AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 13, 2006
--------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 20-F/A
AMENDMENT No. 1
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2004
COMMISSION FILE NUMBER 0-30020
DELTA GALIL INDUSTRIES LTD.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
ISRAEL
(JURISDICTION OF INCORPORATION OR ORGANIZATION)
2 Kaufman Street, Tel Aviv 68012, Israel
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
NONE
(Title of each class)
Securities registered or to be registered pursuant to Section 12(g) of the Act:
ORDINARY SHARES (1)
(Title of Class)
AMERICAN DEPOSITARY SHARES (2)
(Title of Class)
------------------
(1) Not for trading, but only in connection with the listing of the American
Depositary Shares.
(2) Evidenced by American Depositary Receipts, each American Depositary
Share representing one ordinary share, par value NIS 1.00 per share.
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 at the close of the period covered by the
annual report:
AS OF DECEMBER 31, 2004 THE REGISTRANT HAD 19,947,849 ORDINARY SHARES
OUTSTANDING (INCLUDING 1,206,802 ORDINARY SHARES OWNED BY THE REGISTRANT AND
45,882 ORDINARY SHARES HELD BY A TRUSTEE IN CONNECTION WITH THE REGISTRANT'S
STOCK OPTION PLANS).
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes __X__ No _______
Indicate by check mark which financial statement item the Registrant
elected to follow:
Item 17 _______ Item 18 __X__
--------------------------------------------------------------------------------
EXPLANATORY NOTE
Delta Galil Industries Ltd. is filing this amendment on Form 20-F/A to its Form
20-F ("Original Form 20-F") for the year ended December 31, 2004, originally
filed on June 27, 2005, to correct an error contained in the statement of cash
flows for the year ended December 31, 2004.
The error relates to the classification of a cash payment of $4.8 million in
fiscal 2004, relating to restructuring expenses recorded as part of the
acquisition of Auburn Hosiery Mills. The Company had incorrectly classified the
payment as a cash flow used in investing activities rather than cash flows used
in operating activities. The following table reflects the adjustments to the
statement of cash flows to correct this classification error:
AS REPORTED CORRECTION AS RESTATED
--------------- -------------- ---------------
In $ thousands
Cash flows from operating
activities $ 27,174 $ (4,800) $ 22,374
Cash flows from investing activities (73,689) 4,800 (68,889)
Cash flows from financing activities 50,836 - 50,836
Translation differences on cash and
cash equivalents 130 - 130
--------------- -------------- ---------------
Net increase in cash and cash
equivalents $ 4,451 - $ 4,451
=============== ============== ===============
No other financial statement items were affected by the correction of the
classification error.
Furthermore, the Company is amending the Original Form 20-F for the following
Items:
a) Amend Item 15 within the Original Form 20-F to clarify the
opinion of our Chief Executive Officer and of our Chief
Financial Officer with respect to the effectiveness of our
internal controls over financial reporting as of December 31
2004. We hereby replace Item 15 of the Original Form 20-F with
the amended Item 15 included in this Amendment No. 1;
b) Include a revised report of Kesselman & Kesselman dated April
11, 2006, on the Consolidated Financial Statements of Delta
Galil Industries Ltd., which includes a new note 16 relating to
events that occured after December 31, 2004;
c) Include a report of Baker Tilly dated April 10, 2006;
d) Include the revised report of Allied for Accounting & Auditing,
Member Firm of Ernst & Young Global, dated 30 March, 2006, that
refers to the standards of the Public Company Accounting
Oversight Board (United States); and
e) Amend Item 5 - Operating and Financial Review and Prospects to
reflect the restatement to the Consolidated Statement of Cash
Flows for the year ended December 31, 2004.
Except as otherwise expressly stated herein and to reflect the changes referred
to above, this amended annual report on Form 20-F/A speaks as of the filing date
of the Original Form 20-F, and does not purport to reflect events or
developments subsequent to the original filing date of the Original Form 20-F.
PART I
ITEM 5: OPERATING AND FINANCIAL REVIEW AND PROSPECTS
THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION WITH
DELTA GALIL'S CONSOLIDATED FINANCIAL STATEMENTS AND THE NOTES TO THOSE FINANCIAL
STATEMENTS INCLUDED IN ITEM 18 OF THIS ANNUAL REPORT. DELTA GALIL'S CONSOLIDATED
FINANCIAL STATEMENTS ARE PREPARED IN CONFORMITY WITH US GAAP.
LIQUIDITY AND CAPITAL RESOURCES
Delta Galil finances its operations mainly from cash flow from
operations, supplemented, if needed, by revolving short-term bank loans and
long-term bank loans. Delta Galil repays short-term bank loans if the cash flow
from operations exceeds the cash needs for operations and investment.
Following is a breakdown of Delta Galil's cash flows for the last three
years in US $ millions:
YEAR ENDED DECEMBER 31
------------------------------------
2002 2003 2004
---------- ---------- ----------
(RESTATED)
----------
Net cash flow provided by operating activities *............. $26.3 $42.9 $22.4
Net cash flow used in investing activities **................ (19.7) (18.4) (68.9)
Net cash flow provided by financing activities (excluding
dividends to shareholders and cost of acquisition of
treasury shares)............................................. 10.5 (11.8) 59.1
Dividends to shareholders.................................... (7.0) (9.5) (8.3)
Cost of acquisition of treasury shares....................... (8.4) - -
Translation differences on cash equivalents of foreign....... 0.1
currency consolidated subsidiary............................. - -
---------- ---------- ----------
Increase in cash and cash equivalents........................ $1.7 $3.2 $4.4
========== ========== ==========
* Net cash provided by operating activities has been decreased by $ 4.8
million due to a correction of an error in classification of payments made in
2004 relating to restructuring expenses recorded as part of the acquisition of
Auburn Hosiery Mills (see note 1A3 of the Notes to the Consolidated Financial
Statements).
** Net cash used in investing activities has been increased by $4,800
thousand due to the correction of an error in classification of payments made in
the year 2004, relating to restructuring expenses recorded as part of the
acquisition of Auburn Hosiery Mills (see note 1A3 of the Notes to the
Consolidated Financial Statements).
In 2002, 2003 and 2004 Delta Galil generated excess cash flow from
operations of $26.3 million, $42.9 million and $22.4 million respectively. The
decrease in net cash flow provided by operating activities from $42.9 million in
2003 to $22.4 million in 2004 is mainly attributed to the decrease in net
income. The increase in the net cash flow used in investing activities is mainly
attributed to the acquisition of Burlen in the fourth quarter of 2004. Net cash
flow used in financing activities in 2004 amounted to $59.1 million while in
2003 the net cash flow provided by financing activities amounted to $11.8
million. The decrease in cash flow used in financing activities is attributed
mainly to the increase in bank debt in connection with the acquisition of
Burlen.
PART II
ITEM 15: CONTROLS AND PROCEDURES
DISCLOSURE CONTROLS AND PROCEDURES. Delta Galil's Chief Executive
Officer and Chief Financial Officer have evaluated the effectiveness of its
disclosure controls and procedures as of the end of the period covered by this
Annual Report. Based upon such evaluation, the Chief Executive Officer and Chief
Financial Officer have concluded that Delta Galil had in place, as of the end of
the period covered by this Annual Report, effective controls and procedures
designed to ensure that information required to be disclosed by Delta Galil in
the reports it files or submits under the Securities Exchange Act of 1934, as
amended, and the rules thereunder, is recorded, processed, summarized and
reported within the time periods specified in the SEC's rules and forms.
INTERNAL CONTROLS. There have not been any change in Delta Galil's
internal control over financial reporting identified in connection with the
evaluation described above that occurred during the period covered by this
Annual Report that has materially affected or is reasonably likely to affect,
Delta Galil's internal control over financial reporting.
PART III
ITEM 17: FINANCIAL STATEMENTS
Not applicable
ITEM 18: FINANCIAL STATEMENTS
The Consolidated Financial Statements and related notes thereto required
by this item are contained on pages F-1 through F-54 hereof.
-4-
ITEM 19: EXHIBITS
(A) INDEX TO CONSOLIDATED FINANCIAL STATEMENTS PAGE
------------------------------------------ ----
Report of Independent Registered Public Accounting Firm............ F-2
Consolidated Statements of Income for the Years Ended
December 31, 2002, 2003 and 2004................................. F-3
Consolidated Balance Sheets at December 31, 2002 and 2003.......... F-4
Consolidated Statements of Changes in Shareholders' Equity for
the Years Ended December 31, 2002, 2003 and 2004................. F-6
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2002,2003 and 2004 (restated)....................... F-7
Notes to Consolidated Financial Statements......................... F-10
Reports of Independent Auditors with respect to consolidated
subsidiaries..................................................... F-56
(B) EXHIBITS
1.1 Memorandum of Association, as amended**
1.2 Articles of Association**
2.1 Form of Deposit Agreement and ADR*
4.1 Stock Purchase Agreement dated as of December 8, 2004 by and among
Steven Klein, Kristina Nettesheim, and Gary Beggs, as selling
shareholders and Delta Galil Industries Ltd. and Delta Galil USA Inc. as
Purchaser relating to the acquisition of Burlen Corp. + ******
4.2 Second Amended and Related Credit and Security Agreement dated as of
December 9, 2004 by and among Delta Galil USA Inc., as Borrower; Bank
Leumi USA and Bank Hapoalim B.M., as Lenders and Bank Leumi USA, as
Agent. ******
4.3 Agreement for Purchase and Sale of Stock of Auburn Hosiery Mills, Inc.
dated October 30, 2003, by and among Delta Galil USA Inc., Delta Galil
Industries Ltd., Delta Galil Holland B.V., CGW Holdings, Inc., GCI
Spainco, S.L. and Kellwood Company ****
4.4 Option Plan to 13 employees of Delta Galil and/or its subsidiaries*
4.5 Option Plan to Arnon Tiberg*
4.6 Option Plan to 70 employees of Delta Galil and/or its subsidiaries***
4.7 Delta Galil Industries Ltd. 2002 Share Option Plan*****
4.8 Form of Indemnification Undertaking******
8.1 List of subsidiaries ******
12.1 Section 302 Certification of Dov Lautman
12.2 Section 302 Certification of Yossi Hajaj
13.1 Section 906 Certification of Dov Lautman
13.2 Section 906 Certification of Yossi Hajaj
14.1 Consent of Kesselman & Kesselman
14.2 Consent of Baker Tilly
14.3 Consents of Allied for Accounting & Auditing, Member Firm of Ernst &
Young Global
------------------------------------
* Previously filed as an exhibit to Delta Galil's Registration Statement on Form
F-1 (Registration No. 333-10062) filed with the Securities and Exchange
Commission on February 26, 1999 and incorporated herein by reference.
** Previously filed as an exhibit to Delta Galil's Annual Report on Form 20-F
(File No.0-30020) filed with the Securities and Exchange Commission on June 8,
2001 and incorporated herein by reference
-5-
*** Previously filed as an exhibit to Delta Galil's Registration Statement on
Form S-8 (Registration No. 333-12608) filed with the Securities and Exchange
Commission on September 26, 2000 and incorporated herein by reference.
**** Previously filed as an exhibit to Delta Galil's Annual Report on Form 20-F
(File No. 0-30020) filed with the Securities and Exchange Commission on June 23,
2004 and incorporated herein by reference.
***** Previously filed as an exhibit to Delta Galil's Registration Statement on
Form S-8 (Registration No. 353-102247) filed with the Securities and Exchange
Commission on December 30, 2002 and incorporated herein by reference.
****** Previously filed as an exhibit to Delta Galil's Annual Report on Form
20-F (File No. 0-30020) filed with the Securities and Exchange Commission on
June 26, 2003 and incorporated herein by reference.
******* Previously filed as an exhibit to Delta Galil's Annual Report on Form
20-F (File No. 0-30020) filed with the Securities and Exchange Commission on
June 27, 2005 and incorporated herein by reference.
+Portions of this exhibit have been omitted and have been filed separately with
the secretary of the Securities and Exchange Commission pursuant to a
confidential treatment request.
-6-
SIGNATURE
The registrant hereby certifies that it meets all of the requirements
for filing on Form 20-F/A and that it has duly caused and authorized the
undersigned to sign this annual report on its behalf.
DELTA GALIL INDUSTRIES LTD.
By: Yossi Hajaj
-----------
Name: Yossi Hajaj
Title: Chief Financial Officer
Date: April 13, 2006
-7-
DELTA GALIL INDUSTRIES LTD.
(An Israeli corporation)
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 2004
DELTA GALIL INDUSTRIES LTD.
(An Israeli corporation)
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 2004
TABLE OF CONTENTS
PAGE
REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM F-2
CONSOLIDATED FINANCIAL STATEMENTS:
Statements of income F-3
Balance sheets F-4-F-5
Statements of changes in shareholders' equity F-6
Statements of cash flows F-7-F-9
Notes to financial statements F-10-F-55
Reports of Independent Auditors with respect to
consolidated subsidiaries F-55
The amounts are stated in U.S. dollars ($) in thousands.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the shareholders of
DELTA GALIL INDUSTRIES LTD.
We have audited the consolidated balance sheets of Delta Galil Industries Ltd.
(the "Company") and its subsidiaries as of December 31, 2004 and 2003 and the
consolidated statements of income, changes in shareholders' equity and cash
flows for each of the three years in the period ended December 31, 2004. These
financial statements are the responsibility of the Company's Board of Directors
and management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We did not audit the financial statements of certain subsidiaries, whose assets
included in consolidation constitute approximately 12% and 18% of total
consolidated assets as of December 31, 2004 and 2003, respectively, and whose
revenues included in consolidation constitute approximately 0%, 2% and 10% of
total consolidated revenues for the years ended December 31, 2004, 2003 and
2002, respectively. The financial statements of those subsidiaries were audited
by other independent registered public accounting firms, whose reports have been
furnished to us, and our Opinion, insofar as it relates to amounts included for
those companies, is based on the reports of the other independent registered
public accounting firms.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States of America) and with auditing
standards generally accepted in Israel, including those prescribed by the
Israeli Auditors (Mode of Performance) Regulations, 1973. Those standards
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by the Company's Board
of Directors and management, as well as evaluating the overall financial
statement presentation. We believe that our audits and the reports of the other
registered public accounting firms provide a reasonable basis for our opinion.
In our opinion, based on our audits and the reports of the other independent
registered public accounting firms, 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, 2004
and 2003, and the consolidated results of their operations, changes in
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 2004, in conformity with accounting principles generally
accepted in the United States of America.
As discussed in Note 1A.3 to the consolidated financial statements, the
consolidated statement of cash flows for the year ended December 31, 2004 has
been restated.
Tel-Aviv, Israel Kesselman & Kesselman
April 11, 2006 Certified Public Accountant (Isr.)
A member of PricewaterhouseCoopers
International Limited
F-2
DELTA GALIL INDUSTRIES LTD.
