NUMBER OF LEASE
FACILITY IN ISRAEL FOOTAGE EMPLOYEES EXPIRATION (1) FUNCTION
- ------------------------- ------- ------- ---- ----------------------------
Petach Tikva 2,500 6 2008 Management offices
Segev:Central Factory -
Tefron (2)(3) 83,000 195 2012 Development, Knitting
packaging, storage and
administrative functions
Segev: Central Factory -
Hi-Tex 1(2)(3) 143,000 306 2011 Development, Knitting,
sewing, packaging, storage
and administrative functions
Segev: Central Factory -
Hi-Tex 2(2)(3) 178,000 381 2012 Knitting, packaging and
storage
Holon - Macro Center 12,000 73 2009 Design, development, Sewing
and administrative functions
Yarka 23,000 381 2012 Sewing and packaging
Netanya: Dyeing Factory 68,000 35 2009 Dyeing and finishing
Segev: Delivery Warehouse 45,000 16 2007 Warehouse for finished
products
FACILITY IN JORDAN
Irbid (5) 147,000 670 2008(4) Sewing and packaging factory
(1) Including any renewal options.
(2) We lease this property from a subsidiary of Macpell.
(3) Not including an additional option for a 15 year lease exercisable every
three years on 90 days' prior advance notice.
(4) The agreement is renewable annually at our option.
(5) Includes free land lease of 78,000 square feet.
Our Hi-Tex 1, Hi-Tex 2 and Central Factory facilities in Segev, Israel, are
leased from a subsidiary of Macpell. See "Item 7. Major Shareholders and Related
Party Transactions - 7B. Related Party Transactions - Relationships and
Transactions with Macpell - Lease Arrangement."
For a description of our plans regarding our facilities, see Note 5 of the
Notes to the Consolidated Financial Statements.
We believe that our existing facilities in Israel and Jordan are
well-maintained, in good operating condition and provide adequate space for our
current level of operations as well as for a significant increase in sales
volume. We further believe that our facilities and operations are in substantial
compliance with current Israeli governmental regulations regarding safety,
health and environmental pollution.
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UNITED STATES AND EUROPE
As of December 31, 2006, Tefron USA maintained manufacturing and
administrative facilities at the following sites in the United States:
FACILITY IN UNITED STATES APPROX. NUMBER OF
AND EUROPE SQUARE FOOTAGE PERSONNEL FUNCTION
- ------------------------ ------- ---- --------------------------
Valdese, NC - Headquarter and Warehouse 157,000 17 Corporate headquarters and
Warehouse (Consumer Products)
Valdese, NC 52,000 - Partly subleased
New York City - Offices 1,500 1 Sales Offices and Showroom
Portland, OR- Offices 2,029 4 Sales Offices and Showroom
London, England - Offices 350 2 Sales Offices
All plants in Valdese, North Carolina are of brick and steel construction,
and most areas have been air-conditioned. Since April 2005, we are leasing for a
period of seven years 1,500 square feet at 150 West 30th Street New York, New
York. The remainder of Tefron USA's physical properties are held in fee simple.
Tefron USA's physical properties are subject to a lien pursuant to a credit
agreement entered into in connection with the acquisition of Tefron USA. See
"Item 10. Additional Information - 10C. Material Contracts - Credit Agreement."
We believe our existing facilities in the United States are well-maintained, in
good operating condition and provide adequate space for Tefron USA's current
level of operations as well as for a significant increase in sales volume.
We further believe that Tefron USA is in substantial compliance with
present United States federal, state and local regulations regarding the
discharge of materials into the environment. Capital expenditures required to be
made in order to achieve such compliance have had no material adverse effect
upon Tefron USA's earnings or the competitive position of Tefron USA. We believe
that continued compliance will not require material expenditures.
ITEM 4A. UNRESOLVED STAFF COMMENTS
Not Applicable.
28
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
GENERAL
OUR BUSINESS; DEVELOPMENTS
We manufacture intimate apparel, active-wear and swimwear sold throughout
the world by name-brand marketers as well as well known American retailers and
designer labels. Our product line includes knitted briefs, bras, tank tops,
boxers, leggings, crop, T-shirts, daywear, nightwear, bodysuits, swimwear,
beach-wear, active-wear, and accessories.
We have two divisions: Seamless (also called Hi-Tex) and Cut & Sew. Our
Seamless Division, which manufactures intimate apparel and active-wear products,
generated approximately 54.3% of our revenues during 2006. Our Cut & Sew
Division, which manufactures intimate apparel, active-wear and swimwear
products, generated approximately 45.7% of our revenues during 2006.
Our Hi-Tex manufacturing process 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 place mainly in Israel, where we
operated approximately 756 fully equipped Santoni knitting machines as of
December 31, 2006.
Our Cut & Sew manufacturing process also involves a vertically integrated
production process. 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
knitting, dyeing and cutting processes for our intimate apparel and active-wear
products of our Cut & Sew Division take place in Israel and most of the sewing
for these products takes place in Jordan. Our swimwear products are produced by
subcontractors mainly in the Far East.
2006 DEVELOPMENTS
In 2006, we continued to benefit from our strategy, begun at the end of
2002, to transform from an intimate apparel company with one anchor customer to
a more diversified active-wear, swimwear and intimate apparel company with a
diversified customer base. Our expansion into active-wear and swimwear has
provided us with an opportunity to increase our sales to a more diverse customer
base, including Nike, Reebok, Puma, Target, Swimwear Anywhere and others. During
2006, our sales of active-wear and swimwear products accounted for approximately
46.4% of our overall sales, while sales of these products during 2005 accounted
for approximately 40.7% of our overall sales. Despite our transformation to a
more diversified company, in 2006, our largest active-wear customer and our
largest intimate apparel customer together accounted for approximately 67.4% of
our sales, and we have therefore continued our efforts to diversify our customer
base. In the third quarter of 2006, we signed an agreement with lululemon
athletica, a new active-wear customer and we have broadened our customer base in
Europe for swimwear products.
Our active-wear and swimwear product lines continued to grow during 2006,
and our intimate apparel business maintained steady revenues during the year, in
line with our expectations. The growth in our overall sales during 2006 was
mainly due to the significant growth in sales of active-wear, and in particular
sales to Nike for their Nike Pro and Nike + categories. Nevertheless,
active-wear sales during 2006 were below our initial expectations for the year
due to a shift in timing of products flows by Nike. Neverthless, we believe our
relationship with Nike is strong, and it remains a central part of our strategy
driving our long term growth in active-wear.
29
While our transformation to a more diversified company initially reduced
operating efficiency in our Seamless division as we manufactured new, more
complicated active-wear and swimwear products with different raw materials,
during 2006 we improved our operating efficiency. This improved efficiency
contributed to our higher operating and net income during 2006. We intend to
work to maintain these efficiency levels as we expand our product lines and
manufacture other new, more complicated active-wear and swimwear products,
although we cannot guarantee that we will be able to do so.
The cost structure of our Cut & Sew manufacturing process for intimate
apparel and active-wear products, which takes place principally in Israel and
Jordan, continues to be higher than the cost structure of many of our
competitors in the Far East, Egypt and Mexico. This competition, mainly for the
sale of intimate apparel products, has caused an erosion of our prices. We are
endeavoring to move additional portions of our Cut & Sew manufacturing process
within the next few years from Israel to Jordan and other locations to benefit
from the lower labor costs in those locations.
Our Cut & Sew manufacturing process for swimwear products continues to take
place principally in the Far East to keep costs low.
In addition, the weakening of the U.S. dollar compared to the NIS in 2006
adversely affected our operating income in 2006.
CURRENCY; REVENUES; RAW MATERIALS
The currency of the primary economic environment in which our business is
conducted is the U.S. 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 delivery. 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.
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 at the time they are made. These estimates,
judgments and assumptions affect the reported amounts of assets and liabilities
as of the date of the financial statements, as well as the reported amounts of
expenses during the periods presented.
Our management believes the significant accounting policies which affect
management's more significant estimates, judgments, and assumptions used in the
preparation of the Company's consolidated financial statements and which are the
most critical to aid in fully understanding and evaluating the Company's
reported financial results include the following:
30
o Inventory valuation
o Property, plant and equipment
o Income taxes and valuation allowance
INVENTORY VALUATION
At each balance sheet date, we evaluate our inventory balance for excess
quantities and obsolescence. We estimate the excess inventory of products and
raw materials which are not designated for existing or projected orders as well
as inventory that is not of saleable quality, estimate their market value and
reduce their carrying value accordingly. Misjudgement in planning inventory
levels or in the assessment of the market value of the excess raw materials and
products may require us to record inventory mark downs that would be reflected
in cost of sales in the period the revision is made.
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 by way of sale are reported at the lower of the carrying
amount and fair value less costs to sell.
INCOME TAXES AND VALUATION ALLOWANCE
The Company and its subsidiaries account for income taxes in accordance
with Statement of Financial Accounting Standards No.109, "Accounting for Income
Taxes," or 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.
In addition, the calculation of our tax liabilities involves uncertainties
in the application of complex tax regulations, particularly under the Investment
Law. We estimate our tax liabilities under the various investment programs under
the Israeli Investment 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 or if we experience changes due to off-shoring certain of our
production processes.
OPERATING RESULTS
The following table sets forth our results of operations expressed as a
percentage of total sales for the periods indicated:
31
YEAR ENDED DECEMBER 31,
2004 2005 2006
----- ----- -----
Sales 100.0% 100% 100%
Cost of sales 91.8 82.7 77.2
----- ----- -----
Gross profit 8.2 17.3 22.8
Selling, general and administrative
expenses 11.4 7.9 9.0
----- ----- -----
Operating income (loss) (3.2) 9.4 13.8
Financial expenses, net 2.6 1.9 1.1
----- ----- -----
Income (loss) before taxes on
income (5.8) 7.5 12.7
Taxes on income 0.1 2.5 3.0
----- ----- -----
Income (loss) from continuing operation (5.9) 5.0 9.7
Income (loss) from discontinued operation 1.2 (3.1) 0.1
----- ----- -----
Net income (loss) (4.7) 1.9 9.8
===== ===== =====
YEAR ENDED DECEMBER 31, 2006 COMPARED TO YEAR ENDED DECEMBER 31, 2005
SALES
CONSOLIDATED. Sales for the year ended December 31, 2006 were $188.1
million, a 9.8% increase compared to sales of $171.3 million for the year ended
December 31, 2005. Our sales of intimate apparel decreased 0.7% from $101.6
million in 2005 to $100.9 million in 2006, our sales of active-wear products
increased 14.3% from $52.0 million in 2005 to $59.4 million in 2006 and our
sales of swimwear increased 56.7% from $17.8 million in 2005 to $27.8 million in
2006. Below is a table that describes our 2005 and 2006 sales of intimate
apparel, active-wear and swimwear products:
SALES
----------------------------------------------------------------------------------------
2005 2006
---------------------------------------- ----------------------------------------
(Dollars in thousands)
CUT & SEW SEAMLESS TOTAL CUT & SEW SEAMLESS TOTAL
Intimate Apparel $ 37,564 $ 64,061 $101,625 $ 53,148 $ 47,742 $100,890
Active-wear 6,140 45,821 51,961 4,995 54,411 59,406
Swimwear 17,750 -- 17,750 27,808 -- 27,808
TOTAL 61,454 109,882 171,336 85,951 102,153 188,104
SEAMLESS. Sales for the year ended December 31, 2006 for this segment
were $102.2 million, a 7.0% decrease compared to sales of $109.9 million
for the year ended December 31, 2005. This decrease in sales was due to a
decrease of 25.5% of our sales of intimate apparel products from $64.1
million in 2005 to $47.7 million in 2006 due to a decrease in sales to our
major intimate apparel customer, which was partially offset by an increase
of 18.7% in our sales of active-wear from $45.8 million in 2005 to $54.4
million in 2006 which was principally due to increase in our sales to Nike
for their Nike Pro and Nike + categories.
CUT & SEW. Sales for the year ended December 31, 2006 for this segment
were $86.0 million, a 39.9% increase compared to sales of $61.5 million for
the year ended December 31, 2005. This increase in sales was due to an
increase of 41.5% in our sales of intimate apparel from $37.6 million in
2005 to $53.1 million in 2006 due to an increase in sales to our major
intimate apparel customer and due to an increase of 56.7% in our sales of
swimwear products from $17.8 million in 2005 to $27.8 million in 2006 due
to increased sales to our two largest swimwear customers. The increase in
sales of our intimate apparel and swimwear product lines was partly offset
by a decrease of 18.6% in our sales of active-wear products from $6.1
million in 2005 to $5.0 million in 2006.
32
COST OF SALES
Cost of sales consists primarily of materials, various salaries and related
expenses, subcontracting expenses and other overhead expenses related to our
manufacturing operations. Cost of sales increased by 2.5% to $145.1 million in
2006 as compared to $141.6 million in 2005 due to an increase in our sales
volume. As a percentage of sales, cost of sales decreased to 77.2% in 2006 as
compared to 82.7% in 2005. This improvement in gross margin was primarily due to
an increase in our sales volume, continued improved operating efficiencies and
further transfer of our sewing capacity to Jordan with lower labor 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 increased by 25.8% to $17.1
million in 2006 as compared to $13.6 million in 2005. This increase was
primarily due to the growth in our sales volume, the expansion of our selling
activities related to our swimwear product line and an increase in our freight
expenses mainly due to the increase in sales of our swimwear product line. A
number of our swimwear customers required us to be responsible for delivering
their products directly to their distribution warehouse, which increased our
freight expenses. As a percentage of sales, selling, general and administrative
expenses increased from 7.9% in 2005 to 9.0% in 2006.
OPERATING INCOME
CONSOLIDATED. Operating income for the year ended December 31, 2006 was
$25.9 million (13.8% of sales), compared to operating income of $16.1 million
(9.4% of sales) for the year ended December 31, 2005. This increase in operating
income was due to the increase in gross profit, as discussed above.
SEAMLESS. Operating income for the year ended December 31, 2006 for
this segment was $16.4 million (16.0% of sales), compared to operating
income of $13.3 million (12.1% of sales) for the year ended December 31,
2005. This improvement was due to an increased contribution of higher
margin products, the improvement in our operating efficiencies and further
transfer of sewing capacity to Jordan, as discussed above.
CUT & SEW. Operating income for the year ended December 31, 2006 for
this segment was $9.5 million (11.1% of sales), compared to operating
income of $2.9 million (4.7% of sales) for the year ended December 31,
2005. The increase resulted mainly from the growth in sales volume and the
improvement in our operating efficiencies.
33
FINANCIAL EXPENSES, NET
Financial expenses, net decreased to $1.9 million in 2006 as compared to
$3.2 million in 2005. This decrease was mainly due to a significant reduction of
our net bank debt over the course of the year primarily as a result of the sale
of our interest in AlbaHealth, our public offering of securities on the Tel-Aviv
Stock Exchange and cash provided by our operating activities. This decrease was
partly offset by currently exchange losses resulting from the weakening of the
U.S dollar as compared to the NIS.
INCOME TAXES
Tax expense for 2006 was $5.7 million as compared to tax expense of $4.3
million for 2005. The main reason for this increase was the increase in our
pretax profit which was $24.0 million in 2006 compared to $12.9 million in the
year 2005.
YEAR ENDED DECEMBER 31, 2005 COMPARED TO YEAR ENDED DECEMBER 31, 2004
SALES
CONSOLIDATED. Sales for the year ended December 31, 2005 were $171.3
million, a 15.3% increase compared to sales of $148.6 million for the year ended
December 31, 2004. Our sales of intimate apparel decreased 14.1% from $118.2
million in 2004 to $101.6 million in 2005, our sales of active-wear products
increased 158.4% from $20.1 million in 2004 to $52.0 million in 2005 and our
sales of swimwear increased 72.7% from $10.3 million in 2004 to $17.8 million in
2005. Below is a table that describes our 2004 and 2005 sales of intimate
apparel, active-wear and swimwear products:
SALES
----------------------------------------------------------------------------------------
2004 2005
---------------------------------------- ----------------------------------------
(Dollars in thousands)
CUT & SEW SEAMLESS TOTAL CUT & SEW SEAMLESS TOTAL
Intimate Apparel $ 47,351 $ 70,889 $118,240 $ 37,564 $ 64,061 $101,625
Active-wear 7,646 12,459 20,105 6,140 45,821 51,961
Swimwear 10,275 -- 10,275 17,750 -- 17,750
TOTAL 65,272 83,348 148,620 61,454 109,882 171,336
SEAMLESS. Sales for the year ended December 31, 2005 for this segment
were $109.9 million, a 31.8% increase compared to sales of $83.3 million
for the year ended December 31, 2004. This increase in sales was mainly due
to the growth in sales of our active-wear seamless products, and in
particular in sales to Nike for their Nike Pro category.
CUT & SEW. Sales for the year ended December 31, 2005 for this segment
were $61.5 million, a 5.8% decrease compared to sales of $65.3 million for
the year ended December 31, 2004. This decrease in sales was mainly due to
a decrease of 20.7% of our sales of intimate apparel products from $47.4
million in 2004 to $37.6 million in 2005, which was partially offset by an
increase of 72.7% in our sales of swimwear products from $10.3 million in
2004 to $17.8 million in 2005.
34
COST OF SALES
Cost of sales consists primarily of materials, various salaries and related
expenses, subcontracting expenses and other overhead expenses related to our
manufacturing operations. Cost of sales increased by 3.8% to $141.6 million in
2005 as compared to $136.4 million in 2004, primarily due to the increase in
sales. As a percentage of sales, cost of sales decreased to 82.7% in 2005 as
compared to 91.8% in 2004. This improvement in gross profit percentage was due
to the increased contribution of higher margin products and the improved
operating efficiencies in our Seamless and Cut & Sew segments. These efficiency
measures included, among others, increased production and quality performance
and further transfer of sewing capacity to Jordan.
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 19.7% to $13.6
million in 2005 as compared to $16.9 million in 2004. This decrease was
primarily due to a reduction in air freight expenses due to improved deliveries
to our customers and to a reduction of general and administrative payroll
expenses. As a percentage of sales, selling, general and administrative expenses
decreased from 11.4% in 2004 to 7.9% in 2005. This was primarily due to the
increase in sales volume and the factors mentioned above.
OPERATING INCOME
CONSOLIDATED. Operating income for the year ended December 31, 2005 was
$16.1 million (9.4% of sales), compared to operating loss of $4.7 million for
the year ended December 31, 2004. This increase in operating income was due to
the increase in gross profit and decrease in selling, general and administrative
expenses as discussed above.
SEAMLESS. Operating income for the year ended December 31, 2005 for
this segment was $13.3 million (12.1% of sales), compared to operating loss
of $8.2 million for the year ended December 31, 2004. This improvement was
due to the increased contribution of higher margin products, increased
production volume, improvement in production and quality performance,
further transfer of sewing capacity to Jordan and a decrease in freight
expenses.
CUT & SEW. Operating income for the year ended December 31, 2005 for
this segment was $2.9 million (4.7% of sales), compared to operating income
of $3.5 million (5.4% of sales) for the year ended December 31, 2004. The
decrease resulted primarily from a decrease in sales to a major intimate
apparel customer due to strengthened price competition.
FINANCIAL EXPENSES, NET
Financial expenses decreased to $3.2 million in 2005 as compared to $3.9
million in 2004. This decrease was mainly due to the strengthening of the U.S
dollar as compared to the NIS and the EUR. This decrease was partly offset by an
increase in interest expenses on our loans and credit lines due to an increase
in LIBOR rates.
35
INCOME TAXES
Tax expense for 2005 was $4.3 million, as compared to tax expense of $0.1
million for 2004. The main reason for this increase was the increase in pretax
profit which was $12.9 million in 2005 compared to a pretax loss of $8.6 million
in the year 2004.
LIQUIDITY AND CAPITAL RESOURCES
2006 SOURCES AND USES OF CASH
During 2006, we generated $27.3 million in cash from continuing operating
activities compared to $17.8 million during 2005. In addition, we received:
o net proceeds of $13.8 million from our offering of securities on the
Tel-Aviv Stock Exchange during the first quarter,
o proceeds of $1.0 million from the exercise of option certificates
issued in such offering,
o proceeds of $3.2 million from exercise of stock options by employees
and directors,
o proceeds of $9.9 million in cash from the sale of our interest in
AlbaHealth, and
o $1.2 million of Israeli governmental investment grants in respect of
our investment in fixed assets.
This cash flow was used to repay a net amount of $30.9 million in bank
debt, pay dividends of $ 9.4 million, invest $4.4 million, net in property,
plant and equipment, and together with other cash flow activities, increase our
cash and cash equivalents, deposits and marketable securities balance by $12.4
million from $7.7 million at December 31, 2005 to $20.1 million at December 31,
2006.
Cash provided by operating activities is net income (loss) adjusted for
certain non-cash items and changes in assets and liabilities. For 2006, cash
provided by continuing operating activities was $27.3 million, compared to $17.8
million in 2005, while our net income increased in 2006 to $18.4 million
compared to net income of $3.3 million in 2005. During 2006, the majority of our
increase in cash flow as compared to 2005 was mainly due to an increase in our
net income (excluding the non cash expenses).
CONTRACTUAL AND OTHER COMMITMENTS
We have various commitments primarily related to long-term debt. The
following tables provide details regarding our contractual cash obligations and
other commercial commitments subsequent to December 31, 2006:
CONTRACTUAL OBLIGATIONS(1) (2) TOTAL 2007 2008 2009 - 2010 - 2012
----- ----- ----- ----- -----
Long-Term Bank Debt $25.3 $ 5.9 $ 5.9 $ 5.6 $ 7.9
Other Long-Term Obligations (3) -- -- -- --
TOTAL CONTRACTUAL CASH
OBLIGATIONS -- $ 5.9 $ 5.9 $ 5.6 $ 7.9
36
OTHER COMMERCIAL COMMITMENTS TOTAL AMOUNTS AVAILABLE 2006(4)
- ---------------------------- ----------------------- -------
Lines of Credit $21.1 $0
Guarantees/Letters of Credit $ 11 $9
TOTAL COMMERCIAL COMMITMENTS $31.2 $9
(1) Contractual obligations are defined as agreements for finance purposes
that are enforceable and legally binding on Tefron and that specify all
significant terms, including fixed or minimum quantities to be purchased, and
the approximate timing of the transaction. Because our purchase orders are based
on our current manufacturing needs, our agreements for the purchase of raw
materials and other goods and services are not included in the table above.
(2) This table does not include payments of interest on our long-term bank
debt, due to its variable nature. Interest on our long-term bank debt ranges
from three-month LIBOR plus 1.2% to three-month LIBOR plus 1.5% As of March 15,
2007, the three-month LIBOR was 5.34%.
(3) This table does not include deferred tax obligations, net, of $11.9
million and accrued severance pay, net, in the amount of $2.5 million. We do not
know in what year these long-term obligations will be payable.
(4) These credit lines facilities are revolving every year.
LOAN FACILITIES
At December 31, 2006, outstanding borrowings from banks, comprised of long
term debt, totaled $25.3 million, including current maturities of $5.9 million.
The bank loans bear interest at three months LIBOR plus 1.2% to 1.5% and are
scheduled to mature during the next six years.
Long-term loans include a term loan facility of our subsidiary, Tefron USA,
with Bank Hapoalim B.M. and Israel Discount Bank of New York entered into in
connection with the acquisition of Tefron USA, in the outstanding amount of $9.2
million and payable in 12 quarterly installments commencing March 15, 2007
through December 15, 2012.
The term loan facility is secured by a floating lien on all the personal
property of Tefron USA and its subsidiaries, pledges of all non-margin stock of
Tefron USA owned by our U.S. subsidiary, Tefron U.S. Holdings Corp., and all
subsidiary stock then owned by Tefron USA, and guaranties made by us, Hi-Tex
Founded by Tefron Ltd. and by Tefron U.S. Holdings Corp.
The bank loan agreements contain various covenants which require, among
other things, that we maintain certain financial ratios related to shareholders'
equity and operating results. In addition, the terms prohibit us and Tefron USA
from incurring certain additional indebtedness, limit certain investments,
advances or loans and restrict substantial asset sales, cash dividends and other
payments to shareholders of us and of Tefron USA. These covenants and
restrictions could hinder us in operations and growth. As of December 31, 2006,
the Company was in compliance with these covenants.
EQUITY FINANCINGS
On April 22, 2004, we issued to Norfet, Limited Partnership, or Norfet,
controlled by FIMI Opportunity Fund and certain other co-investors,
approximately 3.53 million Ordinary Shares at a base price of $4.25 per share
and to a group of investors represented by Mr. Zvi Limon, or Leber,
approximately 1.07 million of our Ordinary Shares at a base price of $4.65 per
share. See "Item 10. Additional Information - C. Material Agreements - FIMI
Agreements." We applied most of the aggregate amount of $19.7 million from these
investments to repay short-term debt. On April 5, 2005, we issued, with no
further consideration, additional shares to Norfet and Leber according to share
purchase price adjustment mechanisms included in the investments agreements with
these investors. Also, on March 9, 2004, we announced that we had entered into
an equity line credit facility with Brittany Capital Management Ltd., or
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
2,470,021 Ordinary Shares (equal to 19.9% of our outstanding share capital on
the day we signed the agreement) over a three-year period expiring at the end of
October 2007. 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."
37
On January 10, 2006, we completed a public auction of our Ordinary Shares
and Option Certificates (Series 1) in Israel. A total of 100,000 units,
consisting of 18 Ordinary Shares and six Option Certificates each, were issued
in the offering at a price of NIS 701.64 (approximately $151.48) per unit. Each
Option Certificate was exercisable into one Share until January 9, 2007 at an
exercise price of $9.49 per Ordinary Share denominated in NIS (subject to
adjustment for dividend distributions). Of the total number of Option
Certificates issued, 572,748 were exercised and 27,252 expired. Our total net
proceeds from the offering were approximately $13.8 million for shares plus
approximately $5.7 million generated from the exercise of the Option
Certificates. The Ordinary Shares and the shares issued upon the exercise of the
Option Certificates are listed for trading on the Tel Aviv Stock Exchange.
OUTLOOK
We currently believe that our cash flow from ongoing operations and our
available bank credit will be sufficient to finance all of our ongoing costs and
our planed investment in our business through 2007. We are looking to further
expand our relationship with Nike and lululemon athletica and continue to
increase our sales of swimwear products. We intend to broaden our scope of
products while entering into new categories and increase the visibility of our
Engineered For Performance EFP(TM) technology. However, we may not generate
sufficient cash from operations to finance our ongoing costs and service our
debt. See "Item 3. Key Information - 3D. Risk Factors," and 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," "Our expansion into new
product lines with more complicated products and new raw materials reduced our
operating efficiency during 2003 and 2004. We may also face operating efficiency
difficulties in the future," 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 is not
generated, we may need to renegotiate the terms of our debt, refinance our debt,
obtain additional financing, postpone capital expenditures or sell assets. 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."
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 invested
approximately $4.4 million to $4.9 million in 2004, $4.8 million to $5.0 million
in 2005 and $5.4 million to $5.6 million in 2006 on design and development of
products, including investments made by Tefron USA.
38
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. Part of our expenses
are executed in Euro and, therefore, we are also exposed to the risk of
appreciation of the Euro vis-a-vis the U.S dollar. This appreciation would cause
an increase in our NIS or Euro expenses as recorded in our U.S. dollar
denominated financial reports even though the expenses denominated in NIS or
Euro 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 NIS linked to dollar, 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 2003 and 2005, the rate of devaluation of the NIS vis-a-vis the dollar
exceeded the inflation rate in Israel. During 2003 and 2005, the rate of
inflation was (1.9)% and 2.4%, respectively, while the NIS devalued against the
U.S dollar by 7.6% and 6.9% in 2003 and 2005, respectively. During 2004 and
2006, the rate of inflation was 1.2% and 0.1% while the NIS appreciated versus
the U.S dollar by 1.6 % and 8.2%, respectively and this negatively affected our
profitability.
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 devaluation would also
have the effect of reducing the dollar amount of any of our payables or
liabilities which are denominated in NIS (unless such payables or liabilities
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. During 2006, we incurred expenses of approximately $1.1 million due
to the appreciation of the NIS in relation to the dollar and income of
approximately $0.2 million due to the appreciation of the Euro in relation to
the dollar. Hedging transactions performed by the Company during 2006 diminished
the adverse effect of the appreciation of the NIS in relation to the dollar.
This appreciation may continue in 2007.
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 fluctuations
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 U.S. 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 was generally subject to
corporate tax at the statutory rate of 31% in 2006. The rate is scheduled to
decline to 29% in 2007, 27% in 2008, 26% in 2009 and 25% in 2010 and thereafter.
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) 10 years beginning
in the year that we had taxable income, (ii) 12 years from commencement of
production, or (iii) 14 years from the date of approval.
39
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 Ordinary 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 our 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 NIS
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 our 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)
2002 4.74 4.99 4.44 4.74
2003 4.54 4.92 4.28 4.38
2004 4.48 4.63 4.31 4.31
2005 4.49 4.74 4.30 4.60
2006 4.46 4.73 4.18 4.23
The following table sets forth certain information concerning the
representative rate of exchange between the NIS and the US dollar, as published
for the months October 2006 through March 2007.
40
MONTH AVERAGE RATE HIGH LOW PERIOD END
- ----- ------------ ---- --- ----------
(NIS PER $1.00)
October 2006 4.27 4.30 4.25 4.29
November 2006 4.30 4.33 4.25 4.25
December 2006 4.20 4.23 4.18 4.23
January 2007 4.23 4.26 4.19 4.26
February 2007 4.22 4.25 4.18 4.21
March (through March 15, 2007) 4.21 4.22 4.20 4.21
On March 15, 2007, the representative rate of exchange between the NIS and
the US dollar was NIS 4.212 per $1.00, as published by the Bank of Israel.
Changes in the exchange rate between the NIS and the USD could materially affect
our financial results.
TREND INFORMATION. We have seen a significant improvement in the operating
efficiency in our Seamless Division during 2005 and 2006, although we cannot
assure that we will be able to maintain our current efficiency levels in the
future. For more information, see " - General - 2006 Developments."
