AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 30, 2007
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 20-F
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2006
COMMISSION FILE NUMBER 000-30020
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:
TITLE OF CLASS NAME OF EXCHANGE
------------------------------ --------------------
Ordinary Shares (1)
American Depositary Shares (2) Nasdaq Global Market
----------
(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 registered or to be registered pursuant to Section 12(g) of the Act:
NONE
Securities for which there is a reporting obligation pursuant to Section 15(d)
of the Act:
NONE
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, 2006 THE REGISTRANT HAD 20,113,711 ORDINARY SHARES
OUTSTANDING (INCLUDING 1,206,802 ORDINARY SHARES OWNED BY THE REGISTRANT AND
166,031 ORDINARY SHARES HELD BY A TRUSTEE IN CONNECTION WITH THE REGISTRANT'S
STOCK OPTION PLANS).
Indicate by check mark if the registrant is a well-known seasoned
issuer, as defined in Rule 405 of the Securities Act.
Yes [_] No [X]
If this report is an annual or transition report, indicate by check
mark if the registrant is not required to file reports pursuant to Section 13 or
15(d) of the Securities Exchange Act 1934.
Yes [_] No [X]
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing
requirements for the past 90 days.
Yes [X] No [_]
Indicate by check mark which financial statement item the Registrant
elected to follow:
Item 17 [_] Item 18 [X]
If this is annual report, indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.
Yes [_] No [X]
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer. See definition of "accelerated filer and large
accelerated filer" in Rule 12b-2 of the Exchange Act.
Large Accelerated filer [_] Accelerated Filer [_] Non-Accelerated Filer [X]
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TABLE OF CONTENTS
Page
----
Introduction ........................................................ 4
Item 1 Identity of Directors, Senior Management and Advisers... 5
Item 2 Offer Statistics and Expected Timetable................. 5
Item 3 Key Information......................................... 5
Item 4 Information on the Company.............................. 11
Item 4A Unresolved Staff Comments............................... 21
Item 5 Operating and Financial Review and Prospects............ 22
Item 6 Directors, Senior Management and Employees.............. 38
Item 7 Major Shareholders and Related Party Transactions....... 46
Item 8 Financial Information................................... 48
Item 9 The Offer and Listing................................... 48
Item 10 Additional Information.................................. 50
Item 11 Quantitative and Qualitative Disclosures About Market
Risk................................................. 59
Item 12 Description of Securities Other Than Equity Securities.. 60
Item 13 Defaults, Dividend Arrearages and Delinquencies......... 60
Item 14 Material Modifications to the Rights of Security Holders
and Use of Proceeds.................................. 60
Item 15 Controls and Procedures................................. 60
Item 16A Audit Committee Financial Expert........................ 60
Item 16B Code of Ethics.......................................... 60
Item 16C Principal Accountant Fees and Services.................. 60
Item 16D Exemptions from Listing Standards for Audit Committees.. 61
Item 16E Purchases of Equity Securities by the Issuer and
Affiliated Purchasers................................ 61
Item 17 Financial Statements.................................... 61
Item 18 Financial Statements.................................... 61
Item 19 Exhibits................................................ 61
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INTRODUCTION
As used herein, references to "we," "our," "us," "Delta Galil" or the
"Company" are references to Delta Galil Industries Ltd. and to its consolidated
subsidiaries, except as the context otherwise requires. In addition, references
to our "financial statements" are to our consolidated financial statements
except as the context otherwise requires.
In this document, references to "$," "US$," "U.S. dollars" and
"dollars" are to United States dollars and references to "NIS" and "shekels" are
to New Israeli Shekels.
Our financial statements included in this annual report are prepared
in accordance with U.S. GAAP, and the accompanying discussion of the results of
our operations is based on our results under U.S. GAAP. See "Item 18. Financial
Statements" and "Item 5. Operating and Financial Review and Prospects-Operating
Results".
Delta Galil had 20,113,711 ordinary shares outstanding as of March 25,
2007, including shares held by Delta Galil itself and shares held by a trustee
in connection with Delta Galil's stock option plans. Percentages of outstanding
shares used herein are based on 18,740,878 ordinary shares outstanding as of
March 1, 2007, which excludes 1,206,802 ordinary shares held by Delta Galil, and
166,031 ordinary shares held by a trustee in connection with Delta Galil's stock
option plans.
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PART I
ITEM 1: IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
Not Applicable.
ITEM 2: OFFER STATISTICS AND EXPECTED TIMETABLE
Not Applicable.
ITEM 3: KEY INFORMATION
3.A SELECTED FINANCIAL DATA
The selected consolidated statement of income data set forth below
have been derived from Delta Galil's audited consolidated financial statements,
which were prepared in accordance with U.S. GAAP. The selected consolidated
financial data set forth below should be read in conjunction with "Item 5.
Operating and Financial Review and Prospects" and Delta Galil's consolidated
financial statements and the notes to those financial statements included in
Item 18 of this annual report.
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YEAR ENDED DECEMBER 31,
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2002 2003 2004 2005 2006
-------- -------- -------- --------- --------
($ IN THOUSANDS, EXCEPT PER SHARE DATA)
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STATEMENT OF INCOME DATA:
Net revenues ............................................. $567,298 $580,130 $654,269 $ 684,481 $706,699
Cost of revenues ......................................... 454,238 463,863 533,036 582,799 574,246
-------- -------- -------- --------- --------
Gross profit ............................................. 113,060 116,267 121,233 101,682 132,453
Selling, marketing, general administrative expenses ...... 84,135 82,089 98,646 107,008 107,752
Amortization of intangible asset ......................... 779 739
Loss (gain) from realization of assets ................... 92 (3,645) (922) 77 (686)
Impairment of fixed assets ............................... 7,415
Restructuring expenses ................................... 1,065 1,007 1,100 9,102 1,663
Goodwill impairment ...................................... 5,505
-------- -------- -------- --------- --------
Operating income (loss) .................................. 27,768 36,816 22,409 (28,204) 22,985
Financial expenses - net ................................. 5,456 5,637 6,231 10,218 13,558
Other income - net ....................................... 960 252 958 300
-------- -------- -------- --------- --------
Income (loss) before taxes on income ..................... 23,272 31,431 17,136 (38,122) 9,427
Income tax benefit (expense) ............................. (5,779) (7,340) (2,846) 2,302 (5,784)
-------- -------- -------- --------- --------
Income (loss) after taxes on income ...................... 17,493 24,091 14,290 (35,820) 3,643
Share in profits (losses) of associated companies - net .. 158 (300) (237) (27)
Minority interests - net ................................. (1,025) (439) (1,368) (500) (495)
-------- -------- -------- --------- --------
Net income (loss) ........................................ $ 16,626 $ 23,352 $ 12,685 $ (36,347) $ 3,148
======== ======== ======== ========= ========
EPS:
Basic .................................................... $ 0.88 $ 1.28 $ 0.69 $ (1.94) $ 0.17
======== ======== ======== ========= ========
Diluted .................................................. $ 0.88 $ 1.24 $ 0.67 $ (1.94) $ 0.17
======== ======== ======== ========= ========
Weighted average number of shares used in computation(1)
Basic ................................................. 18,914 18,313 18,478 18,695 18,700
Diluted ............................................... 18,927 18,763 18,834 18,695 18,742
Cash dividend per ordinary shares ........................ $ 0.37 $ 0.52 $ 0.45 -,- -,-
(1) See note 11g of the notes to Delta Galil's consolidated financial
statements included in Item 18 of this annual report for a discussion of
the shares used to compute net income per share for the years ended
December 31, 2004, 2005 and 2006.
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YEAR ENDED DECEMBER 31,
----------------------------------------------------
2002 2003 2004 2005 2006
-------- -------- -------- -------- --------
($ IN THOUSANDS)
----------------------------------------------------
BALANCE SHEET DATA:
Cash and cash equivalents .. $ 14,491 $ 17,699 $ 22,150 $ 14,595 $ 10,342
Working capital (1) ........ 67,945 56,612 127,382 80,949 54,853
Total assets ............... 441,058 450,884 534,497 476,573 450,862
Shareholders' equity ....... 197,829 212,334 221,081 184,314 188,217
Amount of Share Capital .... 21,792 21,830 21,840 21,840 21,851
(1) Working capital is computed as total current assets less current
liabilities.
3.B CAPITALIZATION AND INDEBTEDNESS -
Not applicable.
3.C REASONS FOR THE OFFER AND USE OF PROCEEDS
Not applicable.
3.D RISK FACTORS
The following factors, in addition to other information contained in
this annual report, should be considered carefully.
This annual report includes certain statements that are intended to
be, and are hereby identified as, "forward-looking statements" for the purposes
of the safe harbor provisions of the Private Securities Litigation Reform Act of
1995. We have based these forward-looking statements on our current expectations
and projections about future events. These forward-looking statements are
subject to risks, uncertainties, and assumptions about Delta Galil, including,
among other things:
o our anticipated growth strategies;
o our intention to introduce new products;
o increased competition, especially from the Far East;
o anticipated trends in our business;
o future expenditures for capital projects; and
o our ability to continue to control costs and maintain quality.
Forward-looking statements can be identified by the use of
forward-looking terminology such as "may," "will," "expect," "anticipate,"
"estimate," "continue" or other similar words. These statements discuss future
expectations, contain projections of results of operations or of financial
condition or state other "forward-looking" information. When considering such
forward-looking statements, you should keep in mind the risk factors and other
cautionary statements in this annual report.
These statements may be found in Item 4: "Information on the Company"
and Item 5: "Operating and Financial Review and Prospects" and in this annual
report generally. Our actual results could differ materially from those
anticipated in these forward-looking statements as a result of various factors,
including all the risks discussed in "Risk Factors" and elsewhere in this annual
report.
We undertake no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise. In light of these risks, uncertainties and assumptions, the
forward-looking events discussed in this annual report might not occur.
RECENT CHANGES IN WORLD TRADE ORGANIZATION QUOTAS COULD PUT PRESSURE ON APPAREL
PRICES.
Effective January 1, 2005, the World Trade Organization's 148 member
nations lifted some of the quotas on apparel and textiles. As a result, some of
the textiles and textile apparel manufactured in a member nation are no longer
subject to quota restrictions, although in 2006, some of the quotas on products
from China were re-imposed. This change allows retailers, apparel firms and
others to import unlimited quantities of apparel and textile items from China,
India and other low-cost countries. As a result, prices of textiles and apparel,
including our products, have faced downward pressure and may continue to
decline. If
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prices decline faster than we are able to cut costs, our business and results of
operations could be affected adversely.
MOST OF DELTA GALIL'S SALES ARE TO A FEW SIGNIFICANT CUSTOMERS. ANY REDUCTION OF
PURCHASES BY ANY SIGNIFICANT CUSTOMER COULD MATERIALLY ADVERSELY AFFECT DELTA
GALIL'S REVENUES.
A majority of Delta Galil's revenues is from sales to three customers.
In 2006, 22% of Delta Galil's revenues were from sales to Marks and Spencer,
Delta Galil's largest customer. Sales to Wal-Mart reached 21% of revenues and
sales to Target reached 8% of revenues. Delta Galil's contracts with its
customers, including Marks & Spencer, Wal-Mart and Target are short-term and do
not contain minimum purchase requirements. It is possible that, in the future,
Delta Galil's customers will not purchase Delta Galil's products in the same
volumes or on the same terms as in the past. Any reduction of purchases by Marks
& Spencer, Wal-Mart, Target or other key customers could adversely affect Delta
Galil.
DELTA GALIL HAS BENEFITED FROM ITS SHIFT OF LABOR-INTENSIVE PRODUCTION TO LOWER
LABOR COST COUNTRIES. A RISE IN WAGE LEVELS IN THOSE COUNTRIES COULD ADVERSELY
AFFECT DELTA GALIL'S FINANCIAL RESULTS.
Delta Galil owns production facilities and outsources production in
countries that have low labor costs. In 2006, Delta Galil produced goods in
Jordan, Egypt, Turkey, Eastern Europe and the Far East that accounted for
approximately 88% of its revenues. Historically, Delta Galil's operating results
have benefited from this shift of labor-intensive production to lower labor cost
countries, and Delta Galil intends to increase its production in low labor cost
countries. Delta Galil's financial results could be harmed if wage levels
increased dramatically in the countries in which Delta Galil produces. In
addition, there can be no assurance that we will be able to shift additional
production to lower labor cost countries.
A DETERIORATION IN ISRAEL'S RELATIONSHIP WITH NEIGHBORING COUNTRIES IN WHICH
DELTA GALIL HAS PRODUCTION FACILITIES COULD INTERRUPT DELTA GALIL'S PRODUCTION
AND HARM ITS FINANCIAL RESULTS.
Products produced in Egypt, Jordan and Turkey accounted for 35% of our
2006 revenues. Delta Galil's operations in these countries depend largely on
their relationship with the State of Israel. In the past, there have been
hostilities between Israel and Jordan and Egypt. In addition, since October
2000, there has been an increase in hostilities between Israel and the
Palestinians. As a result, several Arab states reduced the level of relations
with the State of Israel, principally regarding economic and commercial
activities. A deterioration in Israel's relations with Jordan or Egypt could
interrupt Delta Galil's foreign production operations and would adversely affect
Delta Galil.
DUE TO SEASONAL FLUCTUATIONS, DELTA GALIL'S OPERATING RESULTS IN ANY QUARTER MAY
NOT BE REPRESENTATIVE OF FUTURE PERFORMANCE.
Delta Galil has experienced fluctuations in its annual and quarterly
operating results, and may continue to experience these fluctuations in the
future. Delta Galil's revenues have fluctuated in certain years due to seasonal
purchasing by consumers. Revenues in the last two quarters of certain years
exceeded revenues in the first two quarters due to back-to-school and holiday
purchases. Because of these fluctuations, Delta Galil's operating results in any
quarter may not be representative of its future performance. These fluctuations
may make it difficult for investors to properly evaluate Delta Galil's
prospects.
DELTA GALIL'S INTERNATIONAL OPERATIONS EXPOSE IT TO THE RISK OF FLUCTUATIONS IN
CURRENCY EXCHANGE RATES THAT COULD HARM ITS OPERATING RESULTS.
Although Delta Galil is an Israeli company, its functional currency is
the U.S. dollar. Delta Galil has operations and sales in many countries that are
not denominated in dollars, and is therefore exposed to fluctuations in the rate
of exchange between the dollar and those currencies. In 2006, Delta Galil
derived 24.3% of its revenues from customers in Pounds Sterling, 8.5% in NIS,
and 7.6% in Euros. More than 10% of Delta Galil's expenses in 2006 were in NIS.
Some of Delta Galil's expenses in Israel are linked to the Israeli
consumer price index. Consequently, Delta Galil is exposed to risk to the extent
that the rate of Israeli inflation exceeds the rate of the NIS devaluation in
relation to the U.S. dollar and to the extent that the timing of such
devaluation lags behind inflation in Israel, resulting in a negative effect on
Delta Galil's profitability in dollar terms in those periods.
In order to limit Delta Galil's exposure to fluctuations in the
exchange rate between the U.S. dollar and other currencies, Delta Galil from
time to time purchases forward contracts for the exchange of foreign currencies
into dollars at a fixed rate. Nevertheless, these hedging transactions will not
protect Delta Galil if the decline in those currencies against the dollar
continues for longer than the term of the forward contracts. See Item 11:
"Quantitative and Qualitative Disclosures About Market Risk".
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INTEGRATION OF RECENT ACQUISITIONS WITH DELTA GALIL REQUIRES SUBSTANTIAL
MANAGERIAL RESOURCES, AND DELTA GALIL MAY BE UNABLE TO ACHIEVE INTEGRATION
SUCCESSFULLY.
In December 2004, Delta Galil acquired Burlen Corporation, and in
November 2003 Delta Galil completed the acquisition of Auburn Hosiery Mills and
its subsidiaries. We are continuing to integrate the facilities and personnel of
these acquired companies. The integration diverts substantial attention of our
senior management team from Delta Galil's daily operations, places significant
pressure on our staff and other resources and poses financial, operational and
legal risks. The integration may be impeded by general economic conditions,
failure to integrate financial and operating systems, adverse response of
competitors or clients, or regulatory developments. Any failure to complete the
integration successfully could adversely affect Delta Galil.
THE APPAREL INDUSTRY IS SUBJECT TO CHANGES IN FASHION PREFERENCES. IF DELTA
GALIL AND ITS CUSTOMERS MISJUDGE A FASHION TREND, SALES COULD DECLINE.
Delta Galil's success depends, in part, on its ability to design and
manufacture products that will appeal to consumers' changing fashion
preferences. Delta Galil may not be successful in anticipating and responding to
fashion trends in the future. If Delta Galil and its customers misjudge a
fashion trend, the customer's orders may decline, which could adversely affect
Delta Galil.
DELTA GALIL MAY BE UNABLE TO COMPETE WITH OTHER MANUFACTURERS THAT HAVE
FINANCIAL, GEOGRAPHIC AND OTHER ADVANTAGES.
Delta Galil competes directly with numerous manufacturers of apparel,
which enjoy better economies of scale and/or lower effective labor costs, are
closer geographically to customers and/or suppliers, and enjoy greater financial
and marketing resources than Delta Galil. Increased competition could result in
pricing pressure or loss of market share and adversely affect Delta Galil's
revenues and profitability. There can be no assurance that Delta Galil will be
able to compete successfully against existing or new competitors.
IF PRIVATE LABEL CUSTOMERS PRODUCE THEIR OWN PRODUCTS AND CONTRACT DIRECTLY WITH
MANUFACTURERS SUCH AS DELTA GALIL, OUR SALES COULD DECLINE.
Recently, some large retailers have attempted to bypass private label
underwear manufacturers and to contract directly with factories to produce their
own products. This trend is most likely to occur in the more basic, mass-market
products, in which design is less of a factor. If this trend continues and
grows, it could have an adverse effect on Delta Galil's sales in those
categories.
IF DELTA GALIL'S CUSTOMERS ARE UNABLE TO SUCCESSFULLY COMPETE IN THEIR MARKETS,
DELTA GALIL'S REVENUES COULD DECLINE.
Delta Galil's customers operate in an intensely competitive retail
environment. In the event that any of its customers' sales decline for any
reason, whether or not related to Delta Galil or its products, Delta Galil's
sales to such customers could also decline.
GMM CAPITAL AND DOV LAUTMAN OWN OVER 50% OF DELTA GALIL'S OUTSTANDING SHARES,
AND TOGETHER CAN CONTROL DELTA GALIL'S MANAGEMENT.