(An Israeli corporation)
CONSOLIDATED STATEMENTS OF INCOME
(U.S. dollars in thousands, except earnings per share)
YEAR ENDED DECEMBER 31
------------------------------------
2004 2003 2002
---------- ---------- ----------
NET REVENUES $654,269 $580,130 $567,298
COST OF REVENUES 533,036 463,863 454,211
---------- ---------- ----------
GROSS PROFIT 121,233 116,267 113,087
SELLING, MARKETING, GENERAL AND ADMINISTRATIVE EXPENSES - net 98,646 82,089 84,162
GAIN (LOSS) ON SALE OF ASSETS AND SUBSIDIARY SHARES 922 3,645 (92)
RESTRUCTURING EXPENSES 1,100 1,007 1,065
---------- ---------- ----------
OPERATING INCOME 22,409 36,816 27,768
FINANCIAL EXPENSES - net 6,231 5,637 5,456
OTHER INCOME - net 958 252 960
---------- ---------- ----------
INCOME BEFORE TAXES ON INCOME 17,136 31,431 23,272
TAXES ON INCOME 2,846 7,340 5,779
---------- ---------- ----------
14,290 24,091 17,493
SHARE IN PROFITS (LOSSES) OF ASSOCIATED COMPANIES - net (237) (300) 158
MINORITY INTERESTS, NET (1,368) (439) (1,025)
---------- ---------- ----------
NET INCOME $12,685 $23,352 $16,626
========== ========== ==========
EARNINGS PER SHARE:
Basic $0.69 $1.28 $0.88
========== ========== ==========
Diluted $0.67 $1.24 $0.88
========== ========== ==========
WEIGHTED AVERAGE NUMBER OF SHARES
(IN THOUSANDS):
Basic 18,478 18,313 18,914
========== ========== ==========
Diluted 18,834 18,763 18,927
========== ========== ==========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
F-3
DELTA GALIL INDUSTRIES LTD.
(An Israeli corporation)
CONSOLIDATED BALANCE SHEETS
(U.S. dollars in thousands)
DECEMBER 31
---------------------------
2004 2003
------------ ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $22,150 $17,699
Accounts receivable:
Trade 105,129 85,723
Other 10,627 10,662
Inventories 183,767 142,984
Deferred income taxes 3,675 5,464
Other investment , see note 3 1,682
------------ ------------
Total current assets 325,348 264,214
------------ ------------
INVESTMENTS AND LONG-TERM RECEIVABLES:
Associated company 455 661
Funds in respect of employee rights upon retirement 6,852 6,161
Long-term receivables, net of current maturities 226 419
------------ ------------
7,533 7,241
------------ ------------
PROPERTY, PLANT AND EQUIPMENT,
net of accumulated depreciation and amortization 128,341 124,877
------------ ------------
GOODWILL 57,920 54,358
------------ ------------
INTANGIBLE ASSET 14,778
------------ ------------
DEFERRED CHARGES, net of accumulated amortization 577 194
------------ ------------
Total assets $534,497 $450,884
============ ============
F-4
DELTA GALIL INDUSTRIES LTD.
(An Israeli corporation)
CONSOLIDATED BALANCE SHEETS
(U.S. dollars in thousands)
DECEMBER 31
---------------------------
2004 2003
------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term bank credit $55,603 $94,560
Current maturities of long-term bank loans and other liability 27,942 10,436
Accounts payable and accruals:
Trade 80,338 54,464
Other 34,083 48,142
------------ ------------
Total current liabilities 197,966 207,602
------------ ------------
LONG-TERM LIABILITIES:
Bank loans and other liability, net of current maturities 99,437 14,709
Liability for employee rights upon retirement 7,408 6,732
Deferred income taxes 4,894 6,300
------------ ------------
Total long-term liabilities 111,739 27,741
------------ ------------
COMMITMENTS AND CONTINGENT LIABILITIES, see note 9
Total liabilities 309,705 235,343
------------ ------------
MINORITY INTERESTS 3,711 3,207
------------ ------------
SHAREHOLDERS' EQUITY:
Ordinary shares of NIS 1 par value
December 31, 2004 and 2003:
Authorized - 26,000,000 shares;
Issued - 19,947,849 shares;
Issued and paid - 19,901,967 shares and 19,860,211 shares,
respectively 21,840 21,830
Additional paid-in capital 100,749 99,735
Retained earnings 108,980 104,607
Accumulated other comprehensive loss (788) (2,503)
Treasury shares, at cost (1,206,802 shares and 1,422,486 shares,
in December 31, 2004 and 2003, respectively) (9,700) (11,335)
------------ ------------
Total shareholders' equity 221,081 212,334
------------ ------------
Total liabilities and shareholders' equity $534,497 $450,884
============ ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
F-5
DELTA GALIL INDUSTRIES LTD.
(An Israeli corporation)
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(U.S. dollars in thousands)
SHARE CAPITAL ACCUMULATED
----------------------- ADDITIONAL OTHER TREASURY
NUMBER OF PAID-IN RETAINED COMPREHENSIVE SHARES,
SHARES PAR VALUE CAPITAL EARNINGS INCOME (LOSS) AT COST TOTAL
------------ ----------- ---------- --------- ---------------- --------- ----------
IN THOUSANDS
------------
BALANCE AT JANUARY 1, 2002 19,678 21,792 98,014 81,098 225 (2,940) $198,189
CHANGES DURING 2002:
Net income 16,626 16,626
Losses in respect of derivative
instruments designated as a
cash-flow hedge (net of related
taxes of $363,000) (808) (808)
Differences from translation of
foreign currency financial statements * *
Additional minimum pension liability
adjustment (net of related (823) (823)
taxes of $540,000)
Total comprehensive income 14,995
Exercise of employee stock options 2 * 16 16
Cash dividend ($0.37 per share) (6,976) (6,976)
Cost of acquisition of treasury shares (8,395) (8,395)
------------ ----------- ---------- --------- ---------------- --------- ----------
BALANCE AT DECEMBER 31, 2002 19,680 $21,792 $98,030 $90,748 $(1,406) $(11,335) $197,826
CHANGES DURING 2003:
Net income 23,352 23,352
Losses in respect of derivative
instruments designated as a
cash-flow hedge (net of related
taxes of $474,000) (1,134) (1,134)
Differences from translation of
foreign currency financial statements * *
Additional minimum pension liability
adjustment (net of related 37 37
taxes of $25,000)
Total comprehensive income 22,255
Exercise of employee stock options 181 38 1,387 1,425
Tax benefit in respect of employee
stock options exercised 318 318
Cash dividend ($0.52 per share) (9,493) (9,493)
------------ ----------- ---------- --------- ---------------- --------- ----------
BALANCE AT DECEMBER 31, 2003 19,861 $21,830 $99,735 $104,607 $(2,503) $(11,335) $212,334
CHANGES DURING 2004:
Net income 12,685 12,685
Gains in respect of derivative
instruments designated as a
cash-flow hedge (net of related
taxes of $798,000) 1,715 1,715
Differences from translation of
foreign currency financial statements 45 45
Additional minimum pension liability
adjustment (net of related taxes
of $30,000) (45) (45)
------
Total comprehensive income 14,400
Exercise of employee stock options 41 10 321 331
Tax benefit in respect of employee
stock options exercised 79 79
Reissuance of treasury shares on
acquisition of Burlen (see note 2a) 614 1,635 2,249
Cash dividend ($0.45 per share) (8,312) (8,312)
------------ ----------- ---------- --------- ---------------- --------- ----------
BALANCE AT DECEMBER 31, 2004 19,902 $21,840 $100,749 $108,980 $(788) $(9,700) $221,081
============ =========== ========== ========= ================ ========= ==========
* Less than $1,000.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
F-6
(Continued) - 1
DELTA GALIL INDUSTRIES LTD.
(An Israeli corporation)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(U.S. dollars in thousands)
YEAR ENDED DECEMBER 31
------------------------------------------
2004 2003 2002
------------ ------------ ------------
(as resated)
CASH FLOWS FROM OPERATING ACTIVITIES*:
Net income $12,685 $23,352 $16,626
Adjustments to reconcile net income to net cash provided by
operating activities:
Income and expenses not involving cash flows:
Minority interests in profits of subsidiaries - net 1,368 439 1,025
Share in losses (profits) of associated companies, net 237 300 (158)
Amounts carried to deferred charges (597) (146)
Depreciation and amortization 15,185 14,530 14,082
Write-down of other investments 634
Deferred income taxes - net (279) (3,555) 440
Restructuring expenses 1,310 194 414
Changes in accrued liability for employee rights upon
retirement 1,023 409 96
Loss (gain) on amounts funded in respect of employee
rights upon retirement (416) 214 624
Capital loss (gain) on sale of property, plant and equipment
and subsidiary shares (922) (3,645) 313
Capital gain from realization of other investment (958) (885) (960)
Erosion of long-term receivables (6) (30)
Exchange differences (erosion) of principal of long-term
bank loans - net (180) 1,043 28
------------ ------------ ------------
15,765 9,648 15,758
------------ ------------ ------------
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable 1,798 15,095 (10,493)
Increase (decrease) in accounts payable and accruals 12,204* (5,061) 4,425
Increase in inventories (20,078) (173) (35)
------------ ------------ ------------
(6,076) 9,861 (6,103)
------------ ------------ ------------
Net cash provided by operating activities - forward $22,374* $42,861 $26,281
------------ ------------ ------------
* Net cash provided by operating activities has been decreased by $4,800 thousand due to the correction of an error in
classification of payments made in the year 2004 relating to restructuring expenses recorded as part of the acquisition
of Auburn Hosiery Mills (see note 1A3).
F-7
(Continued) - 2
DELTA GALIL INDUSTRIES LTD.
(An Israeli corporation)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(U.S. dollars in thousands)
YEAR ENDED DECEMBER 31
------------------------------------------
2004 2003 2002
------------ ------------ ------------
(as restated)
Brought forward $22,374 $42,861 $26,281
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES**:
Acquisition of subsidiaries (1) (56,039) (10,101) (5,600)
Additional payment allocated to goodwill (6,700) (2,003)
Purchase of property, plant and equipment (13,484) (14,925) (17,728)
Investment grants relating to property, plant and equipment 1,074 1,099 1,591
Other investments (58) (17)
Proceeds from sale of property, plant and equipment 4,318 6,091 494
Proceeds from realization of other investment 2,640 2,567 2,480
Proceeds from sale of subsidiary shares 250
Associated company consolidated in previous years (2) (2)
Loans granted to employees (260) (350) (408)
Collection of employees loans 313 345 400
Long term loans granted (26) (221) (270)
Amounts funded in respect of employee rights upon
retirement - net (667) (1,157) (686)
------------ ------------ ------------
Net cash used in investing activities (68,889) (18,405) (19,746)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cost of acquisition of treasury shares (8,356)
Long-term bank loans and other long-term liabilities 119,000 11,000
Decrease in long-term loans and other long-term liabilities (10,430) (10,335) (10,391)
Dividend to the Company's shareholders (8,312) (9,493) (6,976)
Dividend to minority shareholders in a subsidiary (863) (778) (500)
Short-term bank credit - net (48,890) (2,067) 10,401
Proceeds from exercise of options granted to employees
and the company's CEO 331 1,425 16
------------ ------------ ------------
Net cash provided by (used in) financing activities 50,836 (21,248) (4,806)
------------ ------------ ------------
TRANSLATION DIFFERENCES ON CASH AND
CASH EQUIVALENTS OF FOREIGN
CURRENCY CONSOLIDATED SUBSIDIARY 130 *
------------ ------------ ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 4,451 3,208 1,729
CASH AND CASH EQUIVALENTS AT BEGINNING
OF YEAR 17,699 14,491 12,762
------------ ------------ ------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $22,150 $17,699 $14,491
============ ============ ============
* Less than $1,000.
(1), (2) See next page for details.
** Net cash used in investing activities has been increased by $4,800 thousand
due to the correction of an error in classification of payments made in the year
2004, relating to restructuring expenses recorded as part of the acquisition of
Auburn Hosiery Mills (see note 1A3).
F-8
(Concluded) - 3
DELTA GALIL INDUSTRIES LTD.
(An Israeli corporation)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(U.S. dollars in thousands)
YEAR ENDED DECEMBER 31
------------------------------------------
2004 2003 2002
------------ ------------ ------------
SUPPLEMENTARY DISCLOSURE OF CASH FLOW
INFORMATION - CASH PAID DURING THE
YEAR FOR:
Interest $4,133 $3,660 $3,870
============ ============ ============
Income taxes $3,169 $9,478 $6,748
============ ============ ============
(1) ACQUISITION OF SUBSIDIARIES, SEE ALSO NOTE 2:
Assets and liabilities of the subsidiaries upon acquisition:
Working capital (excluding cash and cash equivalents) $29,944 $2,091 $500
Long-lived assets 9,636 6,642 4,347
Intangible asset 14,778
Goodwill arising on acquisition 4,930 1,368 753
------------ ------------ ------------
59,288 10,101 5,600
------------ ------------ ------------
Reissuance of treasury shares 2,249
Amount payable 1,000
------------ ------------ ------------
Cash paid - net $56,039 $10,101 $5,600
============ ============ ============
(2) ASSOCIATED COMPANY PREVIOUSLY CONSOLIDATED:
Assets and liabilities of the subsidiary previously consolidated
Working capital (excluding cash and cash equivalents) $657
Fixed assets (2,511)
Long-term liabilities 435
Minority interest in subsidiaries 711
Investments in an associated company 710
------------
$2
============
SUPPLEMENTARY INFORMATION ON INVESTING ACTIVITIES NOT INVOLVING CASH FLOWS:
In 2004, 2003 and 2002, the net changes in outstanding balances of trade payables in respect of the purchase of property,
plant and equipment were an increase (decrease) of $ 0.1 million, $(1.1) million and $ 0.2 million, respectively.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
F-9
DELTA GALIL INDUSTRIES LTD.
(An Israeli corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES:
A. GENERAL:
1) Operations
Delta Galil Industries Ltd. (the "Company") is an
Israeli corporation which, together with its
subsidiaries (the "Group"), is engaged primarily in
manufacturing and marketing of intimate apparel, in five
reportable operating segments - Delta USA, U.S. upper
market, Europe, Socks and Delta marketing Israel. As to
the Group's segments and principal markets see note 15.
A significant portion of the Group's revenues derives
from three principal customers. See note 12a and 15c.
2) Accounting principles
The consolidated financial statements are prepared in
accordance with generally accepted accounting principles
("GAAP") in the United States of America.
3) Statement of cash flows - restatement
These financial statements have been amended to correct
an error in the statement of cash flows for the year
ended December 31, 2004. The error relates to the
classification of a payment of $4,800 thousand, made in
year 2004, relating to restructuring expenses recorded
as part of the acquisition of Auburn Hosiery Mills. The
Company is amending the Statement of cash flows to
reclassify this payment from cash flows used in
investing activities to cash flows used in operating
activities.