We have also experienced erosion in prices of our Cut & Sew intimate
apparel products and decrease in, sales of these products, that may continue in
the future.
OFF-BALANCE SHEET ARRANGEMENTS. We have no off-balance sheet arrangements
that have or are reasonably likely to have a current or future effect on our
financial condition, revenues or expenses, results of operations, liquidity,
capital expenditures or capital resources that are material to investors, except
for foreign exchange hedging contracts. See "Item 11. Quantitative and
Qualitative Disclosures About Market Risk - Foreign Currency Risk."
41
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
6A. Directors and Senior Management
The following table sets forth certain information concerning our current
directors, senior management and key employees as of March 15, 2007.
NAME AGE POSITION
- ---- --- --------
Ishay Davidi 45 Chairman of the Board
Yosef Shiran 45 Chief Executive Officer and Director
Arie Wolfson 45 Director
Micha Korman 52 Director
Meir Shamir 56 Director
Shirith Kasher 39 Director
Avi Zigelman 50 Director
Eli Admoni 67 External Director
Yacov Elinav 62 External Director
Asaf Alperovitz 37 Chief Financial Officer
Amit Tal 37 Vice President of Sales and Marketing
Itamar Harchol 48 Chief Technology Officer
Anat Barkan 40 Manager of Human Resources
Amit Eshet 45 Supply Chain Manager
David Gerbi 57 Hi-Tex Division Manager
Ilan Gilboa 40 Cut & Sew Division Manager
Ronny Grundland 53 Swimwear Division Manager
Michal Baumwald Oron 34 Company Secretary and Legal Counsel
ISHAY DAVIDI has served as Chairman of the Board of Directors since
November 2005 and served as a director of the Company since June 2005. Mr.
Davidi serves as a CEO of each of First Israel Mezzanine Investors Ltd. and FIMI
2001 Ltd., the managing general partners of the partnerships constituting the
FIMI Private Equity Funds. Mr. Davidi also serves as a director at Tedea
Development & Automation Ltd. and TAT Technologies Ltd. Mr. Davidi was formerly
the CEO of the Tikvah VC Fund. Mr. Davidi holds a B.Sc in Industrial and
Management Engineering from Tel Aviv University and an MBA from Bar Ilan
University.
YOSEF SHIRAN has served as Chief Executive Officer and a Director of Tefron
since January 2001. Prior to joining Tefron, Mr. Shiran was the general manager
of Technoplast Industries, an injection molding and extrusion company, from 1995
to 2000. Mr. Shiran has over 15 years of management experience. Mr. Shiran holds
a B.Sc. degree in Industrial Engineering from Ben-Gurion University and a
masters degree in Business Administration from Bar Ilan University.
ARIE WOLFSON joined Tefron in 1987 and served as Chairman of the Board of
Directors from August 2002 until November 2005. He also served as Chairman of
the Board of Directors from 1997 to 2000, and as President from 1993 to 2000.
Mr. Wolfson served as Chief Financial Officer from 1988 to 1990 and Assistant to
the Chief Executive Officer from 1990 to 1993. Mr. Wolfson has also served as
Chairman of Macpell Industries Ltd., a principal shareholder in Tefron, since
1998 and served as Chief Executive Officer of Macpell from 1998 until March
2003. Mr. Wolfson is a graduate of High Talmudical Colleges in the United States
and in Israel.
MEIR SHAMIR was elected as a director of the Company on March 31, 2004 and
has been the Chairman of Mivtach Shamir Holdings Ltd., an investment company
traded on the TASE, since 1992. Mr. Shamir also serves as a director of several
companies controlled by Mivtach Shamir Holdings Ltd.
42
MICHA KORMAN has served as a director of the Company since October 2002.
Mr. Korman leads the improving, recovery and rehabilitation process for
companies. Mr. Korman held various senior management positions in the Company
from 1991 until 2003. From October 2000, he served as the Executive Vice
President of the Company. Prior to that, Mr. Korman was Chief Financial Officer
of the Company from 1991 to September 2000. Prior to joining the Company, Mr.
Korman held various senior financial and management positions with companies in
the hi-tech, beverage and food and communication industries. Mr. Korman holds a
Bachelor's degree in Economics, a Business Administration degree from Bar-Ilan
University and an LL.B degree from Kiryat Ono College.
SHIRITH KASHER was elected as a director of the Company on March 31, 2004
and is the head of Corporate & Structured Finance at Brack Capital Holding Ltd.
From April 2005 until April 2006 Ms. Kasher was the CEO of Telem Ltd. From 2001
to March 31, 2005, Ms. Kasher was the Business and Corporate Counsel and
Secretary of The Israel Phoenix Assurance Company Ltd. and the General Counsel
of Atara Investment Company Ltd. and Atara Technology Ventures Limited (both
from the Phoenix Group). From 1997 to 2000, Ms. Kasher worked at S. Horowitz &
Co., first as an Articled Clerk and then as an Advocate. Ms. Kasher holds a
B.Sc. and an LLB, from Tel Aviv University and is admitted to practice law in
Israel.
AVI ZIGELMAN was elected as a director of the Company on June 28, 2005.
Since 2004 Mr. Zigelman is a financial advisor and serves as a director in the
following companies: Plastro Irrigation Ltd., Phoenix Gemel Ltd., Fox Vizel
Ltd.,King Ltd., Bram Industries Ltd., Ilex Medical Ltd., Migdal Capital Markets
(1965) Ltd., Gindi Towers Investments Ltd., Osif Investment and Development
Ltd., Simha Urieli and Sons Ltd., Milomor Trade & Communication Ltd. and Pangea
Real Estates Ltd. Since 2000 Mr. Zigelman is a member of the Professional
Committee of the Israeli Accounting Standard Board. Between 1996 and 2003, Mr.
Zigelman served as a Partner Head of Professional Practice Department of KPMG
Somekh Chaikin accounting firm and Mr. Zigelman holds an M.A. in Business
Economics, specialization in Finance, with honors, B.A in Accounting and
Economics, Economics with honors, and Post degree Accounting Studies, with
honors, - all from Tel-Aviv University. Mr. Zigelman is a Certified Public
Accountant.
ELI ADMONI has served as an External Director of Tefron since August 10,
2006. Mr. Admoni has been the chairman of the Clalit Health Services since 2005,
serves as a director and chairman of the finance committee of Clalit Health
Services and served as the chairman and as a director in boards of directors of
different companies from 2000 to 2005. Mr. Admoni served as the president of
Biotechnology General (Israel) Ltd from 1999 to 2000, as CEO of Caniel Israel
Can Company Ltd from 1994 to 1998, as CEO of Rafa Labs Ltd from 1989 to 1993,
and as CEO of Abic Ltd from 1982 to 1989. Mr. Admoni holds an LLB from the
Hebrew University, Jerusalem and a Business Administration degree from
University of Manitoba, Canada.
YACOV ELINAV has served as an External Director of Tefron since 2004.
Between 1991 and July 2003, Mr. Elinav was a member of the Board of Management
of Bank Hapoalim B.M. Mr. Elinav also serves as a Chairman of the Board of DS
Securities Investment Ltd. and of the Board of DS Pension Funds Ltd and is a
director of Middle East Tube Ltd., New Kopel Ltd, DS Trust Funds Ltd, DS
Institutionals Ltd, Sapians Ltd., Bagir Ltd., Polar Communication Ltd and is an
external director of Office Textile Ltd. Mr. Elinav formerly served as a
director of other prominent Israeli companies.
ASAF ALPEROVITZ joined Tefron in June 2005 as Chief Financial Officer. Mr.
Alperovitz has held several management positions, including that of Chief
Financial Officer of Corigin Ltd., an enterprise software company from 2003
until 2005. Prior to that, Mr. Alperovitz worked as the Head of Israeli Desk and
as High-Technology Senior Manager for Ernst & Young in both Israel and
California. Mr. Alperovitz holds a Bachelor's degree in Accounting and Economics
and a Master in Business Administration from Tel-Aviv University and is a
Certified Public Accountant.
AMIT TAL has served as Vice President of Sales and Marketing at Tefron
since 2005 and was marketing director at Tefron from 2001 to 2005. Before
joining Tefron, Mr. Tal was a business unit manager for a large textile firm.
Mr. Tal holds a B.A. in economics and marketing as well as a Masters in Business
Administration.
43
ITAMAR HARCHOL joined Tefron in March 2003 as Chief Technology Officer.
Prior to joining Tefron, from the beginning of 2001 to February 2003, Mr.
Harchol served as the Engineering Manager of Tamuz, a manufacturer of electronic
packaging, between 1998 and 2001 he was Products Manager for the automotive
industry in Ortal Dye Casting and prior to that, between 1994 and 1997, he
served as the Engineering Manager of Inbar Reinforced Polyester which is a
plastic manufacturer of composite materials products. Mr. Harchol holds a degree
of mechanical engineering from the Nazareth College.
ANAT BARKAN joined Tefron in 2005 as Human Resource Manager. Prior to
joining Tefron, Ms. Barkan served as Human Resource manager in several
companies, including Golan Plastic Products from 2001 until 2005 and in
Glidat-Strauss Ltd. from 1995 until 2001. Ms. Barkan holds a Bachelor's degree
in Political Science and Sociology from Haifa University, a Master in Business
Administration from the Hebrew University and a degree in Organizational
Consulting from Haifa University.
AMIT ESHET joined Tefron in February 2001 and has served as Hi-Tex division
manager since July 2004 and as Supply Chain manager since March 2005. Prior to
that, he served as manager quality assurance of Hi-Tex division. Mr. Eshet
served as manager in several industrial corporations. Mr. Eshet holds a B.Sc
degree in Industrial Engineering from the Technion in Haifa.
DAVID GERBI joined Tefron as Hi-Tex Managing director in February 2005.
David has significant experience in management positions in the textile
industry. Mr. Gerbi served in Nilit Ltd. from 1977 to 1985 as a production
manager in the Textile Division, from 1985 to 1994 as a plant manager in the
Delta Galil socks division, from 1994 to 1997 as Delta fabric division manager,
from 1997 to 1999 established and managed his own private textile factory,
between 1999 to 2002 served as Delta sporting managing director, and from 2002
to 2005 was a country manager for Sara Lee in Turkey. Mr. Gerbi holds a degree
in practical engineering from ORT in Israel.
ILAN GILBOA joined Tefron as manager of Tefron's cut & sew division in
March 2003. Prior to joining Tefron, Mr. Gilboa served from 1996 to February
2003 in Kulicke & Soffa Israel, a leading supplier of semiconductor assembly and
test innerconnect equipment, materials and technologies, first as a manager of
industrial engineering and last as vice president of operations and as such, was
responsible for the construction of K&S's new industrial facility in China. Mr.
Gilboa holds a B.Sc and M.Sc degree in industrial engineering from the Technion
in Haifa.
RONNY GRUNDLAND joined Tefron in May 2003, following the acquisition of
Macro Clothing Ltd, and has served since then as a Head of Tefron Swimwear
Division. Prior to that Mr. Grundland served since 1995 until 2003 as the
general manager of Macro, since 1993 until 1995 he served as general manger of
Macpell Industries, Ltd. jointly with another and as its marketing manager,
since 1990 until 1992 Mr. Grundland served as an organizational advisor to
textile companies in Israel and Europe, and since 1980 until 1989 he served as a
production and operational manager in Gotex, Ltd. Mr. Grundland holds a B.Sc
degree with honors in industrial engineering form the Technion- the Technologic
Institution in Israel, and LLB with honor from Sharei-Mishpat College.
MICHAL BAUMWALD ORON joined Tefron in 2003 and has served as the company
secretary and legal counsel since August 2004. Prior to joining Tefron, Ms. Oron
served as a lawyer and as legal counsel in a law firm, in private practice and
in the IDF. Ms. Oron holds an LLB from Tel-Aviv University and an LLM from
Bar-Ilan University and was admitted to practice law in Israel in 1996.
MACPELL SHAREHOLDERS' AGREEMENT
The Macpell Shareholders Agreement relates, among other things, to the
election of Directors of Tefron. The agreement provides, among other things,
that subject to the agreement of the shareholders in Tefron, the distribution of
the directors on Tefron's Board of Directors will reflect the direct and
indirect holdings in Tefron (including through Macpell) of the parties to the
agreement. See "Item 7 - Major Shareholders and Related Party Transactions - 7B.
- - Related Party Transaction - Relationships and Transactions with Macpell -
Macpell Shareholders' Agreement."
44
MACPELL-ARWOL- NORFET AGREEMENT
Arwol, Macpell and Norfet are parties to an agreement pursuant to which
they agreed to vote all of Tefron Ordinary Shares owned or controlled by each of
them for the election to Tefron's Board of Directors of: (i) three members (of
whom at least one will be female and at least one will qualify as an
"independent director" under the NYSE rules) plus, subject to applicable law,
one external director, that shall be nominated by Norfet, (ii) three members (of
whom at least one will qualify as an independent director and a financial expert
under the NYSE rules) plus, subject to applicable law, one external director,
that shall be nominated by Arwol and Macpell, and (iii) Tefron's chief executive
officer. Ishay Davidi, Meir Shamir, Shirith Kasher and Yacov Elinav were
nominated to the Board by Nofet, and Arie Wolfson, Micha Korman, Avi Zigelman
and Eli Admoni were nominated to the Board by Arwol and Macpell. See "Item 10.
Additional Information - C. Material Agreements - FIMI Agreements - Macpell
Agreement" for a description of the agreement between Arwol, Macpell and Norfet,
Limited Partnership regarding the election of members to Tefron's Board of
Directors.
6B. COMPENSATION
The aggregate direct remuneration paid to all Directors and senior
management as a group for services in all capacities for the year ended December
31, 2006 was approximately $2.4 million, of which $104,000 was paid to Directors
in their capacities as Directors. Negligble amounts were set aside or accrued
for vacation and recuperation pay for all Directors and senior management as a
group. No amounts were set aside or accrued to provide pension, retirement or
similar benefits. The amount does not include any amounts expended by us for
automobiles made available to our officers, expenses (including business travel
and professional and business association dues and expenses) reimbursed to
officers and other fringe benefits commonly reimbursed or paid by companies in
Israel and $120,000 in management fees paid to Norfet and $120,000 in management
fees paid to New York Delights, a company wholly owned by Arie Wolfson.
In 2006, we granted options for 80,000 Ordinary Shares under the Share
Option Plan to senior managers. Such options have an average exercise price of
$9.90 per share (including adjustments to two dividend distributions which took
place in 2006) and expire in 2016. Options for 15,000 Ordinary Shares under the
Share Option Plan expired or were cancelled during 2006.
EMPLOYMENT AGREEMENTS
CHIEF EXECUTIVE OFFICER
Under the terms of our management services agreement with Mr. Yosef Shiran,
our Chief Executive Officer, and with an entity controlled by him, referred to
in this Annual Report as the Management Agreement, we pay to the entity
controlled by Mr. Shiran: (i) compensation for management services in the amount
of $26,888 plus NIS 2,065 per month, plus VAT as applicable by law, and (ii)
reimbursement of any and all reasonable direct expenses including telephone,
cellular phone and vehicle expenses. The management agreement originally
provided for the payment of an annual grant to Mr. Shiran in an amount not
higher than 2.5% of Tefron's Net Profit, as defined in the Management Agreement,
and not lower than 1.5% of such Net Profit (with any annual grant higher than
1.5% of the Net Profit subject to approvals of both the Board of Directors and
the Tefron shareholders, unless no longer required under applicable law).
Following approval of the Tefron shareholders, the Management Agreement was
amended to provide for the annual grant to be 2% of the Company's Net Profits.
Tefron shareholders have also resolved to change the definition of "Net Profit"
for the purposes of calculating the annual bonus for 2006 and thereafter to be
Tefron's annual net profit as set forth in Tefron's audited financial
statements, after deducting tax and without taking into consideration special
profits or losses (except special profits which resulted from Mr. Shiran's
actions which will be taken into consideration) or profits or losses which are
not derived from Tefron's ordinary operations.
45
The Audit Committee and the Board of Directors have approved an increase of
Mr. Shiran's monthly compensation starting from January 1, 2007 to $35,000 plus
VAT as applicable by law. This change is subject to shareholder approval and
will apply retroactively to January 1, 2007, if approved by shareholders.
In addition, in 2001 we granted to Mr. Shiran options to purchase 300,000
Ordinary Shares at an exercise price per share of $3.56. Of these options,
150,000 were exercised by Mr. Shiran during 2006 and the shares issued upon such
exercise were sold by Mr. Shiran. In 2002, we granted to Mr. Shiran options to
purchase 15,000 Ordinary Shares with an exercise price per share of $3.59. All
of these options are subject to the terms and conditions of our 1997 Share
Option Plan. In March 2004, the Tefron shareholders approved the grant to Mr.
Shiran of additional options to purchase 650,000 Ordinary Shares at an exercise
price of $ 4.25 per share issued in accordance with our 1997 Share Option Plan.
As of March 15, 2007, 679,583 of Mr. Shiran's options had vested (in
addition to the 150,000 options already exercised), and the remaining 135,417
options will vest, subject to relevant tax laws, until December 31, 2007 in the
amount of 13,542 options each month. The agreement granting these 650,000
options included a provision providing for an adjustment to the exercise price
in the event of a dividend distribution during the period that the options
cannot be exercised, whether due to the fact that the options are not vested or
due to the terms of Section 102 of the Israel Income Tax Ordinance. The Audit
Committee and the Board of Directors have approved a two-year extension of the
period (until October 22, 2008) during which the exercise price of these options
would be adjusted for dividend distribution by Tefron, whether or not the
options are exercisable at the time of the dividend distribution. This change is
subject to shareholder approval and will apply retroactively to October 2006, if
approved by shareholders.
In the event the Management Agreement is terminated by us without "cause"
or by Mr. Shiran, Mr. Shiran will be entitled to exercise the options he would
otherwise be entitled to exercise as of such date for a period ending 36 months
after such termination. Notwithstanding the foregoing, in the event we terminate
the Management Agreement because of a "Change in Control", Mr. Shiran will be
entitled to exercise all of the 650,000 options not exercisable at the time of
termination. In such a case, Mr. Shiran will be entitled to exercise these
options within 30 days of the termination date. For the purpose of this grant,
"Change of Control" means: if none of (i) FIMI Opportunity Fund, L.P. (and its
affiliates and investors, including FIMI Israel Opportunity Fund, Limited
Partnership), or FIMI; (ii) "Arwol"; and (iii) Macpell, will be party to the
shareholder agreement dated March 17, 2004 between such parties (described in
"Item 10. Additional Information - C. Material Contracts - FIMI Agreements -
Macpell Agreement"), or will otherwise effectively have Control of the Company.
For that purpose, the term "Control" shall have the meaning given to that term
(in Hebrew: "Shlita") in Section 1 of the Securities Law, 1968.
AGREEMENT WITH ARIE WOLFSON
Under the terms of our consulting and management services agreement with
Mr. Arie Wolfson, a Director of the Company, and with a company controlled by
him, referred to herein as the Consulting Agreement, we pay to the company
controlled by Mr. Wolfson: (1) compensation for consulting services in the
amount of $15,000 per month, plus 41% cost (equivalent to the cost we would have
paid for a similar senior management wage) (total of $253,800 annually), (2)
reimbursement of vehicle expenses, (3) reimbursement of out-of-pocket expenses,
and (4) reimbursement of other standard expenses customarily provided to persons
serving in such capacity in Israel. These payments replace payments made until
2002 to Macpell in the amount of $20,000 per month. In addition, the consulting
and management services agreement includes non-competition clauses.
46
In addition, we granted to Mr. Wolfson options to purchase 225,000 Ordinary
Shares at an exercise price per share of $3.50. Such options were exercised by
Mr. Wolfson during 2006 and the shares issued upon such exercise were sold by
Mr. Wolfson. Pursuant to the terms of the agreement between Norfet, Limited
Partnership and the Company, on March 31, 2004, the general meeting of
shareholders of the Company approved an amendment to the Consulting Agreement
which provides that as of the date on which Mr. Wolfson ceases to act as
chairman of the board of directors of the Company, and for so long as Mr.
Wolfson continues to provide consulting services to the Company, the annual
amounts payable pursuant to the Consulting Agreement will be reduced from
$253,800 to $120,000 per annum, each plus VAT. See "Item 10. Additional
Information - 10C. Material Contracts - FIMI Agreements".
FORMER PRESIDENT
Under the terms of a retirement agreement we executed with Mr. Rabinowicz
on January 10, 2005, we paid Mr. Rabinowicz during most of 2005 monthly
payments, employee benefits such as vacation, educational fund, sick leave, and
management and disability insurance contributions and provision of a vehicle. We
will pay Mr. Rabinowicz in accordance with the retirement agreement a further
$162,500 during 2007. The retirement agreement also includes non-competition
clauses.
6C. BOARD PRACTICES
Each Director, other than the External Directors, is generally elected by a
vote at the Annual General Meeting of shareholders and serves for a term of one
year or until the following Annual General Meeting. Each External Director is
elected to serve for a period of three years from the date of the Annual General
Meeting. Each office holder will serve until his or her removal by the Board of
Directors or resignation from office.
Under the Israeli Companies Law, each Israeli public company is required to
determine the minimum number of directors with "accounting and financial
expertise" that such company believes is appropriate in light of the particulars
of such company and its activities. A director with "Accounting and Financial
Expertise" is a person that, due to education, experience and qualifications, is
highly skilled and has an understanding of business-accounting issues and
financial statements in a manner that enables him/her to understand in depth the
company's financial statements and stimulate discussion regarding the manner of
presentation of the financial data. On March 8, 2006 the Board determined that
at least two members of the board would be required to have Accounting and
Financial Expertise. The Board believes it complies with such requirement.
INDEPENDENT/EXTERNAL DIRECTORS
ISRAELI COMPANIES LAW REQUIREMENTS
We are subject to the provisions of the Israeli Companies Law, 1999 which
requires that we have at least two External Directors. Under a recent amendment
to the Companies Law, at least one of the external directors is required to have
Financial Expertise and the other External Directors are required to have
Professional Expertise. A director has "Professional Expertise" if he or she
satisfies ONE of the following:
(i) the director holds an academic degree in one of these areas:
economics, business administration, accounting, law or public
administration;
(ii) the director holds an academic degree or has other higher
education, all in the main business sector of the company or in a relevant
area for the board position; or
(iii) the director has at least five years' experience in one or more
of the following (or a combined five years' experience in at least two or
more of these: (a) senior management position in a corporation of
significant business scope; (b) senior public office or senior position in
the public sector; or (c) senior position in the main business sector of
the company.
The above qualifications do not apply to external directors appointed prior
to January 19, 2006. However, an external director may not be appointed to an
additional term unless: (i) such director has "Accounting and Financial
Expertise"; or (ii) he or she has "Professional Expertise", and on the date of
appointment for another term there is another external director who has
"Accounting and Financial Expertise" and the number of "Accounting and Financial
Experts" on the board of directors is at least equal to the minimum number
determined appropriate by the board of directors.
47
Under the Companies Law, a person may not be appointed as an External
Director if he or his relative, partner, employer or any entity under his
control has or had during the two years preceding the date of appointment any
affiliation with the company, any entity controlling the company or any entity
controlled by the company or by this controlling entity. The term affiliation
includes: an employment relationship, a business or professional relationship
maintained on a regular basis, control, and service as an office holder. No
person can serve as an External Director if the person's position or other
business creates, or may create, conflicts of interest with the person's
responsibilities as an External Director. Until the lapse of two years from
termination of office, a company may not engage an External Director to serve as
an office holder and cannot employ or receive services from that person, either
directly or indirectly, including through a corporation controlled by that
person.
Under the Companies Law, External Directors must be elected by a majority
vote at a shareholders' meeting, provided that either: (1) the majority of
shares voted at the meeting, including at least one-third of the shares of
non-controlling shareholders who are participating in the voting at the meeting
in person or by proxy, vote in favor of the election; or (2) the total number of
shares voted against the election of the external director does not exceed one
percent of the aggregate voting rights in the company. The initial term of an
External Director is three years, which term may be extended for an additional
three years. Each committee of a company's board of directors must include at
least one External Director, and all External Directors must serve on the audit
committee. The Company's External Directors are currently Arie Arieli and Yacov
Elinav.
NEW YORK STOCK EXCHANGE REQUIREMENTS
The Company is subject to the rules of the New York Stock Exchange
applicable to listed companies that are foreign private issuers. Under such NYSE
rules, each member of the Company's audit committee must be independent. See "-
Audit Committee" below for a description of the independence standards under the
NYSE rules as applicable to foreign private issuers.
AUDIT COMMITTEE
NYSE REQUIREMENTS. Under NYSE rules as applicable to foreign private
issuers, we are required to have an audit committee that satisfies the
independence requirements of Rule 10A-3 of the U.S. Securities Exchange Act of
1934, as amended.
The requirements implement two basic criteria for determining independence:
(i) audit committee members would be barred from accepting, directly or
indirectly, any consulting, advisory or other compensatory fee from the issuer
or any subsidiary of the issuer, other than in the member's capacity as a member
of the board of directors and any board committee, and (ii) audit committee
members may not be an "affiliated person" of the issuer or any subsidiary of the
issuer apart from his or her capacity as a member of the board and any board
committee.
The SEC has defined "affiliate" for non-investment companies as "a person
that directly, or indirectly through one or more intermediaries, controls, or is
controlled by, or is under common control with, the person specified. The term
"control" is intended to be consistent with the other definitions of this term
under the U.S. Securities Exchange Act of 1934, as "the possession, direct or
indirect, of the power to direct or cause the direction of the management and
policies of a person, whether through the ownership of voting securities, by
contract, or otherwise."
Among the roles of the audit committee is to be directly responsible for
the oversight of the work of any registered public accounting firm engaged for
the purpose of preparing or issuing an audit report or performing other audit,
review or attest services for Tefron, and each such registered public accounting
firm must report directly to the audit committee.
48
COMPANIES LAW REQUIREMENTS. Under the Companies Law, the board of directors
of any company that is required to nominate external directors must also appoint
an audit committee, comprised of at least three directors including all of the
external directors, but excluding the chairman of the board of directors, a
controlling shareholder and any director employed by the company or who provides
services to the company on a regular basis.
Among the roles of the audit committee is to examine flaws in the business
management of the company, in consultation with the internal auditor and the
company's independent accountants, and suggest appropriate course of action. The
audit committee also determines whether to approve certain actions and
transactions with related parties. Arrangements regarding compensation of
directors require the approval of the audit committee, the board of directors
and the shareholders.
QUALIFICATIONS OF OTHER DIRECTORS
Under a recent amendment to the Companies Law, the Board is required to
determine the minimum number of board member that would be required to have
Accounting and Financial Expertise. See " - Board Practices" above.
DUTIES OF DIRECTORS
The Companies Law codifies the duty of care and fiduciary duties that an
"Office Holder" (as defined below) owes to a company. An Office Holder's duty of
care and fiduciary duty include avoiding any conflict of interest between the
Office Holder's position in the company and his personal affairs, any
competition with the company, avoiding exploiting any business opportunity of
the company in order to receive personal advantage for himself or others, and
revealing to the company any information or documents relating to the company's
affairs which the Office Holder has received due to his position as an Office
Holder.
An "Office Holder" is defined as a director, managing director, chief
business manager or chief executive officer, executive vice president, vice
president, other manager directly subordinate to the CEO or any other person
assuming the responsibilities of any of the foregoing positions without regard
to such person's title. Under the Companies Law, all arrangements as to
compensation of Office Holders who are not directors and who are not controlling
shareholders require approval of the board of directors, unless the articles of
association provide otherwise. Our articles require that such a transaction
which is not irregular shall be approved by the Board of Directors or by the
Audit Committee or by any other entity authorized by the Board of Directors.
Arrangements regarding the compensation of directors or controlling shareholders
also require the approval of the shareholders.
COMMITTEES
Our Board of Directors has established an Audit Committee, Compensation
Committee and Contributions Committee. The Companies Law restricts the
delegation of powers from the Board of Directors to its committees in certain
manners. The Audit Committee exercises the powers of the Board of Directors with
respect to our accounting, reporting and financial control practices, including
exercising the responsibility, where appropriate, for reviewing potential
conflicts of interest situations. The members of the Audit Committee are Ms.
Kasher and Messrs. Admoni, Elinav and Korman. The members of the Compensation
Committee are Mr. Wolfson, Mr. Davidi, Mr. Admoni and Mr. Shiran. The
Compensation Committee resolves the terms of employment and benefits of the
Company's officers. The Articles of Association provide that we may contribute
reasonable sums for worthy causes, even if the contribution is not in the frame
of our business considerations. The Board of Directors has delegated this power
to the Contributions Committee. The members of the Contributions Committee are
Messrs. Davidi, Shiran, Wolfson and Admoni. See "Item 10. Additional Information
- -10B. Memorandum and Articles of Association - Board of Directors."
49
6D. EMPLOYEES
At December 31, 2006, we employed 1,393 employees in Israel of whom 588
were salaried employees and 805 were hourly wage employees. At December 31,
2006, we employed 22 employees in the United States through our subsidiary,
Alba, of whom 13 were salaried employees and nine were hourly wage employees. At
December 31, 2006, El-masira employed 670 employees in Jordan all of them were
salaried employees, and our subsidiary, Tefron UK, had one employee in the U.K.
and one subcontractor.
At December 31, 2005, we employed 1,373 employees in Israel of whom 565
were salaried employees and 808 were hourly wage employees. At December 31,
2005, we employed 40 employees in the United States through our subsidiary,
Alba, of whom 19 were salaried employees and 21 were hourly wage employees. At
December 31, 2005, El-masira employed 490 employees in Jordan all of them were
salaried employees
At December 31, 2004, we employed 2,082 employees in Israel of whom 469
were salaried employees and 1,613 were hourly wage employees. At December 31,
2004, we employed 48 employees in the United States through our subsidiary,
Alba, of whom 19 were salaried employees and 29 were hourly wage employees. At
December 31, 2004, El-masira employed 440 employees in Jordan, all of whom were
salaried employees.