GMM Capital beneficially owns 5,323,793 ordinary shares, representing
28.4% of the outstanding ordinary shares of Delta Galil. Mr. Dov Lautman the
Chairman of the Board of Directors of Delta Galil, beneficially owns 4,644,993
ordinary shares, representing approximately 24.8% of the ordinary shares
outstanding. Mr. Lautman and the companies that he controls have a shareholders'
agreement with GMM Capital that requires each party to vote the shares it
beneficially owns to elect directors designated by GMM Capital to compose 30% of
the board of directors, other than independent directors, and to elect Mr.
Lautman's designees for the remainder of the board, other than independent
directors. In addition, the agreement provides that the appointment of a new
Chief Executive Officer requires the consent of GMM Capital, and the consent of
both GMM Capital and the companies controlled by Mr. Lautman is required for a
number of major decisions, as described in "Item 7 -- Major Shareholders And
Related Party Transactions - Shareholders Agreements." Mr. Lautman and GMM
Capital have also given one another the first opportunity to buy any shares the
other party wishes to sell. Mr. Lautman and GMM Capital together have the power
to elect all of the directors other than independent directors, appoint
management and approve actions requiring the approval of a majority of Delta
Galil's shareholders.
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DOV LAUTMAN, DELTA GALIL'S CHAIRMAN, FOUNDER AND ONE OF THE PRINCIPAL
SHAREHOLDERS, HAS SIGNIFICANTLY CONTRIBUTED TO ITS SUCCESS. IF DOV LAUTMAN WERE
TO LEAVE, DELTA GALIL COULD BE ADVERSELY AFFECTED.
Dov Lautman, the Chairman of the Board of Directors, a founder and one
of the principal shareholders of Delta Galil, has made significant contributions
to its growth. Delta Galil does not have an employment agreement with Mr.
Lautman. Should Mr. Lautman discontinue his service, Delta Galil's business may
be adversely affected.
DELTA GALIL HAS NO CONTROL OVER FLUCTUATIONS IN THE COST OF THE RAW MATERIALS IT
USES OR THE COST OF FREIGHT. A RISE IN COSTS COULD HARM DELTA GALIL'S
PROFITABILITY.
The primary raw materials used by Delta Galil in the manufacture of
its products are cotton yarn, Lycra(R) and elastics. Delta Galil's financial
performance is dependent to a substantial extent on the cost and availability of
these raw materials. The price of these raw materials, as well as freight costs,
fluctuate due to varying supply and demand and other market factors over which
Delta Galil has no control. Delta Galil may not be able to transfer the
increased costs due to a rise in prices of raw materials to its customers. This
would likely adversely affect Delta Galil's profitability and financial
condition.
BECAUSE DELTA GALIL OPERATES INTERNATIONALLY, IT IS EXPOSED TO CHANGES IN
FOREIGN REGULATIONS, TARIFFS, TAX LAWS AND OTHER RISKS INHERENT TO INTERNATIONAL
BUSINESS, ANY OF WHICH COULD AFFECT DELTA GALIL'S OPERATING RESULTS.
Delta Galil's international purchases, sales and production expose it
to risks inherent in doing business in international markets such as:
o adverse changes in foreign regulations, export restrictions, tariffs,
trade barriers and tax rules;
o difficulty in staffing and managing international operations; and
o changes in social, political and economic conditions.
Any of these factors could adversely affect Delta Galil's ability to
deliver or receive goods on a competitive and timely basis and its results of
operations.
DELTA GALIL HAS NO ESTABLISHED DIVIDEND POLICY AND CANNOT ASSURE THE AMOUNT OR
FREQUENCY OF FUTURE DIVIDENDS.
Delta Galil does not have an established dividend policy. Delta Galil
distributed cash dividends to shareholders from time to time in the past and may
do so in the future. However, Delta Galil cannot assure the amount, frequency or
any distribution of future dividends. Delta Galil's board of directors will
determine future dividends, in light of several factors including Delta Galil's
earnings, financial condition and capital requirements. In addition, under
Israeli law, Delta Galil may pay dividends only out of accumulated earnings or
out of net earnings for the two years preceding the distribution of the
dividends.
A REVIVAL OF HOSTILITIES INVOLVING ISRAEL COULD ADVERSELY AFFECT DELTA GALIL'S
INTERNATIONAL TRADE AND OPERATIONS.
Delta Galil is incorporated under the laws of the State of Israel,
where it also maintains its headquarters and a significant part of its
manufacturing facilities. Political, economic and military conditions in Israel
directly influence Delta Galil. Since the establishment of the State of Israel
in 1948, Israel and its Arab neighbors have engaged in a number of armed
conflicts. A state of hostility, varying in degree and intensity, has led to
security and economic problems for Israel. Despite progress towards peace
between Israel, its Arab neighbors and the Palestinians, major hostilities may
revive. Such hostilities may hinder Israel's international trade and lead to
economic downturn. This, in turn, could have a material adverse effect on Delta
Galil's operations and business.
Generally, male adult citizens and permanent residents of Israel are
obligated to perform military reserve duty annually. Additionally, these
residents may be called to active duty at any time under emergency
circumstances. The full impact on Delta Galil's workforce or business if some of
Delta Galil's officers and employees are called upon to perform military service
is difficult to predict.
DELTA GALIL BENEFITS FROM ISRAELI GOVERNMENT PROGRAMS THAT COULD BE REDUCED OR
ELIMINATED, INCREASING DELTA GALIL'S COSTS.
Many of Delta Galil's existing production facilities in Israel were
entitled to Israeli government grants and tax benefits. Delta Galil received
grants until 2004 under these programs. The grant levels have been reduced in
the past by the Israeli government and there can be no assurance that the
Israeli government
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will not further reduce these investment grants. See Item 10: "Additional
Information - Israeli Taxation."
Due to existing losses for tax purposes, Delta Galil has not used any
of the tax benefits to which it is entitled under these government programs
since 1999, except with respect to accelerated depreciation on real-estate
property. The remaining tax benefits may be available for use in future years.
See Item 10: "Additional Information - Israeli Taxation."
The termination or reduction of these Israeli government programs,
particularly benefits available to Delta Galil as a result of the "Approved
Enterprise" status of its existing facilities, would increase Delta Galil's
costs of acquiring machinery and equipment for its production facilities, which
could have an adverse effect on Delta Galil.
In order to maintain eligibility for these grants and tax benefits,
Delta Galil must continue to meet various conditions, such as investment in
fixed assets and operations in specified zones. If Delta Galil fails to meet
these conditions in the future, it could be required to forego tax benefits and
to refund grants already received, in whole or in part, with interest, linked to
the consumer price index in Israel. To secure its obligations, Delta Galil gave
the Israeli government a security interest over all its assets in Israel.
DELTA GALIL BENEFITS FROM PRODUCING IN COUNTRIES THAT HAVE FREE TRADE AGREEMENTS
WITH COUNTRIES WHERE ITS CUSTOMERS ARE LOCATED. A LOSS OF THESE FREE TRADE
ADVANTAGES WOULD ELIMINATE AN IMPORTANT COMPETITIVE ADVANTAGE.
Delta Galil benefits from Israel's free trade agreements with the
United States, Canada, the European Union and the European Free Trade
Association. The trade agreements permit Delta Galil to sell its Israeli
manufactured products to the United States, Canada, and the member countries of
the European Union and the European Free Trade Association free of customs
duties and import quotas. The United States has extended the benefits of the
Israel- United States Free Trade Area Agreement to goods processed in the area
of Jordan in which Delta Galil has its facilities. Due to a free trade agreement
between the European Union, the United States and Egypt, Delta Galil's products
manufactured in Egypt can enter the EU countries and into the United States,
free of duties and quotes, as well. A loss of these free trade advantages would
eliminate an important competitive advantage.
YOU MAY NOT BE ABLE TO ENFORCE CIVIL LIABILITIES IN THE UNITED STATES AGAINST
DELTA GALIL'S OFFICERS AND MOST OF ITS DIRECTORS.
Most of Delta Galil's officers and directors reside outside the United
States. Service of process upon them may be difficult to effect within the
United States. Furthermore, because the majority of Delta Galil's assets are
located outside the United States, any judgment obtained in the United States
against Delta Galil or any of its directors and officers may not be collectible
within the United States.
ITEM 4: INFORMATION ON THE COMPANY
4.A HISTORY AND DEVELOPMENT OF THE COMPANY
Delta Galil Industries Ltd. was incorporated in Israel in 1975 and
operates as a public company with liability limited by shares under the Israeli
Companies Law, 1999. Our registered offices are located at 2 Kaufman Street,
Tel-Aviv 68012, Israel and our telephone number is (972) 3-519-3636. Delta
Galil's ordinary shares have been listed on the Tel Aviv Stock Exchange since
1982. In 1999 the trading of Delta Galil's ADSs commenced on the Nasdaq National
Market, currently named the Nasdaq Global Market. Delta Galil, with its
consolidated subsidiaries, is a global manufacturer and marketer of quality
private label ladies' intimate apparel, men's underwear, socks, shirts,
babywear, bras, leisurewear and nightwear, knitted fabrics, dyeing, trimmings
and elastic ribbons. Delta Galil sells its products to leading retailers,
including:
o Marks & Spencer (U.K.)
o Wal-Mart (U.S.)
o Target (U.S.)
o Victoria's Secret (U.S.)
o Hema (Holland)
o JC Penney (U.S.)
o Kmart (U.S.)
o Mervyn's (U.S.)
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and to marketers of leading brand names, including:
o Calvin Klein (U.S.)
o Nike
o Hugo Boss (Germany)
o Pierre Cardin
Delta Galil also sells its products under brand names which are
licensed to Delta Galil, such as Wilson(R), Barbie(R), Maidenform(R), Nicole
Miller(R), as well as under the Delta brand name (in Israel).
Delta Galil's ability to provide its customers with a comprehensive
package of services has enabled it to develop and maintain strong long-term
relationships with its customers. These services include:
o product line planning and design;
o manufacture of high quality knitted apparel using automated
manufacturing processes; and
o marketing, packaging and distribution of finished products tailored to
the requirements of the customers in Europe and the United States.
Delta Galil designs and develops its products primarily in the United
States, England and Israel. Most of Delta Galil's products are manufactured in
lower labor cost countries, such as Egypt, Jordan and Turkey as well as
countries in the Far East.
CAPITAL EXPENDITURES
The following table shows Delta Galil's fixed assets purchases in
thousands US dollars for the last three years on a cash flow basis, broken down
by regions. These capital expenditures were financed from Delta Galil's
operating cash flow.
YEAR ENDED DECEMBER 31,
--------------------------
2004 2005 2006
------- ------- ------
Israel .......... $ 6,602 $ 3,424 $2,364
China ........... 3,665 855
Egypt ........... 3,253 3,100 619
North America ... 851 2,233 790
Thailand ........ 501
India ........... 340
United Kingdom .. 314 209 70
Eastern Europe .. 1,112 109 16
Jordan .......... 914 38 83
Others .......... 438 256 68
------- ------- ------
Total $13,484 $13,034 $5,706
======= ======= ======
4.B BUSINESS OVERVIEW
COMPETITIVE STRENGTHS
The apparel market is highly competitive and fragmented. Delta Galil's
products compete with the products of other manufacturers located throughout the
world.
Competition in the apparel market is generally based on price, quality
and customer service. Delta Galil believes that it has a relative advantage over
its competitors for the following reasons:
o HIGH QUALITY INNOVATIVE PRODUCT LINES. Delta Galil produces a broad
selection of fashionably designed product lines using high quality
knitted materials and attractive packaging. In 1998, Delta Galil
introduced seamless intimate apparel, known as "seam-free" products.
These products are produced using techniques that minimize
labor-intensive production functions. In 2005 Delta introduced the
next generation cotton "Real Cool Cotton" (RCC). RCC(TM) uses a
nano-technology process along with special treatment to increase the
absorption capacity of the fabric, simultaneously transferring
moisture to the surface and enabling swift evaporation.
o LONG-TERM RELATIONSHIPS WITH LEADING RETAILERS AND BRAND NAME
MARKETERS. Delta Galil has developed long-term relationships with its
customers, many of whom control significant market shares in their
respective countries. Although Delta Galil's customer contracts are
generally short-term and do not contain minimum purchase requirements,
Delta Galil has enjoyed relationships of more than five years with
most of its major customers. Delta Galil and its in-house design teams
and technology experts work closely with customers to provide a
comprehensive package of services, including design, development,
manufacturing and marketing of new product lines.
-12-
o UNIQUE FREE TRADE STATUS. Israel has free trade agreements with each
of the United States, Canada, the European Union and the European Free
Trade Association. Delta Galil's operations in Jordan and Egypt also
benefit from advantageous trade agreements.
STRATEGY
The key elements of Delta Galil's strategy are to:
o ENHANCE SALES TO EXISTING LARGE CUSTOMERS. Delta Galil seeks to
increase sales of existing products and to introduce new product
categories to existing customers. Delta Galil believes its broad
product offerings, emphasis on customer service and proven reliability
provide a competitive advantage as retailers consolidate purchases
from a smaller number of suppliers. Delta Galil intends to continue
capitalizing on this trend by expanding the scope of its existing
customer relationships.
o DEVELOP RELATIONSHIPS WITH SELECTED NEW CUSTOMERS. Delta Galil is
developing relationships with new customers who require high quality
products to sell under their private labels or brands, are capable of
ordering in significant volumes, demonstrate substantial growth
potential and require Delta Galil's high level of service. Recent
customer additions include Tommy Hilfiger(R), Puma(R), Polo(R), and
Carrefour(R) (Europe), and Nicole Miller(R) (North America).
o CONTINUOUSLY IMPROVE ITS MANUFACTURING EFFICIENCY. Delta Galil
continuously seeks to increase manufacturing efficiencies by (1)
moving labor intensive functions to lower cost countries, (2) further
automating its operations and (3) introducing new technologies.
o PURSUE STRATEGIC ACQUISITIONS. In December 2004 Delta acquired Burlen
Corporation. Delta Galil may pursue additional strategic acquisitions
of businesses that would complement its product lines and customer
relationships.
o BRANDING. The market positioning of brands is becoming more prominent.
Behind each such brand there is a message, which brings the consumer,
an emotional attachment to the product. Delta Galil, traditionally a
private label manufacturer, began licensing leading brand names in the
last few years for use in socks and men's and ladies' underwear. These
brands include, Nicole Miller(R) worldwide; Wilson(R) and Converse(R)
for socks and men's and ladies' underwear for the European and North
American market; Barbie(R) for girls' sleepwear in the United States
and Maidenform(R) for girls' bras in the United States. Delta handles
all aspects of production from the initial processes to finished
products and inventory management. Delta Galil is looking for
additional brands to license.
2004 ACQUISITION
ACQUISITION OF BURLEN
In December 2004, Delta Galil acquired Burlen Corp., a leading private
label manufacturer of ladies intimate apparel. Burlen's customers are mass and
mid-market retailers. Burlen has been supplying Wal-Mart, its largest customer,
for nearly 40 years. Burlen's design, merchandising and marketing teams are
located in New York and its logistics, operations and distribution facilities
are located in Tifton, Georgia. Burlen manufactures primarily through
subcontractors in the Far East and the Caribbean.
Delta paid Burlen's selling shareholders $48.2 million in cash and
$2.2 million in ordinary shares comprised of 215,684 ordinary shares valued at
$10.43 per share transferred from Delta's treasury shares. In addition, Delta
paid $8.2 million of Burlen's bank debt. Delta Galil also accrued $1.0 million
in other cost related to the transaction, which were paid in 2005.
During 2005, Delta Galil made a $1.3 million additional payment to the
selling shareholders with respect to additional costs incurred by the Company as
it was agreed in the purchase agreement. This payment was recorded as additional
goodwill.
In addition, under the agreement Delta Galil was required to pay
additional amounts of up to $15 million in the aggregate to the selling
shareholders, subject to achieving certain revenues and operating profit targets
over a period of three years, from 2005 to 2007.
In February 2006, the parties signed an amendment to the stock
purchase agreement based on which the aggregate additional amount which could be
paid to the selling shareholders was increased to a maximum of $18 million,
subject to achieving adjusted targets over a period of six years, from 2006 to
2011. On March
-13-
15, 2006, a non-refundable payment of $1.3 million was made against future
consideration with respect to 2007 and 2008 targets. In March 2007, Delta Galil
made an additional $2.4 million payment to the selling shareholders with respect
to 2006 targets, as agreed in the purchase agreement. This payment was recorded
on December 31, 2006 as additional goodwill.
PRODUCTS
Delta Galil works closely with its customers to design and manufacture
high quality knitwear. Delta Galil produces a variety of products using cotton
and man-made fibers, which are generally sold at all price levels.
The following table outlines representative products in each of Delta
Galil's product categories, key customers/brands and the percentage of total
revenues that each product category represented during 2004, 2005 and 2006.
% OF REVENUES
YEAR ENDED DECEMBER 31,
-----------------------
PRODUCT CATEGORY KEY PRODUCTS KEY CUSTOMERS/BRANDS 2004 2005 2006
---------------- ----------------------------------- -------------------- ---- ---- ----
Ladies' Intimate Fashion and basic panties and bras Marks & Spencer 54% 61% 58%
Apparel Women's nightwear Wal-Mart
Girl's nightwear Target
JC Penney
Victoria's Secret
Calvin Klein
Socks Men's, women's and children's Marks & Spencer 23% 20% 19%
leisure, dress and sport socks Nike
Wal-Mart
Hema
Men's Underwear Briefs Calvin Klein 13% 11% 15%
Boxer shorts Hema
Mini-briefs Hugo Boss
Undershirts Marks & Spencer
Men's nightwear Wal-Mart
Target
Leisurewear T-shirts Marks & Spencer 4% 3% 4%
Polo shirts
Sweatshirts
Leisure clothes
Babywear Fashion and classic items, focusing Marks & Spencer 4% 3% 3%
on newborns
Others Fabrics, elastic tapes and other 2% 2% 1%
operations
--- --- ---
100% 100% 100%
=== === ===
o LADIES' INTIMATE APPAREL: Delta Galil's intimate apparel items include both
fashion and basic underwear, bras and seam-free panties, tops and control
underwear. The decrease in this category as a percentage of total revenues
in 2006 is mainly due to the decrease in sales to Marks & Spencer due to
increased competition from the Far East.
o SOCKS: Delta Galil manufactures men's, women's and children's socks in the
leisure, dress and sports categories. Among the varieties of socks that
Delta Galil manufactures are socks with popular cartoon and other
characters that Delta Galil licenses. The decrease in this category in 2006
is mainly due to the decrease in sales in North America due to Delta's
decision to cease its activity in Canada.
-14-
o MEN'S UNDERWEAR: Delta Galil manufactures men's fashion and basic underwear
for customers that include marketers of fashion brands and department store
private labels. The increased sales in this category in 2006 are attributed
to a general increase in orders from most of our customers and due to the
introduction of new Real Cool Cotton products.
o LEISUREWEAR: Delta Galil manufactures basic and fashion leisurewear in a
wide variety of styles and fabrics. The products range from T-shirts, polo
shirts, sweatshirts and jogging suits to leisure and fashionable blouson
jackets.
o BABYWEAR: Babywear includes fashion and classic daywear and sleepsuits in a
wide variety of styles and fabrics, with a focus on newborns.