No other items were affected by the error referred to
above.
The following reflect the adjustment to the cash flow
statement for the year ended December 31, 2004:
AS REPORTED CORRECTION AS RESTATED
--------------- -------------- ---------------
In $ thousands
Cash flows from operating
activities $ 27,174 $ (4,800) $ 22,374
Cash flows from investing activities (73,689) 4,800 (68,889)
Cash flows from financing activities 50,836 - 50,836
Translation differences on cash and
cash equivalents 130 - 130
--------------- -------------- ---------------
Net increase in cash and cash
equivalents $ 4,451 - $ 4,451
=============== ============== ===============
4) Use of estimates in the preparation of financial
statements
The preparation of financial statements in conformity
with GAAP requires management to make estimates and
assumptions that affect the reported amounts of assets
and liabilities, and the disclosure of contingent assets
and liabilities at the dates of the financial
statements, and the reported amounts of revenues and
expenses during the reported years. Actual results could
differ from those estimates.
5) Functional currency
The currency of the primary economic environment in
which the operations of the Company and most of its
subsidiaries are conducted is the U.S. dollar (the
"dollar" or "$").
Since the U.S. dollar is the primary currency in the
economic environment in which the Company operates,
monetary accounts maintained in currencies other than
the dollar are remeasured using the representative
foreign exchange rate at the balance sheet date.
Operational accounts and non-monetary balance sheet
accounts are measured and recorded at the rate in effect
at the date of the transaction. The effects of foreign
currency remeasurement are recorded as financial income
or expenses as appropriate.
F-10
DELTA GALIL INDUSTRIES LTD.
(An Israeli corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (continued):
The functional currency of a subsidiary which was
acquired in 2003 (see also note 2c) and an associated
company is its local currency (EURO and NIS). The
financial statements of this subsidiary are included in
consolidation based on translation into dollars in
accordance with the principles set forth in Statement of
Financial Accounting Standard ("FAS") No. 52 issued by
the FASB: assets and liabilities are translated at year
end exchange rate, while operating results items are
translated at average exchange rates during the year.
Differences resulting from translation are presented in
shareholders' equity, under accumulated other
comprehensive income (loss).
B. PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of
the Company and all of its subsidiaries. In these financial
statements, "subsidiaries" are companies controlled to the
extent of over 50%, the financial statement of which are
consolidated with those of the Company. Significant intercompany
balances and transactions were eliminated in consolidation.
Profits from intercompany sales, not yet realized outside the
Group, have also been eliminated.
C. CASH EQUIVALENTS
The Group considers all highly liquid investments, which
composed of short-term bank deposits (up to three months from
date of deposit) that are not restricted as to withdrawal or
use, to be cash equivalents.
D. INVENTORIES
Inventories are valued at the lower of cost or market. Cost is
determined as follows:
Raw materials and supplies, packaging which is part of the
production line and maintenance materials - on the "moving
average" basis. Finished products and products in process -
direct cost of materials (on the "moving average" basis), labor
and an appropriate portion of indirect manufacturing costs.
E. INVESTMENTS IN AN ASSOCIATED COMPANY
An "associated company" is a company over which significant
influence is exercised, but which is not a consolidated
subsidiary. An associated company is accounted for by the equity
method.
F-11
DELTA GALIL INDUSTRIES LTD.
(An Israeli corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (continued):
F. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost, net of related
investment grants in the amount of $ 49.8 million and $ 49.2
million at December 31, 2004 and 2003, respectively. Fixed asset
leased by the Group under capital lease are classified as the
Group's asset and included at the present value of the minimum
lease payments as determined in the lease agreement.
Depreciation is computed by the straight-line method on the
basis of the estimated useful life of the assets, at the
following annual rates:
Buildings and plumbing 2%-7%
(mainly 4%)
Machinery and equipment 7%-25%
(mainly 7%)
Vehicles 15%-20%
(mainly 15%)
Office furniture and equipment 6%-25%
(mainly 7%)
Leasehold improvements are amortized by the straight-line method
over the lease period, which is shorter than the estimated
useful life of the improvements.
G. GOODWILL
Under FAS 142 "Goodwill and Other Intangible Assets", goodwill
is no longer amortized but tested for impairment at least
annually. The Company has selected September 30 of each year as
the date on which it will perform its annual goodwill impairment
test. No impairment resulted from the annual review performed in
the year ended December 31, 2004, 2003 and 2002.
H. DEFERRED CHARGES
Deferred charges represent mainly financing charges, which are
amortized over the credit period.
Amortization of deferred charges included among "financial
expenses, net" were $ 353 thousands, $ 250 thousands and $ 164
thousands, for the years ended December 31, 2004, 2003 and 2002,
respectively.
F-12
DELTA GALIL INDUSTRIES LTD.
(An Israeli corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (continued):
I. IMPAIRMENT IN VALUE OF LONG-LIVED ASSETS
Under FAS 144 "Accounting for the Impairment or Disposal of
Long- Lived Assets" ("FAS 144"), the Company reviews long-lived
assets, to be held and used, for impairment whenever events or
changes in circumstances indicate that the carrying amount of
the assets may not be recoverable. Under FAS 144, if the sum of
the expected future cash flows (undiscounted and without
interest charges) of the long-lived assets is less than the
carrying amount of such assets, an impairment loss would be
recognized, and the assets are written down to their estimated
fair values.
As for long - lived assets impairment, see note 12e.
J. DEFERRED INCOME TAXES
Deferred taxes are determined utilizing the asset and liability
method, based on the estimated future tax effect differences
between the financial accounting and tax bases of assets and
liabilities under the applicable tax laws. Deferred income tax
provisions and benefits are based on the changes in the deferred
tax assets or tax liabilities from period to period.
As stated in note 11a, a plant of an Israeli subsidiary has been
granted "approved enterprise" status and, accordingly, upon
distribution of dividends by this subsidiary to the Company,
such dividends may be subject to tax. In light of the Group's
policy not to cause distribution of dividends, which would
result in additional tax liabilities, any dividends received
from the abovementioned subsidiary will be distributed to the
Company's shareholders. Accordingly, no account has been taken
of the additional tax in respect of the above dividends. See
note 11a(1)(a).
The Group does not provide for an additional tax liability with
respect to the excess of the amount for financial reporting over
the tax basis of investments in non-Israeli subsidiaries, as the
Company does not expect such temporary differences to be
reversed in the foreseeable future.
K. TREASURY SHARES
Treasury shares held by the Company are presented as a reduction
of shareholders' equity, at their cost. The FIFO method was used
for the costing of the reissuance of treasury shares, and any
resulting gains (net of related tax) are credited to additional
paid in capital.
F-13
DELTA GALIL INDUSTRIES LTD.
(An Israeli corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (continued):
L. REVENUE RECOGNITION
Revenues from sales of products and supplies are recognized when
an arrangement (usually in the form of purchase order) exists,
delivery has occurred and title passed to the customer, the
company's price to the customer is fixed or determinable and
collectibility is reasonably assured.
Volume discounts due to customers are estimated based on the
terms of the agreements with the customers.
A reserve for sales returns is recorded based on historical
experience or specific identification of an event necessitating
a reserve.
M. CONCENTRATION OF CREDIT RISKS - ALLOWANCE FOR DOUBTFUL ACCOUNTS
The Group's cash and cash equivalents as of December 31, 2004
and 2003 were deposited Mainly with major banks in United States
of America, United Kingdom, Hungary and Egypt and in 2003 United
States of America, Israel, Hungary and Egypt. The Company is of
the opinion that the credit risk in respect of these balances is
remote.
A large part of the Group's sales is to 3 principal customers
(see also note 15c). The balance receivables from these
principal customers as of December 31, 2004 and 2003 were $
47,982 thousands and $ 51,297 thousands, respectively (see also
note 12a). The Group does not hold any collateral from these
customers; however, based on past experience with those
customers, the Group does not anticipate any difficulties in
collecting the above balances. The balance of the item "accounts
receivable - trade" is composed of a large number of customers.
An appropriate allowance for doubtful accounts is included in
the accounts in respect of specific debts doubtful of
collection. The bad debt income (expenses) and allowance charged
to expenses, for the years ended December 31, 2004, 2003 and
2002 aggregated $ 950 thousands, $ 309 thousands and $ (3,558)
thousands, respectively.
N. SHIPPING AND HANDLING COSTS
The Group's shipping and handling costs are included under
selling and marketing expenses in the consolidated statements of
income. Shipping and handling costs for the years ended December
31, 2004, 2003 and 2002 were approximately $ 20 million, $ 17
million and $ 18 million, respectively.
O. ADVERTISING COSTS
These costs are expensed as incurred. Advertising costs for the
years ended December 31, 2004, 2003 and 2002 were $ 2.1 million,
$ 1.9 million and $ 2.5 million, respectively.
F-14
DELTA GALIL INDUSTRIES LTD.
(An Israeli corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (continued):
P. STOCK BASED COMPENSATION
Stock options granted to employees are accounted for under the
recognition and measurement principles of APB No. 25,
"Accounting for Stock Issued to Employees", and related
interpretations. Under APB 25, compensation cost for employee
stock option plans is measured using the intrinsic value based
method of accounting.
Accordingly, the difference, if any, between the quoted market
price of the ordinary shares on the date of grant of the options
and the exercise price of such options is amortized by the
accelerated amortization method, against income, over the
expected service period (up to four years).
FAS 123, "Accounting for Stock-Based Compensation", established
a fair value based method of accounting for employee stock
options or similar equity instruments, and encourages adoption
of such method for stock compensation plans. However, it also
allows companies to continue to account for those plans using
the accounting treatment prescribed by APB 25. The Company has
elected to continue accounting for employee stock option plans
under APB 25, and has accordingly complied with the disclosure
requirements set forth in FAS 123, as amended by FAS 148, for
companies electing to apply APB 25, (see also note 1t).
The following table illustrates the effect on net income and
earnings per share assuming the Company has applied the fair
value recognition provisions of FAS 123 to its stock-based
employee compensation:
YEAR ENDED DECEMBER 31
------------------------------------------
2004 2003 2002
------------ ------------ ------------
$ IN THOUSANDS
(EXCEPT PER SHARE DATA)
------------------------------------------
Net income, as reported $ 12,685 $ 23,352 $ 16,626
Add - stock-based employee compensation
expense include in reported net income
net of related tax effect
Less - stock-based employee compensation
expense determined under fair value method,
net of related tax effect (690) (1,384) (1,359)
------------ ------------ ------------
Pro forma net income $11,995 $ 21,968 $ 15,267
============ ============ ============
Earnings per share:
Basic - as reported $ 0.69 $ 1.28 $ 0.88
Basic - pro forma $ 0.65 $ 1.20 $ 0.81
Diluted - as reported $ 0.67 $ 1.24 $ 0.88
Diluted - pro forma $ 0.64 $ 1.17 $ 0.81
F-15
DELTA GALIL INDUSTRIES LTD.
(An Israeli corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (continued):
The fair value of options granted during 2004, 2003 and 2002 was
$452 thousands, $72 thousands and $1,700 thousands,
respectively. The fair value of each option granted is estimated
on the date of grant using the Black & Scholes option-pricing
model, with the following weighted average assumptions:
2004 2003 2002
------------ ------------ ------------
Dividend yield 3.5% 5% 5%
============ ============ ============
Expected volatility 28.00% 27.33% 30.94%
============ ============ ============
Risk-free interest rate 4% 1% 2%
============ ============ ============
Expected life - in years 4.25 4.25 5.58
============ ============ ============
Q. EARNINGS PER SHARE
Basic earnings per share are computed by dividing net income by
the weighted average number of shares outstanding during the
year, net of treasury shares.
Diluted earnings per share are computed by dividing net income
by the weighted average number of shares outstanding during the
year, net of treasury shares, taking into account the potential
dilution that could occur upon the exercise of options granted
under employee stock option plans, using the treasury stock
method.
R. DERIVATIVES
The Company enters into forward exchange contracts to hedge the
cash flows resulting from sales of products, salaries and wages,
in currencies other than the functional currency. The Company
does not hold derivative financial instruments for trading
purposes.
Under FAS 133 "Hedging Activities", all derivatives are
recognized on the balance sheet at their fair value. On the date
that the Company enters into a derivative contract, it
designates the derivative for accounting purposes, as: (1)
hedging instrument, or (2) non-hedging instrument.
For derivative financial instruments that are designated and
qualify as a cash flow hedge, the effective portions of changes
in fair value of the derivative are recorded in other
comprehensive income (loss), under "Gains or losses in respect
of derivative instruments designated as a cash-flow hedge , net
of related tax" and are recognized in the income statement when
the hedged item affects earnings. Ineffective portions of
changes in the fair value of cash flow hedges are recognized
immediately in income among financial expenses. Changes in the
fair value of derivatives that do not qualify for hedge
accounting are recognized in income among financial expenses.
Cash flows from derivatives that qualify as a cash flow hedge
are recognized in the statements of cash flows in the same
category as that of the hedged item.
F-16
DELTA GALIL INDUSTRIES LTD.
(An Israeli corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (continued):
S. COMPREHENSIVE INCOME
In addition to net income, other comprehensive income (loss)
includes gains or losses in respect of derivative instruments
designated as cash-flow hedge, net of related taxes, differences
from translation of foreign currency financial statements of a
subsidiary and an associated company and additional minimum
pension liability adjustments, net of related taxes.
T. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS:
1) FAS 123 (revised 2004) Share-based Payment
In December 2004, the Financial Accounting Standards
Board ("FASB") issued the revised Statement of Financial
Accounting Standards ("FAS") No. 123, Share-Based
Payment (FAS 123R), which addresses the accounting for
share-based payment transactions in which the company
obtains employee services in exchange for (a) equity
instruments of the company or (b) liabilities that are
based on the fair value of the company's equity
instruments or that may be settled by the issuance of
such equity instruments .In March 2005, the SEC issued
Staff Accounting Bulletin No. 107 (SAB 107) regarding
the SEC's interpretation of FAS 123R.
FAS 123R eliminates the ability to account for employee
share-based payment transactions using APB Opinion No.
25 - "Accounting for Stock Issued to Employees", and
requires instead that such transactions be accounted for
using the grant-date fair value based method. This
Statement will be effective for public companies at the
beginning of their next fiscal year that begins after
June 15, 2005 (first quarter of 2006 for the Company).
Early adoption of FAS 123R is encouraged. This Statement
applies to all awards granted or modified after the
Statement's effective date. In addition, compensation
cost for the unvested portion of previously granted
awards that remain outstanding on the Statement's
effective date shall be recognized on or after the
effective date, as the related services are rendered,
based on the awards' grant-date fair value as previously
calculated for the pro-forma disclosure under FAS 123.