To increase the motivation of the workforce, many factory employees are
eligible for bonuses based upon the number of units such employees produce in
any given day. We believe that relations with our employees are good.
Certain collective bargaining agreements between the Histadrut (General
Federation of Labor in Israel) and the Coordination Bureau of Economic
Organizations (including the Industrialists' Association of Israel, or the
Association) are applicable to our employees in Israel. In addition, a
collective bargaining agreement relating to members of the Association, which
governs employee relations in the textile and clothing industry, applies to most
of our employees in Israel. These agreements concern, among other things, the
maximum length of the work day and the work week, minimum wages, contributions
to a pension fund, insurance for work-related accidents, procedures for
dismissing employees, determination of severance pay and other conditions of
employment. Furthermore, pursuant to certain provisions of such agreements, the
wages of most of our employees are automatically adjusted in accordance with
cost-of-living adjustments, as determined on a nationwide basis and pursuant to
agreements with the Histadrut based on changes in the CPI. The amounts and
frequency of such adjustments are modified from time to time.
Israeli law generally requires the payment by employers of severance pay
upon the retirement or death of an employee or upon termination of employment by
the employer or, in certain circumstances, by the employee. We currently fund
our ongoing severance obligations by making monthly payments to pension funds,
employee accounts in a provident fund and insurance policies. In addition,
according to the National Insurance Law, Israeli employees and employers are
required to pay specified amounts to the National Insurance Institute, which is
similar to the U.S. Social Security Administration. Since January 1, 1995, such
amounts also include payments for national health insurance payable by
employees. The payments to the National Insurance Institute are determined
progressively in accordance with the wages and range from 8.5% to 17.7% of
wages, of which the employer contributes 0.4% to 7.0% of wages, and the employee
contributes the rest. A majority of our permanent employees in Israel are
covered by general and/or individual life and pension insurance policies
providing customary benefits to employees, including retirement and severance
benefits. The employers generally contribute up to 15.8% (depending on the
employee) of base wages to such plans and the permanent employees contribute up
to 5.5% of their base wages.
None of Tefron USA's or Tefron UK's employees are covered by a collective
bargaining agreement.
50
6E. SHARE OWNERSHIP
As of March 15, 2007, the following directors and senior managers
beneficially held the number of Ordinary Shares set forth in the table below.
The information in this table is based on 21,187,986 (excluding 997,400 shares
held by our wholly owned subsidiary) Ordinary Shares outstanding as of March 15,
2007. The number of Ordinary Shares beneficially owned by a person includes
Ordinary Shares subject to options held by that person that were currently
exercisable at, or exercisable within 60 days of, March 15, 2007. The Ordinary
Shares issuable under these options are treated as if they were outstanding for
purposes of computing the percentage ownership of the person holding these
options but are not treated as if they were outstanding for the purposes of
computing the percentage ownership outstanding for any other person. Except as
disclosed below, to our knowledge, none of the directors, officers or key
executives listed in the Directors and Senior Management table appearing in Item
6 above beneficially owns any Ordinary Shares.
% OF ORDINARY
NUMBER OF SHARES
NAME ORDINARY SHARES OUTSTANDING**
- ---- --------------- -------------
Ishay Davidi 4,613,085(5) 21.77%
Yos Shiran 706,667(2) 3.23%
Arie Wolfson 3,823,892(1) 18.04%
Meir Shamir 4,613,085(3) 21.77%
Micha Korman * *
Shirith Kasher * *
Avi Zigelman * *
Eli Admoni * *
Yacov Elinav * *
Amit Tal * *
Itamar Harchol * *
Asaf Alperovitz * *
Anat Barkan * *
David Gerbi * *
Ilan Gilboa * *
Ronny Grundland * *
Michal Baumwald Oron * *
Directors and senior managers as a group 14 persons) 9,393,109(4) 43.18%
- -------------------
* Less than 1% of the outstanding Ordinary Shares.
** Does not take into account 997,400 Ordinary Shares held by a wholly owned
subsidiary of the Company.
(1) Includes (a) 2,852,510 Ordinary Shares held by Macpell, (b) 971,282 Ordinary
Shares held by Arwol Holdings Ltd., and (c) 100 Ordinary Shares held by Mr.
Wolfson. Pursuant to Rule 13d-5 of the U.S. Securities Exchange Act of 1934, as
amended, Mr. Wolfson may be deemed to beneficially own the 2,852,510 Ordinary
Shares held by Macpell and the 971,282 Ordinary Shares held by Arwol. See "-6A.
Directors and Senior Management - Macpell Shareholders' Agreement" and "Item 7.
Major Shareholders and Related Party Transactions - 7B. Related Party
Transactions - Relationships and Transactions with Macpell - Macpell
Shareholders' Agreement."
51
(2) Consists of 706,667 Ordinary Shares subject to options exercisable at prices
that are between $3.563 and $4.01 per share (which expire between 2011 and
2012).
(3) Consists of 4,613,085 Ordinary Shares held by Norfet, which Mr. Shamir may
be deemed to beneficially own due to his 40% interest in Mivtah-Shamir, which
held an approximately 34.45% interest in Norfet as of March 15, 2007.
(4) Consists of 4,613,085 Ordinary Shares held by Norfet, which Mr. Davidi may
be deemed to beneficially own under U.S securities laws since he serves as CEO
of FIMI 2001 Ltd., which controls the general partner and one of the limited
partners of Norfet and which Meir Shamir may be deemed to beneficially own under
U.S securities laws due to his 40.02% interest in Mivtah-Shamir, which held an
approximately 34.45% interest in Norfet as of March 15, 2007. Also include
2,852,510 Ordinary Shares held by Macpell of which Arie Wolfson may be deemed to
be beneficial owner under U.S. securities laws due to his beneficial interests
in Macpell and the Macpell Shareholders' Agreement. See "Item 7. Majority
Shareholders and Related Party Transactions - 7B. Related Party Transactions -
Relationships and Transactions with Macpell - Macpell Shareholders' Agreement."
Also includes 971,282 Ordinary Shares held by Arwol of which Arie Wolfson may be
deemed the beneficial owner. Further includes options (exercisable within 60
days) to purchase 956,132 Ordinary Shares. The exercise price of these options
ranges from $3.195 to $11.27 per share. These options will expire between 2007
and 2016.
(5) Consists of 4,613,085 Ordinary Shares held by Norfet, which Mr. Davidi may
be deemed to beneficially own under U.S securities laws since he serves as CEO
of FIMI 2001 Ltd., which controls the general partner of Norfet, one of the
Norfet limited partners (which is managed by FIMI 2001 Ltd.) as well as the
other Norfet limited partners by virtue of an irrevocable power of attorney.
SHARE OPTION PLAN
In September 1997, we adopted the Tefron Ltd. 1997 Share Option Plan to
enable us to attract and retain qualified persons as employees, consultants and
directors and to motivate such persons with an equity participation in us.
GENERAL
The Share Option Plan authorizes the issuance of options to purchase
2,712,323 Ordinary Shares. As of March 15, 2007, options to purchase 2,291,148
of such Ordinary Shares had been granted to our senior managers, directors and
employees, of which 956,132 options had been granted to our senior managers and
directors as a group. Upon the occurrence of any Ordinary Share split, reverse
Ordinary Share split, recapitalization or rights offerings or other
substantially similar corporate transaction or event, we shall make such
equitable changes or adjustments necessary to the number of shares subject to
each outstanding option in order to prevent dilution or enlargement of the
optionees' rights. Options granted to our employees shall be issued to a trustee
nominated by the Board of Directors, which trustee shall hold the options, and
any Ordinary Shares issued upon exercise thereof, for the benefit of the
optionees for two years from the date of the grant. In 2006, the exercise prices
of the options that were outstanding but had neither vested nor were exercisable
in light of Section 102 of the Israeli Income Tax Ordinance [New Version] 1961
at the time of the distributions of our dividends were reduced in an amount
equal to the dividends paid per share in such distributions.
ADMINISTRATION
The Share Option Plan is administered directly by our Board of Directors or
by a committee appointed by the Board of Directors which is authorized, among
other things and, subject to the provisions of the Companies Law, to: (i)
designate participants in the Share Option Plan; (ii) determine the terms and
provisions of the options, including the number of Ordinary Shares to which an
option may relate and the terms, conditions and restrictions thereof; (iii)
accelerate the right of an optionee to exercise any previously granted options;
(iv) construe and interpret the provisions and supervise the administration of
the Share Option Plan; and (v) make all other determinations deemed necessary or
advisable for the administration of the Share Option Plan.
52
VESTING PERIODS
Unless otherwise determined by our Board of Directors and, in the case of
option grants to Directors or an interested party, approved by our shareholders,
one-third of the options granted under the Share Option Plan are exercisable on
each of the first three anniversaries from the date of grant. Unless otherwise
determined by our Board of Directors and, in the case of option grants to
Directors or an interested party, approved by our shareholders, the options
expire on the tenth anniversary from the date of grant, and any additional
options granted in the future shall vest in the same manner over a three-year
period commencing on the date of their grant.
AMENDMENT AND TERMINATION OF THE SHARE OPTION PLAN
We may, at any time and from time to time, amend, alter or discontinue the
Share Option Plan; PROVIDED, HOWEVER, that no amendment or alteration of the
Share Option Plan shall adversely affect an optionee's rights under any
outstanding option without the consent of such optionee.
ACCOUNTING TREATMENT
For a discussion of the accounting treatment of the Share Option Plan, see
Note 2(k) of the Notes to the Consolidated Financial Statements.
AMENDMENT TO THE SHARE OPTION PLAN EFFECTIVE AS OF JANUARY 1, 2003
In December 2002, in order to comply with the new tax rules under the
amended Israeli Income Tax Ordinance [New Version], 1961, our Board approved an
amendment to our Share Option Plan.
The new tax rules enable a company to issue options under three alternative
tracks, which may generally be described as follows: (i) without a trustee,
under which the income will be considered employment income, the income will
continue to be taxed at regular marginal rates of up to the maximal tax rate
plus payments to the National Insurance Institute and payment of health tax, and
no expense is deductible by the employer; (ii) with a trustee under the
employment income track, under which the options are held by a trustee for a
period of twelve months from the end of the tax year in which the grant took
place, the income is considered regular employment income taxed at marginal
rates of up to 50% plus payments to the National Insurance Institute and payment
of health tax, and the employer is entitled to a deductible expense equivalent
to the income attributed to the employee; or (iii) with a trustee under the
capital gains track, under which the options are held by a trustee for a period
of two years from the end of the tax year in which the grant took place, the
income is considered to be a capital gain and is taxable at a reduced rate of
25%, and no expense is deductible by the employer.
On February 27, 2003, in order to enable us to grant options after January
1, 2003, we filed an amendment to the Share Option Plan with the tax authorities
and informed them of our election of the capital gains track (the third
alternative above). In addition, under the amendment to the Share Option Plan,
we may also issue options under the provisions of the tax track without a
trustee under the first alternative. The capital gains track will apply to all
trustee-track options to be granted by us until December 31, 2004. After this
period has ended, we may change our election.
The new rules and the amendment to the Share Option Plan described above
apply only to issuances of options beginning on January 1, 2003 and thereafter.
Options issued before such date will continue to be governed by the law in
effect prior to the amendment.
53
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
7A MAJOR SHAREHOLDERS
Except as noted herein, to our knowledge, we are not directly or indirectly
owned or controlled by another corporation or by any foreign government and no
arrangements exist the operation of which may at a subsequent date result in a
change in control of the company.
The following table sets forth the number of our Ordinary Shares owned by
any person known to us to be the beneficial owner of 5% or more of our Ordinary
Shares as of March 15, 2007. The information in this table is based on
21,187,986 Ordinary Shares outstanding as of such date (excluding 997,400 shares
held by our wholly owned subsidiary). The number of Ordinary Shares beneficially
owned by a person includes Ordinary Shares subject to options held by that
person that were currently exercisable at, or exercisable within 60 days of,
March 15, 2007. The Ordinary Shares issuable under these options are treated as
if they were outstanding for purposes of computing the percentage ownership of
the person holding these options but are not treated as if they were outstanding
for the purposes of computing the percentage ownership outstanding for any other
person. None of the holders of the Ordinary Shares listed in this table have
voting rights different from other holders of the Ordinary Shares.
NAME NUMBER OF SHARES OWNED PERCENT OF ORDINARY SHARES *
- ---- ---------------------- ----------------------------
Norfet, Limited Partnership
c/o Fimi 2001 Ltd.
"Rubinstein House"
37 Begin Rd
Tel Aviv, Israel 4,613,085(1) 21.77%
Macpell Industries Ltd.
28 Chida Street
Bnei Brak, Israel 51371 2,852,510(2) 13.46%
Arie Wolfson 3,823,892(3) 18.04%
* Does not take into account 997,400 Ordinary Shares held by a wholly-owned
subsidiary of the Company.
(1) Norfet Limited Partnership is an Israeli partnership. As of March 15, 2007,
approximately 8.82% of Norfet was held by FIMI Opportunity Fund, LP,
approximately 45.61% of Norfet was held by FIMI Israel Opportunity Fund,
Limited Partnership, approximately 34.45% was held by Mivtach Shamir
Holdings Ltd., approximately 3.45% was held by Migdal Insurance Company,
approximately 6.89% was held by First International Bank of Israel and
approximately 0.786% was held by Zaleznick and Butler. Pursuant to Rule
13d-5 of the U.S Securities Exchange Act, Norfet may also be deemed to
beneficially own the shares held by Macpell and Arwol due to the
shareholders agreement between Arwol, Macpell and Norfet. See "Item 10.
Additional Information - 10C. Material Contracts - FIMI Agreements." In
addition, pursuant to Rule 13d-5, (i) Mr. Ishay Davidi, the Chairman of the
Board of the Company, may be deemed to beneficially own the shares held by
Norfet due to his position as CEO of FIMI 2001 Ltd. and senior partner of
FIMI Israel, Opportunity Fund, Limited Partnership and FIMI Opportunity
Fund, L.P., and (ii) Mr. Meir Shamir, a director in the Company, may be
deemed to beneficially own the shares held by Norfet due to his 40.02%
interest in Mivtah-Shamir.
(2) Macpell is an Israeli corporation. As of March 15, 2007, 27.8% of Macpell
are controlled by Arie Wolfson; 25.02% of Macpell are controlled by Sigi
Rabinowicz; and 25.84% of Macpell are controlled by Avi Ruimi, representing
78.7% of Macpell's shares in the aggregate. Pursuant to Rule 13d-5 of the
U.S Securities Exchange Act, Macpell may also be deemed to beneficially own
the shares held by Norfet due to the shareholders agreement between Arwol,
Macpell and Norfet. See "Item 10. Additional Information - 10C. Material
Contracts - FIMI Agreements."
54
(3) Includes (i) 2,852,510 Ordinary Shares held by Macpell, (ii) 971,282
Ordinary Shares held by Arwol, and (iii) 100 Ordinary Shares held by Mr.
Wolfson. Pursuant to Rule 13d-5 of the U.S. Securities Exchange Act of
1934, as amended, Mr. Wolfson may be deemed to beneficially own the
2,852,510 Ordinary Shares held by Macpell due to his beneficial interest in
Macpell and the Macpell Shareholders' Agreement. See "Item 10. Additional
Information - 10C. Material Contracts - FIMI Agreements."
Since Norfet's acquisition of Ordinary Shares in 2004, Norfet's percentage
ownership in the Company Ordinary Shares has decreased from approximately 28.8%
in 2004 to approximately 21.8% as of March 15, 2007 due to Norfet's sales of
Ordinary Shares in the public markets and the issuance by the Company of
additional Ordinary Shares. Macpell's percentage ownership in the Company
Ordinary Shares has decreased from approximately 36% in 2004 to approximately
13.5% as of March 15, 2007 due to Macpell's sales of Ordinary Shares to Norfet
and in the public markets and due to the issuance by the Company of additional
Ordinary Shares.
At March 15, 2007, there were 15 holders of Ordinary Shares of record
registered with a United States mailing address, including banks, brokers and
nominees. These holders of record represented approximately 49.45% of the total
outstanding Ordinary Shares (excluding 997,400 shares held by our wholly owned
subsidiary). Because these holders of record include banks, brokers and
nominees, the beneficial owners of these Ordinary Shares may include persons who
reside outside the United States. See "Item 7. Major Shareholders and Related
Party Transactions - 7A. Major Shareholders."
7B. RELATED PARTY TRANSACTIONS
The following discussion includes summaries of the significant terms of
various agreements and transactions. Because these are summaries, they are
qualified by reference to the actual agreements, which are attached as exhibits
to this Annual Report.
The Companies Law requires that certain related party transactions be
approved as provided for in a company's articles of association and, in certain
circumstances, by a company's audit committee or its shareholders. Our Audit
Committee is responsible for reviewing potential conflicts of interest
situations where appropriate.
RELATIONSHIPS AND TRANSACTIONS WITH NORFET
As of March 15, 2007, Norfet owned 4,613,085 Ordinary Shares, which
represented approximately 21.77% of Tefron's outstanding Ordinary Shares
(excluding 997,400 shares held by Tefron's wholly owned subsidiary).
Substantially all of Norfet is owned by (i) N.D.M.S. Ltd., a company wholly
owned by FIMI Opportunity Fund L.P., (ii) FIMI Israel Opportunity Fund, Limited
Partnership and (iii) Migdal Insurance Company, Mivtach Shamir Holdings Ltd. and
the provident funds of First International Bank of Israel.
Pursuant to a Share Purchase Agreement, dated February 17, 2004, we issued
to Norfet in April 2004, 3,529,412 Ordinary Shares for a base price of $4.25 per
share and a base aggregate consideration of $15 million. Norfet also acquired an
additional 1,365,000 of our Ordinary Shares in the aggregate from Arwol and
Macpell pursuant to a separate agreement. Immediately following the closing of
these agreements, Norfet held 4,894,412, or approximately 28.8% of our
outstanding share capital, without taking into account our Ordinary Shares held
by our wholly-owned subsidiary. In April 2005, due to a purchase price
adjustment agreed to with Norfet instead of the purchase price adjustment
mechanism agreed to in the Share Purchase Agreement, we issued to Norfet an
additional 661,765 Ordinary Shares, and Arwol transferred 106,908 additional
Ordinary Shares to Norfet.
55
Under the Share Purchase Agreement, we also agreed to pay Norfet a
management fee of approximately $172,000 plus VAT per annum until our first
annual meeting in 2005 (which took place on June 28, 2005), and $120,000 plus
VAT thereafter.
AGREEMENTS AMONG NORFET, MACPELL AND ARWOL
Under an agreement among Norfet, Macpell and Arwol, the parties agreed to
vote all of Tefron Ordinary Shares owned or controlled by each of them for the
election of Tefron's Board of Directors of: (i) three members (of whom at least
one will qualify as an "independent director" under the NYSE rules) plus,
subject to applicable law - one external director, that shall be nominated by
Norfet (one of whom shall be a woman), (ii) three members (of whom at least one
will qualify as an independent director and a financial expert under the NYSE
rules) plus, subject to applicable law, one external director, that shall be
nominated by Arwol and Macpell, and (iii) Tefron's chief executive officer.
The Company, Norfet, Arwol and Macpell, together with Leber Partners L.P.,
are also party to a Registration Rights Agreement, dated April 22, 2004, which
replaced the previous Registration Rights Agreements to which the Company and
certain of these shareholders had been a party. Please see "Item 10. Additional
Information- 10C. Material Contracts - Leber Partners L.P." for a more complete
description of this agreement. On November 29, 2005, the Securities and Exchange
Commission declared effective a Registration Statement on Form F-3 covering the
resale of 11,521,259 Ordinary Shares held by the shareholders party to this
agreement.
Please see "Item 10. Additional Information- 10C. Material Contracts - FIMI
Agreements" for a more complete description of these agreements.
RELATIONSHIPS AND TRANSACTIONS WITH MACPELL
As of March 15, 2007, Macpell owned 2,852,510 Ordinary Shares, which
represented approximately 13.46% of Tefron's outstanding Ordinary Shares
(excluding 997,400 shares held by Tefron's wholly owned subsidiary). Macpell is
mainly a holding company that owns various companies, including Tefron and a
partnership that mainly trades in various clothing and apparel products. Macpell
was also engaged in the construction of industrial buildings mainly intended for
the use of the Macpell group.
As of March 15, 2007, 28.58% of Macpell are controlled by Arie Wolfson, one
of our directors; 25.68% of Macpell are controlled by Sigi Rabinowicz; and
26.52% of Macpell are controlled by Avi Ruimi, a former Director of Tefron. The
ordinary shares of Macpell are listed and traded on the Tel Aviv Stock Exchange.
MACPELL SHAREHOLDERS' AGREEMENT
Arwol Holdings Ltd., Riza Holdings Ltd. and Condo Overseas Inc. are parties
to the Macpell Shareholders' Agreement. The agreement provides, among other
things, that subject to the agreement of the shareholders in Tefron, the
distribution of the directors on Tefron's Board will reflect the direct and
indirect holdings in Tefron (including through Macpell) of the parties to the
agreement, subject to certain exceptions. Pursuant to the Macpell Shareholders'
Agreement, the Tefron Ordinary Shares of Macpell held by the parties thereto
will be voted at each meeting of Macpell's shareholders by the trustee in
accordance with the resolution of the shareholders party to the agreement, each
shareholder having one vote for each Macpell share held by such shareholder.
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The Macpell Shareholders' Agreement contains a right of first refusal in
the event that either party wishes to sell its shares in Macpell, and a
tag-along right if either party finds a buyer outside of the Macpell
Shareholders' Agreement who is willing to purchase the Macpell shares. It also
provides that the parties to the Macpell Shareholders' Agreement shall retain
their ownership of at least 50% of the Macpell shares they own as of the date
the agreement was executed. The Macpell Shareholders' Agreement provides that
the vote of the holders of 75% of the Macpell shares is required for Macpell to
(i) enter another line of business, (ii) merge, consolidate or dispose of any of
its substantial assets, (iii) purchase, lease or acquire another substantial
company, (iv) wind-up Macpell, (v) make decisions regarding the allotment of
Macpell shares and (vi) declare dividends. The Macpell Shareholders' Agreement
specifically permits the sale of Macpell shares by Arwol Holdings Ltd. to Sigi
Rabinowicz or a company controlled by Sigi Rabinowicz, provided that the
transferee agrees to be bound by the terms and conditions of the Macpell
Shareholders' Agreement.
AGREEMENT WITH ARIE WOLFSON
We are party to a consulting and management services agreement with Mr.
Arie Wolfson, a Director of the Company and an indirect holder of 18.04% of the
Company's shares through Macpell and a company controlled by him. See "Item 6.
Directors, Senior Management and Employees - 6B. Compensation".
RELATIONSHIPS BETWEEN SIGI RABINOWICZ AND SUPPLIERS
We understand that Sigi Rabinowicz, our former president, who also owns a
significant interest in Macpell, began to serve as an agent of some of the
suppliers from whom we regularly purchased materials, and hence may be paid a
commission with respect to such purchases. We believe that our transactions with
these suppliers are in the ordinary course and are on customary terms.
LEASE ARRANGEMENT
We lease the following facilities from a wholly-owned subsidiary of Macpell
(that has since merged into Macpell):
o On August 12, 1997, we entered into an agreement to lease
approximately 143,000 square feet of industrial space in a facility
(the Hi-Tex 1 facility) adjacent to its current facilities in Segev
for a current monthly rent of approximately $73,000 until 2011. The
first rental payment was made upon entrance into the facility on
October 1, 1999. Under an agreement approved by our shareholders on
August 10, 2006, the rent of this facility was reduced by 4%.
o On December 21, 1998, we entered into an agreement to lease until 2012
approximately 178,000 square feet of industrial space in a second
facility (the Hi-Tex 2 facility) adjacent to our existing facilities
in Segev from the same wholly-owned subsidiary of Macpell for a
monthly rent of approximately $89,000. The first rental payment was
made upon entrance into the facility on March 1, 2000.
We conduct our Hi-Tex manufacturing operations in these facilities:
o According to an agreement we entered into with Macpell on August 16,
1995, a 83,000 square foot facility in Segev under a lease that
expired in 2006 for a monthly rent of approximately $48,000 (the
Headquarters Facility). Under an agreement approved by our
shareholders on August 10, 2006, the rent for the first 65,000 square
feet is $28,000 and the rent for the remaining 18,000 square feet is
$2.70 per square meter.
o According to an agreement we entered into with Macpell on December 10,
1999, a 65,000 square foot warehouse under a lease that expires in
2012 for a monthly rent of approximately $28,000 (the Products
Facility). Under an agreement approved by our shareholders on August
10, 2006, this facility was vacated, and Macpell bore the costs of
Tefron's departure, which were approximately $85,000.
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The rent payable under these leases was until August 2006 50% linked to the
Israeli and U.S. consumer product index and 50% to the exchange rate between the
NIS and the dollar. Under the agreement approved by our shareholders on August
10, 2006, all rent is paid in US dollars (linked to the US consumer price
index).
Under the original agreements, the monthly rent was increased by 5% every
3-5 years. Under the agreement approved by our shareholders on August 10, 2006,
the rent for all facilities is to be increased by 3% instead (other than the
18,000 square feet of the Headquarters Facility, for which the rent is $2.70 per
square meter, which is not subject to any increase).
According to the terms of the lease agreements, we pay the property
insurance premiums on these facilities. We entered into agreement with Macpell
which was approved by our shareholders on August 10, 2006 which amended the
lease agreement as described above.
All of these facilities are subject to a long-term lease agreement between
Macpell's subsidiary and the Israel Land Authority. Under the terms of such
lease agreement, Macpell's affiliate was granted a 49-year lease over such
property.
PRODUCTS PURCHASES FROM TEFRON
An affiliate of Macpell purchases from us various products and sells them
in the local Israeli market and abroad. In 2003, our sales to this affiliate
were approximately $1.2 million, in 2004 approximately $0.8 million and in 2005
and 2006 there was a negligible amount of sales. We believe that the prices of
the products sold to Macpell were no less favorable than those were available to
us from unaffiliated third parties. See Note 17 of the Notes to the Consolidated
Financial Statements.
7C. INTERESTS OF EXPERTS AND COUNSEL.
Not Applicable.
ITEM 8. FINANCIAL INFORMATION
CONSOLIDATED FINANCIAL STATEMENTS
See Item 18.
LEGAL PROCEEDINGS
A former employee of the Company has filed law suits against the Company
and three of its former or current officers, with the Israeli District Court and
the Israeli Labor Law Court, seeking damages in the amount of approximately $1.7
million, due to damages allegedly incurred by him as a result of his
imprisonment in Egypt. The Company is of the opinion that these law suits are
without merit, the Company has filed statements of defense and intends to defend
the law suits vigorously.
DIVIDEND POLICY
Although we have no established dividend policy, in the past we have
distributed dividends to our shareholders from our accumulated earnings. In
2006, we twice declared and paid dividends of approximately $5 million each, and
we may distribute dividends in the future if our Board of Directors so
determines and there are sufficient accumulated earnings in accordance with
applicable law.
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ITEM 9 THE OFFER AND LISTING
9A. OFFER AND LISTING DETAILS
Since the initial public offering of our Ordinary Shares on September 24,
1997, our Ordinary Shares have been traded on the NYSE, under the symbol "TFR."
Prior to the offering, there was no market for our Ordinary Shares.
As reported on the NYSE, the annual high and low sales prices for our
Ordinary Shares were as follows:
High Low
---- ---
2002 $ 4.70 $ 1.15
2003 $ 4.80 $ 3.10
2004 $ 6.30 $ 3.50
2005 $ 8.75 $ 3.84
2006 $ 13.05 $ 8.30
As reported on the NYSE, the quarterly high and low sales prices for our
Ordinary Shares for the last two years were as follows:
2005 High Low
---- ---- ---
First quarter $ 5.35 $ 3.84
Second quarter $ 5.93 $ 4.93
Third quarter $ 7.04 $ 4.96
Fourth quarter $ 8.75 $ 6.20
2006
First quarter $ 11.53 $ 8.30
Second quarter $ 13.05 $ 10.25
Third quarter $ 13.00 $ 11.00
Fourth quarter $ 12.12 $ 9.85
2007
First quarter (through March 15, 2007) $ 10.95 $ 9.13
As reported on the NYSE, the monthly high and low sales prices for our
Ordinary Shares for the last six months were as follows:
2006 High Low
---- ---- ---
October $ 12.12 $ 11.10
November $ 11.53 $ 9.85
December $ 11.61 $ 10.50
2007
January $ 10.95 $ 9.81
February $ 10.57 $ 9.13
March (through March 15, 2007) $ 9.69 $ 9.30
Our Ordinary Shares have been trading on the TASE since September 28, 2005.
As reported on the TASE, the annual high and low sales prices for our
Ordinary Shares were as follows:
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High Low
---- ---
2006 NIS 57.80 NIS 37.33
As reported on the TASE, the quarterly high and low sales prices for our
Ordinary Shares since the listing of our Ordinary Shares on the TASE were as
follows:
2005 High Low
---- ---- ---
Fourth quarter NIS 40.71 NIS 28.65
2006
First quarter NIS 48.61 NIS 37.33
Second quarter NIS 57.80 NIS 45.86
Third quarter NIS 54.15 NIS 47.34
Fourth quarter NIS 50.16 NIS 43.33
2007
First quarter (through March 15, 2007) NIS 46.33 NIS 38.03
As reported on the TASE, the monthly high and low sales price for our
Ordinary Shares for the last six months were as follows:
2006 High Low
---- ---- ---
October NIS 50.16 NIS 46.65
November NIS 48.49 NIS 43.33
December NIS 48.47 NIS 44.43
2007
January NIS 46.33 NIS 41.51
February NIS 44.99 NIS 38.03
March (through March 15, 2007) NIS 39.87 NIS 38.39
On September 8, 1998, we announced our intention to repurchase through a
stock repurchase program up to one million of our outstanding Ordinary Shares.
As of March 15, 2007, we had repurchased and hold in our treasury 997,400
Ordinary Shares.