CUSTOMERS
Delta Galil maintains long-term relationships with its customers, many
of whom control significant market shares in their respective countries. Delta
Galil premises its marketing strategy on its ability to offer customers a
package of services, including product planning and design tailored to the
customers' needs, high-tech quality manufacturing, distribution and logistics
setup and computer-linked accounts.
Delta Galil has strong in-house creative teams of designers and
technology experts, consisting of fashion designers, textile designers, yarn
experts, knitting experts and dyeing and finishing experts. Delta Galil's design
specialists remain constantly apprised of technological innovations in textile
equipment and the state of the art in yarns, fabrics and accessories worldwide.
Delta Galil's presence in both the United States and Europe also enables its
design personnel to offer significant sales and marketing advice in both
markets. Although Delta Galil's products are sold predominantly under the
private labels and brands of its customers, Delta Galil's design specialists
collaborate closely with its customers to design and develop products. The
design teams prepare presentations for customers, including analysis of previous
season successes and failures, and, with the customer's participation, develop
the concept, product, packaging and product specifications, tailored to the
customer's specific needs. Delta Galil believes that the comprehensive nature of
the services it offers is a major factor in the strength of its relationship
with its customers.
THE NORTH AMERICAN MARKET
Recognizing the North American market's size and diversification,
Delta Galil targeted this market as its major strategic market for growth and
profitability. Through internal growth and a series of acquisitions, Delta Galil
has been successful in rapidly increasing its presence in the North American
market. Sales to North America grew from $47.3 million (which represented 16% of
total sales) in 1998 to $418.0 million (which represented 59% of total sales) in
2006. Our five largest customers in North America, Wal-Mart, Target, Victoria's
Secret, JC Penney and Calvin Klein, represented approximately 79% of our 2006
sales in North America. The increase in 2006 sales in North American is mainly
due to the increase in sales of ladies fashionable intimate apparel products to
Victoria's Secret.
MARKS & SPENCER RELATIONSHIP
Delta Galil is one of Marks & Spencer's five largest suppliers and has
been doing business with Marks & Spencer for more than 20 years. Marks & Spencer
sells all of its products under its own brand name and is one of the leading
retailers of men's underwear, women's underwear and men's socks in the United
Kingdom. Delta Galil is a diversified supplier to Marks & Spencer, selling to 12
different departments of the chain. Each department is independently managed,
has autonomy in procurement decisions, and establishes its own product standards
and supply requirements.
Delta Galil's sales to Marks & Spencer grew from $1 million in 1981 to
$49 million in 1990, to $92 million in 1995 and to $156 million in 2006,
representing 22% of Delta Galil's revenues in 2006. In 2006 sales to Marks &
Spencer decreased by 3% compared to 2005 mainly in the ladies category due to
the increased competition from the Far East which led to erosion in selling
prices and to loss of sales.
ISRAELI MARKET
Delta Galil believes that it is among the market leaders in Israel for
men's underwear, ladies' intimate apparel and socks, with $54.3 million of sales
in 2006. These sales include products Delta Galil manufactures, as well as goods
it imports into Israel or purchases from other Israeli suppliers. Of Delta
Galil's sales in Israel, 42% were made through retail department stores and
supermarkets, and 58% were made through Delta Galil's Delta Plus chain stores.
As of December 31, 2006 Delta Plus had 86 stores.
-15-
SEASONALITY
Delta Galil's revenues fluctuate due to seasonal purchasing by
consumers. Revenues in the last two quarters of certain years exceeded revenues
in the first two quarters due to back-to-school and holiday purchases.
MANUFACTURING
MANUFACTURING PROCESS
Delta Galil's manufacturing techniques enable it to provide its
customers with a wide array of consistently high quality products customized to
their individual needs at competitive prices. The production process includes
the following steps:
o RAW MATERIAL PROCUREMENT: The raw materials Delta Galil requires
include, primarily, cotton yarns, blends of cotton and synthetic
yarns (such as cotton-spandex, cotton-Lycra(R) and cotton-
viscose) and other accessories such as elastic tapes, laces and
other textile components. Delta Galil purchases its raw materials
from several international and domestic suppliers and
historically has not experienced any difficulty in obtaining raw
materials to meet production requirements. The price of these raw
materials fluctuates due to varying supply and demand and other
market factors over which Delta Galil has no control. Delta Galil
purchases its raw materials only against actual orders, except
for basic cotton yarn. As a result, Delta Galil can effectively
manage its raw material inventory. Typically, Delta Galil does
not maintain inventory of raw materials for a period of more than
eight weeks. From time to time, when market conditions are
favorable, Delta Galil enters into contracts with various
suppliers of basic cotton yarn for delivery over a period of
three to six months.
o KNITTING: Delta Galil produces the knitted fabric required for
the underwear and other garments it manufactures in Israel and in
Egypt. Delta Galil produces various types of fabric. Delta Galil
operates approximately 160 automatic knitting machines, with a
total production capacity of approximately 600 tons of fabric per
month depending on the type of fabric produced. During 2006,
Delta Galil produced approximately 410 tons of fabric per month,
approximately 91% of which Delta Galil used and the remainder was
sold to third parties. Delta Galil does not have any long-term
supply obligations and is able to adjust its capacity for its own
use when necessary. Delta Galil outsources from various suppliers
the rest of the knitted fabric it requires.
Delta Galil operates approximately 2,000 knitting machines for
the production of socks, including machines owned by
sub-contractors, with a total production capacity of
approximately 12 million pairs per month.
o DYEING AND FINISHING: Delta Galil has its own dyeing plant in
Israel for fabrics and products. The dyeing plant is principally
engaged in supplying Delta Galil's own requirements. Delta Galil
outsources the dyeing and finishing for production in Egypt.
Delta Galil's ability to control the dyeing and finishing of its
products and accumulated expertise in this area are key elements
in its ability to provide quality products to its customers.
o CUTTING: Delta Galil uses computerized, automatic cutting
equipment, which minimizes fabric waste.
o SEWING: Cut fabrics are sewn to complete the product, including
the addition of accessories such as elastic waist and leg bands
and labels. Delta Galil is currently operating at its sewing
capacity, which is, on an average basis, approximately 6 million
units per month (depending on the type of product). Delta Galil
operates its sewing plants, in Jordan, Egypt and the Far East.
Delta Galil also subcontracts sewing functions, primarily to
contractors in Israel, Egypt, the Far East and Central America.
o TESTING AND QUALITY ASSURANCE: Delta Galil places significant
emphasis on quality control and uses quality assurance teams at
each stage of the manufacturing process. Delta Galil's quality
assurance procedures meet the very strict quality control
standards of its customers.
SEAM-LESS MANUFACTURING
Applying technology utilized in the manufacture of hosiery, Delta
Galil produces one-piece seam-less panties and bras. Seam-less technology
enables the direct conversion of yarn into a nearly completed final product by a
single machine. After the machine knits the basic garment, all that is required
to complete the garment is dyeing and a limited amount of sewing and finishing.
-16-
The seam-less process eliminates most stages of the manufacturing
process, which required special equipment such as knitting machines, cutting
equipment and extensive sewing machine operations, and personnel. This advanced
computer-intensive technology enables the production of a substantially wider
range of fabrics, styles and product lines. The use of the seam-less machines
also improves Delta Galil's potential to manufacture fashionable products with
consistently higher quality, durability and comfort.
Delta Galil is making a major effort to capitalize on this unique
technology. Delta Galil continuously engages in research and development to
create additional products that use the seam-less technology. Sales of seam-less
products decreased from $40.2 million in 2000 to $25.7 million in 2006. In 2006
sales increased by 7%, compared to $24.0 million in 2005. As of December 31,
2006, Delta Galil owned 270 seam-less knitting machines.
OUTSOURCING OF PRODUCTS
Subcontractors manufactured goods in Egypt (babywear and underwear),
Turkey (socks), Bulgaria (socks), Thailand, Hong Kong, Vietnam, India,
Bangladesh, Dominican Republic and China (all ladies intimate apparel), which in
2006 accounted for approximately 70% of Delta Galil's revenues. Delta Galil
personnel closely supervise the production by subcontractors in these countries.
JORDANIAN JOINT VENTURE
Since 1995, Delta Galil has maintained a joint venture with Century
Investment Group, a Jordanian company. Delta Galil supplies cut fabric to the
joint venture and purchases sewing services. Delta Galil holds a controlling
interest in this joint venture and purchases virtually all of the goods produced
by the joint venture. As a result of the controlling interest, Delta Galil
consolidates this entity in its consolidated financial statements.
SALES AND MARKETING
Delta Galil customizes its sales and marketing strategy according to
individual customers' geographic regions and the market segment. For example,
one sales and marketing group handles the Marks & Spencer account, another
handles sales to the U.S. mass market, and a third focuses on accounts for
middle and upper market customers in the United States. Depending on where a
target customer is located, Delta Galil's sales offices in Europe, North America
or Israel implement the marketing strategy in coordination with headquarters.
Delta Galil staffs sales offices with experienced personnel who maintain ongoing
contact with its customers and respond to customers' needs promptly and
effectively.
MANAGEMENT INFORMATION SYSTEMS
Delta Galil has invested in information technology as a tool to reduce
overall costs, improve internal controls, enhance the efficiency of its garment
design and manufacturing, and support the sale and distribution of its products
to its customers. Delta Galil's production software processes customer orders,
schedules production for such orders and monitors the products ordered during
all stages of production, from knitting to sewing and during packaging and
distribution. Delta Galil believes that its information technology system has
been effective in meeting its demands. Delta Galil spent approximately $6.5
million in 2006 and intends to spend approximately $8 million in 2007 to improve
its system's capabilities.
CONDITIONS IN ISRAEL
Delta Galil is incorporated under the laws of, and a significant
portion of its offices and manufacturing facilities are located in, the State of
Israel. Accordingly, Delta Galil is directly affected by political, economic and
military conditions in Israel. The operations of Delta Galil would be materially
adversely affected if major hostilities involving Israel should occur or if
trade between Israel and its present trading partners should be curtailed.
POLITICAL CONDITIONS
Since the establishment of the State of Israel in 1948, a number of
armed conflicts have taken place between Israel and its Arab neighbors and a
state of hostility, varying from time to time in intensity and degree, has led
to security and economic problems for Israel. However, a peace agreement between
Israel and Egypt was signed in 1979, a peace agreement between Israel and Jordan
was signed in 1994 and, since 1993, several agreements between Israel and
Palestinian representatives have been signed. As of the date hereof, Israel has
not entered into any peace agreement with Syria or Lebanon. There can be no
assurance as to how the "peace process" will develop or what effect it may have
upon Delta Galil.
-17-
Despite progress towards peace between Israel, its Arab neighbors and
the Palestinians, major hostilities may revive. Since October 2000, there has
been an increase in hostilities between Israel and the Palestinians. In July
2006, a conflict with "Hezbollah" escalated significantly on Israel's northern
border with Lebanon. The unrest in and around the areas administrated by the
Palestinian Authority and on Israel's northern border may hinder Israel's
international trade and lead to economic downturn. This, in turn, could have a
material adverse effect on Delta Galil's operations and business. In addition,
certain countries, companies and organizations continue to participate in a
boycott of Israeli firms. Delta Galil does not believe that the recent violence
or the boycott have had a material adverse effect on Delta Galil, but there can
be no assurance that further violence or restrictive laws, policies or practices
directed towards Israel or Israeli businesses will not have an adverse impact on
Delta Galil's business.
TRADE AGREEMENTS
Israel is a member of the United Nations, the International Monetary
Fund, the International Bank for Reconstruction and Development and the
International Finance Corporation. Israel is a member of the World Trade
Organization and is a signatory to the General Agreement on Trade in Services
and to the Agreement on Basic Telecommunications Services. In addition, Israel
has been granted preferences under the Generalized System of Preferences from,
Australia, Canada and Japan. These preferences allow Israel to export the
products covered by such programs either duty-free or at reduced tariffs.
Delta Galil benefits from Israel's free trade agreements with the
United States, Canada, the European Union and the European Free Trade
Association as well as the QIZ Free Trade Agreements between the US, Israel,
Jordan & Egypt. The trade agreements enable Delta Galil to sell its products to
the above mentioned countries duty & quota free. Delta Galil is in a period of
major changes in the global business environment, following the elimination of
quotas as part of the WTO agreement which resulted in strong pressure to lower
prices and widen the competition and supply.
4.C DELTA GALIL'S ORGANIZATIONAL STRUCTURE
Delta Galil is an Israeli corporation that commenced operations in
1975. It currently has thirty-four subsidiaries in which it holds at least a 50%
interest. The main operations are included in the following companies:
PLACE OF OWNERSHIP
COMPANY INCORPORATION INTEREST FUNCTION
--------------------------------------- ---------------- --------- -------------------------------------------
Delta Galil USA Inc. Delaware, U.S.A. 100% Design, development and marketing of ladies
and girls intimate apparel.
Burlen Corp. Georgia, USA 100% Design, development and marketing of ladies
intimate apparel.
Auburn Hosiery Mills Inc. Kentucky, USA 100% Design, development and marketing of socks.
Delta Textile (New York) Ltd. New York, U.S.A. 100% Marketing
Delta Galil Europe Ltd. U.K. 100% Distribution center and marketing services.
Delta Galil Holland B.V. Holland 100% Contract manufacture and holding company.
Delta Textile Egypt - Free Zone S.A.E. Egypt 100% Manufactures men's and women's underwear and
leisurewear.
Century Wear Corporation (WLL) Jordan 50%(*) Joint venture that performs sewing
services.
Thai Progress Garment Co. Ltd Thailand 100% Manufactures ladies intimate apparel.
Delta Textile Marketing Ltd. Israel 100% Retail and wholesale in Israel.
Delta Elastic Tapes Industries, Ltd. Israel 90% Manufactures elastic tapes and other
components used in underwear manufacture.
(*) Delta Galil effectively controls this joint venture as a result of its
holding of an additional controlling share.
-18-
4.D PROPERTY, PLANT AND EQUIPMENT
Delta Galil has manufacturing facilities in Israel, Jordan, Egypt,
Bulgaria, Thailand and India. Delta Galil has also sub-contracts with
manufacturers in Egypt, Turkey, Bulgaria, Central America and the Far East. In
1995, Delta Galil began transferring labor-intensive production functions from
its plants in Israel and Scotland to Egypt, Jordan, Eastern Europe and the Far
East. As a result all manufacturing plants in Scotland were closed by 2003 and
the last sewing plant in Israel was closed in 2005. In 2006, Delta Galil closed
its production facilities in Honduras and Canada as part of the restructuring
plan initiated in 2005. In 2006, 88% of Delta Galil's revenues were generated
from the sale of products produced in low labor cost countries, up from 49% in
2000. In 2006, goods produced in Israel represented 8% of Delta Galil's
revenues, down from 35% in 2000.
The following table summarizes the distribution of Delta Galil's
revenues by location of production, stated as a percentage of total revenues for
the periods indicated:
% OF REVENUES
YEAR ENDED DECEMBER 31,
-----------------------
COUNTRY ACTIVITY PRODUCTS 2004 2005 2006
--------------------------- -------------------------------- ------------------------ ---- ---- ----
Far East Purchase of finished products Ladies intimate apparel 26% 38% 45%
Sewing Leisurewear
Cutting Men's underwear
Egypt Knitting(2) Ladies' intimate apparel 18% 17% 19%
Dyeing(1) Men's underwear
Cutting Babywear
Sewing(2) Leisurewear
Purchase of finished products
Jordan Sewing(2)(3)(4) Ladies' intimate apparel 13% 10% 11%
Men's underwear
Israel Design & Development Ladies' intimate apparel 12% 10% 8%
Knitting(2) Men's underwear
Dyeing Socks
Cutting & sewing(2) Knitted fabric
Production of fabrics & elastics Elastic bands
Distribution center
Purchase of finished products
Caribbean & Central America Sewing(2) Ladies' intimate apparel 10% 10% 4%
Cutting Socks
Knitting(1)
Purchase of finished products
Turkey Purchase of finished products Socks 6% 6% 5%
Eastern Europe Knitting(1) Socks 9% 5% 4%
Purchase of finished products
North America Purchase of finished products Socks 6% 4% 4%
--- --- ---
100% 100% 100%
=== === ===
-19-
(1) These activities are fully outsourced to local contractors.
(2) A portion of these activities is outsourced to local contractors.
(3) This activity is performed by a joint venture in which Delta Galil has a
controlling interest.
(4) Fabric produced in Israel.
In Israel, Delta Galil owns six facilities, including its principal
production facility in Karmiel, and leases eight facilities. The leases,
including all extension options, for seven facilities expire on various dates
between 2008 and 2015. One lease expires in 2007. Delta Galil is confident that
it can renew such lease on terms no less favorable than the existing lease. In
addition, Delta Galil leases a warehouse and development center outside London
and leases offices in London. Delta Galil leases manufacturing and storage
facilities in Egypt pursuant to 25-year leases that expire between 2014 and
2029. Delta Galil's joint venture in Jordan leases sewing facilities in Irbid,
and in Amman.
Delta Galil leases warehouses and offices in Pennsylvania, New Jersey,
Hong Kong, China and India. These leases expire between 2007 and 2014. Delta
Galil is confident that it can renew these leases on terms no less favorable
than existing leases. Delta Galil also owns other facilities in Bulgaria,
Kentucky USA and Thailand. Management believes that Delta Galil's existing
facilities are well maintained, in good operating condition and provide adequate
space for Delta Galil's current level of operations. In addition, Delta Galil
believes that its facilities and operations are in compliance with current
governmental regulations regarding safety, health and environmental pollution.
Delta Galil generally has complied with these regulations and such compliance
has not had a material adverse effect on its capital expenditures, earnings or
competitive position.
-20-
During 2006 the Company sold its assets which were held for sale in
Ireland, Scotland and part of its assets in the US for a total consideration of
$3.1 million.
On December 31, 2006 Delta Galil's unused real estate assets which are
held for sale and include real-estate in Israel, Hungary and the United States,
were classified as current assets at their net book value of $4.5 million. In
January 2007 Delta Galil sold its asset which was held for sale in the United
States.