The company estimates that there will not be any
cumulative effect of adopting FAS 123R, as of its
adoption date by the company (1 January 2006), based on
the awards outstanding as of December 31, 2005. This
estimate does not include the impact of additional
awards, which may be granted, or forfeitures, which may
occur subsequent to December 31, 2005 and prior to the
adoption of FAS 123R.
The Company expects that upon the adoption of FAS 123R,
as of January 1, 2006, the Company will apply the
modified prospective application transition method, as
permitted by the Statement. Under such transition
method, upon the adoption of FAS 123R, the Company's
financial statements for periods prior to the effective
date of the Statement will not be restated. Compensation
expense for outstanding awards for which the requisite
service had not been rendered as of the effective date
will be recognized over the remaining service period
using the compensation cost calculated for pro-forma
disclosure purposes under FAS 123.
The company does not expect this statement to have a
material effect on the company's financial statements or
its result of operations in future periods.
2) FAS 151 Inventory Costs - an amendment of ARB 43,
Chapter 4 In November 2004, the FASB issued FAS No. 151,
"Inventory Costs - an Amendment of ARB 43, Chapter 4"
("FAS 151"). This Statement amends the guidance in ARB
No. 43, Chapter 4, "Inventory Pricing", to clarify the
accounting for abnormal amounts of idle facility
expense, freight, handling costs, and wasted material.
This Statement requires that those items be recognized
as current-period charges. In addition, this Statement
requires that allocation of fixed production overheads
to the costs of conversion be based on the normal
capacity of the production facilities. This Statement
will be effective for inventory costs incurred during
fiscal years beginning after June 15, 2005 (January 1,
2006 for the company). Earlier application of FAS 151 is
permitted. The provisions of this Statement shall be
applied prospectively. The company does not except this
statement to have a material effect on the company's
financial statements, its results of operations or cash
flows.
3) FAS 154 Accounting Changes and Error Corrections - a
replacement of Accounting Principles Board Opinion
("APB") No. 20 and FASB Statement No. 3.
In June 2005, the Financial Accounting Standards Board
issued FAS No. 154, "Accounting Changes and Error
Corrections - a replacement of APB Opinion No. 20 and
FASB Statement No. 3". This Statement generally requires
retrospective application to prior periods' financial
statements of changes in accounting principle.
Previously, Opinion No. 20 required that most voluntary
changes in accounting principle were recognized by
including the cumulative effect of changing to the new
accounting principle in net income of the period of the
change. FAS 154 applies to all voluntary changes in
accounting principle. It also applies to changes
required by an accounting pronouncement in the unusual
instance that the pronouncement does not include
specific transition provisions. When a pronouncement
includes specific transition provisions, those
provisions should be followed. This Statement shall be
effective for accounting changes and corrections of
errors made in fiscal years beginning after December 15,
2005 (January 1, 2006 for the company). The Company does
not expect the adoption of this statement will have a
material impact on the Company's results of operations,
financial position or cash flows.
F-17
DELTA GALIL INDUSTRIES LTD.
(An Israeli corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (continued):
4) In December 2004, the FASB issued FAS No. 153,
"Exchanges of Non-monetary Assets - An Amendment of APB
Opinion No. 29" (FAS 153). FAS 153 amends APB Opinion
No. 29, "Accounting for Non-monetary Transactions"
(Opinion 29). The amendments made by FAS 153 are based
on the principle that exchanges of non-monetary assets
should be measured based on the fair value of the assets
exchanged. Further, the amendments eliminate the
exception for non-monetary exchanges of similar
productive assets and replace it with a general
exception for exchanges of non-monetary assets that do
not have commercial substance. The provisions in FAS 153
are effective for non-monetary asset exchanges occurring
in fiscal periods beginning after June 15, 2005 (July 1,
2005 for the Company). Early application of the FAS 153
is permitted. The provisions of this Statement shall be
applied prospectively. The Company does not expect the
adoption of FAS 153 to have a material effect on the
Company's financial statements or its results of
operations.
5) FAS 155
In February 2006, the FASB issued FAS 155, accounting
for certain Hybrid Financial Instruments, an amendment
of FASB statements No.133 and 140. This statement
permits fair value measurement for any hybrid financial
instrument that contains an embedded derivative that
otherwise would require bifurcation. This statement is
effective for all financial instruments acquired or
issued after the beginning of an entity's first fiscal
year that begins after September 15, 2006. Earlier
adoption is permitted as of the beginning of an entity's
fiscal year, provided that no interim period financial
statements have been issued for the financial year.
Management is currently evaluating the impact of this
statement, if any, on the Company's financial statements
or its results of operations.
6) FAS 156
In March 2006 the Financial Accounting Standards Board
(the "FASB") issued Statement of Financial Reporting No.
156 ("SFAS 156"). This Statement amends FASB Statement
No. 140, Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities,
with respect to the accounting for separately recognized
servicing assets and servicing liabilities, and is
effective for financial periods beginning after
September 15, 2006. The Company does not currently
engage in transfers of financial fixed assets and
accordingly does not anticipate that the adoption of
this statement will have a material impact on its
financial statements.
F-18
DELTA GALIL INDUSTRIES LTD.
(An Israeli corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (continued):
U. RECLASSIFICATIONS
Certain figures in respect of prior years have been reclassified
to conform with the current year presentation.
NOTE 2 - ACQUISITIONS AND OTHER TRANSACTIONS ACQUISITIONS:
The acquisitions described bellow have all been accounted for by the
purchase method. The consideration for each acquisition was attributed
to net assets on the basis of the fair value of assets acquired and
liabilities assumed.
A. ACQUISITION OF BURLEN INC. (BURLEN) - IN 2004
On December 8, 2004, the Company acquired, through a wholly
owned subsidiary all of the shares of Burlen, a privately held
U.S. company, which is engaged in the development, production
and marketing of ladies' intimate apparel.
The Burlen acquisition is another step in the Company's strategy
to increase its intimate apparel category of the mass market by
exploiting the synergies between Burlen's operations and the
Company's existing activities. This acquisition is expected to
strengthen the Company's position in the mass market.
The acquisition price amounted to $ 59.6 million from which $
56.4 million was paid in cash (including $ 8.2 million paid to a
bank for discharge of a loan) and $ 2.2 million in ordinary
shares comprised of 215,684 ordinary shares reissued from
treasury shares, based on a price per share of $ 10.43.
Acquisition costs accrued to $ 1.0 million would be paid in
2005.
F-19
DELTA GALIL INDUSTRIES LTD.
(An Israeli corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 2 - ACQUISITIONS AND OTHER TRANSACTIONS ACQUISITIONS (continued):
In addition, under the agreement the Company may pay additional
amount to the selling shareholders, subject to achieving certain
revenues and operating profit targets over a period of 3 years,
2005-2007. The additional consideration, will be recorded as
additional goodwill.
Other intangible asset acquired, which amounted to $ 14.8
million, represents customer relations and is amortized over a
period of 20 years. The excess of cost of acquisition over the
fair value of net assets, on acquisition date - $ 3.9 million -
was allocated to goodwill and included as part of Delta USA
segment . Goodwill and customer relations are deductible for tax
purposes. The following table summarizes the estimated fair
values of the assets acquired and liabilities assumed at the
date of acquisition:
At December 8, 2004 (in thousands)
Cash and cash equivalents $2,605
Account receivable - trade 20,577
Account receivable - Other 117
Inventories 19,677
Intangible asset 14,778
Property, plant, and equipment 7,805
Goodwill 3,873
--------------
Total assets acquired $69,432
==============
Short-term bank credit 3,038
Accounts payable - trade 4,341
Accounts payable - Other 2,452
--------------
Net assets acquired $59,601
==============
As to proforma result, see note d below.
F-20
DELTA GALIL INDUSTRIES LTD.
(An Israeli corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 2 - ACQUISITIONS AND OTHER TRANSACTIONS (continued):
B. ACQUISITION OF MANUFACTURING PLANT IN THAILAND (THAILAND) - IN
2004
In December 2004 the Company acquired a manufacturing facility
in Thailand for a total consideration of $2.4 million. From the
said amount $0.9 million was paid for the shares and $0.8
million to pay off debt to the former shareholders. In addition,
the Company assumed bank debt of $0.7 million. The acquired
manufacturing facility in Thailand constitute a "business" under
EITF 98-3 - "Determining Whether a Nonmonetary Transaction
Involves Receipt of Productive Assets or of a Business".
The main strategy for the Thailand plant acquisition is to
reduce the sewing cost. The excess of cost of acquisition over
the fair value of net assets on acquisition date approximately -
$1.0 million - was allocated to goodwill.
At December 31, 2004 (in thousands)
Cash and cash equivalent $61
Account receivable - trade 1,025
Account receivable - Other 34
Inventories 1,381
Property, plant, and equipment 1,831
Goodwill 1,057
--------------
Total assets acquired $5,389
==============
Short-term bank credit 601
Accounts payable - trade 528
Accounts payable - Other 1,776
Long term debt 131
--------------
Net assets acquired $2,353
==============
F-21
DELTA GALIL INDUSTRIES LTD.
(An Israeli corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 2 - ACQUISITIONS AND OTHER TRANSACTIONS (continued):
C. ACQUISITION OF AUBURN HOSIERY MILLS ("AUBURN") - IN 2003
In November 2003, the Company acquired, through wholly owned
subsidiaries from Kellwood inc. ("the seller") all of the shares
of its two private held U.S. and Irish companies, which are
engaged in the operations of design, development, manufacture,
sourcing, marketing, distribution and sale of socks. The
functional currency of the Irish operation is its local currency
- the Euro.
The Group paid $10.8 million in cash to the seller.
The following table summarizes the estimated fair values of the
assets acquired and liabilities assumed at the date of
acquisition. The excess of cost of acquisition over the fair
value of net assets on acquisition date approximately $ 1.4
million - was initially allocated to goodwill.
At November 13, 2003 (in thousands)
Cash and cash equivalents $699
Account receivable - trade 5,754
Account receivable - other 700
Inventories 9,448
Property, plant, and equipment 6,642
Goodwill 1,368*
--------------
Total assets acquired $24,611
==============
Short-term bank credit $213
Accounts payable 7,435
Accrued expenses - restructuring costs 6,163*
--------------
Net assets acquired $10,800
==============
*In 2003 the Company recorded liabilities in respect of
restructuring costs in an amount of $6.2 million, which includes
approximately $2.2 million for severance pay and related costs
and $ 4.0 million for costs associated with the shut down of
certain acquired facilities. An amount of $4.8 million was paid
during 2004, $2 million related to grants, $2.3 million related
to employees, $0.1 million related to property, plant and
equipment and $0.4 million related to manufacturing and others.
F-22
DELTA GALIL INDUSTRIES LTD.
(An Israeli corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 2 - ACQUISITIONS AND OTHER TRANSACTIONS (continued):
During 2004 the Company finalized the restructuring plan and
liabilities in respect of restructuring costs, which results in
a decrease of $1.9 million on the excess of cost of acquisitions
over the fair value of net assets on acquisition date. The said
decrease was allocated $ 1.4 million to the goodwill (which off
set the entire goodwill initially recognized) and $ 0.5 million
to property, plant and equipment.
D. Hereafter are certain unaudited pro forma combined income data
assuming that the acquisition of Burlen had occurred on January
1, 2004 and 2003, respectively, and the acquisition of Auburn
had occurred on January 1, 2003 and 2002, respectively. The
unaudited pro forma financial information is not necessarily
indicative of the combined results that would have been attained
had the acquisitions of Burlen and Auburn occurred as of January
1, 2004 and 2003, and 2003 and 2002, respectively, nor is it
necessarily indicative of future results.
YEAR ENDED DECEMBER 31
------------------------------------------
2004 2003 2002
------------ ------------ ------------
IN THOUSANDS
------------------------------------------
(EXCEPT EARNINGS PER SHARE)
------------------------------------------
(UNAUDITED)
Net Revenues $763,375 $721,172 $626,732
============ ============ ============
Net Income $19,853 $24,664 $16,079
============ ============ ============
Earning per share - Basic $1.06 $1.33 $0.85
============ ============ ============
Earning per share - Diluted $1.04 $1.30 $0.85
============ ============ ============
E. ACQUISITION OF THE OPERATIONS OF KOMAR TEXTILE TRADING CO. LTD.
("KOMAR") - IN 2002
In November 2002 the Company purchased some of the operations of
Komar, a privately held Hungarian company. Komar is engaged in
production of baby-wear. The purchase price - $ 5,600 thousands
was paid in cash. The excess of cost of acquisition over the
fair value of net assets on acquisition date - $ 753 thousands -
was allocated to goodwill, which is included as part of the
Europe segment. Goodwill is not deductible for tax purposes.
During the fourth quarter of 2004 the group has decided to close
the logistic center, and included $ 1.5 million restructuring
expenses, of which $ 0.4 million is included in cost of
revenues. See also note 12e.
F. ACQUISITION OF INNER SECRETS INC. ("INNER") - IN 2001
In January 2001, the Company acquired, through a wholly owned
subsidiary - Wundies Industries Inc. ("the acquiring company"),
all of the shares of Inner, a privately held U.S. company, which
is engaged in the development, production and marketing of
ladies' intimate apparel.
F-23
DELTA GALIL INDUSTRIES LTD.
(An Israeli corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 2 - ACQUISITIONS AND OTHER TRANSACTIONS (continued):
The acquisition price was paid as follows: 85% in cash and 15%
in Company shares. In addition, the acquisition price was set to
be four times Inner's earnings before interest, income taxes,
depreciation and amortization ("EBITDA"), subject to certain
adjustments, for the year ended December 31, 2000, but after
deducting liabilities to banks and other loans as of December
31, 2000.
In addition, in case the EBITDA of both the acquired company and
the acquiring company for the year 2002 will be higher than the
EBITDA of both companies for the year 2000 by at least $ 4
million, the sellers will be entitled to an additional cash
payment, of an amount not exceeding 50% of the EBITDA of the
acquired company for the year 2000 (hereafter - "the performance
payment"), in accordance with certain adjustments. In case the
sellers' entitlement to full performance payment will not be in
accordance with the 2002 results, the sellers will be entitled
to receive the rest of the performance payment, in accordance
with the agreement, considering the 2003 results. In any case,
the sellers will not be entitled to an over-all payment that
exceeds the performance payment. Such additional payment will be
paid in cash and will be recorded when earned as additional
purchase price.
During 2001 the Company paid $ 48.7 million in cash (including $
14.4 million paid to a bank for discharge of a loan) and $ 5.9
million in 454,020 Company shares, based on a price per share of
$ 13.05. During 2003 and 2004 the Company paid an additional $
2.0 million and $ 6.7 million in cash, respectively, as an
adjustment to the purchase price. The payments were allocated to
goodwill.
In 2003 the purchase price was finalized and the total goodwill
amount, resulted from the acquisition, was $ 24.3 million, which
is included as part of Delta USA segment. Goodwill is not
deductible for tax purposes.