9B. PLAN OF DISTRIBUTION
Not Applicable.
9C. MARKETS
Our Ordinary Shares are traded on the NYSE and on the TASE.
9D. SELLING SHAREHOLDERS
Not Applicable.
9E. DILUTION
Not Applicable.
9F. EXPENSES OF THE ISSUE
Not Applicable.
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ITEM 10. ADDITIONAL INFORMATION
10A. SHARE CAPITAL
Not Applicable.
10B. MEMORANDUM AND ARTICLES OF ASSOCIATION
SECURITIES REGISTERS
We are registered with the Israeli Registrar of Companies. Our registration
number with the Israeli Registrar of Companies is 520043407. Section 2 of our
Memorandum of Association provides that our principal objects, among other
things, are to engage in any business connected with manufacturing, processing,
supplying and marketing undergarments, textiles and ready-made clothes. Article
2A of our Articles of Association provides that we may, at any time, carry on
business in any field or type of business permitted to us, whether explicit or
implied, according to our Memorandum of Association.
BOARD OF DIRECTORS
The Companies Law requires that certain transactions, actions and
arrangements be approved as provided for in a company's articles of association
and in certain circumstances by the audit committee by the board of directors
itself and by the shareholders. The vote required by the audit committee and the
board of directors for approval of such matters, in each case, is a majority of
the disinterested directors participating in a duly convened meeting.
The Companies Law requires that a member of the board of directors or
senior management of the company promptly disclose any personal interest that he
or she may have (either directly or by way of any corporation in which he or she
is, directly or indirectly, a 5% or greater shareholder, director or general
manager or in which he or she has the right to appoint at least one director or
the general manager) and all related material information known to him or her,
in connection with any existing or proposed transaction by the company. In
addition, if the transaction is an extraordinary transaction (that is, a
transaction other than in the ordinary course of business, otherwise than on
market terms, or is likely to have a material impact on the company's
profitability, assets or liabilities), the member of the board of directors or
senior management also must disclose any personal interest held by his or her
spouse, siblings, parents, grandparents, descendants, spouse's descendants and
the spouses of any of the foregoing.
Once the member of the board of directors or senior management complies
with the above disclosure requirement, a company may approve the transaction in
accordance with the provisions of its articles of association. If the
transaction is with a third party in which the member of the board of directors
or senior management has a personal interest, the approval must confirm that the
transaction is not adverse to the company's interest. Furthermore, if the
transaction is an extraordinary transaction, then, in addition to any approval
stipulated by the articles of association, it also must be approved by the
company's audit committee and then by the board of directors, and, under certain
circumstances, by a meeting of the shareholders of the company.
Our Articles of Association provide that, subject to the Companies Law, all
actions executed by the Board of Directors or by a committee thereof or by any
person acting as a Director or a member of a committee of the Board of Directors
or by the General Manager will be deemed to be valid even if, after their
execution, it is discovered that there was a certain flaw in the appointment of
such persons or that any one of such persons was disqualified from serving at
his or her office.
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Our Articles of Association provide that, subject to the Companies Law, an
officer is entitled to participate and vote in meetings concerning the approval
of actions or transaction in which he or she has a personal interest. Subject to
the Companies Law, a transaction between an officer of Tefron or an entity
controlling Tefron, and us, or a transaction between any other person in which
an officer or an entity controlling the company has a personal interest and us,
and which is not an extraordinary transaction, shall be approved by the Board of
Directors or by the Audit Committee or by any other entity authorized by the
Board of Directors.
Our Articles of Association provide that the Board of Directors may
delegate all of its powers to such committees of the Board of Directors as it
deems appropriate, subject to the provisions of the Companies Law. The Audit
Committee is responsible for reviewing, among other things, potential conflicts
of interest situations where appropriate. See "Item 6. Directors, Senior
Management and Employees - 6C. Board Practices - Committees."
Arrangements regarding compensation of Directors require the approval of
the Audit Committee and the shareholders. The Board of Directors may from time
to time, at its discretion, cause us to borrow or secure the payment of any
money for our purposes, and may secure or provide for the repayment of such
money in the manner as it deems fit.
DESCRIPTION OF SECURITIES
We are authorized to issue 49,995,500 Ordinary Shares, par value NIS 1.0
per share.
Our Ordinary Shares do not have preemptive rights. The ownership or voting
of Ordinary Shares by nonresidents of Israel or foreign owners is not restricted
or limited in any way by our Memorandum of Association or Articles of
Association, or by the laws of the State of Israel.
TRANSFER OF SHARES AND NOTICES. Fully paid Ordinary Shares are issued in
registered form and may be freely transferred pursuant to our Articles of
Association unless such transfer is restricted or prohibited by another
instrument. Each shareholder of record is entitled to receive at least seven
calendar days' prior notice of an ordinary shareholders' meeting and at least 21
calendar days' prior notice of any shareholders' meeting in which a special or
extraordinary resolution is to be adopted. For purposes of determining the
shareholders entitled to notice and to vote at such meeting, the Board of
Directors may fix the record date not more than 40 nor less than four calendar
days prior to the date of such meeting, nor more than 40 days prior to any other
action.
ELECTION OF DIRECTORS. The Ordinary Shares do not have cumulative voting
rights in the election of Directors. As a result, the holders of Ordinary Shares
that represents more than 50% of the voting power have the power to elect all
the Directors.
DIVIDEND AND LIQUIDATION RIGHTS. Our Ordinary Shares are entitled to the
full amount of any cash or share dividend, if declared. We may declare a
dividend to be paid to the holders of Ordinary Shares according to their rights
and interests in our profits. In the event of our liquidation, after
satisfaction of liabilities to creditors, our assets will be distributed to the
holders of Ordinary Shares in proportion to the nominal value of their
respective holdings. Such right may be affected by the grant of preferential
dividend or distribution rights to the holders of a class of shares with
preferential rights that may be authorized in the future by a special resolution
of our shareholders. Our Board of Directors may declare interim dividends and
propose the final dividend with respect to any fiscal year only out of profits.
Declaration of a final dividend requires approval by an ordinary shareholders'
resolution, which may decrease but not increase the amount proposed by the Board
of Directors. Failure to obtain such shareholder approval does not affect
previously paid interim dividends.
VOTING, SHAREHOLDERS' MEETINGS AND RESOLUTIONS. Holders of Ordinary Shares
have one vote for each Ordinary Share held on all matters submitted to a vote of
shareholders. Such voting rights may be affected by the grant of any special
voting rights to the holders of a class of shares with preferential rights that
may be authorized in the future. The quorum required for an ordinary meeting of
shareholders consists of at least two shareholders present in person or by proxy
who hold or represent, in the aggregate, at least one-fourth of the voting
rights of the issued share capital. A meeting adjourned for lack of a quorum is
adjourned to the same day in the following week at the same time and place or
any time and place as the Directors designate in a notice to the shareholders.
At such reconvened meeting the required quorum consists of two members present
in person or by proxy who hold or represent, in the aggregate, at least
one-fourth of our voting power.
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Annual general meetings of shareholders are held once every year at such
time (within a period of not more than 15 months after the last preceding annual
general meeting) and such place as determined by the board of directors. The
board of directors may call extraordinary general meetings of shareholders and
are obligated to do so upon a written request in accordance with the Companies
Law. The Companies Law provides that an extraordinary general meeting of
shareholder may be called by the board of directors or by a request of two
directors or 25% of the directors in office, or by shareholders holding at least
5% of the issued share capital of the company and at least 1% of the voting
rights, or of shareholders holding at least 5% of the voting rights of the
company.
An ordinary resolution (such as a resolution for the election of directors,
the declaration of dividends or the appointment of auditors) requires approval
by the holders of a majority of the voting rights represented at the meeting, in
person or by proxy, and voting thereon. A special or extraordinary resolution
(such as a resolution amending our Memorandum of Association or Articles of
Association or approving any change in capitalization, merger, consolidation,
winding-up, or other changes as specified in the Companies Law) requires
approval of the holders of 75% of the voting rights represented at the meeting,
in person or by proxy, and voting thereon. In addition, if our share capital is
divided into different classes of shares, the approval of the holders of 75% of
the issued shares of a particular class or a special resolution passed at a
separate general meeting of the holders of the shares of such class is required
to modify or abrogate the rights attached to such shares.
10C. MATERIAL CONTRACTS.
Set forth below are summaries of our material contracts. Because these are
summaries, they are qualified by reference to the actual agreements, which are
attached as exhibits to this Annual Report.
DISPOSITION OF INTEREST IN ALBAHEALTH LLC
ALBAHEALTH OPTION AGREEMENT
In connection with the formation of our formerly owned subsidiary,
AlbaHealth LLC, which manufactures and sells textile health products, in
September 2002 our subsidiary, Tefron USA, became a party to a Put Option
Agreement. Pursuant to the provisions of the Put Option Agreement, for a period
of three years commencing on September 2004 (or, with respect to GE Capital,
commencing on such earlier date as the credit agreement terminates), each of
Alba and GE Capital had an option to require AlbaHealth to purchase all, but not
less than all, of such party's ownership interest in AlbaHealth. We exercised
our put option and in April 2006 sold all of our ownership interests in
AlbaHealth.
MEMBERSHIP INTEREST REDEMPTION AGREEMENT
The sale of our ownership interests in AlbaHealth in April 2006 was made
pursuant to an AlbaHealth Membership Interest Redemption Agreement in
consideration for approximately $13 million, consisting of approximately $10
million paid in cash and $3 million pursuant to the terms of an Unsecured
Subordinated Promissory Note, the principal amount of which is due August 31,
2009. The note bears annual interest at LIBOR plus 3%, and the payment of the
note is subordinated in favor of AlbaHealth's senior bank lenders.
In connection with the execution of the Membership Interest Redemption
Agreement, we entered into an amendment to the existing general administrative
services agreement under which we provided various general administrative
services to AlbaHealth. Pursuant to this amendment, we were to be paid $766,000
for providing these services for the 12-month period ending January 1, 2007. We
also agreed to sell to AlbaHealth as of January 1, 2007 for the price of
$600,000 all of the computer hardware, including related software licenses and
hardware and software leases comprising the computer system in Valdese, NC and
Rockwood, TN, then owned by us and used by AlbaHealth. We were also granted the
right to designate a non-voting observer to the Board of Managers of AlbaHealth
until payment of the promissory note in full.
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UNSECURED SUBORDINATED PROMISSORY NOTE
Under the terms of the Unsecured Subordinated Promissory Note issued to us
by AlbaHealth, AlbaHealth agreed to use its reasonable best efforts to negotiate
an increase in its revolving credit facility availability with its senior bank
lenders in order to prepay the principal amount of the note if trailing 12-month
EBIDTA of AlbaHealth for 2006, 2007 or 2008 reaches certain minimum amounts,
unless such increase would subject AlbaHealth to increased interest rates or
subject AlbaHealth to materially disadvantageous terms. AlbaHealth also agreed
on limitations on its ability to pay dividends, other than as necessary to
enable its security holders to pay taxes.
Upon occurrence of certain events of default, including default in the
payment of the principal when due, we can demand principal amount and all
accrued unpaid interest to be immediately due and payable. In addition, upon the
default in the payment of the principal, we also have the right to convert the
principal balance into common units of AlbaHealth at a price of approximately
$274.20 per common unit (subject to adjustments for dividends and other
distributions).
SUBORDINATION AGREEMENT
Pursuant to a Subordination Agreement we entered into with SunTrust bank,
as administrative agent for the lenders under AlbaHealth's Senior Credit
Facility, we subordinated our claims against AlbaHealth under the Unsecured
Subordinated Promissory Note to the full payment by AlbaHealth to the lenders
under its senior credit agreement; provided so long as no Default or Event of
Default under the senior credit agreement has occurred, we may receive (i)
regularly scheduled payments of interest under the Unsecured Subordinated
Promissory Note and (ii) any payments of principal and interest from AlbaHealth
after August 31, 2009. AlbaHealth recently breached certain non-payment
covenants under its Senior Credit Facility, but the lender under the Facility
delivered a waiver with respect to these breaches.
FIMI AGREEMENTS
We entered into a Share Purchase Agreement, or the Tefron Agreement, dated
February 17, 2004, with Norfet, Limited Partnership, or the Investor,
substantially all of the interests of which are owned by (i) N.D.M.S. Ltd., a
company wholly owned by FIMI Opportunity Fund, L.P., (ii) FIMI Israel
Opportunity Fund, Limited Partnership and (iii) Migdal Insurance Company, Shamir
Insurers Investment Company and the provident funds of First International Bank
of Israel, pursuant to which we issued to the Investor 3,529,412 Tefron Ordinary
Shares for a base price of $4.25 per share and a base aggregate consideration of
$15 million. Due to purchase price adjustment provisions in the Tefron
Agreement, Tefron issued to Norfet an additional 661,765 Ordinary Shares in
April 2005.
In connection with the Tefron Agreement, the Investor also acquired an
additional 1,365,000 Tefron Ordinary Shares in the aggregate from Arwol and
Macpell pursuant to an Agreement, or the Macpell Agreement, by and among
Macpell, Arwol and the Investor. Following the closing of the Tefron Agreement
and the Macpell Agreement, the Investor held 4,894,412, or approximately 30.7%
of the outstanding share capital of Tefron, without taking into account the
Equity Shares. Due to purchase price adjustment provisions in the Macpell
Agreement, Arwol transferred 106,908 additional Ordinary Shares to Norfet in
April 2005.
Tefron, the Investor, Arwol and Macpell executed at the closing of the
Tefron Agreement and the Macpell Agreement a Registration Rights Agreement which
replaced the existing Registration Rights Agreement among the Company, Arwol and
Macpell.
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Below is a description of the principal terms of these transactions. The
Tefron Agreement, the Registration Rights Agreement, and all transactions
contemplated by such agreements to which Tefron is a party are collectively
referred to as the "FIMI Transactions".
TEFRON AGREEMENT
ISSUE PRICE ADJUSTMENT. Under the terms of the Tefron Agreement, in the
event Tefron's earnings before income tax, depreciation and amortization, or
EBITDA, for 2004 (excluding (i) the EBITDA of AlbaHealth to the extent that it
exceeds zero and (ii) any increase in EBITDA of Alba Waldensian, Inc. as a
result of the exercise of the put option by AlbaHealth described below) as set
forth in Tefron's audited consolidated financial statements for the year ending
on December 31, 2004 is less than $23 million, then the price per share of $4.25
will be adjusted as follows: (i) if Tefron's EBITDA for 2004 was equal to or
less than $16 million, then the share price per share was to be reduced
retroactively by $0.75 (to $3.50), and if the Company's EBITDA for 2004 is
higher than $16 million but lower than $23 million, then the share price
reduction was to be calculated in accordance with the following formula:
Price Per Share = 4.25 - 0.75*[x]
Where x = [(23,000,000 -2004 EBITDA)/1,000,000]/7]
Tefron had the discretion to decide, in such instances, whether to issue
additional shares or to refund a proportionate part of the consideration paid by
the Investor.
Tefron's EBDITA for 2004 was $11.809 million and pursuant to an amendment
to the Tefron Agreement signed on March 31, 2005 Tefron issued to Norfet an
additional 661,765 Ordinary Shares, instead of the adjustment mechanism provided
for in the Tefron Agreement.
Under the terms of the Tefron Agreement, the issue price per share will be
increased in the event that, during the three-year period following the closing
of the Tefron Agreement and the Macpell Agreement, the Investor sells at least
20% of the total number of shares purchased on April 22, 2004 from Tefron and
Macpell and Arwol for cash or publicly traded securities (excluding publicly
traded securities in connection with a merger or reorganization of Tefron), at
an average price of at least $9.22 per share (after adjustments for dividends,
share combinations and splits). The amount of the increase will be equal to the
difference between the average sale price and the threshold of $9.22 (as so
adjusted), provided that in any event, an upwards adjustment will be no more
than $0.75 per each share. The amount of any increase is to be paid by the
Investor to Tefron on the third anniversary of the closing of the Tefron
Agreement and the Macpell Agreement.
Since the Tefron Agreement, the Investor has sold 1,050,000 shares, which
exceeds 20% of the total number of shares that the Investor purchased from
Tefron, at a price of more than $9.97. Therefore, Norfet is to pay us an
additional payment under the Tefron Agreement by April 22, 2007.
The adjustment mechanism described in the immediately preceding paragraph
will also apply in respect of the four-year period following the closing of the
Tefron Agreement and the Macpell Agreement, but in such event, the Investor
average sale price must exceed $11.60 per share (rather than $9.22 per share)
for the adjustment to apply.
LIMITS ON EQUITY LINE OF CREDIT. Tefron undertook not to exercise any right
to cause Southridge Capital Markets LLC (or its affiliates) to purchase any of
Tefron's shares without the written consent of the Investor, unless such
issuance is at a price of no less than $4.60 per share or if the issuance is
required in order for Tefron to satisfy covenants relating to shareholders
equity under company loan agreements or if the issuance is required for Tefron
to satisfy certain NYSE listing requirements. Notwithstanding the foregoing,
Tefron may not issue to such third party investor (or its affiliates) an
aggregate sum of more than 12% of Tefron's issued capital without the consent of
the Investor.
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APPROVAL OF RELATED AMENDMENTS. For so long as the provisions of the
Macpell Agreement described below under "- Macpell Agreement - Agreements of the
Parties" are in effect, any change in any agreement or arrangement between
Tefron and Arwol, Macpell or Wolfson in effect at the time of closing or the
adoption of any new agreement or arrangement between Tefron and such parties
will require investor's prior approval. Similarly, any amendment to the
management fee arrangement with investor or the adoption of any new agreement or
arrangement between Tefron and the investor will require approval of Macpell and
Arwol.
INCREASE IN SHARES AVAILABLE FOR ISSUANCE UNDER TEFRON LTD. 1997 SHARE
OPTION PLAN. As a result of the transactions contemplated by the Tefron
Agreement, the shareholders of Tefron were asked to increase the plan by 446,274
Ordinary Shares, which was approved by the shareholders of Tefron on March 31,
2004.
REGISTRATION RIGHTS AGREEMENT
The Investor entered into a Registration Rights Agreement with Tefron,
Arwol and Macpell on the date of closing with respect to the Ordinary Shares
that the Investor acquired pursuant to the Tefron Agreement and the Macpell
Agreement replacing the existing Registration Rights Agreement.
The Registration Rights Agreement is substantially the same as the
Registration Rights Agreement approved by the shareholders of Tefron and entered
into by Company, Arwol and Macpell in November 2003, other than (i) the
insertion of a new provision granting to the Investor, Arwol and Macpell the
right, once every 18 months, to request a registration on Form F-3 (short form
registration statement) when the aggregate net proceeds from the sale of such
holders' securities is at least $3,000,000, in which event Tefron would be
obligated keep such registration statement effective so as to permit sale of
Ordinary Shares pursuant to the Registration Statement for a period of two
years, subject to certain limitations, and (ii) the amendment of an existing
provision granting to the Investor, Arwol and Macpell the right to request a
registration even though Tefron is not eligible to use Form F-3 (short form
registration statement), in which event Tefron would be obligated to keep such
registration statement effective so as to permit sale of Ordinary Shares
pursuant to the Registration Statement for a period of 120 days, subject to
certain limitations.
In connection with the execution of the Share Purchase Agreement with Leber
Partners, L.P., we entered into a Registration Rights Agreement with Leber
Partners, the Investor, Arwol and Macpell which replaced, and is on
substantially the same terms as, the Registration Rights Agreement that we
agreed to execute in connection with the Tefron Agreement. We filed a
registration statement with the Securities and Exchange Commission in accordance
with this agreement, and this registration statement has been declared
effective. See "- Leber Partners, L.P. - Registration Rights Agreement."
MACPELL AGREEMENT
At the same time as the Investor proposed to Tefron to enter into the
Tefron Agreement, the Investor proposed to Arwol to purchase from it an
additional amount of approximately 1.365 million Ordinary Shares at the base
price of $5.538 per share, and concomitantly, and as a condition to the said
purchase, to enter into a shareholders agreement. Arwol offered Macpell to join
it and take part in the sale transaction. Under the terms of the Macpell
Agreement among the Investor, Arwol and Macpell, it was agreed that the base
price for purchase of the shares, would be $5.538 per share and the aggregate
purchase price would be $7,559,370.
PURCHASE PRICE ADJUSTMENT. The purchase price of $5.538 per share under the
Macpell Agreement was subject to adjustment downwards or upwards on
substantially the same terms as the adjustment of the issue price under the
Tefron Agreement, as described above; provided that if Tefron's EBITDA for 2004
is between $16 million and $23 million, then the share price reduction was to be
calculated in accordance with the following formula:
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Price per share = 5.538 - 0.75*[x]
Where x = [(23,000,000 -2004 EBITDA)/1,000,000]/7]
Tefron's EBITDA for 2004 was $11.809 million, and due to purchase price
adjustment, Arwol transferred 106,908 additional Ordinary Shares to Norfet in
April 2005, and Macpell elected to pay Norfet cash in lieu of transferring
additional shares to Norfet.
Under the terms of the Macpell Agreement, the issue price per share will be
increased in the event that, during the three-year period following the closing
of the Tefron Agreement and the Macpell Agreement, the Investor sells at least
20% of the total number of shares purchased on April 22, 2004 from Tefron,
Macpell and Arwol for cash or publicly traded securities (excluding publicly
traded securities in connection with a merger or reorganization of Tefron), at
an average price of at least $9.22 per share (after adjustments for dividends,
share combinations and splits). The amount of the increase will be equal to the
difference between the average sale price and the threshold of $9.22 (as so
adjusted), provided that in any event, an upwards adjustment will be no more
than $0.75 per each share.
AGREEMENTS OF THE PARTIES.
COMPOSITION OF THE BOARD OF DIRECTORS. Arwol, Macpell and the Investor
agreed to vote all of Tefron Ordinary Shares owned or controlled by each of them
for the election to Tefron's Board of Directors of: (i) three members (of whom
at least one will qualify as an "independent director" under the NYSE rules)
plus, subject to applicable law - one external director, that shall be nominated
by the Investor (one of whom shall be a woman), (ii) three members (of whom at
least one will qualify as an independent director and a financial expert under
the NYSE rules) plus, subject to applicable law, one external director, that
shall be nominated by Arwol and Macpell, and (iii) Tefron's chief executive
officer.
CHAIRMAN OF THE BOARD OF TEFRON. Arwol, Macpell and the Investor confirm in
the Macpell Agreement that Arie Wolfson agreed to remain as Chairman of the
Board until Tefron's first Annual General Meeting of Shareholders in calendar
year 2005. Subject to the provisions of applicable law, on or before such
shareholders meeting, Arwol, Macpell and the Investor endeavored to agree on the
identity of the Chairman as of and following such shareholders meeting. The
agreement provided that in the event the parties cannot agree on the identity of
the Chairman, each of Arwol and Macpell (taken as a group) and Norfet will be
entitled to designate the Chairman for an 18 month period, provided that Norfet
would be the first to exercise such right for a period commencing on and as of
the Company's first Annual General Meeting of Shareholders in 2005. In November
2005, Arie Wolfson ceased serving as Chairman of the Board, and Ishay Davidi
began serving as Chairman of the Board.
EXECUTIVE COMMITTEE. Arwol, Macpell and the Investor agreed to appoint an
Executive Committee for advisory purposes, comprised of Messrs. Arie Wolfson and
Ishay Davidi (or, an alternate member appointed by Arwol and Macpell (if Arie
Wolfson cannot fulfill his duties) or an alternative member appointed by the
Investor (if Ishay Davidi cannot fulfill his duties). Decisions of the Executive
Committee do not bind Tefron in any way.
RIGHTS OF FIRST OFFER; TAG-ALONG. The Macpell Agreement contains provisions
which require that if Arwol, Macpell or the Investor wishes to transfer Ordinary
Shares of Tefron to a third party, it must first make an offer to transfer the
shares the other parties, subject to certain exceptions. The agreement also
gives the right to the offerees to sell certain of their Company Ordinary Shares
to the proposed purchaser of the Ordinary Shares rather than accepting the offer
from the transferor. Notwithstanding the foregoing, (i) any transfer of shares
to any direct competitor of Tefron or to any controlling shareholder of a direct
competitor will require consent of the other parties to the agreement and (ii)
each of Arwol and Macpell (as a group) and Norfet may sell Tefron shares, in one
or more instances, constituting in the aggregate less than 2.7% of Tefron's
issued and outstanding share capital.
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DRAG ALONG RIGHTS. The Macpell Agreement contains provisions which provide
that if any of Arwol, Macpell or the Investor secures a bona fide offer from any
third party offeror to purchase all of the Ordinary Shares then held by such
party, in cash or publicly traded securities, at a price per share (adjusted for
allocation of dividend, bonus shares, splits etc.) of not less than $10
(provided that such price per share shall not be lower than 80% of the average
of the closing prices of Tefron's shares on the NYSE over the consecutive 60
trading days immediately preceding such sale), and the offeror conditions its
offer on the acquisition of all the shares held by the other two parties to the
Macpell Agreement at such time, such other two parties will be required under
certain conditions to sell all of the shares of Tefron then held by them to such
offeror, at the same price and upon the same terms and conditions as those to
which the sale by the initiator is subject. Notwithstanding the foregoing, in
lieu of selling the shares as described above, the shareholders who receive the
drag along demand may acquire all of the Tefron shares then held by the
initiating shareholder in cash at the price per share and upon the same terms
and conditions as those to which the sale to the offeror would have been
subject.
DISCUSSIONS PRIOR TO MEETINGS. Arwol, Macpell and the Investor agreed in
the Macpell Agreement to meet regularly and in any event prior to each General
Meeting of shareholders of Tefron and to review, discuss and attempt to reach a
unified position with respect to principal issues on the agenda of each such
meeting. The parties clarified that this should not be interpreted as forcing
any party to act or vote according to any position stated at such prior meeting.
DIVIDEND DISTRIBUTION. The parties agreed to formulate a mutually agreeable
dividend distribution policy for Tefron, which policy shall provide for the
distribution of an annual amount, net after taxes (including withholding tax),
of at least $2 million with respect to calendar year 2004, and at least $4.5
million, effective as of calendar year 2005, and they will utilize their best
efforts to cause Tefron to adopt such policy, subject to: (a) the provisions of
applicable law (including NYSE requirements); (b) any undertaking and commitment
made or to be made towards banks and other creditors; (c) the decision of
Tefron's Board of Directors, taking into account Tefron's financial needs,
investments and all other relevant aspects.
MANAGEMENT FEE. Arwol, Macpell and the Investor agreed in the Macpell
Agreement to vote all of Tefron Ordinary Shares owned or controlled by them in
order to cause Tefron (i) to pay the Investor (or any of its affiliates) the
Management Fees (described above under "the Tefron Agreement"), and (ii) as of
the date on which Arie Wolfson no longer serves as the Chairman of Tefron's
Board of Directors, to pay Arie Wolfson or his designees for their services to
Tefron, an aggregate annual amount of $120,000.
PURCHASE OF SHARES FROM DISCOUNT INVESTMENT COMPANY, OR DIC. Any party to
the agreement wishing to purchase Company Ordinary Shares from DIC will be
required to offer to the other parties the right to participate in such
purchase, at the same price per share and upon the same terms and conditions.
TERM OF AGREEMENTS OF THE PARTIES. All agreements of Arwol, Macpell and the
Investor described above under "Agreements of the Parties" above will remain in
effect until the fifth anniversary of the closing of the transactions under the
Macpell Agreement. The Investor will cease to have any rights under these
agreements as of the first date on which it holds less than 10% of Tefron's
issued share capital (on a non-diluted basis), and will cease to have any
obligation under these agreements as of the first date on which the Investor
holds less than 5% of Tefron's issued share capital (on a non-diluted basis).
Each of Arwol and Macpell will cease to have any rights under "Agreements of the
Parties" above as of the first date in which they hold (in the aggregate) less
than 10% of Tefron's issued share capital (on a non-diluted basis), and each of
Arwol and Macpell will cease to have any obligation under these agreements as of
the first date on which such party holds less than 5% of Tefron's issued share
capital (on a non-diluted basis).
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LEBER PARTNERS L.P.
SHARE PURCHASE AGREEMENT
We also entered into a Share Purchase Agreement, dated March 3, 2004 with
Leber Partners, L.P., which is a group of investors represented by Mr. Zvi
Limon. The investors invested $5 million in cash in Tefron in exchange for
approximately 1.07 million Ordinary Shares of Tefron at a base price of $4.65
per share. According to the agreement, the base price per share will be subject
to certain adjustments and may be increased or reduced by up to $0.75 per share.
ISSUE PRICE ADJUSTMENT. The purchase price of $4.65 per share was subject
to adjustment downwards or upwards on substantially the same terms as the
adjustment of the issue price under the Tefron Agreement and the Macpell
Agreement, as described above; provided that if Tefron's EBITDA for 2004 is
between $16 million and $23 million, then the share price reduction was to be
calculated in accordance with the following formula:
Price per share = 4.65 - 0.75*[x]
Where x = [(23,000,000 -2004 EBITDA)/1,000,000]/7]
Tefron EBDITA for 2004 was $11.809 million. Pursuant to an amendment to the
Purchase Agreement signed on March 3, 2004, Tefron issued to Leber an additional
201,613 Ordinary Shares, instead of the adjustment mechanism provided for in the
Purchase Agreement.
Under the terms of the share purchase agreement, the issue price per share
will be increased in the event that, during the three-year period following the
closing of the agreement, the investors sell for cash or publicly traded
securities (excluding publicly traded securities in connection with a merger or
reorganization of Tefron) at least 20% of the total number of shares they
purchased from Tefron at an average price of at least $9.22 per share (after
adjustments for dividends, share combinations and splits). The amount of the
increase will be equal to the difference between the average sale price and the
threshold of $9.22, provided that in any event, an upwards adjustment will be no
more than $0.75 per such sold share. The amount of any increase, up to $0.75 per
share, is to be paid to Tefron on the third anniversary of the closing.