The following table shows Delta Galil's main owned and leased
properties and facilities as of March 25, 2007:
PLANT LOCATION SQUARE FEET MAIN FUNCTION
------------------------------- ----------- ------------------------------------------------
Karmiel, Israel 534,000 Textile manufacturing
Nahariya, Israel 2,750,000 Undeveloped beach front property held for sale
Rosh Ha'ain, Israel 75,000 Offices and warehouse
Delta Plus retail chain, Israel 127,000 Retail
Yodfat, Israel 42,000 Warehouse and office
Daliat El Carmel, Israel 35,500 Elastic tape manufacturing
Tel Aviv, Israel 10,750 Main office
London, U.K. 25,000 Offices
Northampton, and Mansfield U.K. 122,000 Warehouse and development center
Jordan 343,000 Sewing and warehouse
Egypt 415,000 Knitting, cutting, sewing, warehouse and offices
New Jersey, U.S. 37,000 Offices
New York, U.S. 37,000 Offices
Pennsylvania, U.S. 350,000 Warehouse, logistic center and offices
Kentucky, U.S. 250,000 Offices & warehouse
Georgia, U.S. 495,000 Logistic center, warehouse and offices
Hong Kong 12,000 Offices and warehouse
Hungary 129,000 Unoccupied Logistic center held for sale
Bulgaria 95,000 Socks manufacturing
Thailand 30,000 Cutting and sewing
Guangzhou, China 157,000 Offices
India 76,000 Socks manufacturing
ITEM 4A: UNRESOLVED STAFF COMMENTS.
Not applicable.
-21-
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.
OVERVIEW
Following is a discussion of certain topics that will help you better
understand our results of operations discussed below:
REVENUES
Delta Galil's revenues in 2006 increased by 3.2% and amounted to
$706.7 million compared to $684.5 million in 2005.
The following table shows Delta Galil's revenues by geographical area,
stated in millions of U.S. dollars and as a percentage of total revenues, for
the years ended December 31, 2004, 2005 and 2006:
YEAR ENDED DECEMBER 31,
---------------------------------------------
2004 2005 2006
------------- ------------- -------------
$ % $ % $ %
----- ----- ----- ----- ----- -----
North America .................. 334.8 51.2 401.1 58.6 418.0 59.1
Europe (mainly U.K.) ........... 267.5 40.9 230.3 33.6 225.8 32.0
Israel ......................... 52.0 7.9 53.1 7.8 60.1 8.5
Other .......................... 2.8 0.4
----- ----- ----- ----- ----- -----
Total .......................... 654.3 100.0 684.5 100.0 706.7 100.0
===== ===== ===== ===== ===== =====
In 2006, sales to North America increased by 4.2% to $418.0 million
representing 59.1% of total sales. The increase in sales to North America is
attributed mainly to an increase in sales of more fashionable products to
Victoria's Secret. Delta Galil's sales to Marks & Spencer, decreased by 3.4% to
$155.8 million in 2006, compared to $161.3 million in 2005. The decrease in
sales to Marks & Spencer is attributed mainly to the decrease in sales in the
ladies category due to erosion in selling prices. This decrease was partly
offset by an increase in sales in the men's category, both in units and in
dollar terms. Delta Galil's sales to the European market, excluding Marks &
Spencer, increased by 2.9% to $53.9 million in 2006 compared to $52.4 million in
2005. Delta Galil's sales to the Israeli market increased by 13.2% to $60.1
million in 2005 compared to $53.1 million in 2005 mainly due to the expansion of
Delta Galil's retail store chain and to a better product mix.
Effective January 1, 2005, the World Trade Organization's 148 member
nations lifted some of the quotas on apparel and textiles. As a result, some of
the textiles and textile apparel manufactured in a member nation will no longer
be subject to quota restrictions, although in 2006, some of the quotas from
China were re-imposed. This change has allowed retailers, apparel firms and
others to import unlimited quantities of apparel and textile items from China,
India and other low-cost countries. As a result, prices of textiles and apparel,
including our products, have faced downward pressure and may continue to
decline. If prices decline faster than we are able to cut costs, our business
and results of operations could be affected adversely.
In addition, some large retailers have attempted to bypass private
label underwear manufacturers and to contract directly with factories to produce
their own products. This is known as "direct sourcing". This trend is occurring
in the more basic, mass-market products, in which design is less of a factor
having an adverse effect on Delta Galil's sales in those categories.
-22-
The following table shows Delta Galil's revenues by product
categories, stated as a percentage of total revenues, for the years ended
December 31, 2004, 2005 and 2006:
YEAR ENDED DECEMBER 31
----------------------
2004 2005 2006
---- ---- ----
Ladies' Intimate Apparel ............................. 53.6% 61.1% 57.8%
Socks ................................................ 23.0 20.2 19.3
Men's Underwear ...................................... 12.9 11.1 14.7
Leisurewear .......................................... 3.7 3.1 3.6
Babywear ............................................. 4.4 2.5 3.3
Fabrics and Others ................................... 2.4 2.0 1.3
---- ---- ----
Total ................................................ 100% 100% 100%
==== ==== ====
The decrease in revenues in the Ladies Intimate Apparel in 2006
compared to 2005 is attributed mainly to the decrease in sales to Marks &
Spencer, See -"Overview". The decrease in revenues in the Socks category in 2006
compared to 2005 is attributed mainly to the decrease in sales in North America
due to Delta Galil's decision to close its Canadian activity. The increase in
revenues in the men's category in 2006 compared to 2005 is mainly due to a
general increase in orders from most of our customers and as a result of
introduction of the new Real Cool Cotton products.
REORGANIZATION PLAN IN 2006
As part of the changes Delta decided to make in its organizational
structure, its management has decided during the second quarter of 2006 to focus
its Chinese operations on product development, as well as procurement of
finished goods and raw materials. As a result, Delta Galil has decided to close
its sewing plant in China and to concentrate Far East self-production in
Thailand. This decision is also due to re-imposition of quotas on production in
China starting in 2006.
The closure of the sewing plant in China resulted in a total
restructuring cost of $1.7 million and in the dismissal of approximately 700
employees. From the total cost of $1.7 million, $0.5 million was in cash
primarily for severance payment and the remaining $1.2 million were non-cash,
impairment of assets.
This measure continues the efficiency efforts Delta Galil commenced in
the fourth quarter of 2004, which included the closure of its logistics center
in Hungary and continued with its 2005 restructuring plan, which included the
following main steps:
a. Closure of a sewing plant in Central America and a distribution
center in New Jersey, both of which served the Delta Galil USA
segment, and moving the production of the sewing plant to
subcontractors in the Far East. The closure of the sewing plant
and the distribution center resulted in total restructuring costs
of $1.1 million and in the dismissal of approximately 1,400
employees.
b. Closure of a sock manufacturing plant in Toronto, Canada and
moving its production to subcontractors in Central America and
the Far East. The closure of this plant, resulted in total
restructuring costs of $2.4 million and resulted in the dismissal
of approximately 100 employees.
c. Reduction of manufacturing facilities in Israel and transfer of
its operations to lower labor cost countries. This action
resulted in total restructuring costs of $4.1 million and with
the dismissal of approximately 585 employees.
d. Consolidation of various departments into one building in
Karmiel, Israel in order to cut maintenance and other overhead
costs. This action resulted in a total cost of $1.1 million.
RESTRUCTURING PLAN - 2007
In light of continuous changes in the business environment, continued
erosion of the selling prices and increased competition, in March 2007 Delta
Galil decided to adopt a restructuring plan, organizational changes and
additional effeciency measures in order to improve the company's performance and
enhance its ability to compete in the market place.
Delta Galil intends to take the following measures:
a. Closure of some manufacturing facilities in Israel and downsizing
of others while transferring them to lower cost countries.
b. Downsizing manufacturing in Jordan.
-23-
c. Organizational changes in its operational structure, development
and design functions, marketing and sales operations, as well as
in the finance department in the Company's headquarter in
Israel. These changes will contribute to savings in overhead and
the leveraging of synergies in these areas in the Israeli
operations.
d. Expanding operations in Egypt.
These measures will include the dismissal of approximately 600 workers
in Israel as agreed with employee representative committee. Delta Galil expects
to record restructuring expenses of $10 to $12 million, or $0.53 to $0.64 loss
per diluted share in the first quarter of 2007. These expenses include an
aggregate of approximately $5 million in cash, mainly for severance obligations.
The remainder, including expenses of between $5 to $7 million, comprises
non-cash provisions for impairment of assets following closures and downsizing
at certain production facilities. The implementation is expected to take place
over the course of a year, commencing in the second quarter of 2007.
These steps are being taken further to Delta Galil's restructuring
plan that was implemented during 2005 and 2006. Furthermore, Delta Galil plans
additional efficiency measures and overhead reductions in its U.S. and U.K.
headquarters.
RESULTS OF OPERATIONS
The following table sets forth Delta Galil's results of operations
expressed as a percentage of total revenues for the periods indicated:
YEAR ENDED DECEMBER 31
----------------------
2004 2005 2006
----- ----- -----
Net revenues ........................................ 100.0% 100.0% 100.0%
Cost of revenues .................................... (81.5) (85.1) (81.3)
----- ----- -----
Gross profit ........................................ 18.5 14.9 18.7
Selling, marketing, general and administrative
expenses ......................................... (15.1) (15.6) (15.2)
Amortization of intangible asset .................... (0.1) (0.1)
Gain (loss) from realization of assets .............. 0.1 (*) 0.1
Impairment of fixed assets .......................... (1.1)
Restructuring expenses .............................. (0.1) (1.3) (0.2)
Goodwill impairment ................................. (0.9)
----- ----- -----
Operating income (loss) ............................. 3.4 (4.1) 3.3
Financial expenses - net ............................ (1.0) (1.5) (2.0)
Other income- net ................................... 0.2 (*)
----- ----- -----
Income (loss) before taxes on income ................ 2.6 (5.6) 1.3
Income tax benefit (expense) ........................ (0.4) 0.4 (0.8)
----- ----- -----
Income (loss) after taxes on income (tax benefit) ... 2.2 (5.2) 0.5
Share in losses of associated companies - net ....... (0.1) (*)
Minority interests- net ............................. (0.2) (0.1) (0.1)
----- ----- -----
Net income (loss) ................................... 1.9% (5.3)% 0.4%
===== ===== =====
(*) Less than 0.1%.
SEGMENT RESULTS
We have seven principal segments: Delta USA, U.S. Upper Market,
Europe, Socks, Delta Marketing Israel, Seam-Less and China. Delta USA, U.S.
Upper Market and Europe segments are engaged mainly in manufacturing and
marketing of men's underwear and ladies intimate apparel to various customers in
the U.S. and European markets. The Socks segment is engaged in manufacturing and
marketing of socks to various customers in the U.S. and European markets. Delta
Marketing Israel is engaged in marketing ladies intimate apparel, men's
underwear and socks to various customers in Israel through retail and wholesale
operations. Starting in 2006, Delta Galil decided to present separately the
results of its Seam-Less segment, which were previously included in the U.S
Upper Market results. The Seam-Less segment is engaged mainly in manufacturing
and marketing of ladies intimate apparel products to U.S and European markets.
The facility in China ceased manufacturing operations in the second quarter of
2006 and is engaged with product development and purchasing of raw materials and
finished products.
Delta Galil made certain changes to the structure of its internal
organization in a manner that caused the composition of its reportable segments
to change. As a result, Delta Galil has restated the corresponding items of
segment information for the prior periods presented in a manner consistent with
segment presentation for 2006.
-24-
The following table sets forth Delta Galil's revenues relating to the
various segments:
REVENUES BY SEGMENT
------------------------
($ MILLION)
------------------------
2004 2005 2006
------ ------ ------
Delta USA(1) ...................... $186.3 $267.9 $269.7
U.S. Upper Market ................. 90.3 75.7 95.3
Europe ............................ 193.8 163.5 167.3
Socks ............................. 144.2 130.9 122.5
Delta Marketing Israel ............ 46.5 49.0 54.3
Seam-Less ......................... 20.0 19.6 18.0
China ............................. 0.7 1.8
Other and Inter segment revenues .. (26.8) (22.8) (22.2)
------ ------ ------
Total ............................. $654.3 $684.5 $706.7
====== ====== ======
(1) Including in 2004 $3.6 million of Burlen revenues, which was acquired in
December 2004.
SALES BY SEGMENT IN 2006 VS. 2005
The increase in sales in 2006 compared to 2005 by the U.S. Upper
Market segment is mainly attributed to an increase in sales of more fashionable
products to Victoria's Secret. The increase in sales in 2006 compared to 2005 by
the Europe segment was achieved by increased intersegmental sales, which were
manufactured in Egypt and Thailand factories and were part of this segment in
2006, and despite the decrease in sales to Marks and Spencer. The decrease in
sales to Marks & Spencer was primarily in the ladies category due to increased
competition from the Far East, resulting in loss of sales and erosion in selling
prices. The decrease in sales in the ladies category in Marks & Spencer was
partly offset by an increase in sales of men's underwear and children's
products. Total sales of the European segment to Marks & Spencer decreased by 6%
compared to 2005 in dollar terms and by 7% in pounds sterling. The decrease in
sales in 2006 compared to 2005 by the Socks segment is primarily attributed to
the decrease in sales in North America due to our decision to close the Canadian
activity. The increase in sales in 2006 compared to 2005 by the Delta Marketing
Israel segment is attributed mainly to the expansion of the retail store chain
in Israel and to a better product mix.
SALES BY SEGMENT IN 2005 VS. 2004
The increase in sales in 2005 compared to 2004 by the Delta USA
segment is attributed to the acquisition of Burlen in the fourth quarter of
2004. Burlen's sales in 2005 amounted to $107.4 million compared to $3.6 million
in 2004. Excluding Burlen, Delta USA sales decreased by 12% compared to 2004,
mainly due to a decrease in sales to Wal-Mart explained by a reduction in sales
in the ladies category. The decrease in sales by the U.S. Upper Market segment
in 2005 compared to 2004, resulted primarily from a decrease in sales to Calvin
Klein, especially in the men's' category and to Victoria's Secret due to
different product mix and erosion in selling prices. The decrease in sales by
the European segment in 2005 compared to 2004, is mainly due to an erosion of
approximately 20% in selling prices to Marks & Spencer partly offset by an
increase of 4% in units. Other factors that contributed to a decrease in sales
by the European segment include: (1) a decrease in volume sales in the ladies
category of Marks & Spencer due to increased competition and (2) a decrease in
the children's category due to the same and due to the reduction of Marks &
Spencer market share in the U.K. in this category. The decrease in sales by the
Socks segment in 2005 compared to 2004 is mainly due to erosion of approximately
15% in selling prices especially to Marks & Spencer, partly offset by an
increase of 6% in units and to the decrease in sales in North America due Delta
Galil's decision to cease its activity in Canada. The increase in sales by the
Israeli Market segment in 2005 compared to 2004 is attributed mainly to a
different mix of products.
-25-
The following table sets forth Delta Galil's operating results,
restructuring expenses and impairment of assets by segment (in $ million):
OPERATING INCOME (LOSS) BY SEGMENT
INCLUDING RESTRUCTURING EXPENSES RESTRUCTURING IMPAIRMENT
AND IMPAIRMENT OF ASSETS EXPENSES OF FIXED IMPAIRMENT
---------------------------------- ------------------ ASSETS OF GOODWILL
2004 2005 2006 2004 2005 2006 2005 2005
----- ------ ----- ---- ---- ---- ---------- -----------
Delta USA ............... $ 5.9 $ 5.7 $13.3 1.1 1.5
U.S. Upper Market ....... 0.6 (12.6) 0.7 1.6 3.5 2.1
Europe .................. 4.9 (8.8) 7.7 1.1 2.0
Socks ................... 9.1 (5.0) 1.4 4.1 3.4
Delta Marketing Israel .. 4.8 5.0 6.8
Seam Less ............... (1.4) (9.2) (2.5) 2.4
China ................... (2.3) (4.1) 1.7
Other Adjustments ....... (1.5) (1.0) (0.3) 0.3
----- ------ ----- ---- ---- ---- ---- ----
Total ................ $22.4 $(28.2) $23.0 $1.1 $9.1 $1.7 $7.4 $5.5
===== ====== ===== ==== ==== ==== ==== ====
OPERATING INCOME (LOSS) BY SEGMENT IN 2006 VS. 2005
The increase in the operating results of th e Delta USA segment in
2006 compared to 2005 is mainly attributed to a $1.5 million impairment of fixed
assets and $1.1 million in restructuring expenses, both in 2005, which were
related to the decision to close a sewing plant in Central America and a
distribution center in New Jersey and to a $2.1 million inventory step-up with
respect to the acquisition of Burlen, in December 2004. Higher sales volume in
2006 and improvement in management of surplus inventory also contributed to the
increase in the operating results.
The increase in the operating results of U.S. Upper Market segment in
2006 compared to 2005 is mainly attributed to the increase in sales, especially
to Victoria's Secret and Calvin Klein and to the fact that the 2005 operating
loss included $6.1 million of restructuring expenses and impairment of assets.
The increase in the operating results of the European segment in 2006
compared to the loss in 2005 is mainly attributed to the implementation of the
restructuring plan which included the cease of the activity in East Europe, from
a decrease in air freight cost due to improvement in on time deliveries and due
to the improved exchange rates of the pound sterling and the Euro versus the
U.S. dollar.
The increase in the operating results of the Socks segment from a loss
of $5.0 million in 2005 to an income of $1.4 million in 2006 is due to $7.5
million of restructuring expenses and impairment of goodwill included in 2005
results. Excluding the restructuring expenses and goodwill impairment, the
operating results decreased from an income of $2.5 million to $1.4 million due
to lower sales volume and due to erosion in selling prices, especially to Marks
& Spencer due to the increased competition from the Far East, offset to some
extent by the improved exchange rate of the pound sterling and the Euro versus
the US dollar.
The decrease in the operating losses of the Seam-Less segment to $2.5
million, in 2006 compared to $9.2 million in 2005 was primarily due to
improvement of the manufacturing processes which led to a decrease in failure
costs, a better product mix, and also due to the fact that the 2005 operating
loss included $2.4 of impairment of assets.
The increase in the operating losses of the Chinese segment in 2006
compared to 2005 was primarily due to restructuring expenses totaling $1.7
million due to the cessation of the manufacturing activity during 2006. See
"Overview -Reorganization Plan."
OPERATING INCOME (LOSS) BY SEGMENT IN 2005 VS. 2004
The decrease in the operating income of the Delta USA segment in 2005
compared to 2004 is attributed to a $1.5 million impairment of fixed assets and
$1.1 million in restructuring expenses, both in 2005, which relate to the
decision to close a sewing plant in Central America and a distribution center in
New Jersey and to lower sales volume, especially to Wal-Mart in the ladies
category offset by Burlen's positive contribution of $9.1 million operating
income.