OTHER TRANSACTION:
SALE OF SUBSIDIARY'S SHARES
In August 2002, Delta Galil signed an agreement for the sale of
10% of its wholly-owned subsidiary, in consideration of $250
thousands.
During March 2003 the Company received the payment, transferred
the shares and as a result recognized a gain in an amount of $
109 thousands.
According to the agreement the buyer has an option to purchase
additional shares of the subsidiary on terms to be agreed at a
later stage. The option shall remain in effect for a period of
36 months from the date of agreement.
F-24
DELTA GALIL INDUSTRIES LTD.
(An Israeli corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 3 - OTHER INVESTMENT AND INVESTMENT IN AN ASSOCIATED COMPANY
A. SALE OF INVESTMENT IN STANDARD TEXTILE EUROPE LTD. ("STE") -
OTHER INVESTMENT
On August 4, 2000, a subsidiary signed an agreement for the sale
of its investment in STE, which was an associated company (till
January 2003), for $ 9 million, which bears interest of LIBOR
plus 1.5% per year.
The transaction was carried out in four equal batches, in the
years 2004, 2003, 2002 and 2000. The capital gains recorded in
the years 2004, 2003 and 2002 were $958 thousands, $885
thousands and $ 960 thousands, respectively, and were classified
to "Other Income - net".
B. EDOMIT LTD. ("EDOMIT") - AN ASSOCIATED COMPANY
The Company holds 50% of the shares in Edomit. The Company's
investment in Edomit is accounted for by the equity method.
The balance of the investment in Edomit as of December 31, 2004
and 2003 is $ 455 thousands and $ 661 thousands, respectively.
As of December 31, 2004 and 2003 these balances include a loan
in the amount of $ 446 and $ 417, respectively. The loan is
linked to the Israeli CPI and bears no interest.
NOTE 4 - LONG-TERM RECEIVABLES
Long-term receivables represent long-term loans to employees -
mainly linked to the Israeli consumer price index ("CPI") and
bearing interest at the rate of 4%.
These balances are mature in the following years after balance
sheet dates:
DECEMBER 31
---------------------------
2004 2003
------------ ------------
IN THOUSANDS
---------------------------
First year - current maturities $193 $512
------------ ------------
Second year 204 362
Third year 14 36
Fourth year 5 21
Fifth year 3
------------ ------------
$226 $419
------------ ------------
$419 $931
============ ============
F-25
DELTA GALIL INDUSTRIES LTD..
(An Israeli corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 5 - PROPERTY, PLANT AND EQUIPMENT:
A. Composition of property, plant and equipment, grouped by major
classifications, is as follows:
DECEMBER 31
---------------------------
2004 2003
------------ ------------
IN THOUSANDS
---------------------------
Land, buildings and plumbing, see b. below* $41,706 $38,688
Machinery and equipment 134,873 128,050
Vehicles, office furniture and equipment
and leasehold improvements 46,729 43,484
------------ ------------
223,308 210,222
Less - accumulated depreciation and amortization (94,967) (85,345)
------------ ------------
$128,341 $124,877
============ ============
* Including building leased under capital lease -
(see note 1f):
Cost $1,414 $1,414
Less - accumulated depreciation 409 315
------------ ------------
$1,005 $1,099
============ ============
In 2003 the Group recorded a $3.5 millions capital gain from sale of
real estate in London.
B. LAND AND BUILDINGS
Part of the buildings of the Company stand on land leased from
the Israel Lands Administration for periods expiring in the
years 2016-2037. The leasehold rights have not yet been
registered in the Land Registry.
C. Investment projects of the Company and its subsidiary have been
approved by the Israeli Investment Center, under the Law for the
Encouragement of Capital Investments, 1959. The balance of
uncompleted investments as of December 31, 2004 aggregates $ 6.4
million.
D. Depreciation and amortization in respect of property, plant and
equipment totaled $ 14.8 , $14.3 and $ 13.9 million in the year
ended December 31, 2004, 2003 and 2002 (excluding impairment of
assets relating to restructuring, see note 12e).
E. As to pledges on assets, see notes 8d and 11a.
F-26
DELTA GALIL INDUSTRIES LTD.
(An Israeli corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 6 - GOODWILL:
Changes in goodwill during the year:
YEAR ENDED DECEMBER 31, 2004
-------------------------------------------------------------
IN THOUSANDS
-------------------------------------------------------------
US UPPER
DELTA USA MARKET EUROPE SOCKS TOTAL
------------- ------------ -------- --------- ---------
Goodwill at beginning of year $ 46,732 $2,119 $ 753 $ 4,754 $ 54,358
Changes during the year:
Goodwill arising from
acquisition of
subsidiaries, see notes 2a
and 2b 3,873 1,057 4,930
Adjustment to purchase price,
see note 2c (1,368) (1,368)
------------- ------------ -------- --------- ---------
Goodwill at end of year $ 50,605 $2,119 $1,810 $ 3,386 $ 57,920
============= ============ ======== ========= =========
YEAR ENDED DECEMBER 31, 2004
-------------------------------------------------------------
IN THOUSANDS
-------------------------------------------------------------
US UPPER
DELTA USA MARKET EUROPE SOCKS TOTAL
------------- ------------ -------- --------- ---------
Goodwill at beginning of year $ 40,032 $2,119 $ 753 $ 3,386 $ 46,290
Changes during the year:
Goodwill arising from
Acquisition of operations,
see note 2c 1,368 1,368
Adjustment to purchase
price, see note 2f 6,700 6,700
------------- ------------ -------- --------- ---------
Goodwill at end of year $ 46,732 $2,119 $ 753 $ 4,754 $ 54,358
============= ============ ======== ========= =========
F-27
DELTA GALIL INDUSTRIES LTD.
(An Israeli corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 7 - EMPLOYEE RIGHTS UPON RETIREMENT:
A. Employee related obligations are composed as follows:
B.
DECEMBER 31
---------------------------
2004 2003
------------ ------------
IN THOUSANDS
---------------------------
Accrued severance pay $6,076 $5,442
Obligation in respect of
defined benefit plans 1,332 1,290
------------ ------------
$7,408 $6,732
============ ============
As of December 31, 2004 and 2003, the Group had deposits of $
5.7 million and $ 5.1 million, respectively, with funds managed
by major Israeli insurance companies, which are earmarked by
management to cover the severance pay liability in respect of
Israeli employees. Under FAS No. 132, "Employers Disclosures
About Pensions and Other Post Retirement Benefits", such
deposits are not considered to be "plan assets".
Costs of pension and severance pay charged to income in the
years ended December 31, 2004, 2003 and 2002 were $ 6.9 million,
$ 7.0 million and $ 6.5 million respectively (in 2004, 2003 and
2002, excluding $ 190 thousands, $ 850 thousands and $ 651
thousands, respectively, relating to the termination of
employment, which were charged to restructuring expenses, see
note 12e).
The profit (loss) from deposits in respect of severance pay were
$ 416 thousands, $(214) thousands and $(624) thousands in the
years ended December 31, 2004, 2003 and 2002, respectively.
The main terms of the various arrangements with employees are
described in b. below. Further details relating to defined
benefit plans, as required by FAS 132, are presented in b and c
below.
B. TERMS OF ARRANGEMENTS:
1) The Company and Israeli subsidiaries
Israeli law generally requires payment of severance pay
and/or pensions upon dismissal of an employee or upon
termination of employment in certain other
circumstances. The following principal plans relate to
employee rights upon retirement, as applicable to
Israeli companies in the Group:
a) Pension plans for the majority of the Group's
employees - under collective labor agreements,
these external pension plans cover the severance
pay liability. The pension and severance pay
liabilities covered by these plans are not
reflected in the financial statements as the
pension and severance pay risks have been
irrevocably transferred to the pension funds.
b) Insurance policies for employees in managerial
positions - these policies provide coverage for
severance pay and pension liabilities of
managerial personnel. Under labor agreements
these insurance policies are, subject to certain
limitations, the property of the employees.
F-28
DELTA GALIL INDUSTRIES LTD.
(An Israeli corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 7 - EMPLOYEE RIGHTS UPON RETIREMENT (continued):
c) Severance pay liabilities not covered by the
pension funds are fully provided for in these
consolidated financial statements, as if it was
payable at each balance sheet date on an
undiscounted basis, based upon the number of
years of service and the most recent monthly
salary of the Group's employees in Israel.
2) Non-Israeli subsidiary
A U.S. subsidiary provides various defined benefit
pension plans to its employees, see c below.
At December 31, 2004, the assets of the defined benefit
pension plan are primarily invested in group annuity
contracts with an insurance company. The plan was frozen
effective January 1996.
Contributions to the defined contribution 401(k) plan
are based on a percentage of annual salaries. The
Company generally matches 50% of each participant's
pretax contribution up to 4% of the participant's annual
compensation.
C. CERTAIN DETAILS RELATING TO DEFINED BENEFIT PLANS:
2004 2003
------------ ------------
IN THOUSANDS
---------------------------
CHANGE IN BENEFIT OBLIGATION:
Benefit obligation at beginning of year $3,145 $3,150
Interest cost 179 183
Actuarial loss 20 7
Benefit paid (204) (195)
------------ ------------
Benefit obligation at end of year $3,140 $3,145
------------ ------------
CHANGE IN PLAN ASSETS:
Fair value of plan assets at beginning of year $2,888 $2,931
Actual return on plan assets 90 152
Employer contribution 225
Benefit paid, including plan expenses (204) (195)
------------ ------------
Fair value of plan assets at end of year $2,999 $2,888
------------ ------------
RECONCILIATION OF FUNDED STATUS:
Funded status (carryforward obligations) $(141) $(257)
Unrecognized net actuarial loss 1,332 1,290
Adjustment to recognize minimum liability (1,332) (1,290)
------------ ------------
Prepaid / pension cost (accrued) $(141) $(257)
------------ ------------
2004 2003 2002
------------ ------------ ------------
WEIGHTED AVERAGE ASSUMPTIONS AT END OF YEAR:
Discount rate 5.75% 6.00% 6.25%
Expected return on plan assets 6.25% 6.25% 6.50%
Rate of compensation increase N/A N/A N/A
F-29
DELTA GALIL INDUSTRIES LTD.
(An Israeli corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 7 - EMPLOYEE RIGHTS UPON RETIREMENT (continued):
The consolidated components of net periodic benefits costs are
as follows:
YEAR ENDED DECEMBER 31
------------------------------------------
2004 2003 2002
------------ ------------ ------------
IN THOUSANDS
------------------------------------------
Interest cost $179 $183 $ 190
Actual return on plan assets (122) (85) (134)
Net amortization 10 13 57
------------ ------------ ------------
$ 67 $111 $ 113
============ ============ ============
D. CASH FLOWS INFORMATION REGARDING THE COMPANY'S LIABILITY FOR
EMPLOYEE RIGHTS UPON RETIREMENT:
1. The Company expects to contribute in 2005, $670
thousands to insurance companies and $270 thousands to
contribution plans.
2. The Company expects to pay the following future benefits
to its Israeli employees upon their normal retirement
age:
SEVERANCE PAY
BENEFITS
------------------
IN THOUSANDS
------------------
2005 $52
2006 $283
2007 $61
2008 $801
2009 $159
Years 2010-2014 $1,196
These amounts, as they relate to the Israeli subsidiaries were
determined based on the employees current salary rates and the
number of service years that will be accumulated upon their
retirement date. These amounts do not include amounts that might
be paid to employees that will cease working with the Company
before their normal retirement age.
F-30
DELTA GALIL INDUSTRIES LTD.
(An Israeli corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 8 - LONG-TERM LIABILITIES - BANK LOANS AND OTHER LIABILITY:
A. COMPOSITION:
WEIGHTED
AVERAGE
INTEREST RATE
------------------- DECEMBER 31
DECEMBER 31, --------------------------
2004 2004 2003
------------------- ------------ ------------
% IN THOUSANDS
Bank loans - in dollars or linked thereto 3.8% $126,131 $18,857
Bank loans - in Canadian dollars 5,191
Bank loans - in other currencies 5.5% 216
Other liability -
Obligation under capital lease, see note 1f
and c below - in dollars 8.6% 1,032 1,097
------------ ------------
127,379 25,145
Less - current maturities 27,942 10,436
------------ ------------
$99,437 $14,709
============ ============
B. TOTAL LIABILITIES (NET OF CURRENT MATURITIES) MATURE IN THE
FOLLOWING YEARS AFTER BALANCE SHEET DATES:
DECEMBER 31
--------------------------
2004 2003
------------ ------------
IN THOUSANDS
--------------------------
Second year $29,703 $10,440
Third year 23,270 1,018
Fourth year 23,230 1,024
Fifth year 22,584 1,031
Sixth year and thereafter 650 1,196
------------ ------------
$99,437 $14,709
============ ============
F-31
DELTA GALIL INDUSTRIES LTD.
(An Israeli corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 8 - LONG-TERM LIABILITIES - BANK LOANS AND OTHER LIABILITY (continue):
C. A subsidiary of the Company has entered into capital lease
agreements for a building it uses; the lease will expire in the
year 2014.
Following are the future minimum lease payments, by years, under
capital lease and the present value of the net minimum lease
payments as of December 31, 2004:
IN
THOUSANDS
-----------
First year - current maturities 158
Second year 158
Third year 158
Fourth year 158
Fifth year 158
Sixth year and thereafter 790
-----------
1,580
Less - amount representing interest 548
-----------
1,032
===========
D. The balance of liabilities is fully secured by floating charges
in an unlimited amount on all the assets and rights of the
Company and the assets of its subsidiaries, and/or by fixed
charges on the major portion of the Group's fixed assets.
E A subsidiary is a party to a credit agreement, which was
amended, as of December 9, 2004, with Bank Leumi U.S.A and Bank
Hapoalim B.M. Borrowings under the credit agreement are secured
by substantially all of the assets of the subsidiary. The credit
agreement provides for $ 130 million in loans, of which $ 70
million are long term loans which bear interest of Libor +1.4%
and the remainder is short term credit which bear interest of
Libor +1.15%. The principal of the term loans is payable in 20
equal quarterly installments of approximately $3.5 million each
until December 1, 2009. As of December 31, 2004 the unutilized
credit line was $ 15.2 million.
F-32
DELTA GALIL INDUSTRIES LTD.
(An Israeli corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 9 - COMMITMENTS AND CONTINGENT LIABILITIES:
A. COMMITMENTS
The Company and its subsidiaries lease 30 facilities under
operating leases. The leases (including extension options) for
18 facilities expire on various dates between 2006 and 2025 and
the remaining leases expired in 2005. The Company intends to
renew some of these leases. The minimum future annual lease
payment over each of the years 2005 to 2009 will amount to $7.6,
$6.6, $6.5, $6.0 and $5.4 million, respectively. In the period
from 2010 to the end of the lease periods, the cumulative lease
payments will amount to $ 11.2 million. The lease expenses for
each of the years 2004, 2003 and 2002 were $ 8.6 million, $ 7.3
million and $ 6.6 million, respectively.