The adjustment mechanism described in the immediately preceding paragraph
will also apply in respect of the four-year period following the closing, but in
such event, the average sale price must exceed $11.60 per share (rather than
$9.22 per share) for adjustment to apply.
REGISTRATION RIGHTS AGREEMENT
In connection with the execution of the Share Purchase Agreement with Leber
Partners, we agreed to enter into a Registration Rights Agreement with Leber
Partners, the Investor under the Tefron Agreement, Arwol and Macpell. This
Registration Rights Agreement replaced, and is on substantially the same terms
as, the Registration Rights Agreement that we agreed to execute in connection
with the Tefron Agreement, other than as provided below. In addition to the
rights to be granted to all of the shareholders that are to be party to the
Registration Rights Agreement, Leber Partners would have the right to request a
registration (even though we would not be eligible to use a short form
registration) of all, but not less than all, of the Ordinary Shares then held by
Leber Partners, but in any event not less than 500,000 Ordinary Shares. This
would be below the threshold required for the other shareholders (which would be
a request from holders of at least 25% of the aggregate number of Ordinary
Shares subject to the agreement at such time to register a minimum of 5% of the
share capital of Tefron then outstanding but not less than 500,000 Ordinary
Shares). Leber Partners also has the right to request a registration of all, but
not less than all, of the Ordinary Shares then held by it, but in any event not
less than 500,000 Ordinary Shares. If the Principal Holders intend to distribute
the Ordinary Shares by means of an underwriting, the underwriter will be
selected by the Company and be reasonably acceptable to Principal Holders of a
majority of the Ordinary Shares to be registered. Under certain conditions, the
Company may defer registering such Ordinary Shares for a period not exceeding
180 days. In addition, the Company would have no obligation to register these
shares pursuant to requests once it has effected three effective registrations
pursuant to requests of Principal Holders.
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The Principal Holders also have the right, once every 18 months, to request
a registration on Form F-3 (short form registration statement) when the
aggregate net proceeds from the sale of such holders' securities are at least
$3,000,000. In addition, the Principal Holders also have certain rights to
register their Ordinary Shares for sale at the time the Company registers for
its own account any of its securities in connection with a public offering for
cash (called "piggyback registration").
Under the agreement, the first $50,000 of expenses in connection with
registrations made at the request of one or more Principal Holders will be borne
by the Company, and all expenses in excess of $50,000 will be divided equally
between the Company, on the one hand, and the selling shareholders, on the other
hand. All expenses incurred in connection with "piggyback registrations" will be
borne by the Company, other than underwriting discounts and commissions and
other fees relating to the Ordinary Shares to be sold for the account of the
Principal Holders.
On November 29, 2005, the Securities and Exchange Commission declared
effective a Registration Statement on Form F-3 covering the resale of 11,521,259
Ordinary Shares held by the Principal Holders
CHINESE JOINT VENTURE AGREEMENT
On May 8, 2006 the Company entered into Joint Venture Agreement (the "JV
Agreement") with Langsha Knitting Co. Ltd., a company incorporated under the
laws of the People's Republic of China ("Langsha") and Itochu Textile Materials
(Asia) Ltd., a company incorporated under the laws of Hong Kong ("ITM") for the
establishment of a Chinese limited liability Company the name of which would be
"Langsha Tefron Seamless Co. Ltd." (the "JV Company").
THE OBJECTIVES OF THE JV COMPANY
The purpose of the JV Company will be to design, develop, manufacture,
market and sell seamless apparel for the purpose of becoming a leading company
in the Asian seamless apparel market.
INVESTMENTS OF THE PARTIES IN THE JV COMPANY'S CAPITAL
The Parties will invest in the registered capital of the JV Company a total
amount of US$4,008,016 as follows:
o Within 6 (six) months after the establishment date of the JV Company,
Tefron is to contribute to the JV Company's registered capital 144
machines (the "Machines"). It was agreed by the Parties that the
Machines would be invested in the JV Company at a value of
US$2,008,016, all in consideration for 50.1% of the Company's
registered capital.
o No later than two months after the establishment date of the JV
Company, Langsha is to contribute to the JV Company's registered
capital the amount of US$1,600,000 in cash and eight machines, all in
consideration for 39.9% of the JV Company's registered capital.
o No later than two months after the establishment date of the JV
Company, ITM is to contribute to the JV Company's registered capital
the amount of US$400,801 in cash in consideration for 10% of the JV
Company's registered capital.
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TRANSFER OF INTERESTS IN THE JV COMPANY
Except for a transfer of interests in the JV Company by any party to its
affiliate or among affiliates, any party who wishes to transfer any part or all
of its interests in the registered capital of the JV Company will be subject to
a right of first offer mechanism, pursuant to which such Party will have to
offer its interests to the other Parties prior to offering them to any third
party.
RESPONSIBILITIES OF THE PARTIES
Tefron is to principally participate and cooperate in the design and
development of new products, provide the JV Company with managerial consultation
and assist the JV Company in installation, testing and operation of the
equipment.
Langsha is to, among other of its responsibilities in accordance with the
JV Agreement, handle the matters relating to the establishment of the JV
Company, assist the JV Company in selling and marketing its products in China
(excluding certain areas) and in Asia, use its best efforts in assisting the JV
Company to obtain favorable local regulatory and financial support as well as
incentives and tax preferential treatment, handle customs clearance for
importing equipment, raw materials and machinery imported by the JV Company, and
assist the JV Company in obtaining preferred rights of land use for its
operations.
ITM is to, among other of its responsibilities in accordance with the JV
Agreement, assist the JV Company in selling and marketing its products in Asia
and enhance the overall image and position of the JV Company in Asia, provide
information on market trends in raw materials and products, and consulting on
technology, assist the JV Company in import-export procedures and cooperate in
product distribution, and continuously use its contacts and acquaintances with
the Chinese and Asian market in order to enhance the JV Company's business and
protect the JV Company's rights in China (excluding certain areas) and in Asia.
OTHER PROVISIONS
The JV Company's products are to be marketed under the name "Langsha Tefron
Seamless".
The JV Agreement includes also non-compete, non-solicitation and
confidentiality provisions.
The JV Company's Board of Directors is to consist of five Directors, of
which three Directors are to be appointed by Tefron, one Director is to be
appointed by Langsha and one Director is to be appointed by ITM. The Chairman of
the Board is to be appointed by Tefron, and the Vice Chairman of the Board is to
be appointed by Langsha. Certain decisions, including any merger or division of
the Company and any increase or decrease in the registered capital of the
JV Company, requires unanimous approval of all Board members.
The establishment process of the JV Company has not yet been concluded.
EQUITY LINE CREDIT FACILITY
On March 9, 2004, we entered into an equity line credit facility with
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
2,470,021 Ordinary Shares (equal to 19.9% of our outstanding share capital on
the day we signed the agreement) over a three year period expiring at the end of
October 2007. 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. The "market price" under the agreement is calculated to be the average
of the lowest closing prices for any four trading days (not necessarily
consecutive) during the ten trading day period immediately following the date on
which we deliver a written notice to Brittany setting forth the dollar amount
with respect to which we will require Brittany to purchase our Ordinary Shares.
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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. In addition, under our
agreement with Norfet, Limited Partnership described above under "- FIMI
Agreements - Tefron Agreement", we require the consent of Norfet for the
issuance of shares under an equity line of credit if such issuance is at a price
of less than $4.6 per share unless the issuance is required in order for us to
satisfy covenants relating to shareholders equity under company loan agreements
or to satisfy certain NYSE listing requirements. Notwithstanding the foregoing,
the issuance under the equity line of an aggregate sum of more than 12% of our
issued capital will also require the consent of Norfet.
To date, we have elected not to draw on our equity line.
OUR CREDIT AGREEMENTS
To finance the acquisition of Tefron USA, we entered into a credit
agreement, dated as of December 13, 1999, with Bank Hapoalim B.M. and the Israel
Discount Bank of New York, as subsequently amended. The Credit Agreement
provided for a tender offer credit facility of up to $70.5 million.
The Credit Agreement also provides for a seven-year term loan facility of
up to $65.5 million, which was drawn down as a single borrowing at the time of
the merger and amortizes in 11 consecutive semi-annual installments commencing
on January 15, 2002. In addition, the Credit Agreement further provides a
one-year revolving loan facility of up to $5 million. The proceeds from the term
loan facility and the revolving loan facility were used to repay the tender
offer credit facility, which was used initially to finance the acquisition of
Alba and to refinance certain indebtedness of Alba.
SECURITY. The term loan facility and the revolving loan facility are
secured by the following:
o a floating lien on all the personal property of Alba and its
subsidiaries,
o pledges of all non-margin stock of Alba owned by Tefron U.S.
Holdings Corp., the parent company of AWS and a wholly-owned
subsidiary of Tefron, and all subsidiary stock then owned by
Alba, and
o guarantees made by Tefron U.S. Holdings Corp. and any
subsidiaries of Alba, and the continuing guaranty of Tefron.
COVENANTS. Under the terms of the Credit Agreement, Alba and its
subsidiaries are restricted from, among other things, the following:
o incurring additional indebtedness, other than certain permitted
indebtedness;
o creating liens other than certain permitted encumbrances;
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o creating or assuming any guarantee obligations other than certain
permitted guarantee obligations;
o merging, consolidating, amalgamating or entering into any other
form of business combination with a third party, or liquidating
or dissolving;
o selling assets, subject to certain exceptions which include sale
of assets in the ordinary course of business or in amounts not
exceeding $250,000 in any twelve-month period;
o declaring or setting aside funds for payment of dividends;
o making capital expenditures, subject to certain exceptions such
as capital expenditures in the ordinary course of business;
o making investments, loans or advances other than as specified; or
o entering into transactions with affiliates unless certain
requirements are satisfied.
The Credit Agreement requires that we maintain certain financial ratios
related to shareholders' equity and operating results. The Credit Agreement also
contains customary events of defaults, including the failure to pay interest or
principal, material breach of any representation or warranty or breach of any
covenant, cross-defaults, bankruptcy, a judgment in excess of $100,000 or a
change in control event relating to Tefron or Alba or its subsidiaries.
Pursuant to the amendment of our Credit Agreement, the repayment schedule
of the loans will be spread over the period from 2007-2012.
10D. EXCHANGE CONTROLS
Nonresidents of Israel who purchase our Ordinary Shares with U.S. dollars
or other foreign currency will be able to convert dividends (if any) thereon,
and any amounts payable upon the dissolution, liquidation or winding-up of the
affairs of the company, as well as the proceeds of any sale in Israel of the
Ordinary Shares to an Israeli resident, into freely repatriatable dollars, at a
rate of exchange prevailing at the time of conversion, pursuant to regulations,
provided that the Israeli income tax has been withheld with respect to such
amounts, to the extent applicable, or an exemption has been obtained.
10E. TAXATION
The following is a discussion of material United States federal and Israeli
income tax consequences to U.S. Holders (defined below) of Ordinary Shares. This
discussion is based upon existing United States federal and Israeli income tax
laws, including legislation, regulations, administrative rulings and court
decisions, all as in effect on the date of this Annual Report, as well as the
Convention Between the Government of the United States of America and the
Government of the State of Israel With Respect to Taxes on Income (the
"Treaty"). All of these authorities are subject to change (possibly with
retroactive effect) and to differing interpretations.
This summary is for general information only and does not purport to be a
complete analysis of all potential tax consequences of owning Ordinary Shares.
This summary only addresses Ordinary Shares that are held as capital assets
(generally, property held for investment), and does not address all tax
considerations that may be relevant to persons in light of their particular
circumstances, including, for example, persons who hold or at any time have held
(actually or constructively) 10% or more of all classes of voting stock of
Tefron, persons who acquired their Ordinary Shares before the listing of Tefron
shares on the NYSE, persons who acquired their Ordinary Shares pursuant to the
exercise of an employee stock option or otherwise as compensation, and persons
subject to special tax treatment under Israeli or U.S. federal income tax laws,
such as banks and other financial institutions, entities classified as
partnerships for U.S. federal income tax purposes and other pass-through
entities, insurance companies, tax-exempt entities, dealers in securities,
persons holding Ordinary Shares as part of a hedging or conversion transaction
or a straddle, and holders that have a functional currency other than the U.S.
dollar. This summary does not address any aspects of state, local or non-United
States (other than certain Israeli) tax laws, or any estate, gift or other
non-income tax considerations.
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For purposes of this discussion, a "U.S. Holder" means a beneficial owner
of Ordinary Shares (i) who is, for U.S. federal income tax purposes:
o a citizen or resident of the United States;
o a corporation (or another entity taxable as a corporation for U.S.
federal income tax purposes) created or organized in the United States or
under the laws of the United States or any political subdivision thereof;
o an estate, the income of which is subject to U.S. federal income tax
regardless of its source; or
o a trust, if a U.S. court is able to exercise primary supervision over the
administration of the trust and one or more U.S. persons have the authority
to control all substantial decisions of the trust, or, if it was in
existence on August 20, 1996, was treated as a U.S. person on the previous
day and has validly elected to continue to be so treated,
(ii) who is not a resident of Israel for Israeli income tax purposes, and whose
holding of Ordinary Shares is not in any way related to properties or activities
located in Israel, and (iii) who is fully entitled to the benefits of the Treaty
in respect of the Ordinary Shares.
If an entity that is classified as a partnership for U.S. federal tax
purposes holds Ordinary Shares, the U.S. federal income tax treatment of its
partners will generally depend upon the status of the partners and the
activities of the partnership. Entities that are classified as partnerships for
U.S. federal tax purposes and persons holding Ordinary Shares through such
entities should consult their tax advisors about the income and other tax
consequences of purchasing, owning and disposing of the Ordinary Shares.
ALL PERSONS OWNING OR CONSIDERING AN INVESTMENT IN ORDINARY SHARES
(INCLUDING PERSONS THAT ARE RESIDENT OR OTHERWISE TAXABLE IN COUNTRIES OTHER
THAN THE UNITED STATES) ARE STRONGLY URGED TO CONSULT THEIR OWN TAX ADVISORS AS
TO THE PARTICULAR TAX CONSEQUENCES TO THEM OF AN INVESTMENT IN ORDINARY SHARES
UNDER THE TAX LAWS APPLICABLE TO THEM AND ANY POTENTIAL CHANGES IN THE TAX LAWS.
1. CAPITAL GAINS
U.S. FEDERAL INCOME TAX CONSIDERATIONS. Subject to the discussion below
under "Passive Foreign Investment Company Rules," upon the sale or other taxable
disposition of Ordinary Shares, a U.S. Holder generally will recognize capital
gain or loss equal to the difference between the amount realized on the
disposition and such holder's adjusted tax basis in the Ordinary Shares. Such
capital gain or loss will be long-term gain or loss if, at the time of
disposition, the U.S. Holder's holding period in the Ordinary Shares exceeds one
year. Non-corporate taxpayers are subject to lower tax rates on long-term
capital gains. All taxpayers are subject to certain limitations on the deduction
of capital losses.
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Subject to complex conditions and limitations, any Israeli capital gains
tax paid with respect to a disposition of Ordinary Shares (see generally the
discussion below under "-Israeli Tax Considerations") will be a foreign income
tax eligible for credit against a U.S. Holder's U.S. federal income tax
liability (or, alternatively, for deduction against income in determining such
tax liability). In general, gain that a U.S. Holder recognizes on the sale or
other disposition of Ordinary Shares will be U.S.-source for purposes of foreign
tax credit limitations, and losses generally will be allocated against U.S.
source income. The rules governing foreign tax credits are complex, and U.S.
Holders should consult their own tax advisors regarding the availability of
foreign tax credits in their particular circumstances.
ISRAELI TAX CONSIDERATIONS. Capital gain tax is imposed on the disposal of
capital assets by an Israeli resident, and on the disposal of such assets by a
non-Israel resident if those assets either (i) are located in Israel; (ii) are
shares or a right to a share in an Israeli resident corporation; or (iii)
represent, directly or indirectly, rights to assets located in Israel. The
Israeli Tax Ordinance distinguishes between "Real Gain" and the "Inflationary
Surplus". Real Gain is the excess of the total capital gain over Inflationary
Surplus computed generally on the basis of the increase in the Israeli CPI
between the date of purchase and the date of disposal.
The capital gain accrued by individuals on the sale of an asset purchased
on or after January 1, 2003 will be taxed at the rate of 20%. However, if the
individual shareholder is a "Controlling Shareholder" (I.E., a person who holds,
directly or indirectly, alone or together with other, 10% or more of one of the
Israeli resident company's means of control at the time of sale or at any time
during the preceding 12 month period), such gain will be taxed at the rate of
25%. In addition, capital gain derived by an individual claiming deduction of
financing expenses in respect of such gain will be taxed at the rate of 25%. The
real capital gain derived by corporation will be generally subject to tax at the
rate of 25%. However, the real capital gain derived from sale of securities, as
defined in Section 6 of the Inflationary Adjustment Law, by a corporation, which
was subject on December 31, 2005 to the provisions of Section 6 of the
Inflationary Adjustment Law, will be taxed at the corporate tax rate (31% in
2006). The capital gain accrued on the sale of an asset purchased prior to
January 1, 2003 will be subject to tax at a blended rate. The marginal tax rate
for individuals (up to 49% in 2006) and the regular corporate tax rate for
corporations (31% in 2006) will be applied to the portion of the gain amount
which bears the same ratio to the total gain realized as the ratio which the
holding period commencing at the acquisition date and terminating on January 1,
2003 bears to the total holding period. The remainder of the gain realized will
be subject to capital gains tax at the rates applicable to an asset purchased
after January 1, 2003 (see aforementioned).
Individual and corporate shareholders dealing in securities in Israel are
taxed at the tax rates applicable to business income (in 2006 - 31% tax rate for
a corporation and a marginal tax rate of up to 49% for individual).
Notwithstanding the foregoing, if the shareholder is a non-Israeli resident,
then such taxation is subject to the provision of any applicable double tax
treaty. Moreover, capital gain derived from the sale of the Shares by a
non-Israeli shareholder may be exempt under the Israeli income tax ordinance
from Israeli taxation provided the following cumulative conditions are met: (i)
the Shares were purchased upon or after the registration of the Shares on the
stock exchange, (ii) the seller doesn't have a permanent establishment in Israel
to which the derived capital gain is attributed and (iii) if the seller is a
corporation, less than 25% of its means of control are held by Israeli resident
shareholders. In addition, the sale of the Shares may be exempt from Israeli
capital gain tax under an applicable tax treaty. Thus, the U.S.-Israel Double
Tax Treaty exempts U.S. resident from Israeli capital gain tax in connection
with such sale, provided (i) the U.S. resident owned, directly or indirectly,
less than 10% of an Israeli resident company's voting power at any time within
the 12-month period preceding such sale; (ii) the seller, being an individual,
is present in Israel for a period or periods of less than 183 days at the
taxable year; and (iii) the capital gain from the sale was not derived through a
permanent establishment of the U.S. resident in Israel.
Either the seller, the Israeli stockbrokers or financial institution
through which the sold securities are held are obligated, subject to the above
mentioned exemptions, to withhold tax upon the sale of securities from the real
capital gain at the rate of 25% in respect of a corporation and 20% in respect
of an individual.
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Generally, within 30 days of a transaction, a detailed return, including a
computation of the tax due, should be submitted to the Israeli Tax Authority,
and an advanced payment amounting to the tax liability arising from the capital
gain is payable. At the sale of traded securities, the aforementioned detailed
return may not be submitted and the advanced payment should not be paid if all
tax due was withheld at source according to applicable provisions of the Israeli
income tax ordinance and regulations promulgated thereunder. Capital gain is
also reportable on the annual income tax return.
2. DISTRIBUTIONS
U.S. FEDERAL INCOME TAX CONSIDERATIONS. Subject to the discussion below
under "Passive Foreign Investment Company Rules," a U.S. Holder generally will
be required to include in gross income, as ordinary dividend income, the amount
of any distributions paid on the Ordinary Shares (including the amount of any
Israeli taxes withheld) to the extent that such distributions are paid out of
Tefron's current or accumulated earnings and profits as determined for U.S.
federal income tax purposes. Distributions in excess of Tefron's earnings and
profits as so determined will be applied against and will reduce the U.S.
Holder's adjusted tax basis in its Ordinary Shares and, to the extent they are
in excess of such tax basis, will be treated as gain from a sale or exchange of
such Ordinary Shares. Subject to certain limitations, "qualified dividend
income" (which dividends paid by Tefron should qualify as) received by a
non-corporate taxpayer generally is subject to U.S. federal income tax at a
reduced rate. Dividends paid by Tefron will not qualify for the
dividends-received deduction otherwise available to U.S. corporations.
In the event Tefron pays dividends in a currency other than the U.S.
dollar, such dividends will be includible in the gross income of a U.S. Holder
in a U.S. dollar amount calculated by reference to the exchange rate in effect
on the day they are actually or constructively received by the U.S. Holder
(regardless of whether the U.S. Holder in fact converts the dividends into U.S.
dollars). Any gain or loss resulting from currency exchange fluctuations during
the period from the date the dividend is received to the date such foreign
currency is disposed of will be treated as ordinary income or loss.
Subject to complex conditions and limitations, any Israeli withholding tax
imposed on dividends paid by Tefron (see generally the discussion below under
"-Israeli Tax Considerations") will be a foreign income tax eligible for credit
against a U.S. Holder's U.S. federal income tax liability (or, alternatively,
for deduction against income in determining such tax liability). In general,
dividends will be treated as foreign-source passive income, for foreign tax
credit purposes. There are special rules for computing the foreign tax credit
limitation of a taxpayer who receives dividends that are subject to a reduced
rate of tax. The rules governing foreign tax credits are complex, and U.S.
Holders should consult their own tax advisors regarding the availability of
foreign tax credits in their particular circumstances.
ISRAELI TAX CONSIDERATIONS. A distribution of dividends from income
attributed to an "Approved Enterprise" will be subject to tax in Israel at the
rate of 15%, subject to a reduced rate under any applicable double tax treaty. A
distribution of dividends from income, which is not attributed to an Approved
Enterprise, to an Israeli resident individual will generally be subject to
income tax at a rate of 20%. However, a 25% tax rate will apply if the dividend
recipient is a "Controlling Shareholder" (I.E., a person who holds, directly or
indirectly, alone or together with other, 10% or more of one of the Israeli
resident company's means of control at the time of distribution or at any time
during the preceding 12 month period). If the recipient of the dividend is an
Israeli resident corporation, such dividend will be exempt from income tax
provided that the income from which such dividend is distributed was derived or
accrued within Israel.
76
Under the Israeli income tax ordinance, a non-Israeli resident (either
individual or corporation) is generally subject to an Israeli income tax on the
receipt of dividends at the rate of 20% (25% if the dividends recipient is a
"Controlling Shareholder" (as defined above)); those rates are subject to a
reduced tax rate under an applicable double tax treaty. Thus, under the Double
Tax Treaty concluded between the State of Israel and the U.S., the following
rates will apply in respect of dividends distributed by an Israeli resident
company to a U.S. resident: (i) if the U.S. resident is a corporation which
holds during that portion of the taxable year which precedes the date of payment
of the dividend and during the whole of its prior taxable year (if any), at
least 10% of the outstanding shares of the voting stock of the Israeli resident
paying corporation and not more than 25% of the gross income of the Israeli
resident paying corporation for such prior taxable year (if any) consists of
certain type of interest or dividends - the tax rate is 12.5%, (ii) if both the
conditions mentioned in section (i) above are met and the dividend is paid from
an Israeli resident company's income which was entitled to a reduced tax rate
applicable to an "approved enterprise" under the Israeli Law for the
Encouragement of Capital Investments of 1959 - the tax rate is 15%, and (iii) in
all other cases, the tax rate is 25%. The aforementioned rates under the Israel
U.S. Double Tax Treaty will not apply if the dividend income was derived through
a permanent establishment of the U.S. resident in Israel.
An Israeli resident company whose shares are listed on a stock exchange is
obligated to withhold tax, upon the distribution of a dividend attributed to an
Approved Enterprise's income, from the amount distributed, at the following
rates: (i) Israeli resident corporation - 15%, (ii) Israeli resident individual
- - 15%, and (iii) non-Israeli resident - 15%, subject to a reduced tax rate under
an applicable double tax treaty. If the dividend is distributed from an income
not attributed to the Approved Enterprise, the following withholding tax rates
will apply: (i) Israeli resident corporation - 0%, (ii) Israeli resident
individual - 20% (iii) non-Israeli resident - 20%, subject to a reduced tax rate
under an applicable double tax treaty.
3. PASSIVE FOREIGN INVESTMENT COMPANY RULES
For U.S. federal income tax purposes, Tefron will be considered a "passive
foreign investment company" (or "PFIC") if (i) 75% or more of our gross income
for the taxable year is passive income (the "income test") or (ii) the average
percentage of our assets (by value) held during the taxable year that produce
passive income (e.g., dividends, interest, royalties, rents and annuities) or
that are held for the production of passive income is at least 50% (the "asset
test"). A corporation that owns, directly or indirectly, at least 25% by value
of the stock of a second corporation must take into account its proportionate
share of the second corporation's income and assets in applying the income test
and the asset test.
Based on current projections concerning the composition of Tefron's income
and assets, Tefron does not believe that it will be treated as a PFIC for its
current or future taxable years. However, because this conclusion is based on
our current projections and expectations as to future business activity, Tefron
can provide no assurance that it will not be treated as a PFIC in respect of its
current or any future taxable years.
If Tefron is treated as a PFIC for any taxable year during which a U.S.
Holder holds Ordinary Shares, then, subject to the discussion of the qualified
electing fund ("QEF") and "mark-to-market" rules below, such U.S. Holder
generally will be subject to a special and adverse U.S. income tax regime with
respect to any gain realized on the disposition of the Ordinary Shares and with
respect to certain "excess distributions" received from Tefron. The adverse tax
consequences include taxation of such gain or excess distribution at
ordinary-income rates and the imposition of an interest charge on tax
liabilities with respect to such gain or excess distributions.
In some circumstances, a U.S. Holder may avoid certain of the unfavorable
consequences of the PFIC rules by making a QEF election in respect of Tefron. A
QEF election effectively would require an electing U.S. Holder to include in
income currently its pro rata share of the ordinary earnings and net capital
gain of Tefron. However, a U.S. Holder cannot elect QEF status with respect to
Tefron unless Tefron complies with certain reporting requirements and there can
be no assurance that Tefron will provide such information.
A U.S. Holder that holds "marketable" stock in a PFIC may also avoid
certain unfavorable consequences of the PFIC rules by, instead of making a QEF
election, electing to mark the PFIC stock to market at the close of each taxable
year. Tefron expects that the Ordinary Shares will be "marketable" for this
purpose. A U.S. Holder that makes the mark-to-market election will be required
to include in income each year as ordinary income an amount equal to the excess,
if any, of the fair market value of the stock at the close of the year over the
U.S. Holder's adjusted tax basis in the stock. If, at the close of the year, the
U.S. Holder's adjusted tax basis exceeds the fair market value of the stock,
then the U.S. Holder may deduct any such excess from ordinary income, but only
to the extent of net mark-to-market gains previously included in income. Any
gain from the actual sale of the PFIC stock will be treated as ordinary income,
and any loss will be treated as ordinary loss to the extent of net
mark-to-market gains previously included in income.
77
4. U.S. BACKUP WITHHOLDING AND INFORMATION REPORTING
A U.S. Holder may be subject to U.S. Internal Revenue Service information
reporting and U.S. backup withholding with respect to dividends received with
respect to Ordinary Shares and proceeds from the sale of Ordinary Shares, unless
the U.S. Holder is a corporation or within certain exempt categories and
demonstrates that fact when so required, or (in the case of backup withholding
only) furnishes a correct taxpayer identification number and makes the required
certifications.
U.S. backup withholding is not an additional tax. Any amount withheld under
the backup withholding rules will be allowed as a credit against the U.S.
Holder's U.S. federal income tax liability and may entitle such U.S. Holder to a
refund, provided the required information is timely furnished to the Internal
Revenue Service.
10F. DIVIDENDS AND PAYMENT AGENTS
Not Applicable.
10G. STATEMENTS BY EXPERTS
Not Applicable.
10H. DOCUMENTS ON DISPLAY
We are currently subject to the information and periodic reporting
requirements of the Securities Exchange Act of 1934, as amended. Our SEC filings
are available for inspection and copying at the public reference facilities
maintained by the Commission in Room 1024, 450 Fifth Street, N.W. Washington,
D.C. 20549, and the Commission's regional offices located in New York, New York
and Chicago, Illinois. Please call the Commission at 1-800-SEC-0330 for further
information on the public reference rooms.
As a foreign private issuer, we are exempt from the rules under the
Securities Exchange Act of 1934, as amended, prescribing the furnishing and
content of proxy statements to shareholders. Certain of our SEC filings are also
available to the pubic on the SEC website at http://www.sec.gov. Because we are
a foreign private issuer, we, our directors and our officers are also exempt
from the shortswing profit recovery and disclosure regime of section 16 of the
Exchange Act.
10I. SUBSIDIARY INFORMATION
Not Applicable.
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
FOREIGN CURRENCY RISK
Our operating expenses are influenced by changes in the exchange rates
between the dollar and foreign currencies, especially the NIS. Our operational
expenses increase when the dollar is devalued against such currencies. At
December 31, 2006, our liabilities denominated in foreign currencies in the
amount of $24.7 million represented 29.9% of our total liabilities of $82.4
million. At December 31, 2006, our assets denominated in foreign currencies in
the amount of $8.4 million represented 5.1% of our total assets of $164.7
million. We may from time to time utilize derivative financial instruments to
manage risk exposure to movements in foreign exchange rates. Accordingly, in
2002, a forward exchange contract was designated as hedging instrument. We do
not engage in any speculative or profit motivated forward or derivatives
activities. See "Item 3. Key Information - 3D. Risk Factors" and "Item 5.
Operating and Financial Review and Prospects - Impact of Inflation and Currency
Fluctuations.