-26-
The increase in the operating loss of the U.S. Upper Market segment in
2005 compared to 2004 is attributed to the impairment of fixed assets, which
amounted to $3.5 million, mainly with respect to machinery and equipment in the
fabric facility in Israel in connection with the restructuring plan initiated by
Delta Galil, which also resulted in an additional $1.6 million of expenses
related mainly to workforce reduction in this facility and other overhead
reduction. The operating loss of the US Upper Market segment in 2005 also
included a $2.1 million goodwill impairment, as determined based on the annual
test carried out by Delta Galil which indicated a decrease in the segment
assets fair value. In addition, the operating results of the US Upper Market
segment in 2005 suffered from the decrease in sales volume, especially to Calvin
Klein and Victoria's Secret which also resulted in a lower production level in
the fabric facility in Israel and in the sewing facility in Jordan.
The decrease in the operating results of the European segment in 2005
compared to 2004 is attributed mainly to the erosion in selling prices to Marks
& Spencer, but also to other customers due to the increased competition from the
Far East, following the downward pressure on prices as a result of the
cancellation of part of the quotas on textile products. Operating results of the
European segment in 2005 were also negatively affected by the low production
volume in Egypt due to the reduction in sales.
The decrease in the operating results of the Socks segment in 2005
compared to 2004, from $9.1 million profit to a $5.0 operating loss, is
attributed mainly to the $4.1 million restructuring expenses due to our decision
to cease operations in Canada and to reduce manufacturing operations in Israel.
Furthermore the operating loss of the socks segment in 2005, included a $3.4
million goodwill impairment, as determined based on the annual test carried by
Delta Galil which indicated a decrease in the segment assets fair value. Also
attributed to the decrease in operating results is the lower sales volume and
erosion in selling prices, especially to Marks & Spencer, as well as to other
customers due to the increased competition from the Far East and due to
operating losses incurred in North America due to our decision to cease our
activity in Canada.
Delta Galil started operations in China during the third quarter of
2005. The plant included sewing and cutting executed by approximately 800
employees, focusing on ladies intimate apparel products. The $2.3 million
operating loss of the China facility in 2005 was attributed to the low initial
production volume and also included start-up costs.
YEAR ENDED DECEMBER 31, 2006 COMPARED WITH YEAR ENDED DECEMBER 31, 2005 -
CONSOLIDATED REVENUES
Total revenues in 2006 increased by 3.2% to $706.7 million compared to
$684.5 million in 2005. The increase in revenues is due mainly to the increase
in sales to the US market, mainly to Victoria's Secret, and to the Israeli
market.
COST OF REVENUES.
Delta Galil's cost of revenues is comprised mainly of cost of
materials, salaries and related expenses, work performed by subcontractors,
depreciation and amortization and the changes in inventories of finished
products and products in process. While costs associated with depreciation and
indirect salaries are generally fixed, cost of materials, work performed by
subcontractors and directs salaries are variable. Cost of revenues in 2006
decreased by 1.5% and amounted to $574.2 million (81.3% of revenues) compared to
$582.8 million (85.1% of revenues) in 2005. The decrease in the cost of revenues
in 2006 compared to 2005 despite the increase in sales is due to the
implementation of the restructuring plan and improved production processes and
inventory management.
GROSS PROFIT.
Gross profit in 2006 increased by 30.3% compared to 2005 and totaled
$132.5 million (18.7% of revenues), compared to $101.7 million (14.9% of
revenues) in 2005. The increase in the gross margin is mainly attributed to
increased sales, the implementation of the restructuring plan declared in
Septenber 2005, shifting self production to subcontractors, and due to favorable
exchange rates of the European currencies versus the U.S. dollar.
SELLING AND MARKETING EXPENSES.
Delta Galil's selling and marketing expenses are comprised mainly of
salaries and related expenses, professional expenses, packaging, transportation
and delivery, advertising, royalties, depreciation and amortization, commissions
and leases. While costs associated with salaries, professional expenses,
depreciation and amortization and leases are generally fixed, packaging,
transportation, delivery, advertising, royalties and commissions are more
variable. Selling and marketing expenses increased by 1.7 % to $ 88.2 million
(12.5% of revenues) in 2006 compared to $86.7 million (12.7% of revenues) in
2005. The increase in selling and marketing expenses is attributed mainly to
higher sales volume.
-27-
GENERAL AND ADMINISTRATIVE EXPENSES.
General and administrative expenses are comprised mainly of salaries
and related expenses, entertainment and travel expenses, professional fees,
doubtful accounts and bad debts, depreciation and amortization and other office
expenses. General and administrative expenses decreased from $20.3 million in
2005 (2.9% of revenues) to $19.6 million in 2006 (2.7% of revenues).
AMORTIZATION OF INTANGIBLE ASSET.
Intangible asset includes customer relations, derived from the
acquisition of Burlen, and is amortized over a period of 20 years. The yearly
amortization amounts to $739 thousands.
GAIN (LOSS) FROM REALIZATION OF ASSETS.
In 2006 Delta Galil recorded a capital gain of $0.7 million, mainly
from sale of vehicles compared to $0.1 million capital loss in 2005.
IMPAIRMENT OF FIXED ASSETS.
During 2006 as a result of the restructuring plan in the Far East,
Delta Galil tested the carrying amount of its fixed assets in China and
recognized a total impairment of $1.2 million which is included among
restructuring expenses. During 2005 and as a result of the restructuring plan
following the change in operation in various divisions and the erosion in
profitability, Delta Galil tested the carrying amount of its fixed assets and,
as a result, recognized a total impairment of $9.8 million, of which $2.4 is
included among restructuring expenses and $7.4 million is included among
impairment of assets. The fixed assets which were impaired include mainly
machinery and equipment in the fabric and seam-less facilities in Israel, and
leasehold improvements in real-estate which would be abandoned in connection
with Delta Galil's decision to consolidate most of its premises in Karmiel,
Israel.
RESTRUCTURING EXPENSES.
Due to a reorganization plan, restructuring expenses in 2006 amounted
to $1.7 million compared to $9.1 million in 2005. See "Overview - Reorganization
Plan".
GOODWILL IMPAIRMENT.
In 2006 Delta Galil didn't record any goodwill impairment. In 2005
Delta Galil recorded goodwill impairment expenses in the amount of $5.5 million
of which $3.4 million relates to the socks segment and $2.1 million to the U.S.
Upper Market segment.
OPERATING INCOME (LOSS).
Operating income in 2006 amounted to $23.0 million (3.3% of revenues)
compared to an operating loss of $28.2 million in 2005. Operating income in 2006
included $1.7 million of restructuring expenses, while 2005 operating loss
included $9.1 million of restructuring expenses and $12.9 million of impairment
of assets. Operating income, excluding the above, increased from a loss of $6.2
million in 2005 to an income of $24.6 million in 2006, mainly due to the
improved gross profit.
FINANCIAL EXPENSES - NET.
Financial expenses increased by 32.7% to $13.6 million in 2006 from
$10.2 million in 2005. Financial expenses are comprised mainly of interest
expenses and exchange rate differences.
The increase in 2006 financial expenses compared to 2005 is mainly
attributed to the increase in the average interest rates which resulted in
additional $2.0 million interest expenses and due to exchange rate differences
relating to the strengthening of the pound sterling versus the U.S. dollar.
OTHER INCOME- NET.
Other income in 2006 was zero. In 2005 other income included $0.3
million proceeds from realization of other investment.
TAXES ON INCOME.
In 2006 Delta Galil recorded tax expenses of $5.8 million compared to
a tax benefit of $2.3 million in 2005. The effective tax rate in 2006 was 61%
compared to 6% in 2005. The high tax expenses in 2006 is mainly attributed to
Delta Galil's decision to increase the valuation allowance in the amount $3.3
million on losses for tax purposes incurred in 2006 in Israel and in China, as
it is considered more likely than not that such losses will not be realized.
-28-
MINORITY INTEREST- NET.
Delta Galil operates sewing facilities in Jordan through a partially
owned subsidiary - Century Wear Corporation (WLL). Minority interests in profit
of this subsidiary and also 10% of Delta Elastic Tapes, amounted to $0.5 million
in 2006 and in 2005.
NET INCOME (LOSS).
Net income in 2006 totaled $3.1 million (0.4% of sales) compared to a
loss of $36.3 million in 2005. The net income in 2006 compared to the loss in
2005 is attributed to the increase in the gross and operating income offset to
some extant by the increase in financial expenses and taxes on income.
YEAR ENDED DECEMBER 31, 2005 COMPARED WITH YEAR ENDED DECEMBER 31, 2004 -
CONSOLIDATED REVENUES
Total revenues in 2005 increased by 5% to $684.5 million compared to
$654.3 million in 2004. Excluding sales of Burlen, which was acquired in the
fourth quarter of 2004, sales decreased by 11% compared to 2004. The decrease in
revenues is due mainly to an erosion in selling prices, especially to Marks &
Spencer and in the European market.
COST OF REVENUES.
Cost of revenues in 2005 increased by 9.3% and amounted to $582.8
million (85.1% of revenues) compared to $533.0 million (81.5% of revenues) in
2004. The increase in the cost of revenues is attributed to the acquisition of
Burlen in December 2004. Burlen's 2005 cost of revenues amounted to $84.9
million (79.1% of Burlen's revenues) compared to $2.8 million in 2004. The
decrease in the cost of revenues excluding Burlen in 2005 compared to 2004 is
due to the decrease in sales volumes.
GROSS PROFIT.
Gross profit in 2005 decreased by 16.1% compared to 2004 and totaled
$101.7 million (14.9% of revenues), compared to $121.2 million (18.5% of
revenues) in 2004. The decrease in the gross margin is mainly attributed to the
erosion in selling prices, mainly to the European operation and especially with
Marks & Spencer following the change in business environment due to the WTO
decision to lift some of the quotas on intimate apparel and textile product
coming from the Far East. This allowed retailers, apparel firms and others to
import unlimited quantities of apparel and textile items from China, India and
other low-cost countries. As a result, prices of textiles and apparel, including
our products, have faced downward pressure.
SELLING AND MARKETING EXPENSES.
Selling and marketing expenses increased by 6.7 % to $ 86.7 million (12.7% of
revenues) in 2005 compared to $81.2 million (12.4% of revenues) in 2004. The
increase in selling and marketing expenses is attributed mainly to the
acquisition of Burlen. Burlen's selling and marketing expenses amounted to $9.1
million in 2005, (8.5% of Burlen's revenues), compared to $0.7 million in 2004.
The increase in the percentage of the selling and marketing expenses of total
sales is attributed mainly to increase in freight cost mainly in the European
segment due to the transfer of part of its operation from Eastern Europe to the
Far East, and to the increased activity in the Israeli market which resulted in
higher salaries and advertising costs.
GENERAL AND ADMINISTRATIVE EXPENSES.
General and administrative expenses increased from $17.4 million in
2004 (2.7% of revenues) to $20.3 million in 2005 (3.0% of revenues). The
increase in general and administrative expenses is attributed mainly to the
acquisition of Burlen. Burlen's general and administrative expenses amounted to
$3.6 million in 2005, (3.3% of Burlen's revenues), compared to $0.1 million in
2004.
AMORTIZATION OF INTANGIBLE ASSET.
The amortization of the intangible asset includes customer relations,
derived from the acquisition of Burlen, and is amortized over a period of 20
years.
GAIN (LOSS) FROM REALIZATION OF ASSETS.
In 2005 Delta Galil recorded a capital loss of $0.1 million compared
to $0.9 million capital gain in 2004 derived from the sale of real estate in
Ireland.
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IMPAIRMENT OF FIXED ASSETS.
During 2005 and as a result of the restructuring plan following the
change in operation in various divisions and the erosion in profitability, Delta
Galil tested the carrying amount of its fixed assets and, as a result,
recognized a total impairment of $9.8 million, of which $2.4 is included among
restructuring expenses and $7.4 million is included among impairment of assets.
The fixed assets which were impaired include mainly machinery and equipment in
the fabric and seam-free facilities in Israel, and leasehold improvements in
real-estate which would be abandoned in connection with Delta Galil's decision
to consolidate most of its premises in Karmiel, Israel.
RESTRUCTURING EXPENSES.
Due to a reorganization plan, Restructuring expenses in 2005 amounted
to $9.1 million. See "Overview- Reorganization Plan" above. Restructuring
expenses in 2004 related to the closure of the logistic center in Hungary.
GOODWILL IMPAIRMENT.
In 2005 Delta Galil recorded goodwill impairment expenses in
the amount of $5.5 million of which $3.4 million relates to the socks
segment and $2.1 million to the U.S. Upper Market segment.
OPERATING INCOME (LOSS).
Operating loss in 2005 amounted to $28.2 million compared to an
operating income of $22.4 million (3.4% of revenues) in 2004. The operating loss
is mainly attributed to a decrease in the gross profit derived from the erosion
in selling prices and due to the restructuring expenses and the impairment of
fixed assets and goodwill.
FINANCIAL EXPENSES - NET.
Financial expenses increased by 64.0% to $10.2 million in 2005 from
$6.2 million in 2004 mainly due to increased bank debt, of approximately $60
million, due to the acquisition of Burlen which resulted in an increase of $2.6
million financial expenses and also due to the increase in the average interest
rate. Financial expenses were composed mainly of interest and exchange
differences.
OTHER INCOME - NET.
Other income in 2005 decreased by $0.7 million compared to 2004. In
2005 other income included $0.3 million proceeds from realization of other
investment. In 2004 other income included $1.0 million capital gain from
realization of the investment in an associated company, as described above
"Sales of Arad Towels and Standard Textile (Europe) Ltd".
TAXES ON INCOME.
In 2005 Delta Galil recorded tax benefits of $2.3 million compared to
tax expenses of $2.9 million in 2004. The effective tax rate in 2005 was 6%
compared to 17% in 2004. The lower tax savings in 2005 is mainly attributed to
Delta Galil's decision to create a valuation allowance in the amount of $8.9
million on losses for tax purposes incurred in 2005 in Israel, as it is
considered more likely than not that such losses will not be realized.
SHARE IN LOSSES OF ASSOCIATED COMPANY.
Delta Galil's share in losses of associated company includes in 2005
and in 2004 its investment in Edomit Ltd., which is accounted for by the equity
method. In 2005 this share amounted to a loss of less the $0.1 million compared
to a loss of $0.2 million in 2004. During the third quarter of 2005 Edomit sold
its holding in a hotel and ceased its operation.
MINORITY INTEREST- NET.
Delta Galil operates sewing facilities in Jordan through a partially
owned subsidiary - Century Wear Corporation (WLL). Minority interests in profit
of this subsidiary and also 10% of Delta Elastic Tapes, amounted to $0.5 million
in 2005 compared to $1.4 million in 2004. The decrease in the minority interest
in 2005 compared to 2004 is attributed mainly to the decrease in profit of the
Jordanian joint venture due to lower production levels.
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NET INCOME (LOSS).
Loss in 2005 totaled $36.3 million compared to a net income of $12.7
million (1.9% of sales) in 2004. The loss in 2005 compared to the net profit in
2004 is attributed to the decrease in gross profit, impairment of fixed assets
and goodwill and due to higher financial expenses and low tax benefit.
CRITICAL ACCOUNTING POLICIES
To improve your understanding of Delta Galil's financial statements,
it is important to obtain some degree of familiarity with Delta Galil's
principal or significant accounting policies. These policies are described in
Note 1 to the Consolidated Financial Statements listed in Item 18. Delta Galil,
in conjunction with its audit committee and its external auditors, reviews its
financial reporting, disclosure practices and accounting policies annually to
ensure that the financial statements developed, in part, on the basis of these
accounting policies provide complete, accurate and transparent information
concerning the financial condition of Delta Galil. As part of this process,
Delta Galil has reviewed the selection and application of its critical
accounting policies and financial disclosure as at December 31, 2006, and it
believes that the Consolidated Financial Statements listed in Item 18 present
fairly, in all material respects, the consolidated financial position of Delta
Galil as at that date.
In preparing Delta Galil's financial statements in accordance with
GAAP, Delta Galil's management must often make estimates and assumptions that
may affect the reported amounts of assets, liabilities, revenues, expenses and
related disclosures as at the date of the financial statements and during the
reporting period. Some of those judgments can be subjective and complex, and
consequently actual results may differ from those estimates. However, Delta
Galil believes that, given the facts and circumstances before it at the time of
making the relevant judgments, estimates or assumptions, it is unlikely that
applying any such other reasonable judgment would cause a material adverse
effect on Delta Galil's consolidated results of operations, financial position
or liquidity for the periods presented in the Consolidated Financial Statements
listed in Item 18.
Delta Galil is also subject to risks and uncertainties that may cause
actual results to differ from estimates and assumptions, such as changes in the
economic and political environment, competition, foreign exchange, taxation and
governmental programs. Certain of these risks, uncertainties and assumptions are
discussed in Item 3D. - Risk Factors and Item 11 - Quantitative and Qualitative
Disclosures About Market Risk. Delta Galil considers its most significant
accounting policies to be those relating to fixed assets and inventory
valuation, both of which, as well as Delta Galil's accounting policy relating to
goodwill valuation are discussed below.
FIXED ASSETS VALUATION
Fixed assets are stated at cost, net of related investment grants.
Depreciation is computed using the straight - line method on the basis of the
estimated useful life of the assets. Due to rapid changes in technology and due
to the materiality of the fixed assets and depreciation rates on its financial
results, Delta Galil considers this to be a critical issue. On January 1, 2002
Delta Galil adopted FAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets". FAS 144 requires that long-lived assets be held and used by
an entity, be reviewed for impairment and, if necessary, written down to the
estimated fair value, whenever events or changes in circumstances indicate the
carrying amount of assets may not be recoverable through undiscounted future
cash flows.
Delta Galil's fixed assets cost as of December 31, 2006 amounted to
$188.3 million. Depreciation and amortization expenses with respect to Delta
Galil's fixed assets on an annual basis are approximately $14.1 million. An
increase of 1% in the average annual depreciation rates would increase Delta
Galil's depreciation and amortization expenses by approximately $1.9 million per
year. A decrease in the annual rates would have the opposite effect.
Delta tests long-lived assets for impairment, in the event an
indication of impairment exists. An impairment loss would be recognized, and the
assets would be written down to their estimated fair values, 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. See also note
4f of the consolidated financial statements.
INVENTORY VALUATION
Inventory, which is a material part of Delta Galil's total assets, is
valued at the lower of cost or market value. Cost of raw and packaging materials
and purchased products is determined mainly on a "moving average" basis. Cost of
finished products and products in process is determined as follows: the raw
material and packaging component -is determined mainly on a "moving average"
basis; while labor and overhead is determined on an average basis over the
production period. If actual market prices for finished goods prove less
favorable than those projected by management, additional inventory write-downs
may be
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required. Inventory is written down for estimated obsolescence based upon
assumptions about future demand and market conditions. Likewise, favorable
future demand and market conditions could positively impact future operating
results if inventory that has been written down is sold.
Delta Galil's inventories carrying value as of December 31, 2006
amounted to $131.6 million. This amount is net of an allowance for specific
obsolete and slow-moving inventories in the amount of $26.7 million.