B. CONTINGENT LIABILITIES - GUARANTEES
The Company and its subsidiaries signed a guarantee, each for
other, which is unlimited in amount to all of the group's
liabilities.
C. As to contingent consideration, see note 2a.
D. The Company entered into agreements that provide the Company
rights to market products brand names owned by other parties.
Royalties under these agreements are calculated as a percentage
of the sales. The royalties rate range from 4% to 16% of sales.
NOTE 10 - SHAREHOLDERS' EQUITY:
A. SHARE CAPITAL:
1) The Company's shares are traded on the Tel-Aviv Stock
Exchange ("TASE") and in the form of American Depositary
Shares ("ADS's"), each of which represents one ordinary
share, on the Nasdaq National Market in the United
States. On December 31, 2004, the closing price per ADS
on Nasdaq was $10.34; the shares were quoted on the TASE
on that date at NIS 43.81 ($10.09).
2) On December 2004, the Company reissued 215,684 treasury
shares as part of the proceeds paid to the selling
shareholders of Burlen, see note 2a.
3) In December 2002, the Company purchased 565,000 of the
Company's shares for an amount of $ 6,215 thousands
(representing $ 11.0 per share).
4) On September 28, 2001, the Company's Board of Directors
approved the repurchase of Company shares for an amount
of up to $3.0 million. During 2002 and 2001 the Company
purchased 282,483 and 96,017 shares, respectively, in
the open market at an average price of $7.58 and $9.0
per share in a total amount of $2,141 thousands and $860
thousands, respectively.
5) As of December 31, 2004 and 2003, the balance of shares
issued by the Company for the purpose of future exercise
of employee stock options, which is held by a trustee
company, is 45,884 and 87,638 shares, respectively.
6) The shares held by the Company have no voting rights and
are not entitled to receive dividends.
F-33
DELTA GALIL INDUSTRIES LTD.
(An Israeli corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 10 - SHAREHOLDERS' EQUITY (continued):
B. STOCK OPTIONS PLANS FOR EMPLOYEES AND THE COMPANY'S CEO:
1) On May 10, 1998, the Company's Board of Directors
approved an employee stock option plan for the grant,
without consideration, of up to 304,696 options,
exercisable in purchase of 319,931 ordinary shares of
NIS 1 par value of the Company, to thirteen senior
employees of the Company and/or its subsidiaries. All of
the above options were granted in June 1998. The
exercise price of each option is $ 8.297, based on the
quoted price of the Company's shares on the last day of
trade prior to the Board of Directors' resolution ($
9.22), less 10%. The options vest in four equal batches.
As of December 31, 2004, all the options are fully
vested. The options are exercisable over three years
period, commencing on the date that is two years after
the date such option vested. Any option not exercised
within the said five years will expire. The options
expire over the years 2003-2006.
2) On September 10, 1998, the Company's Board of Directors
approved a plan for the grant, at no consideration, of
up to 100,000 options to its CEO, which are exercisable
in purchase of 100,000 shares of NIS 1 par value of the
Company. All of said options were granted in September
1998. The exercise price of each option is $ 7.90, based
on the quoted price of the Company's share on the last
day of trade prior to the Board of Directors' resolution
($ 8.77), less 10%. The options vest in four equal
batches. As of December 31, 2004, all the options are
fully vested. The exercise terms under the CEO's plan
are identical to those of the employees plan.
3) On June 4, 2000, the Company's Board of Directors
approved an employee stock option plan for the grant,
without consideration, of up to 809,000 options
(including 100,000 options to its CEO), exercisable to
809,000 ordinary shares of NIS 1 par value of the
Company, to 70 senior employees of the Group ("the
optionees"). All the options were granted on August 6,
2000. The exercise price of each option is $ 21.07,
based on the quoted price of the Company's shares on the
last day of trade prior to the Board of Directors'
resolution.
The options vest in four equal batches: the first,
second, third and fourth batch vest in August 2001,
2002, 2003 and 2004, respectively. The options are
exercisable over a three years period, commencing one
year after the vesting date of each batch.
4) On October 23, 2002, the Company's Board of Directors
approved an employee stock option plan for the grant,
without consideration, of up to 1,100,000 options
(including 100,000 options to its CEO), exercisable in
purchase of 1,100,000 ordinary shares of NIS 1 par value
of the Company. The exercise price of each option is the
higher of the quoted price of the Company's shares on
the grant day or $ 9.
On November 22, 2002, the Company granted 1,004,500
options to 97 senior employees of the Group (including
100,000 options to the CEO) at an exercise price of $ 9.
The options vest in four equal batches. The first,
second, third and fourth batches will vest in November
2003, 2004, 2005 and 2006, respectively. The options are
exercisable over a three-year period, commencing one
year after the vesting date of the first batch and on
the vesting date of the second, third and fourth batch.
F-34
DELTA GALIL INDUSTRIES LTD.
(An Israeli corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 10 - SHAREHOLDERS' EQUITY (continued):
In May 2003 the Company granted 30,000 options to three
employees of the Group at an exercise price of $10.76.
In March and in August 2004 the Company granted 80,000
and 30,000 options respectively, to six and one
employees of the Group, respectively, at an exercise
price of $ 15.35 and $ 12.74, respectively. The options
are exercisable over a three-year period, commencing one
year after the vesting date of the first batch and on
the vesting date of the second, third and fourth batch.
At December 31, 2004 72,000 options remain available for
grant under the plan.
5) The grant of options to Israeli employees under the
Company's plans is subject to the terms stipulated by
Section 102 and 102A of the Israeli Income Tax
Ordinance. Inter-alia, that Section provides that the
Company will be allowed to claim as an expense for tax
purposes the amounts credited to the employees as a
benefit, when the related tax is payable by the
employee.
6) The rights pertaining to the ordinary shares issued upon
exercise of the options will be identical to those of
the other ordinary shares of the Company.
7) Following is a summary of the status of the Company's
stock option plans:
YEAR ENDED DECEMBER 31
------------------------------------------------------------------------------------
2004 2003 2002
------------------------- ------------------------- -------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
NUMBER* PRICE** NUMBER* PRICE** NUMBER* PRICE**
---------- ----------- ---------- ----------- ---------- -----------
Options outstanding at beginning of year 1,830,702 $13.50 2,038,562 $ 13.07 1,076,940 $ 17.10
Changes during the year:
Granted - at market price 110,000 $14.65 30,000 $ 10.76 1,004,500 $ 9.00
Exercised (41,756) $7.91 (180,109) $ 7.91 (2,003) $ 7.91
Forfeited (66,875) $9.34 (57,751) $ 11.35 (40,875) $ 18.11
---------- ---------- ----------
Options outstanding at end of year 1,832,071 $13.84 1,830,702 $ 13.50 2,038,562 $ 13.07
========== ========== ==========
Options exercisable at end of year 1,106,821 $14.69 528,952 $ 17.15 405,880 $ 16.94
========== ========== ==========
* Represents the number of shares arising upon exercise of options, based
on the conversion ratio.
** Per option.
F-35
DELTA GALIL INDUSTRIES LTD.
(An Israeli corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 10 - SHAREHOLDERS' EQUITY (continued):
8) The following table summarizes information regarding
options outstanding at December 31, 2004:
NUMBER OF SHARES ISSUABLE UPON EXERCISE OF OPTIONS
------------------------------------------------------------------------------------
OUTSTANDING VESTED EXERCISABLE
--------------------------------------------------- -------------- --------------
BALANCE AT WEIGHTED AVERAGE BALANCE AT BALANCE AT
EXERCISE DECEMBER 31, REMAINING DECEMBER 31, DECEMBER 31,
PRICES 2004 CONTRACTUAL LIFE 2004 2004
------------ -------------- ------------------ -------------- --------------
YEARS
-----
$8.30 65,696 1.2 65,696 65,696
$7.90 50,000 1.4 50,000 50,000
$21.07 688,375 2.0 688,375 532,125
$9.00 888,000 4.4 459,000 459,000
$10.76 30,000 4.8 7,500
$15.35 80,000 5.8
$12.74 30,000 6.1
============== ============== ==============
1,832,071 1,270,571 1,106,821
============== ============== ==============
C. RETAINED EARNINGS
In determining the amount of retained earnings available for
distribution as a dividend, the Companies Law stipulates that
the cost of the Company's shares acquired by the Company (that
are presented as a separate item in the statement of changes in
shareholders' equity) has to be deducted from the amount of
retained earnings.
NOTE 11 - TAXES ON INCOME:
A. THE COMPANY AND CERTAIN ISRAELI SUBSIDIARIES (HEREAFTER - THE
COMPANIES):
1) Tax benefits under the Israeli Law for the Encouragement
of Capital Investments, 1959 ("the law")
The Company and certain Israeli subsidiary have received
investment grants from the State of Israel. In the event
of failure to comply with the terms attached to the
receipt of those grants, the companies may be required
to refund the amount of the grants, in whole or in part,
with linkage differences to the Israeli CPI and interest
from the date of receipt.
F-36
DELTA GALIL INDUSTRIES LTD..
(An Israeli corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 11 - TAXES ON INCOME (continued):
The abovementioned companies have registered floating
charges on all their assets in favor of the State of
Israel as security for compliance with the terms
relating to the grants.
Under the law, by virtue of the "approved enterprise"
status granted to certain of their enterprises, the
Company and its Israeli subsidiary are entitled to
various tax benefits, as follows:
a) Reduced tax rates
During the period of benefits - 7 to 10 years
commencing in the first year in which the
companies earn taxable income from the approved
enterprises (provided the maximum period to
which it is restricted by law has not elapsed) -
a reduced tax rate of 25% applies, instead of
the regular tax rate, see (4) below. Some of the
approved enterprises are eligible for a tax
exemption for the first two years commencing in
the year in which the companies first earn
taxable income.
The proportion of the Company's taxable income
entitled to benefits of reduced tax rates is
calculated on the basis of the ratio between the
turnover of the approved enterprise and the
whole turnover of the Company. The turnover
applicable to the approved enterprise is
calculated, as a general rule, by taking the
increase resulting from the comparison of the
Company's turnover with its "base" turnover,
which is prescribed as being the turnover during
the last year before the operation of the
approved enterprise, or such other basis as is
stipulated in the instrument of approval.
The period of benefits in respect of certain
enterprises expired in 1994, while the period of
benefits in respect of other enterprises expires
in 2006. The Company first derived income from
approved enterprises in 1998.
In the event of distribution of cash dividends
out of income, which was tax exempt as above,
the companies would have to pay the 25% tax in
respect of the amount distributed.
b) Accelerated depreciation
The companies are entitled to claim accelerated
depreciation in respect of buildings, machinery
and equipment used by approved enterprises
during the first five tax years of the operation
of these assets.
c) Conditions for entitlement to the benefits
The entitlement to the above benefits is
conditional upon the companies fulfilling the
conditions stipulated by the law, regulations
published thereunder and the
F-37
instruments of approval for the specific
investments in approved enterprises. In the
event of failure to comply with these
conditions, the benefits may be cancelled and
the companies may be required to refund the
amount of the benefits, in whole or in part,
with the addition of linkage differences to the
Israeli CPI and interest.
F-38
DELTA GALIL INDUSTRIES LTD.
(An Israeli corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 11 - TAXES ON INCOME (continued):
2) Measurement of results for tax purposes under the Income
Tax (Inflationary Adjustments) Law, 1985 (the
"inflationary adjustments law")
Under the inflationary adjustments law, results for tax
purposes are measured in real terms, having regard to
the changes in the Israeli CPI. Under income tax
regulations, the Company and certain subsidiaries are
entitled to adjust their results for tax purposes on the
basis of the changes in the exchange rate of the dollar,
instead of the changes in the Israeli CPI. Commencing
2001 the Company and two of its subsidiaries chose to do
so.
As explained in note 1a(4), the financial statements
were measured in dollars. For the years in which the
result for tax purposes are measured in real terms,
having regard to the changes in the Israeli CPI, the
difference between the changes in the Israeli CPI and
the exchange rate of the dollar - both on an annual and
a cumulative basis - caused differences between taxable
income and income reflected in these financial
statements. Paragraph 9(f) of FAS 109 creates an
exception which prohibits the recognition of deferred
tax liabilities or assets that arise from differences
between the financial reporting and tax bases of assets
and liabilities that are remeasured from the local
currency into dollars using historical exchange rates,
and that result from (i) changes in exchange rates, or
(ii) indexing for tax purposes.
3) Tax rates
a) The income of the company and its Israeli
subsidiaries (other than income from "approved
enterprises", see 1a. above) is taxed at the
regular rate. Through to December 31, 2004, the
corporate tax was 36%. In July 2004, an
amendment to the Income Tax Ordinance was
enacted. One of the provisions of this amendment
is that the corporate tax rate is to be
gradually reduced from 36% to 30%, in the
following manner: the rate for 2004 is 35%, and
will be in 2005 - 34%, in 2006 - 32%, and in
2007 and thereafter - 30%. The effect of the
change in the tax rates in the coming years, on
the deferred tax balances of the amendment to
the law, is included under the item "taxes on
income" in the statements of income.
b) Pursuant to another amendment to the Income Tax
Ordinance, which became effective in 2003,
capital gains are taxed at a reduced rate of 25%
from January 1, 2003, instead of the regular
corporate tax rate at which such gains were
taxed until the aforementioned date. The
aforesaid amendment stipulates that with regard
to the sale of assets acquired prior to January
1, 2003, the reduced tax rate will be applicable
only for the gain allocated to capital gains
earned after the implementation of the
amendment, which will be calculated, as
prescribed by said amendment.
F-39
DELTA GALIL INDUSTRIES LTD..
(An Israeli corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 11 - TAXES ON INCOME (continued):
4) Tax benefits under the Law for the Encouragement of
Industry (Taxation), 1969
The Company and certain Israeli subsidiary are
"industrial companies" as defined by this law. As such,
these companies are entitled to certain tax benefits,
consisting mainly of accelerated depreciation, as
stipulated by regulations published under the
inflationary adjustments law, and the right to claim
public issuance expenses as a deduction for tax
purposes.
Pursuant to this law, the Company files consolidated tax
returns with the said subsidiary.
B. NON-ISRAELI SUBSIDIARIES
Subsidiaries that are incorporated outside of Israel, except
which incorporated in the free zone, are assessed for tax under
the tax laws in their countries of residence. The principal tax
rates applicable to main subsidiaries outside Israel are as
follows:
Company incorporated in the USA - tax rate of 38%-40% Company
incorporated in U.K- tax rate of 30%
C. CARRYFORWARD TAX LOSSES
Carryforward tax losses (derived from the Israeli companies) as
of December 31, 2004 and 2003, aggregate $ 36 million and $ 33
million, respectively.
Carryforward tax losses in Israel may be utilized indefinitely.