78
Most of our sales are denominated in U.S. dollars, and we incur most of our
expenses in U.S. dollars and in NIS. According to the salient economic factors
indicated in SFAS No. 52, "Foreign Currency Translation," our cash flow, sale
price, sales market, expense, financing and intercompany transactions and
arrangement indicators are predominately denominated in U.S. dollars. In
addition, the U.S. dollar is the primary currency of the economic environment in
which we operate, and thus the U.S. dollar is our functional and reporting
currency.
In our balance sheet, we re-measure into U.S. dollars all monetary accounts
(principally cash and cash equivalents and liabilities) that are maintained in
other currencies. For this re-measurement, we use the foreign exchange rate at
the balance sheet date. Any gain or loss that results from this re-measurement
is reflected in the statement of income as financial income or financial
expense, as appropriate.
We measure and record non-monetary accounts in our balance sheet
(principally fixed assets, prepaid expenses and share capital) in U.S. dollars,
and we do the same with operational accounts. For this measurement, we use the
U.S. dollar value in effect at the date that the asset or liability was
initially recorded in our balance sheet (the date of the transaction).
In managing our foreign exchange risk, from time to time we enter into
various foreign exchange hedging contracts. Our policy is to hedge significant
net exposures in the major foreign currencies in which we operate. We attempt to
limit our exposure resulting from liabilities and anticipated expenses that are
denominated in NIS through forward contracts. We monitor foreign exchange rates
and trends periodically to measure the effectiveness of our foreign currency
hedging. If our forward contracts meet the definition of a hedge and are so
designated, changes in the fair value of the contracts will be:
o offset against changes in the fair value of the hedged assets or
liabilities through earnings, or
o recognized in other comprehensive income until the hedged item is
recognized in earnings.
As of December 31, 2006, there were no gains or losses recognized in
earnings for hedge ineffectiveness. As of December 31, 2006, we had outstanding
forward contracts in the amount of $20.2 million. We enter into forward
contracts only with well-established institutions, and therefore we believe that
the liabilities that were owed to us at December 31, 2006 will be realized. In
the event that forward contracts were to become unavailable to us for a period
of time and the dollar were devalued against foreign currencies, our operational
expenses would increase by an amount corresponding to the devaluation of the
dollar as a result of our inability to hedge changes in exchange rates.
INTEREST RATE RISK
Of our dollar-denominated financial liabilities at December 31, 2006, $25.3
million were loans denominated in dollar bearing interest at LIBOR. As a result,
our interest expenses are sensitive to changes in LIBOR.
79
Our dollar-denominated financial liabilities bear interest at 1.2% to 1.5%
over LIBOR. A hypothetical ten percent shift in interest rates would result in a
decrease (or increase) in net income of approximately $0.2 million.
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
Not Applicable.
80
PART II
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
None.
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF
PROCEEDS
14A. TO E. Not Applicable.
ITEM 15T. CONTROLS AND PROCEDURES
(a) DISCLOSURE CONTROLS AND PROCEDURES. As of the end of the period covered
by this report, we performed an evaluation of the effectiveness of our
disclosure controls and procedures that are designed to ensure that the material
financial and non-financial information required to be disclosed in the reports
that it files or submits under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported within the time periods specified in the
SEC's rules and forms. Disclosure controls and procedures include, without
limitation, controls and procedures designed to ensure that information required
to be disclosed by an issuer in the reports that it files or submits under the
Securities Act of 1933, as amended, is accumulated and communicated to the our
management, including our principal executive and principal financial officers,
or persons performing similar functions, as appropriate to allow timely
decisions regarding required disclosure. There can be no assurance that our
disclosure controls and procedures will detect or uncover all failures of
persons within Tefron to disclose material information otherwise required to be
set forth in our reports. Nevertheless, our disclosure controls and procedures
are designed to provide reasonable assurance of achieving the desired control
objectives. Based on our evaluation, our management, including our Chief
Executive Officer and Chief Financial Officer, have concluded that our
disclosure controls and procedures (as defined in Rules 13a-15(e) and 15(d) -
15(e) of the Securities Exchange Act of 1934, as amended) as of the end of the
period covered by this report are effective at such reasonable assurance level.
(b) MANAGEMENT'S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL
REPORTING. Our management, under the supervision of our Chief Executive Officer
and Chief Financial Officer, is responsible for establishing and maintaining
adequate internal control over our financial reporting, as defined in Rules
13a-15(f) and 15d-15(f) of the Exchange Act of 1934, as amended. The Company's
internal control over financial reporting is designed to provide reasonable
assurance to the Company's management and Board of Directors regarding the
reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted accounting
principles. Internal control over financial reporting includes policies and
procedures that:
o pertain to the maintenance of our records that in reasonable detail
accurately and fairly reflect our transactions and asset dispositions;
o provide reasonable assurance that our transactions are recorded as
necessary to permit the preparation of our financial statements in
accordance with generally accepted accounting principles;
o provide reasonable assurance that our receipts and expenditures are
made only in accordance with authorizations of our management and
Board of Directors (as appropriate); and
o provide reasonable assurance regarding the prevention or timely
detection of unauthorized acquisition, use or disposition of our
assets that could have a material effect on our financial statements.
81
Due to its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. In addition, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.
Under the supervision and with the participation of our management,
including our principal executive officer and principal financial officer, we
conducted an evaluation of the effectiveness of our internal control over
financial reporting as of December 31, 2006 based on the framework for Internal
Control-Integrated Framework set forth by The Committee of Sponsoring
Organizations of the Treadway Commission. Based on our assessment, our
management concluded that the Company's internal control over financial
reporting were effective as of December 31, 2006.
This Annual Report does not include an attestation report of our registered
public accounting firm regarding internal control over financial reporting.
Management's report was not subject to attestation by our registered public
accounting firm pursuant to temporary rules of the Securities and Exchange
Commission that permit us to provide only management's report in this Annual
Report.
(c) CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING. There were no
changes in our internal control over financial reporting that occurred during
the year ended December 31, 2006 that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.
ITEM 16. [RESERVED]
16A. AUDIT COMMITTEE FINANCIAL EXPERT
The Board of Directors has determined that Yacov Elinav is an "audit
committee financial expert" as defined in Item 16A of Form 20-F. Mr. Elinav is
an "independent" director in accordance with applicable NYSE and SEC
regulations.
16B. CODE OF ETHICS
We have adopted a code of ethics that applies to our Chief Executive
Officer, Chief Financial Officer, Corporate Controller and employees. This code
of ethics is posted on our website, www.tefron.com, and may be found as follows:
1. From our main web page, first click on the "meet tefron" bar on the
left.
2. Next, click on "code of business ethics" on the bottom.
16C. ACCOUNTANTS' FEES AND SERVICES
The following table presents the aggregate fees for professional services
and other services rendered by Kost, Forer Gabbay & Kasierer in Israel, a member
of Ernst & Young Global, and by McGladrey & Pullen, LLP in the United States to
Tefron in 2006 and 2005.
US$ 2005 US$ 2006
-------- --------
Audit Fees (1) $108,000 $119,250
Audit-related Fees (2) $ 53,000 --
Tax Fees (3) $ 19,000 $ 90,850
All Other Fees (4) $ 58,200 $ 54,400
TOTAL $238,200 $264,500
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.
82
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, programs 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, tax advice related to mergers and acquisitions, transfer pricing, and
requests for rulings or technical advice from taxing authority.
All Other Fees include fees billed for training; forensic accounting; data
security reviews; treasury control reviews and process improvement and advice;
environmental, sustainability and advisory services.
AUDIT COMMITTEE PRE-APPROVAL POLICIES AND PROCEDURES
Tefron's audit committee's main role is to assist the Board of Directors in
fulfilling its responsibility for oversight of the quality and integrity of the
accounting, auditing and reporting practices of the Company. The Audit Committee
oversees the appointment, compensation, and oversight of the public accounting
firm engaged to prepare or issue an audit report on the financial statements of
the Company. The audit committee's specific responsibilities in carrying out its
oversight role include the approval of all audit and non-audit services to be
provided by the external auditor and quarterly review the firm's non-audit
services and related fees. These services may include audit services,
audit-related services, tax services and other services, as described above. The
audit committee approves in advance the particular services or categories of
services to be provided to the Company during the following yearly period and
also sets forth a specific budget for such audit and non-audit services.
Additional services may be pre-approved by the audit committee on an individual
basis during the year.
During 2006, none of Audit-related Fees, Tax Fees or Other Fees provided to
us by Kost, Forer Gabbay & Kasierer in Israel or by Ernst & Young or McGladrey &
Pullen, LLP in the United States were approved by the Audit Committee pursuant
to the de minimis exception to the pre-approval requirement provided by
paragraph (c)(7)(i)(C) of Rule 2-01 of Regulation S-X.
16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES.
None.
16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS.
None.
83
PART III
ITEM 17. FINANCIAL STATEMENTS
We have responded to Item 18 in lieu of this Item.
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
Report of Registered Public Accounting Firm F-2
Consolidated Balance Sheets F-3 - F-4
Consolidated Statements of Operations F-5
Consolidated Statements of Changes in Shareholders' Equity F-6 - F-7
Consolidated Statements of Cash Flows F-8 - F-10
Notes to the Consolidated Financial Statements F-11 - F-41
Report of Independent Auditors for Alba Health LLC
for 2005 and 2004 Financial Statements F-42
84
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. Amended and Restated Articles of Association of the Company.
2.1. Form of Credit Agreement, dated as of December 13, 1999, among
AWS Acquisition Corp., Israel Discount Bank of New York and Bank
Hapoalim B.M., New York Branch as Administrative Agent
(incorporated by reference to Exhibit 99(b)(2) to Amendment No. 2
to Schedule 14D-1 in respect of Alba-Waldensian, Inc. filed by
the Company on December 13, 1999).
2.2 Letter, dated March 2, 2004, from Israel Discount Bank Ltd. to
the Company regarding shareholders' equity requirements under the
Credit Agreement (incorporated by reference to Exhibit 2.8 to the
Company's Annual Report on Form 20-F for the fiscal year ended
December 31, 2003).
2.3 Letter, dated March 2, 2004, from Bank Hapoalim to the Company
regarding shareholders' equity requirements under the Credit
Agreement (incorporated by reference to Exhibit 2.9 to the
Company's Annual Report on Form 20-F for the fiscal year ended
December 31, 2003).
2.4 Letter, dated February 16, 2004, from Israel Discount Bank to the
Company regarding revised repayment schedule and revised
shareholders' equity requirements under the Credit Agreement
(incorporated by reference to Exhibit 2.10 to the Company's
Annual Report on Form 20-F for the fiscal year ended December 31,
2003).
2.5 Letter, dated February 15, 2004, from Bank Hapoalim to the
Company regarding revised repayment schedule under the Credit
Agreement (incorporated by reference to Exhibit 2.11 to the
Company's Annual Report on Form 20-F for the fiscal year ended
December 31, 2003).
2.6 Letter, dated March 31, 2004, from Bank Hapoalim to the Company
regarding revised shareholders' equity requirements under the
Credit Agreement (incorporated by reference to Exhibit 2.12 to
the Company's Annual Report on Form 20-F for the fiscal year
ended December 31, 2003).
2.7 Sixth Amendment to Credit Agreement, dated December 15, 2004,
among Alba-Waldensian, Inc. and Bank Hapoalim, as Agent and
Lender, together with Term B Notes (incorporated by reference to
Exhibit 2.7 to the Company's Annual Report on Form 20-F for the
fiscal year ended December 31, 2004).
2.8 Loan Agreement, dated as of December 21, 2004, between Israel
Discount Bank and Hi-Tex Founded by Tefron Ltd (incorporated by
reference to Exhibit 2.12 to the Company's Annual Report on Form
20-F for the fiscal year ended December 31, 2004).
2.9 Loan Agreement, dated as of December 31, 2004, between Bank
Hapoalim and Hi-Tex Founded by Tefron Ltd (incorporated by
reference to Exhibit 2.13 to the Company's Annual Report on Form
20-F for the fiscal year ended December 31, 2004).
2.10 Loan Agreement, dated as of December 25, 2004, between Israel
Discount Bank and the Company (incorporated by reference to
Exhibit 2.14 to the Company's Annual Report on Form 20-F for the
fiscal year ended December 31, 2004).
85
2.11 Loan Agreement, dated as of December 31, 2004, between Bank
Hapoalim and the Company (incorporated by reference to Exhibit
2.15 to the Company's Annual Report on Form 20-F for the fiscal
year ended December 31, 2004).
2.12 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 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).
3.2 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).
4.1 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).
4.2 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).
4.3 Management and Services Agreement, effective as of July 30, 2003,
between the Company, Yosef Shiran and Shiran & Partners -
Consulting, Entrepreneurship, 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).
4.4 Letter, dated March 28, 2007, from General Counsel of Company to
Mr. Yosef Shiran re: amendments to Management and Services
Agreement.
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 Membership Interest Redemption Agreement, dated April 26, 2006,
by and between AlbaHealth, LLC and Tefron USA, Inc.
4.7 Subordination Agreement, dated April 26, 2006, by Tefron USA,
Inc. in favor of Suntrust Bank, in its capacity as administrative
agent for the lenders from time to time party to the Senior
Credit Agreement.
4.8 Unsecured Subordinated Promissory Note in the principal amount of
US $3 million, dated April 26, 2006, by AlbaHealth LLC. in favor
of Tefron USA, Inc.
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).
86
4.10 Amendment to Purchase Agreement, dated March 31, 2005, by and
between the Company and Norfet Limited Partnership (incorporated
by reference to Exhibit 4.11 to the Company's Annual Report on
Form 20-F for the fiscal year ended December 31, 2004).
4.11 Share Purchase Agreement, made as of March 3, 2004, by and
between Tefron and Leber Partners, L.P, including related
Registration Rights Agreement attached as a schedule
(incorporated by reference to Exhibit 4.10 to the Company's
Annual Report on Form 20-F for the fiscal year ended December 31,
2003).
4.12 Amendment to Agreement, dated March 31, 2005, by and between the
Company and Leber Partners, L.P (incorporated by reference to
Exhibit 4.13 to the Company's Annual Report on Form 20-F for the
fiscal year ended December 31, 2004).
4.13 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).
4.14 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).
4.15 Agreement, dated as of July 5, 2006, between Macpell Industries
Ltd. and the Company regarding the lease of properties.
4.16 Joint Venture Agreement, dated as of May 8, 2006, by and between
the Company, Langsha Knitting Co. Ltd. and Itochu Textile
Materials (Asia) Ltd.
8.1 List of subsidiaries of the Company.
12.(a).1 Certification by CEO pursuant to Rule 13a-14(a) or Rule 15d-14(a)
of the Securities Exchange Act of 1934, as adopted pursuant to
Section 302 of the Sarbanes Oxley Act of 2002.
12.(a).2 Certification by CFO pursuant to Rule 13a-14(a) or Rule 15d-14(a)
of the Securities Exchange Act of 1934, as adopted pursuant to
Section 302 of the Sarbanes Oxley Act of 2002.
13.(a).1 Certification of CEO and CFO pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
14.(a).1 Consent of Kost, Forer Gabbay & Kasierer, a member of Ernst &
Young Global.
14.(a).2 Consent of McGladrey & Pullen, LLP.
87
TEFRON LTD. AND ITS SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2006
U.S. DOLLARS IN THOUSANDS
INDEX
PAGE
--------------
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM F - 2
CONSOLIDATED BALANCE SHEETS F - 3 - F - 4
CONSOLIDATED STATEMENTS OF OPERATIONS F - 5
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY F - 6 - F - 7
CONSOLIDATED STATEMENTS OF CASH FLOWS F - 8 - F - 10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F - 11 - F - 41
REPORT OF INDEPENDENT AUDITORS FOR ALBAHEALTH LLC
FOR 2005 AND 2004 FINANCIAL STATEMENTS F - 42
[ERNST & YOUNG LOGO]
o KOST FORER GABBAY & KASIERER o Phone: 972-3-6232525
3 Aminadav St. Fax: 972-3-5622555
Tel-Aviv 67067, Israel
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF
TEFRON LTD.
We have audited the accompanying consolidated balance sheets of Tefron
Ltd. ("the Company") and its subsidiaries as of December 31, 2005 and 2006, 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, 2006. 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 former subsidiary in which the Company sold its interest on April
20, 2006, whose statements constitute 21.5% of total consolidated assets as of
December 31, 2005, and whose revenues constitute 16.7% and 18.7% of total
consolidated revenues for the years ended December 31, 2004 and 2005,
respectively. 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.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. We were not engaged to
perform an audit of the Company's internal control over financial reporting. Our
audit included consideration of internal control over financial reporting as a
basis for designing audit procedures that are appropriate in the circumstances,
but not for the purpose of expressing an opinion on the effectiveness of the
Company's internal control over financial reporting. Accordingly we express no
such opinion. An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management and
evaluating the overall financial statement presentation. We believe that our
audits and the reports of the other auditors provide a reasonable basis for our
opinion.
In our opinion, based on our audits and the reports 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, 2005 and 2006, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2006, in conformity with accounting principles generally accepted
in the United States.
As discussed in Note 2n to the consolidated financial statements, the
Company adopted the provision of Statement of Accounting Standard No. 123(R),
"Share-Based Payment", effective January 1, 2006.
Tel-Aviv, Israel KOST FORER GABBAY & KASIERER
March 28, 2007 A Member of Ernst & Young Global
F - 2
TEFRON LTD. AND ITS SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
DECEMBER 31,
---------------------
NOTE 2005 2006
---- --------- ---------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 7,652 $ 3,966
Short term deposit - 10,089
Marketable securities 3 - 4,975
Trade receivables (net of allowances of $ 273 and $ 183 at December
31, 2005 and 2006, respectively) 25,978 30,655
Other accounts receivable and prepaid expenses 4 4,956 4,166
Inventories 5 26,382 28,912
--------- ---------
TOTAL current assets 64,968 82,763
--------- ---------
LONG TERM INVESTMENTS:
Bank deposit - 1,029
Severance pay fund 634 778
Subordinate note - 3,000
--------- ---------
TOTAL long term investments 634 4,807
--------- ---------
PROPERTY, PLANT AND EQUIPMENT, NET 6 80,859 77,086
--------- ---------
ASSETS ATTRIBUTED TO DISCONTINUED OPERATIONS 40,053 -
--------- ---------
TOTAL assets $ 186,514 $ 164,656
========= =========
The accompanying notes are an integral part of the consolidated financial
statements.
F - 3
TEFRON LTD. AND ITS SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA
DECEMBER 31,
---------------------
NOTE 2005 2006
---- --------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term bank credit 7 $ 14,713 $ -
Current maturities of long-term bank loans 9 6,373 5,948
Trade payables 27,865 31,143
Other accounts payable and accrued expenses 8 8,721 10,402
--------- ---------
TOTAL current liabilities 57,672 47,493
--------- ---------
LONG-TERM LIABILITIES:
Long-term loans from banks (net of current maturities) 9 35,535 19,322
Deferred taxes 13g 9,116 12,313
Accrued severance pay 2,695 3,298
--------- ---------
TOTAL long-term liabilities 47,346 34,933
--------- ---------
LIENS, CONTINGENCIES AND COMMITMENTS 10
LIABILITIES AND MINORITY INTEREST ATTRIBUTED TO DISCONTINUED
OPERATIONS 26,811 -
--------- ---------
SHAREHOLDERS' EQUITY: 11
Share capital -
Ordinary shares of NIS 1 par value - Authorized: 49,995,500
shares; Issued: 19,010,376 and 21,747,568 shares at
December 31, 2005 and 2006, respectively; Outstanding:
18,012,976 and 20,750,168 shares at December 31, 2005 and 2006,
respectively 6,810 7,411
Additional paid-in capital 83,069 101,684
Deferred stock-based compensation (198) -
Cumulative other comprehensive income 307 55
Accumulated deficit (27,895) (19,512)
Less - 997,400 Ordinary shares in treasury, at cost (7,408) (7,408)
--------- ---------
TOTAL shareholders' equity 54,685 82,230
--------- ---------
TOTAL liabilities and shareholders' equity $ 186,514 $ 164,656
========= =========
The accompanying notes are an integral part of the consolidated financial
statements.
March 28, 2007
- ------------------------ -------------------------- --------------------------- --------------------------
Date of approval of the Ishay Davidi Yosef Shiran Asaf Alperovitz
financial statements Chairman CEO and Director CFO
F - 4
TEFRON LTD. AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA
YEAR ENDED DECEMBER 31,
-----------------------------------------
NOTE 2004 2005 2006
---- ----------- ----------- -----------
Sales $ 148,620 $ 171,336 $ 188,104
Cost of sales 12a 136,424 141,621 145,144
----------- ----------- -----------
Gross profit 12,196 29,715 42,960
Selling and marketing expenses 11,309 8,984 11,573
General and administrative expenses 5,603 4,595 5,504
----------- ----------- -----------
Operating income (loss) (4,716) 16,136 25,883
Financial expenses, net 12b 3,888 3,189 1,912
----------- ----------- -----------
Income (loss) before taxes on income (8,604) 12,947 23,971
Taxes on income 13d 83 4,297 5,711
----------- ----------- -----------
Income (loss) from continuing operations (8,687) 8,650 18,260
Income (loss) from discontinued operations
(including impairment and other costs related to the exercise of
the put option), net of taxes 1,822 (5,357) 120
----------- ----------- -----------
Net income (loss) $ (6,865) $ 3,293 $ 18,380
=========== =========== ===========
Basic and diluted net earnings (losses) per share
from continuing operations:
Basic net earnings (losses) per share $ (0.56) $ 0.49 $ 0.90
=========== =========== ===========
Diluted net earnings (losses) per share $ (0.56) $ 0.47 $ 0.88
=========== =========== ===========
Basic and diluted net earnings (losses) per share
from discontinued operations:
Basic net earnings (losses) per share $ 0.12 $ (0.30) $ 0.01
=========== =========== ===========
Diluted net earnings (losses) per share $ 0.12 $ (0.29) $ 0.01
=========== =========== ===========
Basic and diluted net earnings (losses) per share:
Basic net earnings (losses) per share $ (0.44) $ 0.19 $ 0.91
=========== =========== ===========
Diluted net earnings (losses) per share $ (0.44) $ 0.18 $ 0.89
=========== =========== ===========
Weighted average number of shares used for computing
basic earnings (losses) per share 15,603,904 17,719,275 20,210,722
=========== =========== ===========
Weighted average number of shares used for computing
diluted earnings (losses) per share 15,603,904 18,542,618 20,754,566
=========== =========== ===========
The accompanying notes are an integral part of the consolidated financial
statements.
F - 5
TEFRON LTD. AND ITS SUBSIDIARIES
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
- --------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS (EXCEPT SHARE DATA)
CUMULATIVE
ADDITIONAL DEFERRED OTHER TOTAL
ORDINARY DEFERRED PAID-IN STOCK-BASED COMPREHENSIVE ACCUMULATED COMPREHENSIVE TREASURY
SHARES SHARES CAPITAL COMPENSATION GAIN DEFICIT INCOME SHARES TOTAL
-------- -------- ---------- ------------ ------------- ----------- ------------- -------- --------
Balance as of January 1,
2004 $ 5,575 $ 1 $ 62,810 $ - $ - $ (24,323) $ (7,408) $ 36,655
Issuance of shares (net
of issuance expenses in
the amount of $ 296) 1,007 - 15,393 - - - - 16,400
Deferred stock-based
compensation - - 1,040 (1,040) - - - -
Amortization of deferred
stock-based compensation - - - 554 - - - 554
Net loss - - - - - (6,865) - (6,865)
-------- -------- ---------- ------------ ------------- ----------- -------- --------
Balance as of December
31, 2004 6,582 1 79,243 (486) - (31,188) (7,408) 46,744
Settlement of the
conditional obligation
with respect to
issuance of shares 200 - 3,254 - - - - 3,454
Exercise of stock options
related to employees
and directors 28 - 428 - - - - 456
Cancellation of deferred
shares - (1) 1 - - - - -
Deferred stock-based
compensation - - 143 (143) - - - -
Amortization of deferred
stock-based compensation - - - 431 - - - 431
Comprehensive income:
Unrealized gain on
hedging derivative - - - - 307 - $ 307 - 307
Net income - - - - - 3,293 3,293 - 3,293
-------- -------- ---------- ------------ ------------- ----------- ------------- -------- --------
Total comprehensive income $ 3,600
=============
Balance as of December
31, 2005 $ 6,810 $ - $ 83,069 $ (198) $ 307 $ (27,895) $ (7,408) $ 54,685
-------- -------- ---------- ------------ ------------- ----------- -------- --------
F - 6
TEFRON LTD. AND ITS SUBSIDIARIES
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (CONT.)
- --------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS (EXCEPT SHARE DATA)
CUMULATIVE
ADDITIONAL DEFERRED OTHER TOTAL
ORDINARY PAID-IN STOCK-BASED COMPREHENSIVE ACCUMULATED COMPREHENSIVE TREASURY
SHARES CAPITAL COMPENSATION GAIN DEFICIT INCOME SHARES TOTAL
-------- ---------- ------------ ------------- ----------- ------------- -------- --------
Balance as of January 1, 2006 $ 6,810 $ 83,069 $ (198) $ 307 $ (27,895) $ (7,408) $ 54,685
Issuance of shares and options
(net of issuance expenses in
the amount of $ 1,333) 389 13,427 - - - - 13,816
Exercise of stock options
related to employees,
directors and others 195 3,430 - - - - 3,625
Exercise of tradable options
issued at the secondary
offering 17 955 972
Cash dividend - - - - (9,997) - (9,997)
Reclassification of deferred
stock compensation due to
implementation of SFAS 123(R) - (198) 198 - - - -
Compensation related to options
granted to employees - 555 - - - - 555
Tax benefit related to exercise
of stock options - 446 - - - 446
Comprehensive income:
Realized gain on hedging
derivative - - - (307) - $ (307) - (307)
Unrealized gain on hedging
derivative - - - 52 - 52 - 52
Unrealized gain on marketable
securities - - - 3 - 3 - 3
Net income - - - - 18,380 18,380 - 18,380
-------- ---------- ------------ ------------- ----------- ------------- -------- --------
Total comprehensive income $ 18,128
=============
Balance as of December
31, 2006 $ 7,411 $ 101,684 $ - $ 55 $ (19,512) $ (7,408) $ 82,230
======== ========== ============ ============= =========== ======== ========
The accompanying notes are an integral part of the financial statements.
F - 7
TEFRON LTD. AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
YEAR ENDED DECEMBER 31,
------------------------------
2004 2005 2006
-------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (6,865) $ 3,293 $ 18,380
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Loss (income) from discontinued operations (1,822) 5,357 (120)
Depreciation, amortization and impairment of property, plant
and equipment 9,992 9,686 8,719
Compensation related to options granted to employees 554 431 555
Loss related to conditional obligation 150 - -
Increase (decrease) in severance pay, net 380 (588) 459
Increase (decrease) in deferred taxes, net (827) 4,670 2,128
Realization of pre-acquisition acquired operating losses 489 - -
Accrual of interest on short and long-term deposits - - (100)
Gain on sale and accretion of discount on marketable
securities - - (57)
Loss (gain) on sale of property, plant and equipment, net 23 (409) (73)
Decrease (increase) in trade receivables, net 3,515 (9,099) (4,677)
Decrease (increase) in other accounts receivable and prepaid
expenses (233) 884 (417)
Decrease (increase) in inventories (1,471) 3,740 (2,530)
Increase in trade payables 209 793 3,278
Increase (decrease) in other accounts payable and accrued
expenses (898) (946) 1,718
-------- -------- --------
Net cash provided by continuing operating activities 3,196 17,812 27,263
Net cash provided by discontinued operating activities 3,714 2,999 507
-------- -------- --------
Net cash provided by operating activities 6,910 20,811 27,770
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment (8,637) (4,960) (4,688)
Investment grants received 1,156 452 1,218
Proceeds from sale of property, plant and equipment 422 475 335
Dividend received from discontinued operations 662 484 140
Proceeds from sale of subsidiary, net - - 9,917
Investment in short and long-term deposits and marketable
securities - - (22,894)
Proceeds from sale of marketable securities - - 6,961
Proceeds from the Company's insurance policy for plant and
machinery damage - 619 -
Earn out payments related to acquisition of Macro Clothing (b) (106) (261) -
-------- -------- --------
Net cash used in continuing investing activities (6,503) (3,191) (9,011)
Net cash used in discontinued investing activities (975) (779) (172)
-------- -------- --------
Net cash used in investing activities (7,478) (3,970) (9,183)
-------- -------- --------
The accompanying notes are an integral part of the consolidated financial
statements.
F - 8
TEFRON LTD. AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONT.)
- --------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
YEAR ENDED DECEMBER 31,
------------------------------
2004 2005 2006
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of long-term bank loans $ (9,854) $ (6,038) $(21,188)
Proceeds from long-term bank loans - - 5,000
Payments under capital lease 1,412 (206) -
Decrease in short-term bank credit, net (9,276) (3,642) (14,713)
Excess tax benefit from exercise of stock options related to
employees and directors - - 446
Proceeds from exercise of stock options related to employees
and directors - 456 3,175
Exercise of tradable options issued at the secondary offering - - 972
Proceeds from issuance of shares and options, net 19,704 - 13,816
Dividend paid to shareholders - - (9,446)
-------- -------- --------
Net cash provided by (used in) continuing financing activities 1,986 (9,430) (21,938)
Net cash used in discontinued financing activities (3,606) (2,768) (544)
-------- -------- --------
Net cash used in financing activities (1,620) (12,198) (22,482)
-------- -------- --------
Increase (decrease) in cash and cash equivalents (2,188) 4,643 (3,895)
Decrease in cash and cash equivalents attributed to discontinued
operations 867 548 209
-------- -------- --------
Increase (decrease) in cash and cash equivalents attributed to
continuing operations (1,321) 5,191 (3,686)
Cash and cash equivalents at beginning of year 3,782 2,461 7,652
-------- -------- --------
Cash and cash equivalents at end of year $ 2,461 $ 7,652 $ 3,966
======== ======== ========
The accompanying notes are an integral part of the financial statements.
F - 9
TEFRON LTD. AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONT.)