VALUATION OF INTANGIBLE ASSETS - GOODWILL
Goodwill represents the excess of cost of investments in subsidiaries
acquired over the fair value of the net assets at acquisition. Until December
31, 2001, Goodwill was amortized in equal annual installments usually over a
40-year period, the maximum allowed period under U.S. GAAP. As from January 1,
2002, pursuant to FAS 142," Goodwill and Other Intangible Assets," goodwill is
no longer amortized but rather is tested for impairment annually. Delta
completed the transitional impairment review of goodwill on June 30, 2002, as
required by FAS 142. The various reporting units, for which separately
identifiable cash flow information is available, were identified and the fair
values of such reporting units were determined using the net income multiple of
comparable publicly traded companies in the textile industry. Consequently,
Delta has determined that there is no indication of impairment with respect to
goodwill as of January 1, 2002. Delta has selected September 30 as the date on
which it will perform its annual impairment test for indefinite life intangible
assets. As of December 31, 2005, based on the review made by Delta Galil, the
Company recorded Goodwill impairment expenses of $5.5 million with respect to
the U.S. Upper Market and the Socks segments. In 2006 no impairment resulted
from the annual review performed. See also note 1g of the consolidated financial
statements.
As of December 31, 2006 the goodwill included in Delta Galil's balance
sheet amounted to $57.3 million, of which $55.5 million relate to the Delta USA
segment and the remaining, $1.8 million relate to the European segment. Based on
the annual test, as mentioned above, the asset fair value of these business
units are estimated to be higher than their respective book value.
NEWLY ISSUED AND RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS
In February 2006, the FASB issued Statement of Financial Accounting
Standards No. 155, "Accounting for Certain Hybrid Financial Instruments - an
amendment of FASB Statements No. 133 and 140" ("FAS 155"). This statement
permits fair value measurement for any hybrid financial instrument that contains
an embedded derivative that otherwise would require bifurcation in accordance
with the provisions of SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities" ("FAS 133"), with changes in fair value of such hybrid
financial instrument recognized in earnings. The fair-value election will
eliminate the need to separately recognize certain derivatives embedded in
hybrid financial instruments under FAS 133.
FAS 155 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 (January 1, 2007, for Delta Galil). 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. The adoption of
this Statement is not expected to have a material effect on Delta Galil's
financial statements or its results of operations.
In March 2006 the FASB issued Statement of Financial Accounting
Standards No. 156, "Accounting for Servicing of Financial Assets - an amendment
of FASB Statement No. 140" ("FAS 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. In accordance with the
provisions of FAS 156, separately recognized servicing assets and servicing
liabilities must be initially measured at fair value, if practicable. Subsequent
to initial recognition, company may use either the amortization method or the
fair value measurement method to account for servicing assets and servicing
liabilities within the scope of this Statement. FAS 156 is effective for fiscal
years beginning after September 15, 2006 (January 1, 2007, for Delta Galil).
Earlier adoption is permitted as of the beginning of an entity's fiscal year,
provided the entity has not yet issued financial statements, including interim
financial statements, for any period of that fiscal year. Delta Galil does not
currently engage in transfers of financial assets and accordingly does not
anticipate that the adoption of this statement will have a material effect on
its financial statements.
In July 2006, the FASB issued FASB Interpretation No. 48 "Accounting
for Uncertainty in Income Taxes - an interpretation of FASB Statement 109" ("FIN
48"). FIN 48 prescribes a comprehensive model for recognizing, measuring and
presenting in the financial statements tax positions taken or expected to be
taken on a tax return. This Interpretation also provides guidance on
derecognition, classification, interest
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and penalties and disclosure requirements for uncertain tax positions. FIN 48 is
effective for fiscal years beginning on or after December 15, 2006 (January 1,
2007, for Delta Galil). The provisions of FIN 48 shall be applied to all tax
positions upon initial adoption of this Interpretation. Only tax positions that
meet the more likely than not recognition threshold at the effective date may be
recognized or continue to be recognized upon adoption of this Interpretation.
The cumulative effects, if any, of applying this Interpretation will be recorded
as an adjustment to retained earnings, goodwill, or accumulated gains and
(losses) not affecting retained earnings, as appropriate, as of the beginning of
the period of adoption. The company is currently evaluating the impact of
adopting FIN48 on its financial position, cash flows, and results of operations.
In September 2006, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 108, "Considering the Effects of Prior Year
Misstatements when Quantifying Misstatements in Current Year Financial
Statements" ("SAB 108"), which provides interpretive guidance on the
consideration of the effects of prior year misstatements in quantifying current
year misstatements for the purpose of a materiality assessment. SAB 108 is
effective for fiscal years ending after November 15, 2006. Delta Galil adopted
SAB
108 in these financial statements and accordingly, follows SAB 108 requirements
when quantifying financial statement misstatements. The adoption of SAB No.108
did not result in corrections of Delta Galil's financial statements.
In September 2006, the FASB issued Statement of Financial Accounting
Standards No. 157, "Fair Value Measurements" ("FAS 157"). FAS 157 defines fair
value, establishes a framework for measuring fair value in accordance with
generally accepted accounting principles, and expands disclosures about fair
value measurements; however, it does not require any new fair value
measurements. FAS 157 is effective for fiscal years beginning after November 15,
2007 (January 1, 2008, for Delta Galil). Earlier application is encouraged,
provided that the reporting entity has not yet issued financial statements for
that fiscal year, including any financial statements for an interim period
within that fiscal year. Delta Galil is currently evaluating the impact of the
provisions of FAS 157 on its financial position and results of operations.
In June 2006, the Emerging Issues Task Force, reached a consensus on
Issue No. 06-03, "How Taxes Collected from Customers and Remitted to
Governmental Authorities Should be Presented in the Income Statement (That Is,
Gross versus Net Presentation)". EITF 06-03 relates to any tax assessed by a
governmental authority that is directly imposed on a revenue-producing
transaction. EITF 06-03 states that the presentation of the taxes, either on a
gross or net basis, is an accounting policy decision that should be disclosed
pursuant to Accounting Principles Board Opinion No. 22, "Disclosure of
Accounting Policies," if those amounts are significant. EITF 06-03 should be
applied to financial reports for interim and annual reporting periods beginning
after December 15, 2006 (January 1, 2007, for Delta Galil). Delta Galil does not
expect that the adoption of EITF 06-03 will have a material effect on its
financial position and results of operations.
5.B 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.
There are no legal restrictions on the ability of Delta Galil's
subsidiaries to transfer funds to Delta Galil in the form of dividends, loans or
advances.
The following is a breakdown of Delta Galil's cash flows for the last
three years in US $ millions:
YEAR ENDED DECEMBER 31
------------------------
2004 2005 2006
------ ------ ------
Net cash flow provided by operating activities ............... $ 23.0 $ 11.6 $ 26.3
Net cash flow used in investing activities ................... (68.9) (14.4) (7.6)
Net cash flow provided by (used in) financing activities(*) .. 50.2 (4.7) (23.0)
Translation differences on cash equivalents of foreign
currency consolidated subsidiary .......................... 0.1 (0.1) (**)
------ ------ ------
Increase (decrease) in cash and cash equivalents ............. $ 4.4 $ (7.6) $ (4.3)
====== ====== ======
(*) Including payment of dividend to shareholders of $8.3 million in 2004.
(**) Less than $0.1 millions.
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In 2006, 2005 and 2004 Delta Galil generated excess cash flow from
operations of $26.3 million, $11.6 million and $23.0 million respectively. The
increase in net cash flow provided by operating activities from $11.6 million in
2005 to $26.3 million in 2006 is mainly attributed to the net income in 2006
compared to the loss in 2005. The decrease in the net cash flow used in
investing activities is mainly attributed to a decrease in purchase of fixed
assets accompanied with increased proceeds from realization of fixed assets and
assets held for sale in the amount of $4.4 million in 2006 compared to $1.1
million in 2005. Net cash flow used in financing activities in 2006 amounted to
$23.0 million compared to $4.7 million in 2005. The increase in cash flow used
in financing activities in 2006 is attributed mainly to the improvement in
Delta's free cash flow which enable decreasing its net bank debt.
We believe that our cash reserves, together with cash from operations,
will be sufficient to meet our anticipated cash needs in both the short and long
term. However, if, in the future, cash generated from operations is insufficient
to satisfy our liquidity requirements, or if our estimates of revenues, expenses
or capital or liquidity requirements change or are inaccurate, we may need to
raise additional funds. We may also need to raise additional funds, or may seek
to take advantage of any capital raising opportunities, to finance expansion
plans, develop or acquire new products or technologies, enhance our existing
product or respond to competitive pressures. We cannot be certain that we will
be able to obtain additional financing on commercially reasonable terms or at
all, which could limit our ability to grow and carry out our business plan.
BANK DEBT
Set forth in the table below are Delta Galil's bank debt for the last
three years in US $ millions:
YEAR ENDED DECEMBER 31
------------------------
2004 2005 2006
------ ------ ------
SHORT-TERM:
Bank loans ............................. $ 55.6 $ 80.6 $107.1
Current maturities of long-term loans .. 27.9 29.5 16.9
------ ------ ------
Total Short-term .................... 83.5 110.1 124.0
------ ------ ------
LONG-TERM:
Total Long-term bank loans .......... 98.4 68.8 32.4
------ ------ ------
Total Debt .......................... $181.9 $178.9 $156.4
====== ====== ======
Delta Galil has incurred bank debt mainly for acquisitions, working
capital, capital expenditures and general corporate purposes. Delta Galil's bank
loans bear interest at annual variable rates, which were approximately 6.4% on
average for the year ended December 31, 2006 and are secured by liens on Delta
Galil's assets and part of its subsidiaries. Delta Galil's bank loans are issued
under secured bank lines of credit of up to $269.2 million of which, as of
December 31, 2006, Delta Galil had $90.2 million available for additional
borrowings under the same prevailing rates.
Delta Galil's bank lines of credit permit either short-term or
long-term borrowings and letters of credits. All of Delta Galil's short-term
loans have maturities of up to three months. Part of Delta Galil's borrowings is
for shorter periods in order to maintain cash management flexibility. Long-term
bank loans mature in periods up to November 2009. Delta Galil and part of its
subsidiaries have granted each other guarantees for each other's indebtedness.
Delta Galil USA Inc., a subsidiary of Delta Galil is a party to a
credit agreement, dated 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. As of December 31, 2006, the credit
agreement provided for $22.5 million in long term loans, and $60 million are
short term loans. The loan bears interest at a variable rate that is linked to
the Libor. As of December 31, 2006, the interest rate on the long term loan was
7.0% and on the short-term credit was 6.75%. As of December 31, 2006, the
unutilized credit line was $15.0 million.
The credit agreement included covenants based on (1) the ratio of
Delta Galil USA's earnings before interest, taxes, depreciation and
amortization, or EBITDA, to fixed charges; (2) the ratio of net worth to total
assets of Delta Galil USA; and (3) the ratio of the sum of Delta Galil USA's (a)
loans (b) letters of credit, and (c) acceptances to EBITDA.
Delta Galil USA and the banks amended the credit agreement in January
and May 2006. The material changes contained in those amendments were the
following: a prepayment of $25 million of the principal amount of the long term
loan; a reduction in the quarterly payment on the long term loan from $3.5
million to $1.9 million; an extension of the expiration date of the revolving
loan facility from January
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15, 2006 to January 31, 2007; a deposit of $4 million with Bank Leumi USA and a
pledge of that deposit to the banks, an increase of 0.25% in the interest rate;
and a change of the covenant mentioned above as follows:
1. The ratio of Delta Galil USA's EBITDA to fixed charges, as
defined in the credit agreement, may not be below 1 to 1 for each
three -month period ended June 30, September 30, and December 31,
2006, with such ratio rising to 1.5 to 1 for the twelve months
ending March 31, June 30, September 30, and December 31, 2007,
and 1.6 to 1 for the twelve months ending March 31, June 30,
September 30, and December 31 2008 and 2009;
2. The ratio of net worth to total assets of Delta Galil USA may not
be below 0.25 to 1 for the twelve months ended March 31, 2006 and
June 30, 2006, and a ratio of 0.28 to 1 for the twelve months
ending September 30, 2006 and for the twelve-month period ended
December 31, 2006, with such ratio rising to 0.4 to 1 for the
twelve months ending March 31, 2007 and for the end of each
subsequent quarter until maturity;
3. The ratio of the sum of Delta Galil's (a) loans (b) letters
of credit, and (c) acceptances (or, collectively, debt) to
EBITDA may not exceed 6.70 to 1 for the twelve months ended
March 31, 2006; 5.70 to 1 for the twelve months ended June
30, 2006, and 4.0 to 1 for the twelve months ended each of
September 30, 2006 and December 31, 2006, with such ratio
rising to 3.5 to 1 for the twelve months ended March 31,
June 30, September 30, and December 31, 2007, 3.0 to 1 for
the twelve months ending March 31, 2008 and for each twelve
months period ending at the end of each subsequent quarter
until maturity.
In July 2006, Delta Galil USA and the banks further amended the credit
agreement to revise, among other things, the prepayment terms of the term loan.
In January 2007, Delta Galil USA and the banks entered into Amendment
no. 4 to the credit agreement. The material changes contained in this amendment
are the following: a prepayment of the outstanding long term loan in the
principal amount of $22.5 million; an increase of the short term revolving loan
from $60 million to $90 million, a change to the term loan interest rate to
LIBOR + 1.5%; an extension of the expiration date of the revolving loan facility
from January 31, 2007 to January 31, 2008; a subordination of Delta Galil's loan
to Delta Galil USA in the amount of $20 million for a period ending December 1,
2009; a conversion of $5 million of the outstanding Delta Galil's loan to Delta
Galil USA into equity of Delta Galil USA which was executed on December 31,
2006.; a release of the $4 million deposit with Bank Leumi USA; a change to the
financial covenants as follows:
1. The ratio of net worth to total assets of Delta Galil USA may not
be below a ratio of 0.28 to 1 as of December 31, 2006 and as of
March 31, June 30 and September 30, 2007, and a ratio of 0.3 to 1
as of December 31, 2007;
2. The net worth of Delta Galil USA may not be less than $60 million
as of December 31, 2006 and as of March 31, June 30 and September
30, 2007, and $65 million as of December 31, 2007; and
3. For the twelve month period ending December 31, 2006, and for the
rolling twelve month period ending on each subsequent fiscal
quarter thereafter, Delta Galil USA shall have a profit of at
least $1.00.
WORKING CAPITAL AND CAPITAL EXPENDITURES
Working capital at December 31, 2006 was $54.9 million, compared to
$80.9 million at December 31, 2005. The decrease in the working capital is
attributed to the increase in short term loans replacing long term loans and to
the decrease in inventory. Delta Galil believes that its working capital is
sufficient for its present requirements. Delta Galil has no material commitment
for capital expenditures.
5.C RESEARCH AND DEVELOPMENT
Delta Galil has strong in-house creative teams of designers and
technology experts, consisting of fashion designers, textile designers, yarn
experts, knitting experts and dyeing and finishing experts. Delta Galil's design
and development expenses amounted to approximately $28 million in 2006, compared
to $29 million in 2005 and $25 million in 2004.
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5.D TREND INFORMATION
Please see "Item 3. Risk Factors - Recent Changes in World Trade
Organization quotas could put pressure on apparel prices," and "Item 3. Risk
Factors - If private label customers produce their own products and bypass
manufacturers such as Delta Galil, our sales could decline." See also "Item 5.
Operating and Financial Review and Prospects" and "Item 4. Information on the
Company" for trend information.
5.E OFF-BALANCE SHEET ARRANGEMENTS
Delta Galil does not have any off-balance sheet arrangements that have
or are reasonably likely to have an effect on its financial condition, changes
in financial condition, revenues or expenses, results of operations, liquidity,
capital expenditures or capital resources that is material except hedging
transactions, see Item 11 "Quantitative and Qualitative Disclosures About Market
Risk".
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5.F CONTRACTUAL OBLIGATIONS
Set forth below are our contractual obligations and other commercial
commitments as of December 31, 2006:
PAYMENTS DUE BY PERIOD
------------------------------------------
LESS THAN MORE THAN
CONTRACTUAL OBLIGATIONS TOTAL 1 YEAR 2- 4 YEARS 5 YEARS
----- --------- ---------- ---------
(U.S. $ IN MILLIONS)
Long-Term Debt (1) ..................... 54.0 19.5 34.5
Capital Lease Obligations .............. 0.9 0.1 0.3 0.5
Operating Leases ....................... 48.4 8.7 19.1 20.6
Minimum guaranteed royalties ........... 9.9 4.3 5.6
Letter of credits and bank guarantees .. 26.8 22.8 3.8 0.2
----- ---- ---- ----
Total Contractual Cash Obligations ..... 140.0 55.4 63.3 21.3
===== ==== ==== ====
(1) Includes expected interest expenses on long-term debt, based on interest
rates in effect as of December 31, 2006. In January 2007, the credit agreement
between Delta Galil USA and Bank Hapoalim and Bank Leumi USA was amended. In
connection with this amendment, Delta Galil USA pre-paid the outstanding long
term loan in the principal amount of $22.5. As a result, Delta Galil USA's term
loan is zero and the Delta's consolidated long term debt as of January 31, 2007
is as follows: $31.5 (Total); $11.7 (less than one year); $19.8 (2-4 years); and
$0 (more than 5 years).
See Item 11: "Quantitative and Qualitative Disclosures About Market Risk"
regarding obligations related to forward currency contracts.
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ITEM 6: DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
6.A DIRECTORS AND SENIOR MANAGEMENT
The directors and executive officers of Delta Galil are as follows:
NAME AGE POSITION
---- --- --------
Dov Lautman 71 Chairman of the Board of Directors
Isaac Dabah(3) 49 Director and Vice Chairman of the Board of Directors
Aviram Lahav 48 President and Chief Executive Officer
Yossi Hajaj 39 Senior Vice President & Chief Financial Officer
Tom Witthuhn 52 Senior Vice President & CEO of Delta Galil USA
Imad Telhami 48 Senior Vice President & Chief Operation Officer
Esti Maoz 59 Senior Vice President & Chief Marketing Officer
Israel Baum(2) (3) 68 Director
Gideon Chitayat(3) 67 Director
Aharon Dovrat 76 Director
Harvey M. Krueger 78 Director
Noam Lautman 38 Director
Giora Morag(1) (2) 62 Director
Amnon Neubach(1) (2) 62 Director
Dan Propper 66 Director
Arnon Tiberg 63 Director
Leah Perez 57 Director
(1) External Director.
(2) Member of the Audit Committee.
(3) Mr. Dabah, Mr. Chitayat and Mr. Baum are nominees of GMM Capital LLC,
pursuant to a Shareholders Agreement between GMM Capital and the Lautman
Group concerning the election of directors.