D. DEFERRED INCOME TAXES:
1) The deferred income taxes are composed as follows:
DECEMBER 31
---------------------------
2004 2003
------------ ------------
IN THOUSANDS
---------------------------
Property, plant and equipment $13,832 $13,975
Inventories (841) (907)
Provisions for employee related obligations (1,457) (1,551)
Other 653 (639)
In respect of carryforward tax losses
(see c. above) (10,968) (10,042)
------------ ------------
Total $1,219 $836
============ ============
F-40
DELTA GALIL INDUSTRIES LTD.
(An Israeli corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 11 - TAXES ON INCOME (continued):
2) Deferred income taxes are presented in the balance
sheets among:
DECEMBER 31
---------------------------
2004 2003
------------ ------------
IN THOUSANDS
---------------------------
Current asset $(3,675) $(5,464)
Long term liability 4,894 6,300
------------ ------------
$1,219 $836
============ ============
E. INCOME BEFORE INCOME TAXES IS COMPOSED AS FOLLOWS:
YEAR ENDED DECEMBER 31
------------------------------------------
2004 2003 2002
------------ ------------ ------------
IN THOUSANDS
------------------------------------------
The Company and its Israeli
Subsidiaries $3,190 $(4,832) $(8,658)
Non-Israeli subsidiaries 13,946 36,263 31,930
------------ ------------ ------------
$17,136 $31,431 $23,272
F. TAXES ON INCOME INCLUDED IN THE STATEMENTS OF INCOME:
YEAR ENDED DECEMBER 31
------------------------------------------
2004 2003 2002
------------ ------------ ------------
IN THOUSANDS
------------------------------------------
Current:
Israeli $1,636 $746 $353
Non-Israeli 1,941 10,292 4,963
------------ ------------ ------------
3,577 11,038 5,316
------------ ------------ ------------
Deferred:
Israeli $(498) $(4,075) $(1,796)
Non-Israeli 219 520 2,236
------------ ------------ ------------
(279) (3,555) 440
------------ ------------ ------------
For previous years :
Israeli $(516) $(30) $(112)
Non-Israeli 64 (113) 135
------------ ------------ ------------
(452) (143) 23
------------ ------------ ------------
$2,846 $7,340 $5,779
============ ============ ============
F-41
DELTA GALIL INDUSTRIES LTD.
(An Israeli corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 11 - TAXES ON INCOME (continued):
G. Following is a reconciliation of the theoretical tax expense,
assuming all income is taxed at the regular tax rates applicable
to income of companies in Israel (36% in the years 2002 and
2003, and 35% in 2004) and the actual tax expense:
YEAR ENDED DECEMBER 31
------------------------------------------
2004 2003 2002
------------ ------------ ------------
IN THOUSANDS
------------------------------------------
Income before taxes on income, as reported in
the consolidated statements of income $17,136 $31,431 $23,272
Theoretical tax expense $5,997 $11,315 $8,378
============ ============ ============
Additional tax expenses arising from reduced tax
rate on losses from an approved enterprise 73 380 958
Decrease in tax arising from different tax rate
applicable to non-Israeli subsidiaries (2,575) (2,834) (3,886)
------------ ------------ ------------
3,495 8,861 5,450
Increase (decrease) in taxes resulting from\
permanent differences:
Disallowable deductions 110 36 22
Previous years (452) (143) 23
Difference between the basis of measurement
of income reported for tax purposes and
the basis of measurement of income for
financial reporting purposes - net (807) 151 (242)
Sundry - net 500 (1,565) 526
------------ ------------ ------------
Taxes on income - in the consolidated statements
of income $2,846 $7,340 $5,779
============ ============ ============
H. TAX ASSESSMENTS
Tax assessments for the Company and most of its subsidiaries are
final through the tax year 1999.
F-42
DELTA GALIL INDUSTRIES LTD.
(An Israeli corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 12 - SUPPLEMENTARY FINANCIAL STATEMENT INFORMATION:
BALANCE SHEETS:
DECEMBER 31
------------------------------------------
2004 2003 2002
------------ ------------ ------------
IN THOUSANDS
------------------------------------------
A. ACCOUNTS RECEIVABLE:
1) Trade:
Outside Israel $90,682 $73,883
In Israel 14,447 11,840
------------ ------------
$105,129 $85,723
============ ============
Allowance for doubtful accounts:
Opening balance $1,038 $1,131 $3,671
Hamashbir 859
Other 95
Decrease due to bad debts
Hamashbir (872)
K-Mart (3,494)
Other (39) (123)
Increase due to an acquisition of a new
subsidiary 30
------------ ------------ ------------
Closing balance $127 $1,038 $1,131
============ ============ ============
Principal customers (see note 1m and 15c):
Customer 1 $2,656 $18,890
============ ============
Customer 2 $29,871 $15,907
============ ============
Customer 3 $15,455 $16,500
============ ============
2) Other:
Investment grant receivable $646 $576
Government departments - mainly
value added tax refundable 1,501 4,500
Prepaid expenses 1,822 2,046
Deposits 858 663
Income receivable 1,184 96
Employees 380 512
Receivables from subcontractors 2,987 1,157
Sundry 1,249 1,112
------------ ------------
$10,627 $10,662
============ ============
F-43
DELTA GALIL INDUSTRIES LTD.
(An Israeli corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 12 - SUPPLEMENTARY FINANCIAL STATEMENT INFORMATION (continued):
DECEMBER 31
--------------------------
2004 2003
---------- ----------
IN THOUSANDS
--------------------------
B. INVENTORIES:
Finished products $137,813 $94,338
Products in process 21,829 21,380
Raw materials and supplies 12,797 19,918
Packaging and maintenance materials 11,328 7,348
---------- ----------
$183,767 $142,984
========== ==========
C. SHORT-TERM BANK CREDIT
The weighted average interest rate of short-term bank credit as
of December 31, 2004 and 2003 is 3.5% and 1.9% , respectively. A
subsidiary is a party to a credit agreement, which was amended,
as of December 9 2004, with Bank Leumi U.S.A and Bank Hapoalim
B.M. Borrowings under the credit agreement are secured by
substantially all of the assets of the subsidiary. The credit
agreement provides for up to $ 60 million in short term credit
(see note 8e).
Unutilized short-term credit lines of the Group (under the USA
credit agreement and other credit agreements) as of December 31,
2004 and 2003 aggregated to $ 163 million and $ 100 million,
respectively.
DECEMBER 31
--------------------------
2004 2003
---------- ----------
IN THOUSANDS
--------------------------
D. ACCOUNTS PAYABLE AND ACCRUALS - OTHER:
Employees and employee institutions $7,745 $7,589
Provision for vacation and recreation pay 4,297 4,463
Income tax payable 2,731 1,612
Accrued expenses 18,300 17,956
Accrued expenses - restructuring costs 6,163
In respect of purchase price adjustment,
see note 2f 6,700
In respect of derivatives, see note 13c 2,657
Other 1,010 1,002
--------------------------
$34,083 $48,142
==========================
F-44
DELTA GALIL INDUSTRIES LTD.
(An Israeli corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 12 - SUPPLEMENTARY FINANCIAL STATEMENT INFORMATION (continued):
STATEMENTS OF INCOME:
E. RESTRUCTURING EXPENSES
1) Consolidated statements of operations for the years
ended December 31, 2004, 2003 and 2002 include
restructuring costs in the Europe segment totaling
approximately $1.1 million $1.0 million and $1.1 million
respectively. During the years ended December 31, 2004,
2003 and 2002, the Company implemented restructuring
plans which included the dismissal of a total of
approximately 1,300 employees and the closing of certain
of the Company's sewing plants and logistic centers.
2) The primary components of the restructuring costs are:
YEAR ENDED DECEMBER 31
2004 2003 2002
-------- -------- --------
IN THOUSANDS
------------------------------
Costs relating to workforce reduction $190 $850 $651
Costs relating to write-off of fixed assets 50 157 414
Costs relating to write-off of other
accounts receivable 860
-------- -------- --------
$1,100 $1,007 $1,065
======== ======== ========
THE 2004 PROGRAM
During the fourth quarter of 2004 the Company initiated a
restructuring program desined to reduce its cost structure (the
"2004 Program"). The 2004 Program included the closure of a
logistic center in Hungary and resulted in total restructuring
costs of $1.5 million, from which $0.4 million included among
cost of sales (related to inventory).
The implementation of the 2004 Program in Hungary, consisted of
the dismissal of approximately 230 persons who had previously
been employed by the Company's Hungary subsidiary. The 2004
Program was concluded by May 2005.
THE 2003 PROGRAM
During 2003, the Company initiated a restructuring program
designed to reduce its cost structure (the "2003 program"). The
2003 Program included the closure of sewing plants in Scotland
and in Israel. The 2003 Program resulted in total restructuring
charges to the Company of $1.0 million, which were recorded in
the first quarter of 2003.
The implementation of the 2003 Program in Scotland, which
represented $0.9 million of the total charges of $1.0 million,
consisted of the dismissal of approximately 100 persons who had
previously been employed by the Company's European subsidiary.
F-45
DELTA GALIL INDUSTRIES LTD.
(An Israeli corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 12 - SUPPLEMENTARY FINANCIAL STATEMENT INFORMATION (continued):
The implementation of the 2003 Program in Israel which
represented $0.1 million of the total charges of $1.0 million,
consisted of the dismissal of approximately 70 employees in
Israel, who had previously been employed by the Company's. 2003
Program was concluded by the end of the first quarter of 2003.
THE 2002 PROGRAM
During 2002, the company initiated restructuring program
designed to reduce its cost structure (the "2002 program"). The
2002 program included the closure of cutting and sewing
facilities in Scotland and in the Dominican Republic. The 2002
program resulted in total restructuring charges to the Company
of $1.1 million which were recorded in the fourth quarter of
2002.
The implementation of the 2002 program in Scotland, which
represented $0.7 million of the total $1.1 million, consisted of
the dismissal of approximately 100 employees in Scotland.
The implementation of the 2002 program in Dominican Republic,
which represented $0.4 million of the total $1.1 million,
consisted of the dismissal of approximately 800 employees in the
Dominican Republic.
As to restructuring plan with respect to an acquiree company, in
2003, see note 2c.
F. FINANCIAL EXPENSES - NET:
YEAR ENDED DECEMBER 31
------------------------------
2004 2003 2002
-------- -------- --------
IN THOUSANDS
------------------------------
Interest expenses $4,923 $3,824 $4,286
Interest income (42) (58) (92)
Exchange differences and other - net 763 1,259 939
Losses from derivatives instruments 587 612 323
-------- -------- --------
$6,231 $5,637 $5,456
======== ======== ========
F-46
DELTA GALIL INDUSTRIES LTD.
(An Israeli corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 12 - SUPPLEMENTARY FINANCIAL STATEMENT INFORMATION (continued):
G. EARNINGS PER SHARE
Following is data relating to the weighted average number of
shares used in the computation of diluted earnings per share:
2004 2003 2002
-------- -------- --------
IN THOUSANDS
--------------------------------
Weighted average number of
shares used in the computation of
basic earnings per share 18,478 18,313 18,914
Add:
Net additional shares from the anticipated
exercise of stock options 356 450 13
-------- -------- --------
Weighted average number of
shares used in the computation of
diluted earnings per share 18,834 18,763 18,927
======== ======== ========
NOTE 13 - FINANCIAL INSTRUMENTS AND RISK MANAGEMENT:
A. GENERAL
The Group operates internationally, which gives rise to exposure
to market risks mainly from changes in exchange rates of foreign
currencies in relation to the dollar. Derivative financial
instruments ("derivatives") are utilized by the Group to reduce
these risks, as explained in this note. As the counter parties
to these derivatives are Israeli banks, the Company considers
the inherent credit risks remote. The Company does not hold or
issue derivative financial instruments for trading purposes.
B. FOREIGN EXCHANGE RISK MANAGEMENT
The Company enters into most foreign currency derivatives -
forward exchange contracts - in order to protect itself from the
risk that the eventual non-dollar net cash flows resulting from
sales of products and from salaries, wages and related expenses,
will be affected by changes in exchange rates. The term of most
of these contracts is less than one year.
These transactions are mainly for the exchange of pounds
sterling, Euro and NIS into dollars.
F-47
DELTA GALIL INDUSTRIES LTD.
(An Israeli corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 13 - FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (continued):
For forward exchange contracts designated as cash flow hedges,
gains and losses are recorded in other comprehensive income
(loss) until the foreign currency denominated sales, salaries,
wages and related expenses transactions are recognized in
earnings.
The following table summarizes changes in other comprehensive
income (loss) related to derivatives that are classified as cash
flow hedges held by the Company during the period from January
1, 2002 through December 31, 2004:
2004 2003 2002
--------- --------- ---------
$ IN THOUSANDS
---------------------------------
Balance at beginning of year $(1,715) $(583) $225
Changes in effective portion of derivatives
designated as cash flow hedges 691 (2,905) (2,114)
Reclassification into earnings from other
comprehensive income 1,822 1,299 943
Net of tax effect (798) 474 363
--------- --------- ---------
Balance at end of year -;- $(1,715) $(583)
========= ========= =========
Hedge loss related to the portion of cash flow hedging
instruments excluded from assessment of effectiveness had impact
on earnings for 2004 of $ 0.6 million, 2003 of $ 0.7 million
loss and had no material impact on earnings for the years ended
December 31, 2002. No cash flow hedges were discontinued during
the years ended December 31, 2004, 2003 and 2002.
As of December 31, 2004, the Company has no derivatives
instruments outstanding.
C. FAIR VALUE OF FINANCIAL INSTRUMENTS
The financial instruments of the Group consist mainly of
non-derivative assets and liabilities (items included in working
capital, long-term receivables - in insignificant amounts - and
long-term liabilities); the Group also has derivatives.
In view of their nature, the fair value of the financial
instruments included in working capital of the Group is usually
identical or close to their carrying value. The fair value of
long-term receivables and long-term loans also approximates
their carrying value, since they bear interest at rates close to
the prevailing market rates, or are in immaterial amounts. The
fair values derivatives as of December 31, 2003 was $ 2,657
thousands (As of December 31, 2004, the Company has no
derivative instruments).
F-48
DELTA GALIL INDUSTRIES LTD.
(An Israeli corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 14 - "RELATED PARTIES" - TRANSACTIONS AND BALANCES:
A. TRANSACTIONS WITH RELATED PARTIES:
YEAR ENDED DECEMBER 31
-------------------------------------
2004 2003 2002
----------- ----------- -----------
IN THOUSANDS
-------------------------------------
Net revenues $1,303 $2,433 $4,922
=========== =========== ===========
Purchases and other expenses $21 $249 $410
=========== =========== ===========
The above transactions were made with one of the Company's
shareholders in the ordinary course of business, at prices
agreed upon in negotiations between the parties, taking into
account the volume of orders, at customary supplier credit
terms.
As to options granted to the Company's CEO, see note 10b.