- --------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
YEAR ENDED DECEMBER 31,
------------------------------
2004 2005 2006
-------- -------- --------
(a) CASH PAID DURING THE YEAR FOR:
Interest $ 1,479 $ 3,139 $ 2,504
======== ======== ========
Income taxes, net of refunds received $ 272 $ 204 $ 996
======== ======== ========
(b) ACQUISITION OF MACRO CLOTHING:
Goodwill $ (367) $ - $ -
Accrued payments 261 (261) -
-------- -------- --------
$ (106) $ (261) $ -
======== ======== ========
(c) SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING
ACTIVITY:
Purchase of property, plant and equipment by credit,
net of investment grants receivable $ (490) $ 1,418 $ 266
======== ======== ========
Unsecured subordinated promissory note as a partial
consideration of the sale of Alba Health $ - $ - $ 3,000
======== ======== ========
Exercise of options in exchange for a bank loan $ - $ - $ 450
======== ======== ========
Deferred tax asset related to tax benefit derived from
exercise of options by employees $ - $ - $ 446
======== ======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
F - 10
TEFRON LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA
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,
swimwear and active wear, which are manufactured using two
different techniques (seamless and cut and sew) (see also Note
16). The Company's principal markets are the United States and
Europe.
The Company's significant subsidiaries are Hi-Tex, founded by
the Company ("Hi-Tex"), which commenced operations in 1997,
Tefron USA, Inc., and Macro Clothing Ltd. ("Macro") which was
purchased in April 2003.
b. During 2004, 2005 and 2006, 72.4%, 76.9% and 77.4%,
respectively, were derived from the three largest customers
all located in the United States. 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 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.
c. Discontinued operations:
The Company had a put option to sell its ownership interest in
Alba Health, one of its subsidiaries, to Alba Health. On
December 22, 2005, the Company delivered a notice of exercise
to Alba Health and the other parties to the put option
agreement. On April 26, 2006, the Company finalized the sale
of its interest in Alba Health. Under the terms of the
transaction, the Company received an aggregate consideration
of approximately $ 13,000, consisting of approximately $
10,000 in cash and $ 3,000 pursuant to the terms of an
unsecured subordinated promissory note, the principal amount
of which will be due on August 31, 2009. The note will bear
annual interest at the rate of LIBOR plus 3% payable
quarterly, and the payment of the note will be subordinated in
favor of Alba Health's senior bank lenders. Since the closing
date of the sale, Alba Health business has been treated as a
discontinued operation in the Company's financial statements.
This transaction was accounted for in accordance with
Statement of Financial Accounting Standard No. 144,
"Accounting for the Impairment or Disposal of Long-Lived
Assets" ("SFAS No. 144"), and EITF 03-13, "Applying the
Conditions in Paragraph 42 of FASB Statement No. 144 in
Determining Whether to Report Discontinued Operations".
The results of operations including sales, cost of sales,
operating expenses, financial expenses, taxes on income and
impairment and other costs related to the exercise of the put
option for the years ended December 31, 2004 and 2005, and for
the period ended April 26, 2006, have been reclassified in the
accompanying statements of income and presented as
discontinued operations. The Company's balance sheet as of
December 31, 2005, reflects the net assets of Alba Health as
total assets and total liabilities of discontinued operations
within long-term liabilities and long-term assets. The Company
had previously reported its Alba Health business as a separate
segment (Healthcare USA) as required by Statement of Financial
Standards No. 131, "Disclosures About Segments of an
Enterprise and Related Information" ("SFAS No. 131"). Separate
financial information regarding AlbaHealth, which was
accounted for as discontinued operations as follows:
F - 11
TEFRON LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA
NOTE 1: - GENERAL (CONT.)
FOR THE
YEAR ENDED PERIOD
DECEMBER 31, ENDED
-------------------- APRIL 26,
2004 2005 2006
-------- -------- ---------
Sales $ 34,199 $ 34,249 $ 7,474
Cost of sales 23,513 24,596 5,524
-------- -------- ---------
Gross profit 10,686 9,653 1,950
Selling and marketing expenses 4,199 4,542 1,076
General and administrative expenses 1,276 1,308 338
Impairment and other expenses related to the put
option exercise - 6,073 -
-------- -------- ---------
Operating income (loss) 5,211 (2,270) 536
Financial expenses, net 1,324 1,182 243
-------- -------- ---------
Income (loss) before taxes on income 3,887 (3,452) 293
Taxes on income 120 3,521 9
Minority interest in losses (earnings) of subsidiaries (1,945) 1,616 (164)
-------- -------- ---------
Net income (loss) $ 1,822 $ (5,357) $ 120
======== ======== =========
DECEMBER 31,
---------------------
2005 2006
-------- ---------
Current assets $ 8,660 $ -
Other assets 31,393 -
-------- ---------
Total assets $ 40,053 $ -
======== =========
Current liabilities $ 7,153 $ -
Long term liabilities 5,499 -
Minority interest 14,159 -
-------- ---------
Total liabilities and minority interest $ 26,811 $ -
======== =========
F - 12
TEFRON LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA
NOTE 1: - GENERAL (CONT.)
d. Acquisition of Macro Clothing Ltd. ("Macro"):
In April 2003, the Company agreed to acquire 100% of the
outstanding Ordinary shares of Macro from Macpell Industries
Ltd. ("Macpell"). Macro manufactures, markets and sells
swimsuits and beachwear. The purchase has diversified the
Company's line of products. Under the terms of the acquisition
agreement, contingent payments based on certain financial
performance criteria amounting to $ 367 were recorded in 2004
out of which $ 106 were paid in 2004 and $ 261 in 2005. As a
result, the Company recorded an additional consideration which
increased the purchase price and was allocated to income tax
expenses, due to realization of tax losses derived from
pre-acquisition.
The acquisition has been treated using the purchase method of
accounting in accordance with SFAS No. 141, "Business
Combination". The purchase price has been allocated to the
assets acquired and to the assumed liabilities based on their
estimated fair value at the date of acquisition. The excess of
the purchase price over the estimated fair value of the net
assets acquired has been recorded as goodwill.
NOTE 2: - SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements have been reclassified for
AlbaHealth, which qualified as discontinued operations through
December 31, 2006 in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets.
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. Use of estimates:
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. Financial statements in U.S. dollars:
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 denominated U.S. dollars. Thus, the functional
and the reporting currency of the Company is the U.S. dollar.
F - 13
TEFRON LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA
NOTE 2: - SIGNIFICANT ACCOUNTING POLICIES (CONT.)
Accordingly, monetary accounts maintained in currencies other
than the dollar are remeasured into U.S. dollars in accordance
with Statement No. 52 of the Financial Accounting Standards
Board ("FASB"), "Foreign Currency Translation". All
transactions gains and losses from the remeasurement of
monetary balance sheet items are reflected in the statements
of operations as financial income or expenses as appropriate.
c. Principles of consolidation:
The consolidated financial statements include the accounts of
the Company and its subsidiaries. Intercompany balances and
transactions have been eliminated in consolidation.
d. Cash equivalents:
Cash equivalents are short-term highly liquid investments that
are readily convertible to cash with maturities of three
months or less from the date acquired.
e. Short-term deposit:
A short-term bank deposit has a maturity of more than three
months but less than one year. The deposit is in U.S. dollars
and bears an average interest of 5.34%. The short-term deposit
is presented at cost, including accrued interest.
f. 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. Cost is determined as
follows:
Raw materials, accessories and packaging materials - using the
"moving average cost" method.
Work-in-progress and finished products - using the "moving
average cost" method, based on standard costs which are
adjusted to actual costs.
g. Marketable securities
The Company accounts for its investments in marketable
securities in accordance with SFAS No. 115, "Accounting for
Certain Investments in Debt and Equity Securities".
Management determines the appropriate classification of its
investments in marketable debt securities at the time of
purchase and reevaluates such determinations at each balance
sheet date. Debt securities are classified as available for
sale at fair value, with the unrealized gains and losses,
net of tax, reported in other comprehensive income,
amortization of premiums and accretion of discounts and
interest are included in financial expenses, net. As of
December 31, 2006, no impairment losses have been
identified.
F - 14
TEFRON LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA
NOTE 2: - SIGNIFICANT ACCOUNTING POLICIES (CONT.)
h. Long-term deposit:
A long-term bank deposit is a deposit with a maturity of more
than one year. The deposit is in NIS and bears an average
interest of 5.31%. The long-term deposit is presented at cost,
including accrued interest.
i. Goodwill:
Goodwill attributable to Alba Health, a former subsidiary (see
Note 1c in reference to discontinued operations), is measured
as the excess of the cost of an acquired company over the
total of the amounts assigned to tangible and identifiable
intangible assets acquired less liabilities assumed. Goodwill
is not amortized, but rather reviewed for impairment at least
annually in accordance with the provisions of SFAS No. 142.
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
Company performed annual impairment tests during 2004 and no
impairment losses were identified. However, the annual
impairment test performed in 2005 resulted in an impairment of
$ 5,683 to the goodwill related to Alba Health, a former
subsidiary (see Note 1c).
j. 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 (mainly 5)
Furniture and office equipment 6 - 25 (mainly 6)
Motor vehicles 15
F - 15
TEFRON LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA
NOTE 2: - SIGNIFICANT ACCOUNTING POLICIES (CONT.)
Leasehold improvements are amortized over the term of the
lease, including reasonably assured renewal options, or the
useful lives of the assets, whichever is shorter. The
Company's long-lived assets and certain identifiable
intangibles are reviewed for impairment in accordance with
SFAS 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 by sale are reported at
the lower of the carrying amount or fair value less costs to
sell. The impairment for the year ended December 31, 2004, was
$ 771. There was no impairment for the years 2005 and 2006.
k. 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 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.
Severance pay expenses amounted to $ 1,708, $ 1,221 and $
1,505 for the years ended December 31, 2004, 2005 and 2006,
respectively.
l. 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
collectibility is probable.
Alba Health, a former subsidiary (see Note 1d in reference to
discontinued operations), maintains a provision for
charge-backs and returns, in accordance with Statement of
Financial Accounting Standard No. 48, "Revenue Recognition
When a Right of Return Exists". The provision for charge-backs
and returns amounted to $ 122 and $ 244 for the years ended
December 31, 2004 and 2005, respectively.
F - 16
TEFRON LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA
NOTE 2: - SIGNIFICANT ACCOUNTING POLICIES (CONT.)
m. 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.
n. Accounting for stock-based compensation:
At December 31, 2006, the Company has a stock-based
compensation plan, which is described more fully in Note 11d.
Prior to January 1, 2006, the Company has elected to follow
Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" ("APB No. 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 No. 25, when the
exercise price of the Company's stock options is less than the
market price of the underlying shares on the date of grant,
compensation expense is recognized. No stock-based
compensation cost was recognized in the statement of
operations for the years ended December 31, 2005 and 2004, as
all options granted under those plans had an exercise price
equal to the market value of the underlying common stock on
the date of grant.
Prior to January 1, 2006, the Company adopted the disclosure
provisions of Statement of Financial Accounting Standards No.
148, "Accounting for Stock-Based Compensation - Transition and
Disclosure" ("SFAS No. 148"), which amended certain provisions
of Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("SFAS No. 123") to
provide alternative methods of transition for an entity that
voluntarily changes to the fair value based method of
accounting for stock-based employee compensation. The Company
continues to apply the provisions of APB No. 25 in accounting
for stock-based compensation.
SFAS No. 123(R) requires the cash flows resulting from the tax
deductions in excess of the compensation costs recognized for
those stock options to be classified as financing cash flows.
The $ 446 excess tax benefit classified as financing cash
inflows would have been classified as an operating cash flow
if the Company had not adopted SFAS No. 123(R).
F - 17
TEFRON LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA
NOTE 2: - SIGNIFICANT ACCOUNTING POLICIES (CONT.)
The following table illustrated the effect on net income and
earnings per share if the Company has applied the fair value
recognition provisions of Statement 123 to options granted
under the Company's stock option plans in all periods
presented prior to the adoption of Statement 123(R). For
purposes of this pro forma disclosure, the value of the
options is estimated using a Black-Scholes-Merton
option-pricing formula and amortized to expense over the
options' vesting periods.
The following table illustrates the effect on net income
(loss) and net earnings (losses) per share, assuming that the
Company had applied the fair value recognition provision of
SFAS No. 123 on its stock-based employee compensation:
YEAR ENDED DECEMBER 31,
-----------------------
2004 2005
---------- ---------
Net income (loss) from continuing operations, as reported $ (8,687) $ 8,650
Add: Stock-based compensation expense included in the
determination of net income (loss) as reported 554 431
Deduct: Stock-based compensation expense related to
employee stock options (1,359) (888)
---------- ---------
Net income (loss), including the effect of stock-based
compensation expense from continuing operations $ (9,492) $ 8,193
Income (loss) from discontinued operations, net of taxes $ 1,822 $ (5,357)
---------- ---------
Net income (loss), including effect of stock-based
compensation expense $ (7,670) $ 2,836
========== =========
Basic and diluted net earnings (losses) per share, as reported:
Basic net earnings (losses) per share $ (0.44) $ 0.19
========== =========
Diluted net earnings (losses) per share $ (0.44) $ 0.18
========== =========
Basic and diluted net earnings (losses) per share, including
the effect of stock-based compensation expenses:
From continuing operations:
Basic net earnings (losses) per share $ (0.61) $ 0.46
========== =========
Diluted net earnings per share $ (0.61) $ 0.44
========== =========
From discontinued operations:
Basic net earnings (losses) per share $ 0.12 $ (0.30)
========== =========
Diluted net earnings(losses) per share $ 0.12 $ (0.29)
========== =========
From total operations:
Basic net earnings (losses) per share $ (0.49) $ 0.16
========== =========
Diluted net earnings (losses) per share $ (0.49) $ 0.15
========== =========
F - 18
TEFRON LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA
NOTE 2: - SIGNIFICANT ACCOUNTING POLICIES (CONT.)
Effective January 1, 2006, the Company adopted Statement of
Financial Accounting Standards No. 123 (revised 2004),
"Share-Based Payment" ("SFAS 123R") which requires the
measurement and recognition of compensation expenses based on
estimated fair values for all share-based payment awards made
to employees and directors. SFAS 123R supersedes Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued
to Employees" ("APB 25"), for periods beginning in fiscal
2006. In March 2005, the Securities and Exchange Commission
issued Staff Accounting Bulletin No. 107 ("SAB 107") relating
to SFAS 123R.
SFAS 123R requires company to estimate the fair value of
equity-based payment awards on the date of grant using an
option-pricing model. The value of the portion of the award
that is ultimately expected to vest is recognized as an
expense over the requisite service periods in the Company's
consolidated income statement.
The Company elected to use the modified prospective transition
method as permitted by SFAS 123R and therefore has not
restated its financial results for prior periods. Under this
transition method, stock-based compensation expense for the
year ended December 31, 2006 includes compensation expense for
all stock-based compensation awards granted prior to, but not
yet vested as of January 1, 2006, based on the grant date fair
value estimated in accordance with the original provisions of
SFAS 123. Stock-based compensation expense for all stock-based
compensation awards granted subsequent to January 1, 2006 was
based on the grant date fair value estimated in accordance
with the provisions of SFAS 123R.
The Company recognizes compensation expenses for the value of
its awards granted subsequent to January 1, 2006, based on the
straight-line method, and for awards granted previously, based
on the accelerated attribution method, over the requisite
service period of each of the awards, net of estimated
forfeitures.
As a result of adopting SFAS 123R on January 1, 2006, the
Company's income before income taxes and net income for the
year ended December 31, 2006 is $ 414 lower than if it had
continued to account for stock-based compensation under APB
25. Basic and diluted net income per share for the year ended
December 31, 2006, are $ 0.02 higher than if the Company had
continued to account for share-based compensation under APB
25.
F - 19
TEFRON LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA
NOTE 2: - SIGNIFICANT ACCOUNTING POLICIES (CONT.)
The following table sets forth the total stock-based
compensation expense resulting from stock options included in
the consolidated statements of operation.
YEAR ENDED
DECEMBER 31,
2006
------------
Cost of sales $ 75
Selling and marketing expenses 48
General and administrative expenses 432
------------
Total stock-based compensation expense $ 555
============
Net cash proceeds from the exercise of stock options were
$ 456 and $ 3,175 for the years ended December 31, 2005 and
2006, respectively. Income tax benefits from stock option
exercises were $0 and $446 for the years ended December 31,
2005 and 2006, respectively.
The fair value of stock-based awards was estimated at the date
of grant using the Black-Scholes model with the following
weighted-average assumptions for the years ended December 31,
2004, 2005 and 2006:
2004 2005 2006
---- ---- ----
Risk-free interest rate 2% 4.4% 4.8%
Expected dividend yield 0% 0% 0%
Expected volatility 36% 37% 37%
Expected lives (years) 3 3.5 4
The weighted average fair values at grant dates of options
granted during 2006, 2005 and 2004, were $ 3.7, $ 2.3 and $
2.4, respectively. All options were granted with an exercise
price equal to the market value at the date of grant.
The Company's computation of expected volatility for the years
ended December 31, 2006, 2005 and 2004 is based on its
historical market-based volatility. The computation of
expected life is based on historical exercise patterns. The
interest rate for periods within the contractual life of the
award is based on the U.S. Treasury yield curve in effect at
the time of grant.
o. Fair value of financial instruments:
The carrying amount reported in the balance sheet for cash and
cash equivalents, bank deposits, marketable securities, trade
receivables, short-term bank 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 of these loans.
F - 20
TEFRON LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA
NOTE 2: - SIGNIFICANT ACCOUNTING POLICIES (CONT.)
p. Basic and diluted earnings (losses) per share:
Basic earnings (losses) per share are computed based on the
weighted average number of Ordinary shares outstanding during
the year. Diluted earnings (losses) per share are computed
based on the weighted average number of Ordinary shares
outstanding during the year, plus dilutive potential Ordinary
shares considered outstanding during the year, in accordance
with SFAS No. 128, "Earnings per Share".
q. 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, bank deposits,
marketable securities 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 allowance
for doubtful accounts comprises specific accounts the
collectibility of which, based upon management's estimate, is
doubtful. The doubtful account expenses for the years ended
December 31, 2004, 2005 and 2006, were $ 16, $ 181 and $ (6),
respectively.
The Company's management believes that since the
abovementioned activities were transacted with
well-established institutions, the liabilities owed to the
Company will be fulfilled.
r. Derivatives and hedging:
The Company accounts for derivatives and hedging based on
Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities"
("SFAS No. 133"). SFAS No. 133 requires the Company to
recognize all derivatives on the balance sheet at fair value.
If the derivatives meet the definition of a cash flow hedge
and is so designated, changes in the fair value of derivatives
will either be offset against the change in fair value of the
hedged assets, liabilities, or firm commitments through
earnings, or recognized in other comprehensive income until
the hedged item is recognized in earnings. The ineffective
portion of a derivative's change in fair value is recognized
in earnings depending on the exposure being hedged. During
2004, 2005 and 2006, there were no gains or losses recognized
in earnings for hedge ineffectiveness.
In 2005 and 2006, the Company entered into forward
transactions in order to hedge the variability of
anticipated expenses and balances denominated in new Israeli
shekels ("NIS") and, in 2006 only, of revenues denominated
in Euro, both due to changes of the U.S. dollar against the
NIS and Euro as applicable. The net profits (losses) that
resulted from these contracts and were recognized in
earnings during 2005 and 2006 were ($ 145) and $ 1,765,
respectively.
As of December 31, 2006, unrealized gains on hedging
derivative instruments amounted to $ 52. This unrealized
gain is included in accumulated other comprehensive income.
F - 21
TEFRON LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA
NOTE 2: - SIGNIFICANT ACCOUNTING POLICIES (CONT.)
s. Impact of recently issued accounting pronouncements:
In June 2006, the FASB issued Interpretation No. 48,
"Accounting for Uncertainty in Income Taxes" ("FIN 48"). FIN
48 creates a single model to address uncertainty in tax
positions. FIN 48 clarifies the accounting for income taxes by
prescribing the minimum recognition threshold a tax position
is required to meet before being recognized in the financial
statements. FIN 48 also provides guidance on derecognition,
measurement, classification, interest and penalties,
accounting in interim periods, disclosure and transition. In
addition, FIN 48 clearly scopes out income taxes from
Financial Accounting Standards Board Statement No. 5,
"Accounting for Contingencies." FIN 48 utilizes a two-step
approach for evaluating tax positions. Recognition (step one)
occurs when an enterprise concludes that a tax position, based
solely on its technical merits, is more-likely-than-not to be
sustained upon examination. Measurement (step two) is only
addressed if step one has been satisfied (i.e., the position
is more-likely-than-not to be sustained). FIN 48 applies to
all tax positions related to income taxes subject to Financial
Accounting Standards Board Statement No. 109, "Accounting for
Income Taxes." This includes tax positions considered to be
"routine" as well as those with a high degree of uncertainty.
Derecognition of a tax position that was previously recognized
would occur when a company subsequently determines that a tax
position no longer meets the more-likely-than-not threshold of
being sustained. FIN 48 specifically prohibits the use of a
valuation allowance as a substitute for derecognition of tax
positions. FIN 48 is effective for fiscal years beginning
after December 15, 2006. Management is in the process of
evaluating the possible impact of the adoption of FIN 48 on
its consolidated financial statements.
In September 2006, the Financial Accounting Standards Board
("FASB") issued SFAS No. 157, "Fair Value Measurements." This
Standard defines fair value, establishes a framework for
measuring fair value in generally accepted accounting
principles and expands disclosures about fair value
measurements. SFAS No. 157 is effective for financial
statements issued for fiscal years beginning after November
15, 2007 and interim periods within those fiscal years. The
Company has not yet determined the effect that the adoption of
SFAS No. 157 will have on its consolidated financial
statements.
In February 2007, the FASB issued SFAS No. 159, "The Fair
Value Option for Financial Assets and Financial Liabilities"
("SFAS No. 159"), which permits companies to choose to measure
certain financial instruments and other items at fair value
that are not currently required to be measured at fair value.
SFAS No. 159 is effective for fiscal years beginning after
November 15, 2007. The Company will adopt SFAS No. 159 no
later than January 1, 2008. The Company has not yet determined
the effect that the adoption of SFAS No. 159 will have on its
consolidated financial statements.
t. Reclassification:
Certain prior year amounts were reclassified to conform to
current year financial statement presentation.
F - 22
TEFRON LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA
NOTE 3: - MARKETABLE SECURITIES
As of December 31, 2006, the Company's securities are classified
into available for sale marketable securities.
The following is a summary of marketable securities:
DECEMBER 31, 2006
-----------------------------------------------------------------
GROSS
UNREALIZED ACCRETION MARKET
COST GAINS OF DISCOUNT VALUE
------------ -------------- --------------- ---------------
Available for sale:
Debt securities 4,952 3 20 4,975
============ ============== =============== ===============
NOTE 4: - OTHER ACCOUNTS RECEIVABLE AND PREPAID EXPENSES
DECEMBER 31,
---------------------
2005 2006
--------- ---------
Government authorities:
VAT, customs and other levies recoverable $ 1,508 $ 996
Investment grant receivable 1,130 -
Government participation in extraordinary
expenses due to the war - 710
Deferred income taxes (see Note 13g) 360 459
Advances to suppliers 380 556
Prepaid expenses 1,030 484
Other 548 961
--------- ---------
$ 4,956 $ 4,166
========= =========
NOTE 5: - INVENTORIES
DECEMBER 31,
---------------------
2005 2006
--------- ---------
Raw materials, accessories and
packaging materials $ 9,189 $ 12,832
Work-in progress 10,165 10,632
Finished products 7,028 5,448
--------- ---------
$ 26,382 $ 28,912
========= =========
In the years ended December 31, 2004, 2005 and 2006, the Company
recorded inventory write-downs in the amount of $ 969, $ 660 and $
815, respectively. These write-downs were recorded as cost of
sales.
F - 23
TEFRON LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA
NOTE 6: - PROPERTY, PLANT AND EQUIPMENT, NET
Composition of assets grouped by major classifications, are as
follows:
DECEMBER 31,
---------------------
2005 2006
--------- ---------
Cost:
Buildings (2) $ 4,303 $ 3,566
Machinery and equipment 175,458 178,682
Installation and leasehold improvements 5,403 5,943
Motor vehicles 442 446
Furniture and office equipment 1,757 2,683
Investment grants (33,130) (33,217)
--------- ---------
154,233 158,103
--------- ---------
Accumulated depreciation:
Buildings 942 529
Machinery and equipment 86,352 95,528
Installation and leasehold improvements 3,804 4,071
Motor vehicles 386 407
Furniture and office equipment 963 1,624
Investment grants (19,073) (21,142)
--------- ---------
73,374 81,017
--------- ---------
Depreciated cost $ 80,859 $ 77,086
========= =========
(1) Depreciation, amortization and impairment expenses for the
years ended December 31, 2004, 2005 and 2006 were $ 9,992, $
9,686 and $ 8,719, respectively.
(2) During 2004, the Company had decided to dispose of five
buildings of the seamless segment. The buildings were
classified as held-for-sale and were presented in other
accounts receivable, in accordance with Statement of Financial
Accounting Standard No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" ("SFAS No. 144"). Accordingly,
these buildings were measured at the lower of their carrying
amount or fair value less costs to sell. In respect of the
above, the Company recorded a loss in the amount of $ 771,
resulting from the adjustment of the carrying amount of the
buildings to their fair value less costs to sell. In November
2004, two of the buildings were sold for proceeds of $ 160.
As for liens, see Note 10.
F - 24
TEFRON LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA
NOTE 7: - SHORT-TERM BANK CREDIT
WEIGHTED AVERAGE
INTEREST RATE
---------------------
DECEMBER 31, DECEMBER 31,
--------------------- ---------------------
2005 2006 2005 2006
--------- --------- --------- ---------
%
---------------------
Short-term bank credit 6.5 - $ 14,713 $ -
========= =========
As for collateral, see Note 10.
NOTE 8: - OTHER ACCOUNTS PAYABLE AND ACCRUED EXPENSES
DECEMBER 31
---------------------
2005 2006
--------- ---------
Employees and payroll accruals $ 3,377 $ 3,407
Accrued expenses 3,694 2,937
Equipment suppliers 650 925
Tax payable - 3,133
Short-term deferred taxes (see Note 13g) 1,000 -
--------- ---------
$ 8,721 $ 10,402
========= =========
NOTE 9: - LONG-TERM LOANS
a. Composition:
WEIGHTED AVERAGE
INTEREST RATE
---------------------
DECEMBER 31, DECEMBER 31,
--------------------- ---------------------
2005 2006 2005 2006
--------- --------- --------- ---------
%
---------------------
Loans in U.S. dollars:
Banks (variable interest
LIBOR plus 1.2%-2.75%) 5.9 - 6.8 5.9 - 6.9 $ 41,908 $ 25,270
Less - current maturities:
Loans from banks and others 6,373 5,948
--------- ---------
$ 35,535 $ 19,322
========= =========
F - 25
TEFRON LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA
NOTE 9: - LONG-TERM LOANS (CONT.)
b. The loans as of December 31, 2006 mature as follows:
DECEMBER 31,
-------------------------------------------------------
2007 (current maturities) $ 5,947
2008 5,947
2009 5,544
2010 2,749
2011 and thereafter 5,083
------------
$ 25,270
============
c. Upon the closing of the Share Purchase Agreement with the
investor controlled by FIMI (see Note 11), the Company entered
into new financing arrangements with its bank creditors. The
new financing arrangements contain different financial
covenants and ratios from those in the Company's previous bank
loan agreements. As of December 31, 2006, the Company met those
covenant criteria. During 2006, the Company entered into a
better financing arrangement with new bank creditors.
d. As for collateral, see Note 10.
NOTE 10: - 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. The conditions in
the letters of approval extending the grants from the State of
Israel primarily include, among others, 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 to be 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.
F - 26
TEFRON LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA
NOTE 10: - LIENS, CONTINGENCIES AND COMMITMENTS (CONT.)
c. The facilities of the Company and most of its Israeli
subsidiaries are located in buildings leased for various
periods ending between 2007 and 2024, including renewal
options.
The significant leases are from a related party ending between
2007 and 2024 (including renewal options which the Company
intends to renew) at an annual rent of $ 2,383, linked to the
U.S. CPI. The remaining lease payments are in, or linked to,
the U.S. dollar.
The aggregate minimum rental commitments under non-cancelable
leases, based on the above agreements as of December 31, 2006,
are as follows:
2007 $ 3,080
2008 2,773
2009 2,670
2010 2,518
2011 and thereafter 2,943
---------
$ 13,984
=========
Rental expenses for the years ended December 31, 2004, 2005 and
2006, amounted to $ 3,163, $ 3,345 and $ 3,174, respectively.
d. Legal proceedings:
A former employee of the Company has filed lawsuits against the
Company and three of its former or current officers, with the
Israeli District Court and the Israeli Labor Law Court, seeking
damages in the amount of approximately $ 1,700, in connection
with damages allegedly incurred by him as a result of his
imprisonment in Egypt. The matter is at a preliminary stage and
the Company's management believes that the claim is without
merit and should be dismissed, and thus no accrual was made in
the financial statements.
Except as provided above, there are no material pending legal
proceedings, other than litigation incidental in the ordinary
course of business to which the Company or any of its
subsidiaries are subject.
F - 27
TEFRON LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA
NOTE 11: - SHAREHOLDERS' EQUITY
a. On September 28, 2005, the Company's shares were also listed
for trade on the Tel-Aviv Stock Exchange ("TASE").
On December 27, 2005, Tefron published a prospectus in Israel
in connection with a proposed underwritten offering to the
public in Israel of either Ordinary shares or a combination of
Ordinary shares and options exercisable into Ordinary shares.