DOV LAUTMAN is the founder of Delta Galil and has served as the
Chairman of the Board of Directors since 1975 and as President and Chief
Executive Officer from February 2006 till October 2006. From 1975 to 1996, Mr.
Lautman was the Chief Executive Officer of Delta Galil. From 1986 to 1993, Mr.
Lautman served as President of the Manufacturers Association of Israel and as
the Chairman of the Coordinating Bureau of Economic Organizations of Israel.
From 1993 to 1995, Mr. Lautman was the Prime Minister's Special Emissary for
Economic Development. Since May 2001, Mr. Lautman has served as the chairman of
the executive council of Tel Aviv University.
ISAAC DABAH has served as a Director of Delta Galil and as
Vice-Chairman of Delta Galil's Board of Directors since November 2005. He has
been the Executive Director of GMM Capital LLC, one of our principal
shareholders, since it was formed in January 2005. From 2003 to 2004, Mr. Dabah
was CEO of the Denim Division of Jones Apparel Group, which included brands such
as Gloria Vanderbilt, Polo Jeans, L.E.I. From 2002 to 2003, Mr. Dabah was CEO of
Gloria Vanderbilt, a division of Jones Apparel Group. From 1993 to 2002, Mr.
Dabah was CEO of Gloria Vanderbilt Apparel Corp.
AVIRAM LAHAV has served as the CEO of Delta Galil since November 2006.
Mr. Lahav has been Senior Vice President since 1997. He served as CEO of Delta
Galil's Innerwear USA operations from March 2004 and was appointed as CEO of the
US Upper Market Division of Delta, which merged the former Textile and Innerwear
divisions. From 1997 to 2004 he served as the Chief Financial Officer of Delta
Galil. From 1993 to 1997, Mr. Lahav was Chief Executive Officer of
Europcar/Eurodollar Israel, a car rental company and, from 1991 to 1993, Chief
Financial Officer of Mediterranean Car Agency Ltd. Mr. Lahav is a certified
public accountant (Isr).
YOSSI HAJAJ has served as Senior Vice President and Chief Financial
Officer of Delta Galil since March 2004. From 1999 to 2004 he served as
controller and corporate secretary of Delta Galil and from 1997 to 1999 he was
Delta Galil's Chief Economist and controller of foreign subsidiaries. Mr. Hajaj
is a certified public accountant (Isr.) and holds a B.A. in Accounting and
Economics from Tel Aviv University. He was a member of the Investment Committee
of Tel Aviv University from 2001 until 2006.
TOM WITTHUHN has served as the Chief Executive Officer of Delta Galil
USA since September 2006. From 1998 to 2006 he served as the Senior Vice
President International Operations & Global Licensing of Fruit of the Loom.
Prior to that, from 1996 to 1998, Tom served as the Vice President General
Merchandise Marketing Manager of Jockey International. From 1991 to 1996 he
served as the President of
-38-
the B.D. Baggies Division of Tal Ltd. Mr. Witthuhn holds a B.Sc in Marketing
from Madison University of Wisconsin.
IMAD TELHAMI has served as Delta's Chief Operation Officer since
January 2007. From 2002 to January 2007, Mr. Telhami has served as Senior Vice
President and CEO of Delta's Innerwear USA Operation since 2002. He started his
career at Delta in 1983 as a sewing plant manager. He managed several sewing
plants until he was re-located to manage Delta's facilities in Scotland. In 1996
he returned to Israel when he was promoted to Lingerie Operation Director. In
1999 he was promoted to Director of Delta's Marks and Spencer Operations. Mr.
Telhami holds a B.Sc in Industrial Management from Shenkar College in Israel. In
March 2004 Mr. Telhami was promoted to SVP and CEO of Delta Galil's European
division.
ESTI MAOZ has served as Delta's Chief Marketing Officer since January
2007. Ms. Maoz has been with Delta Galil since its inception in 1975, and has
served as Senior Vice President, Global Development and Marketing since November
2002 until January 2007. From September 1991 through October 2002, Ms. Maoz
served as the President of Delta Textiles (New York) Ltd. During these years,
Ms. Maoz developed and managed the marketing operations within North America. In
1987 Ms. Maoz established the new Ladies Underwear Division and managed the
Division through 1991. From 1984 through 1987 Ms. Maoz served as the Corporate
Director of Product Development and Design. From 1978 through 1984 Ms. Maoz
served as the Manager of all the sewing plants in Delta Galil. Ms. Maoz studied
Business and Marketing at the Haifa University in Haifa, Israel. Since April
2005, Ms. Maoz has served on the Board of Directors of Bagir Ltd.
ISRAEL BAUM has served as a Director of Delta Galil since December
2005. He is currently an entrepreneur, and served as the Chief Executive Officer
of Litam Clothing Ltd., an Israeli apparel manufacturer, from 1994 to 2004. From
1998 to 2005 Mr. Baum served on the Board of Directors of Macpell Industries
Ltd., an Israeli apparel company listed on the Tel Aviv Stock Exchange. Mr. Baum
holds a B.Sc. in Industrial Engineering and Management from Temple University in
Philadelphia.
GIDEON CHITAYAT, has served as a director since November, 2005. He is
the chairman and CEO of General Management and Business Strategy Consultant
(GMBS) Ltd. since 1985. Dr. Chitayat has served as a consultant to Chief
Executive Officers and to Chairmen of Boards of Directors of several leading
Israeli companies and entities in diversified fields in Israel. His main area of
consultancy is competitive strategy. Dr. Chitayat currently serves on the board
of directors of Paz Oil Industries Ltd., Machteshim Agan Ltd. and Teva-Israel, a
subsidiary of Teva Pharmaceutical Industries Ltd. Dr. Chitayat served on the
board of directors of Bank Hapoalim from 2000 until 2006. Dr. Chitayat holds a
Ph.D. and an M.A. in Business and Applied Economics from the Wharton School of
the University of Pennsylvania, and a M.B.A. (with honors) and B.A. (in
Economics) from the Hebrew University in Jerusalem. Dr. Chitayat has held
numerous academic positions at leading business schools in the United States and
Israel. Dr. Chitayat has published numerous articles and a book on corporate,
boards of directors and business issues.
AHARON DOVRAT has served as a Director of Delta Galil since December
1998. Mr. Dovrat is the chairman of Dovrat & Co. Mr. Dovrat serves as a Director
of Cognifit Ltd., DS Polaris Ltd., and Solgood Communication Ltd. Until April
2005 Mr. Dovrat served as a Chairman of Isal Ltd. and as a Director of
Technomatix Technologies Ltd. Until 2004 he served as a Chairman of Alvarion
Ltd. From 1992 to 1998.Mr. Dovrat was the chairman of the Dovrat, Shrem & Co.
S.A., an investment banking firm established in 1991, as well as a Director of
Domicar Ltd., Investment Company of Bank Hapoalim Ltd., Oshap Technologies Ltd.
and Ordan Industries Ltd. Until 1991 Mr. Dovrat served as managing Director of
Clal (Israel) Ltd., one of Israel's largest public investment companies.
HARVEY M. KRUEGER has served as a Director of Delta Galil since August
1999. Mr. Krueger is Vice Chairman of Lehman Brothers and has been involved with
that firm and Kuhn Loeb & Co., one of its constituent firms, since 1959. Mr.
Krueger currently serves as a Director of Chaus Inc., and is also Chairman of
Stockton Partners Inc. In addition, Mr. Krueger is former Chairman of the Peres
Center for Peace, former Chairman of Cooper-Hewitt National Design Museum and
the Smithsonian Institution, former and honorary Chairman of the Hebrew
University of Jerusalem, and a member of the Board of Directors of Beth Israel
Medical Center (NY) and Continuum Health Partners.
NOAM LAUTMAN has been a Director of Delta Galil since October 2001.
Mr. Lautman served as Director for New Ventures and Strategic Business Planning
at Teva Pharmaceutical Industries Ltd (Nasdaq: TEVA) from 2002 to 2006. Mr.
Lautman previously served in various managerial positions in several Israeli
companies operating in the high-tech field. Mr. Lautman serves as the Chairman
of the Board of Directors of Browzwear Ltd and as a Director of Nasvax Ltd.
(TASE: NSVX). Mr. Lautman holds a B.Sc in Computer Science and Mathematics and
an MBA from New York University. Mr. Lautman is the son of Dov Lautman, the
Chairman of the Board of Directors of the Company.
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GIORA MORAG has served as a director of Delta Galil since September
2003. Mr. Morag worked at Bank Hapoalim B.M., for 27 years, until 2002. Mr.
Morag held a variety of managerial positions during his career, most recently as
the General Manager of the bank's UK branches. From 1996 to 1999 Mr. Morag
served as General Manager of American Israel Bank Ltd, a wholly owned subsidiary
of Bank Hapoalim. As of October 2006 Mr. Morag functions as an external director
of Union Bank of Israel. Mr. Morag studied economics and political science at
the Hebrew University.
AMNON NEUBACH has been an independent business consultant since 1997.
From January 2001 until May 2003, Mr. Neubach served as the Chairman of the
Board of Directors of Pelephone Communications Ltd., an Israeli mobile phone
company. From 1995 to 1997, Mr. Neubach served as country advisor to Goldman
Sachs in Israel, and from 1990 to 1994 he served as the Minister of Economic
Affairs at the Israeli Embassy in Washington, D.C. Mr. Neubach serves as an
external director of Mind CTI Ltd. (Nasdaq: MNDO), a software company, Aspen
Building and Development Ltd. (TASE: ASBD), a real estate company, Leumi Card (
subsidiary of Bank Leumi in Israel Ltd.); and as a director of Direct Insurance
- IDI Ltd., a private Israeli insurance company. Mr. Neubach received a B.A. in
economics and business administration and an M.A. in economics from Bar-Ilan
University.
DAN PROPPER has served as a Director of Delta Galil since 1986. Mr.
Propper has been the Managing Director of the OSEM Group of Companies since
1981. In April 2006, he stepped down as CEO and become active chairman of the
OSEM group. Until June 1999, Mr. Propper was the President of the Manufacturers
Association of Israel and Chairman of the Coordinating Bureau of Economic
Organizations of Israel. Mr. Propper is also a member of the Board of Directors
of The Weizmann Institute, the Technion, Israel Institute of Technology and Ben
Gurion University as well as a member of the executive committees of Tel-Aviv
University, and Chairman of the Boards of Directors of various industrial and
high tech companies. Mr. Propper received his B.Sc. (summa cum laude) in
Chemical Engineering, and food Technology from the Technion -Israel Institute of
Technology.
ARNON TIBERG has served as a Director of Delta Galil since March,
2006. He served as Delta Galil's President and Chief Executive Officer from 1996
until January 2006. Mr. Tiberg previously served as a Director of Delta Galil
from 1990 until becoming the Chief Executive Officer in 1996. He is presently a
Director of Nilit Ltd., Ransys Ltd., Kali Insurance Agency Ltd., and The First
International Bank of Israel Ltd. Mr. Tiberg is also the Chairman of the
Academic Club of the Israeli Friends of the Tel Aviv University.
LEAH PEREZ has served as a Director of Delta Galil since October 2006.
Ms. Perez has been the Head of the Fashion Design Department of Shenkar College
of Engineering and Design since September 2006, and also held that position from
1994 to 2003. From 2003 to 2006 she served as Cultural Attache at the Israeli
Embassy in Bogota, Colombia. Ms. Perez has curated numerous art, design and
fashion design shows around the world and has published a number of articles on
art. Ms. Perez earned a B.A. in History of Art and History of the Western World
from Haifa University and an M.A. in History of Art from the Hebrew University
in Jerusalem.
6.B COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS
The directors of Delta Galil, other than Dov Lautman who is also an
employee of Delta Galil, and the directors designated by GMM Capital other than
Isaac Dabah, receive a fixed annual compensation of approximately $9,100 for
their services on the Board of Directors or on any committee thereof. In
addition, a sum of approximately $335 is paid for attending each Board or Board
committee meeting and directors are reimbursed for certain approved expenses
incurred in connection with their services to Delta Galil. In 2006, Delta
Galil's expenses for directors' compensation amounted to a total of
approximately $128,000. The following table sets forth the aggregate
compensation paid to or accrued on behalf of all directors and executive
officers of Delta Galil as a group for the year ended December 31, 2006.
SALARIES, DIRECTORS' FEES, PENSION, RETIREMENT AND
COMMISSIONS AND BONUSES SIMILAR BENEFITS
-------------------------- -----------------------
All directors and executive officers
(consisting of 17 persons) $2.5 million $0.1 million
As of March 27, 2007, 1,163,758 options to purchase Delta Galil's
ordinary shares were outstanding to certain executive officers and key employees
(consisting of 6 persons who were granted options). See "Stock Option Plans"
below and note 9 of the notes to Delta Galil's consolidated financial statements
included in Item 18 of this annual report.
-40-
6.C BOARD PRACTICES
TERMS OF DIRECTORS
Delta Galil's directors are elected at the Annual Shareholders Meeting
to serve until the next annual meeting of shareholders or until their earlier
removal or resignation. Delta Galil's Articles of Association provide that the
directors may appoint additional directors (whether to fill a vacancy or to
expand the Board), provided the number of directors is less than fifteen or such
other maximum number approved at a general meeting of shareholders. The Articles
of Association also provide that the Board of Directors may delegate all of its
powers to committees of the Board as it deems appropriate, subject to the
provisions of the companies law.
Under an amendment to the Israeli Companies Law, each Israeli public
company is required to determine, no later than April 19, 2006, the minimum
number of directors with "accounting and financial expertise" that such company
believes is appropriate in light of the particulars of such company and its
activities. A director with "accounting and financial expertise" is a person
that, due to education, experience and qualifications, is highly skilled and has
an understanding of business-accounting issues and financial statements in a
manner that enables him/her to understand in depth the company's financial
statements and stimulate discussion regarding the manner of presentation of the
financial data.
In accordance with the Companies Law, Delta Galil has determined that
the minimum number of directors with "accounting and financial expertise" that
Delta Galil believes is appropriate, in light of the particulars of Delta Galil
and its activities, is two (one of them is an external director). Under the
Companies Law, only one of such "experts" is required to be an external
director, as described below.
Delta Galil or its subsidiaries have not entered into any service
contracts with its non-employee directors that provide benefits upon termination
of services.
EXTERNAL DIRECTORS AND AUDIT COMMITTEE
Under the Israeli Companies Law, public companies are required to
elect two external directors who must meet specified standards of independence.
The external directors may not have any economic relationship with the company.
External directors are elected by the shareholders. The votes in favor of their
election must include at least one-third of the votes of the shareholders
attending and voting who are non-controlling shareholders of the company,
without taking abstentions into account. This approval requirement need not to
be met if the total votes of such non-controlling shareholders who vote against
the election represent 1% or less of all of the voting rights in the company.
External directors serve for a three-year term, which may be renewed for only
one additional three-year term. External directors can be removed from office
only by the shareholders at the same majority required to elect them, or by a
court. External directors may be removed from office only if they cease to meet
the statutory qualifications with respect to their appointment or if they breach
their duty of loyalty to the company.
Pursuant to the Israeli Companies Law at least one external director
is required to have "accounting and financial expertise" and the other is
required to have "professional expertise" or "accounting and financial
expertise". A director has "professional expertise" if he or she satisfies one
of the following:
(i) the director holds an academic degree in one of these areas:
economics, business administration, accounting, law or public
administration;
(ii) the director holds an academic degree or has other higher
education, in the main business sector of the company or in an
area relevant to his or her position on the board; or
(iii) the director has at least five years experience in one or
more of the following (or a combined five years experience in at
least two or more of these (a) senior management position in a
corporation of significant business scope; (b) senior public office or
senior position in the public sector; or (c) senior position in the
main business sector of the company.
The above qualifications do not apply to external directors appointed
prior to January 19, 2006. However, an external director may not be appointed to
an additional term unless: (i) such director has "accounting and financial
expertise"; or (ii) he or she has "professional expertise", and on the date of
appointment for another term there is another external director who has
"accounting and financial expertise" and the number of "accounting and financial
experts" on the board of directors is at least equal to the minimum number
determined appropriate by the board of directors.
Any committee of the board of directors must include at least one
external
-41-
director. An external director is entitled to compensation as provided in
regulations adopted under the Companies Law and is otherwise prohibited from
receiving any other compensation, directly or indirectly, in connection with his
or her service.
If, when an external director is elected, all members of the board of
directors of a company are of one gender, the external director to be elected
must be of the other gender.
Messrs. Giora Morag and Amnon Neubach serve as external directors of
Delta Galil. Their terms expire on September 30, 2009 and December 16, 2009,
respectively. The board of directors of Delta Galil determined that Mr. Amnon
Neubach and Mr. Gideon Chitayat have "accounting and financial expertise" and
that Mr. Giora Morag has "professional expertise".
The Companies Law also provides that publicly traded companies must
appoint an audit committee. The responsibilities of the audit committee include
identifying irregularities in the management of the company's business and
approving related party transactions as required by the Companies Law. An audit
committee must consist of at least three members and include all of the
company's external directors. The chairman of the board of directors, any
director employed by the company or providing services to the company on a
regular basis, any controlling shareholder or any relative of a controlling
shareholder may not be members of the audit committee. An audit committee may
not approve an action or a transaction with a controlling shareholder or with an
office holder, unless at the time of approval two external directors are serving
as members of the audit committee and at least one of the external directors was
present at the meeting in which an approval was granted.
In addition, the Companies Law requires the board of directors of a
public company to appoint an internal auditor nominated by the audit committee.
A person who does not satisfy the Companies Law's independence requirements may
not be appointed as an internal auditor. The role of the internal auditor is to
examine, among other things, the compliance of the company with applicable law
and orderly business practice.
Pursuant to the listing requirements of the Nasdaq National Market,
Delta Galil is required to have at least two independent directors on its board
of directors and to establish an audit committee, at least a majority of whose
members are independent of management. Messrs. Morag, Neubach, and Baum, who we
believe meet the definitions of independence under the rules of the Securities
and Exchange Commission and the Nasdaq National Market, currently serve on Delta
Galil's audit committee.
Nasdaq rules require any foreign issuer that follows home country
practice in lieu of any qualitative listing requirement to disclose in its
annual reports filed with the Securities and Exchange Commission that it does
not follow such qualitative listing requirement and to describe the home country
practice followed by the issuer in lieu of such requirement. While Delta Galil
does have a board of directors the majority of which meets the independence
requirements under Nasdaq rules, and Delta Galil does have an independent audit
committee, as described above, Delta Galil has decided to follow home country
practice in lieu of having an independent compensation committee and in lieu of
obtaining shareholder approval for stock option plans. Home country practice
does not require having an independent compensation committee. Shareholder
approval will be sought for stock options to be granted to persons for whom such
approval would be required under Israeli law, such as directors and controlling
shareholders, as well as any plans that require shareholder approval for other
reasons, such as to achieve tax benefits for the optionees.