B. RELATED PARTIES BALANCES:
DECEMBER 31
-----------------------
2004 2003
---------- ----------
IN THOUSANDS
-----------------------
Current receivables - presented in the balance
sheets among "accounts receivable - trade" $126 $251
========== ==========
Current liabilities - presented under "accounts
payable and accruals" $20 $28
========== ==========
F-49
DELTA GALIL INDUSTRIES LTD.
(An Israeli corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 15 - SEGMENT INFORMATION :
A. INFORMATION ON OPERATING SEGMENTS:
OPERATING SEGMENTS:
1) General:
The Company conducts its worldwide operations in five
operating segments as follows:
Delta USA, U.S upper market and Europe- these segments
are engaged in manufacturing and marketing of intimate
apparel to various customers in the U.S and European
markets. Socks- the segment is engaged in manufacturing
and marketing of socks to various customers in the U.S
and European markets. Delta marketing Israel - this
segment is engaged in marketing of intimate apparel to
various customers in Israel through retail and wholesale
operations.
The Company changed its internal organization by
transferring Socks marketing operation in Israel to the
managerial responsibility of Delta Marketing Israel. In
addition, US upper market and the textile divisions were
merged. Numbers included below have been reclassified
accordingly.
2) Information on revenues, profit (losses) and assets of
the reportable operating segments:
a) Measurement of revenues, profit (losses) and
assets of the operating segments:
The measurement of revenues, profit (losses) and
assets of the reportable operating segments is
based on the same accounting principles applied
in these financial statements, except for:
1) The effect of hedging transactions that
were excluded from segment data.
2) The Company fully consolidates the
operating results of certain subsidiary
in its consolidated financial
statements, while for operating segment
data the Company includes only its share
(approximately 50.1%) in the operating
profits of this subsidiary as part of
the US Upper market segment.
Segment profits (losses) reflect the income
(loss) from operations of the segment and do not
include financial expenses, other income, income
tax expenses, share in profits (losses) of
associated companies and minority interest,
since those items are not allocated to the
segments. Sale price of intersegment revenue is
based on negotiation between the segments and
when applicable upon market price.
F-50
DELTA GALIL INDUSTRIES LTD.
(An Israeli corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 15 - SEGMENT INFORMATION (continued):
b) Financial data relating to reportable operating segments:
DELTA
US UPPER MARKETING
DELTA USA MARKET EUROPE SOCKS ISRAEL ADJUSTMENTS TOTAL
--------- ------ ------ ----- ------ ----------- -----
(U.S. $ IN THOUSANDS)
---------------------------------------------------------------------------------------------
Year ended December 31, 2004:
Net revenues:
To unaffiliated customers $186,280 $90,540 $193,638 $138,749 $46,460 $(1,398)(1) $654,269
Intersegment $21,312 $165 $5,435 $(26,912) -`-
--------- --------- --------- --------- --------- ----------- ----------
Total net revenues $186,280 $111,852 $193,803 $144,184 $46,460 $(28,310) $654,269
========= ========= ========= ========= ========= =========== ==========
Operating income (loss) $5,911 $(568) $4,906(4) $9,137 $4,753 $(1,730)(2) $22,409
========= ========= ========= ========= ========= =========== ==========
Assets (at end of year) $225,744 $98,055 $100,264 $56,271 $23,866 $30,297(3) $534,497
========= ========= ========= ========= ========= =========== ==========
Depreciation and amortization $1,438 $6,097 $4,326 $2,463 $450 $411 $15,185
========= ========= ========= ========= ========= =========== ==========
(1) Includes results of hedge transactions.
(2) Includes mainly the effect of hedge transactions in an amount of $1,700 thousands.
(3) Includes general corporate assets not assignable to segments.
(4) Includes restructuring expenses in the amount of $1,500 thousands relating to the closure of a logistic center in Hungary.
F-51
DELTA GALIL INDUSTRIES LTD.
(An Israeli corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 15 - SEGMENT INFORMATION (continued):
DELTA
US UPPER MARKETING
DELTA USA MARKET EUROPE SOCKS ISRAEL ADJUSTMENTS TOTAL
--------- ------ ------ ----- ------ ----------- -----
(U.S. $ IN THOUSANDS)
---------------------------------------------------------------------------------------------
Year ended December 31, 2003:
Net revenues:
To unaffiliated customers $213,241 $66,665 $176,827 $86,393 $37,561 $(557) (1) $580,130
Intersegment 21,603 563 3,022 (25,188) - ;-
--------- --------- --------- --------- --------- ----------- ----------
Total net revenues $213,241 $88,268 $177,390 $89,415 $37,561 $(25,745) $580,130
========= ========= ========= ========= ========= =========== ==========
Operating income (loss) $24,780 $(8,871) $4,453 (4) $8,997 $2,415 $5,042 (2) $36,816
========= ========= ========= ========= ========= =========== ==========
Assets (at end of year) $137,762 84,185 $109,377 $69,877 $19,774 $29,909 (3) $450,884
========= ========= ========= ========= ========= =========== ==========
Depreciation and amortization $1,561 $5,560 $4,368 $2,148 $398 $495 $14,530
========= ========= ========= ========= ========= =========== ==========
(1) Includes results of hedge transactions.
(2) Including mainly capital gain in an amount of $ 4,050 thousands, the effect of losses of hedge transactions in an amount of
$ 1,300 thousands and gain of $600 thousands which represents the minority share in the operating profits of certain
subsidiary - included in the US Upper market - which is partly consolidated for segment purposes and fully consolidated in the
consolidated financial statements.
(3) Includes general corporate assets not assignable to segments.
(4) Includes restructuring expenses in the amount of $ 1,007 thousands relating to the closure of sewing facilities in Scotland and
in Israel.
F-52
DELTA GALIL INDUSTRIES LTD.
(An Israeli corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 15 - SEGMENT INFORMATION (continued):
DELTA
US UPPER MARKETING
DELTA USA MARKET EUROPE SOCKS ISRAEL ADJUSTMENTS TOTAL
--------- ------ ------ ----- ------ ----------- -----
(U.S. $ IN THOUSANDS)
---------------------------------------------------------------------------------------------
Year ended December 31, 2002:
Net revenues:
To unaffiliated customers $202,024 $81,968 $170,265 $79,193 $34,808 $(960) (1) $567,298
Intersegment 29,157 706 4,710 (34,573) - ;-
--------- --------- --------- --------- --------- ----------- ----------
Total net revenues $202,024 $111,125 $170,971 $83,903 $34,808 $(35,533) $567,298
========= ========= ========= ========= ========= =========== ==========
Operating income (loss) (3) $14,575 $(4,731) $10,205 $8,319 $(1,267) $667 (4) $27,768
========= ========= ========= ========= ========= =========== ==========
Assets (at end of year) $143,730 $94,849 $105,522 $46,413 $17,129 $33,415 (2) $441,058
========= ========= ========= ========= ========= =========== ==========
Depreciation and amortization $1,294 $5,518 $3,932 $2,420 $387 $531 $14,082
========= ========= ========= ========= ========= =========== ==========
(1) Includes results of hedge transactions.
(2) Includes general corporate assets not assignable to segments.
(3) Includes restructuring costs in the amount of $ 673 thousands in Europe and $ 392 thousands in Delta USA.
(4) Including mainly the losses of hedge transactions in an amount of $ 960 thousands and gains of $ 1,025 thousands which
represents the minority share in the operating profits of certain subsidiary - included in the US Upper market - which is
partly consolidated for segment purposes and fully consolidated in the consolidated financial statements.
F-53
DELTA GALIL INDUSTRIES LTD.
(An Israeli corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 15 - SEGMENT INFORMATION (continued):
B. GEOGRAPHICAL INFORMATION:
YEAR ENDED DECEMBER 31
------------------------------------
2004 2003 2002
---------- ---------- ----------
IN THOUSANDS
------------------------------------
1) Revenues
attributed to geographic area
(based on the location of the
customers):
North America $334,833 $300,708 $303,103
United Kingdom 202,831 187,885 181,302
Europe (other than U.K.) 64,605 48,766 44,409
Israel 52,000 42,771 38,484
---------- ---------- ----------
$654,269 $580,130 $567,298
========== ========== ==========
2) The net balance of the Company's property, plant and
equipment, by geographic location, are as follows:
DECEMBER 31
------------------------------------
2004 2003 2002
---------- ---------- ----------
IN THOUSANDS
------------------------------------
Israel $57,685 $60,108 $64,998
Egypt 24,464 22,218 20,940
United States 15,637 8,369 7,284
Eastern Europe 11,370 11,719 6,803
Jordan 9,470 9,666 10,510
United Kingdom 3,831 4,429 7,740
Ireland 1,184 5,450
Thailand 2,108
Other 2,592 2,918 3,326
---------- ---------- ----------
$128,341 $124,877 $121,601
========== ========== ==========
C. REVENUES FROM PRINCIPAL CUSTOMERS:
YEAR ENDED DECEMBER 31
------------------------------------
2004 2003 2002
---------- ---------- ----------
IN THOUSANDS
------------------------------------
Customer 1 $188,947 $179,120 $174,195
Customer 2 $86,177 $82,472 $76,910
Customer 3 $70,157 $86,829 $65,317
F-54
NOTE 16- SUBSEQUENT EVENT
A. During the third quarter of 2005, as a result of a change in the
business environment and the erosion in selling prices, the Company's management
implemented a restructuring plan in order to reduce expenses and improve
efficiency of operations. In the third quarter of 2005, the Company recorded
expenses relating to the restructuring plan at the total amount of $ 8.6
million. This plan includes the costs associated with closing certain
manufacturing plants in Central and North America and in Israel and the related
employee termination accruals.
In addition to the restructuring plan, the Company recorded in the third quarter
of 2005 an impairment of long-lived assets pursuant to FAS No. 144 "Accounting
for the Impairment or Disposal of Long-Lived Assets" in an amount of $ 7.4
million, and a further goodwill impairment pursuant to FAS No. 142 "Goodwill and
Other Intangible Assets" in an amount of $ 5.5 million.
B. A subsidiary of the Company is a party to a credit agreement, which
provides for $ 130 million in loans, of which $ 70 million are long term loans
which bear interest of Libor +1.4% and the remainder is short term credit which
bears interest of Libor +1.15%. The principal of the term loans is payable in 20
equal quarterly installments. This credit agreement includes covenants based on
the ratio of the subsidiary's EBITDA to fixed charges, the ratio of net worth to
total assets of the subsidiary and the ratio of the sum of the subsidiary's (a)
loans (b) letters of credit, and (c) acceptances (or, collectively, debt) to
EBITDA.
The subsidiary and the banks amended the credit agreement in January 12, 2006.
The material changes contained in the amendment are the following:
o An increase in the interest rate on the revolving credit from LIBOR plus
1.15% to LIBOR plus 1.40%, and an increase in the interest rate on the
term loan from LIBOR plus 1.40% to LIBOR plus 1.65%;
o A prepayment of $25 million of the principal amount of the term loan;
o A reduction in the quarterly payment on the term loan from $3.5 million
to $1.9 million; and
o An extension of the expiration of the revolving loan facility from
January 15, 2006 to May 15, 2006.
The subsidiary did not satisfy the covenant relating to the ratio of EBITDA to
fixed charges for the year ended December 31, 2005. The amendment, from January
12, 2006, provided for a waiver of all of the financial covenants for the period
ending December 31, 2005.
The company is in the process of negotiation with the banks to amend the ratio
of the credit agreement to new covenant targets.
F-55
Report of Independent Auditors
The Board of Directors of Delta Textile Egypt - Free Zone (S.A.E.)
We have audited the balance sheets of Delta Textile Egypt - Free Zone (S.A.E.)
as of 31 December 2004 and 2003, and the related statements of income,
shareholders' equity, and cash flows for each of the three years in the period
ended 31 December 2004 (not presented separately herein). 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. We were not engaged to perform an
audit of the Company's internal control over financial reporting. Our audits
included consideration of internal control over financial reporting as a basis
for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the Group's
internal control over financial reporting. Accordingly, we express no such
opinion. An audit also includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Delta Textile Egypt - Free Zone
(S.A.E.) at 31 December 2004 and 2003, and the results of its operations and its
cash flows for each of the three years in the period ended 31 December 2004, in
conformity with the Egyptian Accounting Standards and the related applicable
Egyptian laws and regulations which differ in certain respects from United
States generally accepted accounting principles (see Note 14 of Notes to the
Financial Statements).
Allied for Accounting and Auditing-
Member Firm of Ernst & Young Global
Cairo, Egypt
30 March 2006
Report of Independent Auditors
The Board of Directors of Delta Egypt Sourcing (Limited Liability Company)
We have audited the balance sheets of Delta Egypt Sourcing (Limited Liability
Company) as of 31 December 2004 and 2003, and the related statements of income
and changes in Quota holders' Equity and cash flows for each of the three years
in the period ended 31 December 2004 (not presented separately herein). 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. We were not engaged to perform an
audit of the Company's internal control over financial reporting. Our audits
included consideration of internal control over financial reporting as a basis
for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the Group's
internal control over financial reporting. Accordingly, we express no such
opinion. An audit also includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Delta Egypt Sourcing (Limited
Liability Company) at 31 December 2004 and 2003, and the results of its
operations and cash flows for each of the three years in the period ended
December 31, 2004, in conformity with the Egyptian Accounting Standards and the
related applicable Egyptian laws and regulations which differ in certain
respects from United States generally accepted accounting principles (see Note
12 of Notes to the Financial Statements).
Allied for Accounting and Auditing-
Member Firm of Ernst & Young Global
Cairo, Egypt
30 March 2006
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM TO THE MEMBERS OF DELTA
TEXTILES (LONDON) LIMITED
We have audited the balance sheets of Delta Textiles (London) Limited and its
subsidiaries ("the Company") as at 31 December 2004 and 31 December 2003 and the
related statements of income, changes in shareholder equity and cash flows for
each of the three years in the period ended 31 December 2004. These financial
statements are the responsibility of the Company's Board of Directors and
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards
in the United Kingdom and 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 from 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
the significant estimates made by the Company's Board of Directors and
management, as well as evaluating the overall annual accounts presentation. We
believe that our audit provides a reasonable basis for our opinion.
In our opinion, the aforementioned financial statements present fairly, in all
material respects, the financial position of the Company as at 31 December 2004
and 31 December 2003 and the result of its operations, changes in its
shareholders' equity and cash flows for each of the three years in the period
ended 31 December 2004, in conformity with generally accepted accounting
principles in the United Kingdom. In addition they present fairly, in all
material respects, the financial position of the Company as at 31 December 2004
and 31 December 2003 and the results of its operations for each of the three
years in the period ended 31 December 2004, in conformity with generally
accepted accounting principles in the United States of America.
BAKER TILLY
Registered Auditor
Chartered Accountants
2 Bloomsbury Street
London WC1B 3ST
United Kingdom
10 April 2006