The publication of the prospectus was approved by the Israeli
Securities Authority and by the Tel-Aviv Stock Exchange. The
offering was made only by Tefron, and not by any selling
shareholder. As a result of the offering completed on January
10, 2006, the Company raised a net amount of $ 13,816 composed
of a combination of 1,800,000 Ordinary shares and 600,000
options to purchase the Company's Ordinary shares at an
exercise price of $ 9.49 (denominated in NIS and subject to
dividend adjustments). The options are exercisable until
January 9, 2007. As of December 31, 2006, 142,263 of theses
options were exercised and 457,737 options remained
unexercised.
b. On April 22, 2004, the transactions pursuant to the Share
Purchase Agreement with a partnership controlled by FIMI
Opportunity Fund ("Fimi") and pursuant to the Share Purchase
Agreement with Leber Partners, L.P., a limited partnership
("the Investor") were closed. Under the agreements, the Company
issued 3.53 million and 1.07 million Ordinary shares of the
Company to Fimi and the Investor, respectively, at a price per
share of $ 4.25 and $ 4.65 ("the PPS"), respectively, for a
total cash consideration of $ 15,000 and $ 5,000, respectively.
The number of shares received may be adjusted, based on a
certain formula set forth in the agreement which determines the
adjusted price per share ("adjusted PPS").
In the event that the adjusted PPS is not equal to the PPS, the
Company, at its sole discretion, shall either (i) deliver Fimi
and the Investor, a number of additional Ordinary shares that
is equal to the difference between the number of purchased
shares issued and the number of Ordinary shares that would have
been issued to Fimi and the Investor at the closing date had
the original PPS been equal to the adjusted PPS, or (ii) pay
Fimi and the Investor, a cash amount equal to the difference
between the price per share and the adjusted PPS per each share
purchased.
The agreements include two instruments: shares and a
conditional obligation that is freestanding of the shares and
can be settled in shares at the Company's discretion. Therefore
the conditional obligation is a liability and not equity since
the value of the payout is based on the performance condition
and not based on the shares. As a result, the conditional
obligation was measured at fair value on transaction date and
on each balance sheet date. The difference between the initial
values assigned to the liability component and the final payout
was charged to the statement of operations.
On March 31, 2005, the Company signed an amendment to the Share
Purchase Agreement with its investors approved by the Company's
Board of Director's on that date. Accordingly, on April 7,
2005, the Company issued 863,378 Ordinary shares with respect
to the conditional obligation in the amount of $ 3,454 pursuant
to a purchase price adjustment mechanism based on the Company's
2004 EBITDA.
F - 28
TEFRON LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA
NOTE 11: - SHAREHOLDERS' EQUITY (CONT.)
c. Equity credit line:
On March 9, 2004, the Company 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 lower of $ 15,000 or 19.9%
of the Company's outstanding share capital over the next three
years.
Under the financing agreement, 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 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. As of
December 31, 2006, no funds were called.
d. 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, July 2001 and March 2004, it was resolved to increase the
number of shares reserved for issuance under the Share Option
Plan by 600,000, 500,000 and 446,274 Ordinary shares,
respectively. The options vest over a period of three to four
years and expire after 10 years from the grant date or upon
termination of employment.
On April 22, 2004, upon the completion of the Purchase
Agreement described in a. above, the Company granted the
Company's CEO 650,000 options ("the Options"), which may be
exercised to purchase up to 650,000 Ordinary shares of the
Company, at an exercise price of $ 4.25 per share. The Options
vest over four years commencing January 1, 2004 and expire 10
years from the date of the grant. The market price of the
Company's shares on the date of grant was $ 5.85. Accordingly,
the Company recorded compensation expenses of $ 554 and $ 303
in 2004 and 2005, respectively, using the acceleration method
according to FIN 28, "Accounting for Stock Appreciation Rights
and Other Variable Stock Option or Award Plans an
interpretation of APB Opinions No. 15 and 25" ("FIN 28"). This
expense was presented under general and administrative
expenses.
F - 29
TEFRON LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA
NOTE 11: - SHAREHOLDERS' EQUITY (CONT.)
Except for these options, all other options are granted with an
exercise price equal to the market value at the date of grant.
The weighted average fair values of the options granted during
2004, 2005 and 2006 were $ 2.0, $ 2.2 and $ 3.7, respectively.
As of December 31, 2006, 29,663 options were available for
future grants under the aforementioned plan.
A summary of the Company's share option activity under the plan
is as follows:
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------
2004 2005 2006
---------------------- ---------------------- ---------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
NUMBER EXERCISE NUMBER EXERCISE NUMBER EXERCISE
OF OPTIONS PRICE OF OPTIONS PRICE OF OPTIONS PRICE
---------- -------- ---------- -------- ---------- --------
Options outstanding
at beginning of
year 1,817,323 $ 4.54 2,422,805 $ 4.48 2,477,054 $ 4.70
Changes during the
year:
Granted 730,000 $ 4.26 210,000 $ 6.34 80,000 $ 10.13
Forfeited or
canceled (124,518) $ 4.23 (23,000) $ 4.16 (6,250) $ 3.50
Exercised - $ - (132,751) $ 3.72 (719,929) $ 3.93
---------- ---------- ----------
Options outstanding
at end of year 2,422,805 $ 4.48 2,477,054 $ 4.70 1,830,875 $ 5.24
========== ======== ========== ======== ========== ========
Options exercisable
at the end of the
year 1,422,551 $ 4.83 1,911,388 $ 4.70 1,417,542 $ 5.02
========== ======== ========== ======== ========== ========
The following table summarizes significant ranges of
outstanding and exercisable options as of December 31, 2006:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------------------- ----------------------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
RANGE OF REMAINING EXERCISE AGGREGATE EXERCISE AGGREGATE
EXERCISE NUMBER OF CONTRACTUAL LIFE PRICE PER INTRINSIC NUMBER OF PRICE PER INTRINSIC
PRICES OPTIONS (IN YEARS) SHARE VALUE OPTIONS SHARE VALUE
---------- --------- ---------------- ---------- --------- --------- ---------- ---------
$ $ $
---------- ---------- ----------
3. 20-4.31 1,303,375 5.85 3.89 $ 8,617 1,137,542 3.84 $ 7,577
5.34-5.37 140,000 8.56 5.34 722 17,500 5.35 90
7.2 60,000 8.83 7.14 201 15,000 7.14 50
8.13-9.50 228,500 2.34 8.80 390 188,500 8.85 310
11.28 40,000 9.33 11.27 - - - -
15.00 59,000 3.46 15.00 - 59,000 15.00 -
--------- --------- --------- ---------
1,830,875 5.72 5.24 $ 9,930 1,417,542 5.02 $ 8,027
========= ================ ========== ========= ========= ========== =========
F - 30
TEFRON LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA
NOTE 11: - SHAREHOLDERS' EQUITY (CONT.)
The aggregate intrinsic value in the table above represents
the total intrinsic value (i.e., the difference between the
Company's closing stock price on the last trading day of the
year of fiscal 2006 and the exercise price, times the number
of shares) that would have been received by the option holders
had all option holders exercised their options on December 31,
2006. This amount changes based on the fair market value of
the Company's share. Total intrinsic value of options
exercised is $ 5,429 for the year ended December 31, 2006.
Total fair value of options vested is $ 607 for the year ended
December 31, 2006.
As of December 31, 2006, $ 570 of total unrecognized
compensation cost related to stock options is expected to be
recognized over an approximate weighted-average period of 1.4
years.
e. Dividend distribution:
On August 8, 2006 and on November 7, 2006, the Company's Board
of Directors declared a dividend of $ 5,000 each, payable to
shareholders on record as of August 31, 2006 and as of
November 30, 2006, respectively, out of earnings that are not
attributable to an "Approved Enterprise" (see Note 13c). The
dividends were paid on September 14, 2006 and on December 14,
2006, respectively. The dividend distributed from income
attributable to sources other than the "Approved Enterprise"
programs.
NOTE 12: - SUPPLEMENTARY INFORMATION TO STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31,
----------------------------------
2004 2005 2006
--------- ---------- ---------
a. Cost of sales:
Materials $ 70,170 $ 74,568 $ 76,031
Salaries and related expenses 31,690 26,414 23,310
Subcontracting 10,152 11,337 18,785
Other production costs 17,163 17,730 17,971
Depreciation 8,292 8,751 7,934
Decrease (increase) in work-in progress and
finished products (1,043) 2,821 1,113
--------- ---------- ---------
$ 136,424 $ 141,621 $ 145,144
========= ========== =========
F - 31
TEFRON LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA
NOTE 12: - SUPPLEMENTARY INFORMATION TO STATEMENTS OF OPERATIONS (CONT.)
b. Financial expenses:
YEAR ENDED DECEMBER 31,
----------------------------------
2004 2005 2006
--------- ---------- ---------
Interest on long-term loans $ 1,847 $ 2,777 $ 2,245
Interest on short-term loans 384 533 42
Interest on tax assessment - 300 -
Interest income on bank deposits and others - - (837)
Exchange rate differences, net 450 (1,057) 538
Bank expenses and other, net 1,057 491 289
Loss (profit) from forward exchange
transactions - 145 (365)
Loss related to conditional obligation 150 - -
--------- ---------- ---------
$ 3,888 $ 3,189 $ 1,912
========= ========== =========
NOTE 13: - TAXES ON INCOME
a. Reduction in corporate tax rate:
On July 25, 2005, the Knesset (Israeli Parliament) passed the
Law for the Amendment of the Income Tax Ordinance (No. 147),
2005, which prescribes, among others, a gradual decrease in
the corporate tax rate in Israel to the following tax rates:
in 2006 - 31%, in 2007 - 29%, in 2008 - 27%, in 2009 - 26% and
in 2010 and thereafter - 25%.
b. Applicable tax laws:
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
issuance of shares.
c. Tax benefits under the Law for the Encouragement of Capital
Investments, 1959 ("the Law"):
Certain production facilities in Israel have been granted the
status of "Approved Enterprise" under the Law, for several
investment programs ("the Programs").
F - 32
TEFRON LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA
NOTE 13: - TAXES ON INCOME (CONT.)
In accordance with the Law, the Company and certain
subsidiaries in Israel received grants from the State of
Israel in respect of investments in their plants. 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. In addition, income attributed to
certain Programs is tax exempt for a period of two years and
is subject to a reduced corporate tax rate of 10% - 25% for an
additional period of five to eight years, based on the
percentage of foreign investment in the Company.
The duration of tax benefits for each of the Programs is
subject to limitations of the earlier of 12 years from
commencement of investment, or 14 years from receipt of
approval, as an "Approved Enterprise" under the Law.
Tax-exempt income attributable to the "Approved Enterprise"
cannot be distributed to shareholders without subjecting the
Company to taxes except upon complete liquidation of the
Company. If such retained tax-exempt income is distributed in
a manner other than upon the complete liquidation of the
Company, it would be taxed at the reduced corporate tax rate
applicable to such profits (between 10%-25%). The Company does
not intend to distribute any amounts of its undistributed
tax-exempt income as a dividend. The Company intends to
reinvest its tax-exempt income and not to distribute such
income as a dividend. No deferred income taxes have been
provided on income attributable to the Company's Approved
Enterprise programs as the undistributed tax exempt income is
essentially permanent in duration.
The entitlement to the above benefits is conditional upon the
Company's fulfilling the conditions stipulated by the Law,
regulations published thereunder and the certificates of
approval for the specific investments in approved enterprises.
Should the Company and its subsidiaries in Israel fail to meet
such requirements in the future, income attributable to its
"Approved Enterprise" programs could be subject to the
statutory Israeli regular corporate tax rate and the Company
could be required to refund a portion of the tax benefits
already received, with respect to such programs. Income from
sources other than the "Approved Enterprise" is subject to tax
at regular Israeli corporate tax rate.
On April 1, 2005, an amendment to the Investment Law came into
effect ("the Amendment") and has significantly changed the
provisions of the Investment Law. The Amendment limits the
scope of enterprises which may be approved by the Investment
Center by setting criteria for the approval of a facility as a
Beneficiary Enterprise, such as provisions generally requiring
that at least 25% of the Beneficiary Enterprise's income will
be derived from export. Additionally, the Amendment enacted
major changes in the manner in which tax benefits are awarded
under the Investment Law so that companies no longer require
Investment Center approval in order to qualify for tax
benefits.
F - 33
TEFRON LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA
NOTE 13: - TAXES ON INCOME (CONT.)
However, the Investment Law provides that terms and benefits
included in any certificate of approval already granted will
remain subject to the provisions of the law as they were on
the date of such approval. Therefore, the Israeli companies
with Approved Enterprise status will generally not be subject
to the provisions of the Amendment. As a result of the
amendment, tax-exempt income generated under the provisions of
the new law, will subject the Company to taxes upon
distribution or liquidation and the Company may be required to
record deferred tax liability with respect to such tax-exempt
income. As of December 31, 2006, the Company did not generate
income subject to the provision of the new law.
d. Taxes on income included in the statements of operations:
YEAR ENDED DECEMBER 31,
------------------------------
2004 2005 2006
-------- -------- --------
Current taxes $ 572 $ 422 $ 3,583
Deferred taxes (853) 3,666 2,128
Taxes in respect of prior years 364 209 -
-------- -------- --------
$ 83 $ 4,297 $ 5,711
======== ======== ========
Domestic $ (476) $ 4,190 $ 5,603
Foreign 559 107 108
-------- -------- --------
$ 83 $ 4,297 $ 5,711
======== ======== ========
F - 34
TEFRON LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA
NOTE 13: - TAXES ON INCOME (CONT.)
e. Effective tax:
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,
----------------------------------
2004 2005 2006
--------- ---------- ---------
Income (loss) before taxes, as reported in
the consolidated statements of operations $ (8,604) $ 12,947 $ 23,971
========= ========== =========
Statutory tax rate 35% 34% 31%
========= ========== =========
Taxes (tax saving) calculated at the
Israeli statutory tax rate $ (3,011) $ 4,402 $ 7,431
Increase (decrease) in taxes resulting from
"Approved Enterprise" benefits 676 (1,297) (1,581)
Deferred taxes on losses and temporary
differences for which valuation allowance
was provided 1,982 736 -
Nondeductible expenses 88 181 124
Change in tax rate used for computation of
deferred taxes (83) - -
Taxes in respect of prior years 366 209 (125)
Other 65 66 (138)
--------- ---------- ---------
Actual tax expenses $ 83 $ 4,297 $ 5,711
========= ========== =========
f. Income before taxes on income is comprised
as follows:
Israel $ (5,681) $ 14,410 $ 24,243
Foreign (2,923) (1,463) (272)
--------- ---------- ---------
Total $ (8,604) $ 12,947 $ 23,971
========= ========== =========
F - 35
TEFRON LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA
NOTE 13: - TAXES ON INCOME (CONT.)
g. 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,
----------------------
2005 2006
--------- ---------
Asset (liability) in respect of:
Property, plant and equipment $ (12,898) $ (12,799)
Allowances and provisions 820 887
Expected realization of foreign subsidiary (1,000) (150)
Net operating loss carryforward 3,352 208
--------- ---------
Net deferred tax assets before valuation allowance (9,726) (11,854)
Valuation allowance (1) - -
--------- ---------
Net deferred tax liability $ (9,726) $ (11,854)
========= =========
Presented in balance sheet:
Long-term liability $ (9,116) $ (12,313)
Other liabilities (1,000) -
Short-term assets - 459
Other receivables 390 -
--------- ---------
Net deferred tax liability $ (9,726) $ (11,854)
========= =========
Domestic $ (8,726) $ (11,704)
Foreign (1,000) (150)
--------- ---------
Net deferred tax $ (9,726) $ (11,854)
========= =========
(1) The net change in the total valuation allowance for the
years ended December 31, 2004, 2005 and 2006 is $ 1,949,
$ 5,551 and $ 0, respectively.
(2) The deferred taxes are computed based on enacted tax
rates expected to apply at the time of reversal (average
rate of 22%).
h. Final tax assessments:
The Company and Hi-Tex, one of the Company's Israeli
subsidiaries, received final tax assessments through 1999.
F - 36
TEFRON LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA
NOTE 14: - CUMULATIVE OTHER COMPREHENSIVE INCOME
DECEMBER 31,
-------------------
2005 2006
-------- --------
Net income $ 3,293 $ 18,380
Realized gain on hedging derivative - (307)
Unrealized gain from hedging derivative 307 52
Unrealized gain on marketable securities - 3
-------- --------
$ 3,600 $ 18,128
======== ========
NOTE 15: - EARNINGS (LOSS) PER SHARE
The following table sets forth the computation of basic and diluted
net earnings (losses) per share ("EPS"):
YEAR ENDED DECEMBER 31,
----------------------------------------------
2004 2005 2006
------------- ------------- -------------
Income (loss) from continuing operations $ (8,687) $ 8,650 $ 18,260
============= ============= =============
Income (loss) from discontinued operations
(including impairment and other costs related to
the exercise of the put option) 1,822 (5,357) 120
------------- ------------- -------------
Net income (loss) $ (6,865) $ 3,293 $ 18,380
============= ============= =============
Weighted average Ordinary shares outstanding -
Basic EPS $ 15,603,904 $ 17,719,275 $ 20,210,722
Dilutive effect:
Employee and directors stock options - 823,343 543,844
------------- ------------- -------------
Weighted average Ordinary shares outstanding -
Diluted EPS 15,603,904 18,542,618 20,754,566
============= ============= =============
Basic and diluted net earnings (losses) per share
from continuing operations:
Basic net earnings (losses) per share $ (0.56) $ 0.49 $ 0.90
============= ============= =============
Diluted net earnings (losses) per share $ (0.56) $ 0.47 $ 0.88
============= ============= =============
Basic and diluted net earnings (losses) per share
from discontinued operations:
Basic net earnings (losses) per share $ 0.12 $ (0.30) $ 0.01
============= ============= =============
Diluted net earnings (losses) per share $ 0.12 $ (0.29) $ 0.01
============= ============= =============
Basic and diluted net earnings (losses) per share:
Basic net earnings (losses) per share $ (0.44) $ 0.19 $ 0.91
============= ============= =============
Diluted net earnings (losses) per share $ (0.44) $ 0.18 $ 0.89
============= ============= =============
F - 37
TEFRON LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA
NOTE 15: - EARNINGS (LOSS) PER SHARE (CONT.)
The total weighted average number of outstanding options excluded
from the calculation of diluted earnings per share, since they would
have an anti-dilutive effect, were 342,500 and 169,000 for the year
ended December 31, 2005 and 2006, respectively.
In 2004, all outstanding stock options were excluded from the
calculation of the diluted net loss per Ordinary share because they
had an anti-dilutive effect.
NOTE 16: - SEGMENT REPORTING
a. General information:
The Company has two production lines: knitted apparel ("Cut
and Sew") and seamless apparel ("Seamless"). 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 two reportable segments:
- Intimate apparel and active wear manufactured using the
Seamless process.
- Intimate apparel, active wear and swim wear manufactured
using the Cut and Sew Process, mainly performed in
Israel and through the purchase of finished products in
China and Cambodia.
The accounting policies of the reportable segments are the
same as those described in Note 2. 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.
b. Reportable segments:
YEAR ENDED DECEMBER 31, 2006
--------------------------------------
CUT & SEW -
ISRAEL SEAMLESS CONSOLIDATED
----------- --------- ------------
Sales to unaffiliated customers $ 85,951 $ 102,153 $ 188,104
=========== ========= ============
Operating income $ 9,517 $ 16,366 $ 25,883
=========== =========
Financial expenses, net 1,912
------------
Income before taxes on income $ 23,971
============
Depreciation and amortization $ 2,170 $ 6,549 $ 8,719
=========== ========= ============
Identifiable and total assets at
December 31, 2006 $ 33,986 $ 102,667 $ 136,653
=========== =========
Assets attributed to discontinued
operations -
Corporate assets 28,003
------------
Total assets $ 164,656
============
F - 38
TEFRON LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA
NOTE 16: - SEGMENT REPORTING (CONT.)
YEAR ENDED DECEMBER 31, 2005
--------------------------------------
CUT & SEW -
ISRAEL SEAMLESS CONSOLIDATED
----------- ---------- ------------
Sales to unaffiliated customers $ 61,454 $ 109,882 $ 171,336
=========== ========== ============
Operating income $ 2,877 $ 13,259 $ 16,136
=========== ==========
Financial expenses, net 3,189
------------
Income before taxes on income $ 12,947
============
Depreciation and amortization $ 3,082 $ 6,604 $ 9,686
=========== ========== ============
Identifiable and total assets at December 31, 2005 $ 37,697 $ 95,522 $ 133,219
=========== ==========
Assets attributed to discontinued operations 40,053
Corporate assets 13,242
------------
Total assets $ 186,514
============
YEAR ENDED DECEMBER 31, 2004
--------------------------------------
CUT & SEW -
ISRAEL SEAMLESS CONSOLIDATED
----------- ---------- ------------
Sales to unaffiliated customers $ 65,272 $ 83,348 $ 148,620
=========== ========== ============
Operating income (loss) $ 3,497 $ (8,213) $ (4,716)
=========== ==========
Financial expenses, net 3,888
------------
Income (loss) before taxes on income $ (8,604)
============
Depreciation and amortization $ 2,824 $ 7,168 $ 9,992
=========== ========== ============
c. The Company's sales by geographic area are as follows:
YEAR ENDED DECEMBER 31,
--------------------------------------
2004 2005 2006
----------- ---------- ------------
North America $ 134,715 $ 153,984 $ 145,205
Europe 8,044 11,074 34,050
Israel 2,892 3,865 4,906
Other 2,969 2,413 3,943
----------- ---------- ------------
$ 148,620 $ 171,336 $ 188,104
=========== ========== ============
F - 39
TEFRON LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA
NOTE 16: - SEGMENT REPORTING (CONT.)
d. Sales to major customers:
YEAR ENDED DECEMBER 31,
--------------------------------------
2004 2005 2006
----------- ---------- ------------
%
--------------------------------------
A 47.4 40.3 38.6
B 8.3 25.8 28.8
C 16.7 10.8 10.0
----------- ---------- ------------
72.4 76.9 77.4
=========== ========== ============
As of December 31, 2005 and 2006, major customer's balances
were $ 19,795 and $ 18,575, respectively.
e. The Company's long-lived assets by geographic area are as
follows:
DECEMBER 31,
------------------------
2005 2006
----------- ----------
Israel $ 74,812 $ 71,777
Other countries 6,047 5,309
----------- ----------
$ 80,859 $ 77,086
=========== ==========
f. Revenues are generated by the following products:
YEAR ENDED DECEMBER 31,
--------------------------------------
2004 2005 2006
----------- ---------- ------------
Intimate apparel $ 118,240 $ 101,625 $ 100,890
Active wear 20,105 51,961 59,406
Swimwear 10,275 17,750 27,808
----------- ---------- ------------
$ 148,620 $ 171,336 $ 188,104
=========== ========== ============
F - 40
TEFRON LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA
NOTE 17: - RELATED PARTIES
Transactions with related parties (shareholders and companies
controlled by shareholders):
YEAR ENDED DECEMBER 31,
--------------------------------------
2004 2005 2006
----------- ---------- ------------
Sales to related parties (1) $ 796 $ 24 $ 12
=========== ========== ============
Cost of sales (2) (3) $ (2,602) $ (2,832) $ (2,574)
=========== ========== ============
Selling, general and administrative expenses (2) $ (684) $ (387) $ (240)
=========== ========== ============
(1) Related parties trade receivables in 2005 and 2006 were $ 83
and $ 10, respectively.
(2) Related parties trade payables in 2005 and 2006 were $ 174 and
$ 43, respectively.
(3) Including primarily rental payments to a company controlled by
shareholders.
NOTE 18: - SUBSEQUENT EVENTS (UNAUDITED)
During January 2007, 437,818 tradable options were exercised into
the Company's Ordinary shares, for a total consideration of
approximately $ 4,300.
F - 41
[McGladrey & Pullen Logo]
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors
AlbaHealth, LLC
Valdese, North Carolina
We have audited the accompanying balance sheets of AlbaHealth, LLC (the
"Company") as of December 31, 2005 and 2004, and the related statements of
operations, members' 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 conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. 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, 2005 and 2004, and the results of its operations and its cash flows for the
years then ended, in conformity with United States generally accepted accounting
principles.
/s/ McGladrey & Pullen, LLP
Charlotte, North Carolina
February 2, 2006
F - 42
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/ Asaf Alperovitz
-----------------------
Asaf Alperovitz
Chief Financial Officer
March 29, 2007
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. Amended and Restated Articles of Association of the Company.
2.1. Form of Credit Agreement, dated as of December 13, 1999, among
AWS Acquisition Corp., Israel Discount Bank of New York and Bank
Hapoalim B.M., New York Branch as Administrative Agent
(incorporated by reference to Exhibit 99(b)(2) to Amendment No. 2
to Schedule 14D-1 in respect of Alba-Waldensian, Inc. filed by
the Company on December 13, 1999).
2.2 Letter, dated March 2, 2004, from Israel Discount Bank Ltd. to
the Company regarding shareholders' equity requirements under the
Credit Agreement (incorporated by reference to Exhibit 2.8 to the
Company's Annual Report on Form 20-F for the fiscal year ended
December 31, 2003).
2.3 Letter, dated March 2, 2004, from Bank Hapoalim to the Company
regarding shareholders' equity requirements under the Credit
Agreement (incorporated by reference to Exhibit 2.9 to the
Company's Annual Report on Form 20-F for the fiscal year ended
December 31, 2003).
2.4 Letter, dated February 16, 2004, from Israel Discount Bank to the
Company regarding revised repayment schedule and revised
shareholders' equity requirements under the Credit Agreement
(incorporated by reference to Exhibit 2.10 to the Company's
Annual Report on Form 20-F for the fiscal year ended December 31,
2003).
2.5 Letter, dated February 15, 2004, from Bank Hapoalim to the
Company regarding revised repayment schedule under the Credit
Agreement (incorporated by reference to Exhibit 2.11 to the
Company's Annual Report on Form 20-F for the fiscal year ended
December 31, 2003).
2.6 Letter, dated March 31, 2004, from Bank Hapoalim to the Company
regarding revised shareholders' equity requirements under the
Credit Agreement (incorporated by reference to Exhibit 2.12 to
the Company's Annual Report on Form 20-F for the fiscal year
ended December 31, 2003).
2.7 Sixth Amendment to Credit Agreement, dated December 15, 2004,
among Alba-Waldensian, Inc. and Bank Hapoalim, as Agent and
Lender, together with Term B Notes (incorporated by reference to
Exhibit 2.7 to the Company's Annual Report on Form 20-F for the
fiscal year ended December 31, 2004).
2.8 Loan Agreement, dated as of December 21, 2004, between Israel
Discount Bank and Hi-Tex Founded by Tefron Ltd (incorporated by
reference to Exhibit 2.12 to the Company's Annual Report on Form
20-F for the fiscal year ended December 31, 2004).
2.9 Loan Agreement, dated as of December 31, 2004, between Bank
Hapoalim and Hi-Tex Founded by Tefron Ltd (incorporated by
reference to Exhibit 2.13 to the Company's Annual Report on Form
20-F for the fiscal year ended December 31, 2004).
2.10 Loan Agreement, dated as of December 25, 2004, between Israel
Discount Bank and the Company (incorporated by reference to
Exhibit 2.14 to the Company's Annual Report on Form 20-F for the
fiscal year ended December 31, 2004).
2.11 Loan Agreement, dated as of December 31, 2004, between Bank
Hapoalim and the Company (incorporated by reference to Exhibit
2.15 to the Company's Annual Report on Form 20-F for the fiscal
year ended December 31, 2004).
2.12 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 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).
3.2 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).
4.1 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).
4.2 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).
4.3 Management and Services Agreement, effective as of July 30, 2003,
between the Company, Yosef Shiran and Shiran & Partners -
Consulting, Entrepreneurship, 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).
4.4 Letter, dated March 28, 2007, from General Counsel of Company to
Mr. Yosef Shiran re: amendments to Management and Services
Agreement.
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 Membership Interest Redemption Agreement, dated April 26, 2006,
by and between AlbaHealth, LLC and Tefron USA, Inc.
4.7 Subordination Agreement, dated April 26, 2006, by Tefron USA,
Inc. in favor of Suntrust Bank, in its capacity as administrative
agent for the lenders from time to time party to the Senior
Credit Agreement.
4.8 Unsecured Subordinated Promissory Note in the principal amount of
US $3 million, dated April 26, 2006, by AlbaHealth LLC. in favor
of Tefron USA, Inc.
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).
4.10 Amendment to Purchase Agreement, dated March 31, 2005, by and
between the Company and Norfet Limited Partnership (incorporated
by reference to Exhibit 4.11 to the Company's Annual Report on
Form 20-F for the fiscal year ended December 31, 2004).
4.11 Share Purchase Agreement, made as of March 3, 2004, by and
between Tefron and Leber Partners, L.P, including related
Registration Rights Agreement attached as a schedule
(incorporated by reference to Exhibit 4.10 to the Company's
Annual Report on Form 20-F for the fiscal year ended December 31,
2003).
4.12 Amendment to Agreement, dated March 31, 2005, by and between the
Company and Leber Partners, L.P (incorporated by reference to
Exhibit 4.13 to the Company's Annual Report on Form 20-F for the
fiscal year ended December 31, 2004).
4.13 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).
4.14 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).
4.15 Agreement, dated as of July 5, 2006, between Macpell Industries
Ltd. and the Company regarding the lease of properties.
4.16 Joint Venture Agreement, dated as of May 8, 2006, by and between
the Company, Langsha Knitting Co. Ltd. and Itochu Textile
Materials (Asia) Ltd.
8.1 List of subsidiaries of the Company.
12.(a).1 Certification by CEO pursuant to Rule 13a-14(a) or Rule 15d-14(a)
of the Securities Exchange Act of 1934, as adopted pursuant to
Section 302 of the Sarbanes Oxley Act of 2002.
12.(a).2
Certification by CFO pursuant to Rule 13a-14(a) or Rule 15d-14(a)
of the Securities Exchange Act of 1934, as adopted pursuant to
Section 302 of the Sarbanes Oxley Act of 2002.
13.(a).1 Certification of CEO and CFO pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
14.(a).1 Consent of Kost, Forer Gabbay & Kasierer, a member of Ernst &
Young Global.
14.(a).2 Consent of McGladrey & Pullen, LLP.