6.D EMPLOYEES
As of December 31, 2006, Delta Galil employed approximately 11,000
employees of these, approximately 8,200 were engaged in production, and the
remainder performed administrative, marketing, logistics and other functions.
During 2006 following Delta Galil's decision to concentrate it's Far
East self production in Thailand and cease it's sewing activity in China
approximately 700 employees were dismissed. See "Item 5 - Operating and
Financial Review and Prospects - Reorganization plan.".
The following table shows the geographical distribution of Delta
Galil's employees, as of December 31, 2006:
COUNTRY NUMBER OF EMPLOYEES
------- -------------------
Egypt 4,588
Israel 2,075
Jordan 2,059
Far East 1,489
United States 603
United Kingdom 186
------
Total 11,000
======
-42-
Many factory employees are eligible for bonuses based upon the number
of units such employees produce in any given day. Delta Galil has not
experienced any significant labor stoppages.
Certain collective bargaining agreements between the General
Federation of Labor in Israel, known as the "Histadrut," and the Coordination
Bureau of Economic Organizations (including the Industrialists' Association of
Israel) are applicable to Delta Galil's employees in Israel. In addition, a
collective bargaining agreement relating to members of the Industrialists'
Association, which governs employee relations in the textile and clothing
industry, applies to all of Delta Galil's textile employees in Israel. These
agreements concern, among other things, the maximum length of the work day and
the work week, minimum wages, contributions to a pension fund, insurance for
work-related accidents, procedures for dismissing employees, determination of
severance pay and other conditions of employment. Furthermore, under these
agreements, the wages of most of Delta Galil's employees are automatically
adjusted in accordance with the cost-of-living adjustments as determined on a
nationwide basis and under agreements with the Histadrut based on changes in the
Israeli consumer price index. The amounts and frequency of such adjustments are
modified from time to time.
Israeli law generally requires the payment by employers of severance
pay upon the retirement or death of an employee or upon termination of
employment by the employer or, in certain circumstances, by the employee. Delta
Galil currently funds its on-going severance obligations by making monthly
payments to pension funds, employee accounts in a provident fund and insurance
policies. In addition, according to the Israeli National Insurance Law, Israeli
employees and employers are required to pay specified amounts to the National
Insurance Institute. Since January 1, 1995, such amounts also include payments
for national health insurance payable by employees. Until June 30, 2005 the
payments to the National Insurance Institute are determined progressively in
accordance with the wages and range from 10.4% to 16.3% of wages, of which the
employee contributes between 43% and 64% and the employer contributes the
balance. Due to a change in the Israeli National Insurance Law, starting July 1,
2005, the range is 9.8% to 16.1% of wages, of which the employee contributes
between 46% and 65%. Starting January 1, 2006 the range is 8.5% to 17.7% of
wages, of which employee contributes between 41% and 68%. Starting January 1,
2007 the range is 7.6% to 17.7% of the wages of which employee contributes
between 46% and 68%. A majority of Delta Galil's permanent employees are covered
by life and pension insurance policies providing customary benefits to
employees, including retirement and severance benefits. Delta Galil generally
contributes up to 15.8% (depending on the employee) of base wages to such plans
and the permanent employees contribute 5.0% of their base wages.
6.E SHARE OWNERSHIP
See table under Item 7: "Major Shareholders and Related Party
Transactions".
STOCK OPTION PLANS
Delta Galil has three stock option plans. The total shares that may be
issued upon exercise of all outstanding options represent approximately 12% of
the outstanding share capital of Delta Galil excluding 1,206,802 ordinary shares
held by the company and 166,031 shares held by a trustee in connection with
Delta Galil's stock option plan after taking into account shares issuable upon
exercise of these options, as of March 25, 2007.
2000 STOCK OPTION PLAN
In June 2000, Delta Galil adopted a stock option plan. Under the plan,
options to purchase 809,000 ordinary shares were granted to 70 employees,
including 100,000 options to Arnon Tiberg, Delta Galil's President and Chief
Executive Officer till January, 2006. As of March 25, 2007, 119,375 options that
were granted to 20 employees were forfeited, upon the termination of their
employment and 371,500 options were expired without being exercised. The options
vest over a three-year period and have an exercise price of $21.07, equal to the
Tel Aviv Stock Exchange closing price on the last day of trading prior to the
board of directors' approval. The options are to be held in trust by ESOP Trust
Company Ltd., as trustee, for a period of at least two years from the date of
grant pursuant to the requirements of the Income Tax Ordinance. As of December
31, 2006 all of these options were fully vested and 318,125 options were
outstanding under the plan.
2002 STOCK OPTION PLAN
In October 2002 Delta Galil adopted an additional stock option plan,
under which options to
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purchase up to 1,100,000 ordinary shares may be granted. Under the plan, options
to purchase up to 1,004,500 ordinary shares were granted to 97 employees,
including 100,000 options to Arnon Tiberg, Delta Galil's President and Chief
Executive Officer till January 31, 2006. The options vest over a four-year
period and have an exercise price of $9.00. The options are to be held in trust
by ESOP Trust Company Ltd., as trustee, for a period of at least two years from
the date of grant pursuant to the requirements of the Israeli Income Tax
Ordinance. As of March 25, 2007, all options were fully vested. 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. Under the same plan, in May 2003 the Company granted 30,000 options to
three employees of the group at an exercise price of $10.76. The options are
exercisable over a three years period, commencing one year after the vesting
date of the first batch and on the vesting date of the second, third and fourth
batch. On March and 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. All options
granted after January 1, 2003 may be exercised only following the elapse of two
years after the end of the year in which the options were granted. As of
December 31, 2006, 972,750 options were outstanding under this plan. As of March
25, 2007 options to purchase an additional 112,250 shares remain available for
grant under the plan. As of March 25, 2007, 156,750 options that were granted to
thirty employees were forfeited upon the termination of their employment, and
15,000 options were exercised by two employees.
2006 STOCK OPTION PLANS
In May 2006 the Board of Directors approved two option plans, one for
Israeli and other non-U.S. employees and the other for U.S. employees. A total
of up to 1,400,000 options, representing approximately 6.5% of Delta Galil's
issued capital on a fully diluted basis, may be issued under the plans. Of such
number, 1,100,000 options are issuable under the plan for Israeli and other
non-U.S. employees and 300,000 options are issuable under the plan for U.S.
employees. Each option may be exercised for one ordinary share of Delta Galil's,
pursuant to terms of the relevant option plan.
Under the plan options to purchase up to 1,345,018 ordinary shares
were granted during 2006 as follows: The exercise price of 845,016 options
granted in May 2006 is $8.43 equal to the closing price of the ordinary shares
on the Tel Aviv Stock Exchange on May 11, 2006 converted to US dollars based on
the exchange rate of the US dollar on that date. The exercise price of 425,000
options granted in June 7, 2006 is $7.26, equal to the closing price of the
ordinary shares on the Tel Aviv Stock Exchange on June 7, 2006 converted to US
dollars and the exercise price of 25,002 options granted on June 25, 2006, is
$7.59 equal to the closing price of the ordinary shares on the Tel-Aviv stock
exchange on that day. The exercise price of 50,000 options granted on September
21, 2006 is $9.20, equal to the closing price of the ordinary share on the Tel
Aviv Stock Exchange on that day. Of the 1,345,018 options granted, 816,014 were
granted to senior employees. The plan for Israeli employees is treated under the
capital gains track under Section 102 of the Israeli Income Tax Ordinance. The
options granted under the plan for U.S. employees as incentive stock options
have certain tax benefits for those receiving the options. The options granted
vest over up to a four-year period and are exercisable over a period of three
years after vesting. The vesting of 277,000 options, granted to 11 senior
employees, is subject to achievement of financial performance goals. Of these
options, 141,000 will vest if our pre-tax net income, excluding one-time capital
gains, is at least U.S $27.5 million in 2007, and 136,000 will vest if the
Company's pre-tax net income, excluding one-time capital gains, is at least U.S
$32.5 million in 2008. Of these said performance based options, 89,000 were
forfeited as of March 15, 2007 in connection with the departure of four
employees. As a result, the total number of options subject to 2007 and 2008
goals is 96,500 and 91,500, respectively. The fair value of the option granted,
based on the Black and Scholes model, is approximately $1.8 million and is
included in the financial statements over the vesting period.
As of December 31, 2006, Delta Galil had outstanding options under
this plan to purchase up to 1,202,732 ordinary shares. As of March 25, 2007
options to purchase an additional 255,270 shares remain available for grant
under the plan.
As of March 15, 2007, 200,288 options that were granted to eighteen
employees were forfeited upon the termination of their employment.
As of March 15, 2007, 2,435,605 options to purchase ordinary shares
were outstanding under all three plans.
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The following table summarizes information regarding options
outstanding at December 31, 2006:
NUMBER OF SHARES ISSUABLE UPON EXERCISE OF OPTIONS
VESTED &
OUTSTANDING EXERCISABLE
-------------------------------------------- ------------
WEIGHTED
AVERAGE
BALANCE AT REMAINING BALANCE AT
DECEMBER 31, CONTRACTUAL DECEMBER 31,
DATE OF PLAN EXERCISE PRICES 2006 LIFE 2006
------------ --------------- ------------ ----------- ------------
(YEARS)
June 2000 $21.07 318,125 1.1 318,125
October 2002 $ 9.00 840,250 1.6 840,250
October 2002 $10.76 30,000 2.1 22,500
October 2002 $15.35 80,000 3.1 40,000
October 2002 $12.74 22,500 3.3 15,000
May 2006 $ 8.43 702,730 5.4
May 2006 $ 7.26 425,000 5.5
May 2006 $ 7.59 25,002 5.5
May 2006 $ 9.20 50,000 5.5
--------- ---------
2,493,607 1,235,875
========= =========
In March 28, 2007 the Company granted 122,000 options to eight
employees at an exercise price per share of $6.95.
Of the total options granted, 120,000 vest and exercisable as follows:
first third vest on the second anniversary of the date of grant and are
exercisable for three years thereafter, second third vest on the third
anniversary of the date of grant and are exercisable for three years thereafter
and the final third vest on the fourth anniversary of the date of grant and are
exercisable for three years thereafter. The remaining 2,000 options vest and
exercisable as follows: first quarter vest on the first anniversary of the date
of grant and are exercisable for three years from the second anniversary of the
date of grant, second quarter vest on the second anniversary of the date of
grant and are exercisable for three years thereafter, third quarter vest on the
third anniversary of the date of grant and are exercisable for three years
thereafter and the final third vest on the fourth anniversary of the date of
grant and are exercisable for three years thereafter.
The fair value of the options granted, based on the Black and Scholes
model, is approximately $0.2 million and will be recognized in the financial
statement over the vesting period.
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ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
7A. MAJOR SHAREHOLDERS
The following table sets forth stock ownership information (including
all ordinary shares represented by ADSs) as of March 25, 2007, with respect to:
1) Each person who is known by Delta Galil to be the beneficial
owner of more than 5% of Delta Galil's outstanding ordinary
shares; and
2) Directors and senior management (on an individual basis);
Except where otherwise indicated, Delta Galil believes, based on
information furnished by such owners, that the beneficial owners of the ordinary
shares listed below have sole investment and voting power with respect to such
shares. The shareholders listed below do not have any different voting rights
from any other shareholders of Delta Galil. Other than as disclosed below, none
of Delta Galil's directors or executive officers beneficially owns 1% or more of
Delta Galil's outstanding ordinary shares.
NUMBER OF PERCENT OF
ORDINARY SHARES ORDINARY
BENEFICIALLY- SHARES
NAME OWNED OUTSTANDING(1)
---- --------------- --------------
GMM Capital, LLC(2) 5,323,793 28.4%
Dov Lautman(3) 4,644,993 24.8%
Menorah Holdings Ltd.(4) 1,095,172 5.8%
Arnon Tiberg-Director(5) 647,588 3.5%
Aharon Dovrat-Director 30,050 0.16%
Harvey Krueger-Director 5, 000 0.03%
---------- ----
Officers and directors
as a group (aggregate) 11,746,596 62.68%
========== ====
(1) Based on 18,740,878 ordinary shares outstanding; as of March 25, 2007,
excluding 1,206,802 ordinary shares held by the Company and excluding
166,031 ordinary shares held by a trustee in connection with Delta Galil's
stock option plans.
(2) The sole member of GMM Capital, LLC is GMM Trust. The trustees of GMM Trust
are Isaac Dabah, Ivette Dabah (Mr. Dabah's wife) and Donald Hecht the
administrator trustee.
(3) Includes 3,264,336 shares held by Nichsei Adinoam Ltd. and 1,380,657 shares
held by N.D.R.L. Investments (1998) Ltd., each of which is a company
controlled by Dov Lautman. Noam Lautman is also a director of each of these
companies.
(4) Includes shares held by Menorah Holdings Ltd., as well as shares held by
pension funds and provident funds affiliated with Menorah.
(5) Includes 439,150 shares held by Ha'lakuach Ha'Neeman (65) Ltd., a company
controlled by Mr. Tiberg and 58,438 held by Mr. Tiberg. Also includes
vested options held by Mr. Tiberg to purchase 150,000 ordinary shares, as
follows: options to acquire 50,000 ordinary shares have an exercise price
of $21.07 per share converted to NIS on the date of the exercise, and are
fully vested. Of these options, 25,000 are exercisable until August 2007
and 25,000 are exercisable until August 2008. Options to acquire an
additional 100,000 ordinary shares have an exercise price of $9.00 per
share converted to NIS on the date of the exercise, and are fully vested.
Of these options 50,000 are exercisable until November 2007, 25,000 until
November 2008 and 25,000 until November 2009.
SHAREHOLDERS AGREEMENTS
Dov Lautman, the Chairman of the Board of Directors of Delta Galil,
and two companies through which he holds shares in Delta Galil, N.D.R.L.
Investments (1998) Ltd. and Nichsei Adinoam Ltd., (collectively, the "Lautman
Group"), have a shareholders agreement with GMM Capital.
The shareholders agreement provides, among other things, that:
o GMM Capital is entitled to nominate 30% of the members of Delta
Galil's board of directors, excluding external directors, with
fractions rounded up to the next whole number, and Mr.
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Lautman is entitled to nominate the remainder of the members of
the board, excluding external directors;
o Delta Galil may not issue, allot or grant options over or
conversion rights into its unissued share capital without the
prior consent of GMM Capital unless as part of a pro rata
distribution of fully paid up bonus shares; and
o New appointments of a Chief Executive Officer of Delta Galil
shall require the consent of GMM Capital.
o The prior approval of GMM Capital and the Lautman Group shall be
required for actions by Delta Galil or its subsidiaries with
respect to (i) acquisitions, dispositions or licenses of assets
or businesses, other than in the ordinary course of business
consistent with past practice, involving consideration with a
value of more than 5% of the total assets of the Company, (ii)
public issuances or private placements of bonds or similar debt
securities or the payment of dividends in any fiscal year in
excess of 5% of the total consolidated assets of the Company,
(iii) the approval of the annual capital expenditure budget of
Delta Galil and any material modification thereof, if the
aggregate amount contemplated by such capital expenditure budget
to be spent exceeds certain pre-defined thresholds and (iv) any
merger, consolidation, recapitalization or equivalent transaction
involving Delta Galil (other than certain intercompany
transactions) or the commencement of any bankruptcy or insolvency
proceedings or liquidation or winding up of the Company; and
o The approval of the annual operating budget of Delta Galil and
any material modification thereof shall require the approval of a
majority of the board of directors of Delta Galil.
In addition, the Lautman Group and GMM Capital each granted the other
a right to purchase any Delta Galil shares that the other party beneficially
owns and proposes to sell to unaffiliated third parties.
The term of the shareholders agreement will expire on the earlier to
occur of: (i) the date on which GMM Capital holds less than 10% of the equity
rights of Delta Galil and (ii) the date on which the Lautman Group hold less
than 10% of the equity rights of the Company, provided that GMM Capital then
owns at least 2.5 times the number of shares held by the Lautman Group.
As of March 25, 2007, GMM Capital owned 28.4% and the Lautman Group
owned 24.8% of the outstanding ordinary shares of Delta Galil.
As of March 25, 2007, Delta Galil had 21 shareholders of record
resident in the United States, accounting for 29.2% of the outstanding ordinary
shares. One U.S. shareholder, GMM Capital, holds 28.4% of the outstanding
ordinary shares.
7B. RELATED PARTY TRANSACTIONS
Transactions made during 2006 with a company held by GMM Capital LLC,
one of the main Company's shareholders, in the ordinary course of business,
amounted to $0.5 million of revenues. See "Item 10: Additional Information-
Approval of Related Party Transactions under Israeli Law and item 13 to the
financial statements."
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ITEM 8: FINANCIAL INFORMATION
8A. CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION
See Delta Galil's consolidated financial statements included in Item
18 of this annual report. No significant change has occurred since the date of
the consolidated financial statements included herein, except as otherwise
described in this report or in other published reports of Delta Galil.
LEGAL PROCEEDINGS
From time to time, Delta Galil is involved in legal proceedings
relating to claims arising out of its operations in the normal course of
business, including claims made by employees and former employees.
Delta Galil believes that there are no legal proceedings pending or
threatened against it or any of its properties that may have significant effects
on its financial position or profitability.
DIVIDENDS
Delta Galil has distributed cash dividends to its shareholders from
time to time in the past and will continue to consider, on a quarterly basis,
the payment of dividends to its shareholders. However, Delta Galil does not have
an established dividend policy, and the amount of future dividends, if any, will
be determined from time to time by the board of directors in light of Delta
Galil's earnings, financial condition, capital requirements and other factors.
Following is a breakdown of dividends per ordinary share paid in the
last four fiscal years:
2003 2004 2005 2006
---- ---- ---- ----
$0.52 $0.45 -- --
===== ===== ==== ====
ITEM 9:
9A. OFFER AND LISTING
Delta Galil's ordinary shares have been listed on the Tel Aviv Stock
Exchange since 1982. The ordinary shares are not listed on any other stock
exchange and have not been publicly traded outside Israel.
In the United States, ADSs evidenced by American Depositary Receipts
(ADRs) represent fully paid ordinary shares of Delta Galil and each ADS
represents one fully paid ordinary share. The ADSs are issued pursuant to a
Deposit Agreement entered into by Delta Galil and The Bank of New York, as
depositary. The Bank of New York's address is 101 Barclay Street, New York, New
York 10286. On March 25, 1999, trading of Delta Galil's ADSs commenced on the
Nasdaq National Market under the symbol DELT.
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The table below sets forth for the periods indicated (i) the high and
low last reported prices of the ordinary shares (in nominal NIS and dollars) on
the TASE, and (ii) the high and low sales prices of the ADSs as reported on the
Nasdaq since the year 2002. The translation into dollars is based on the daily
representative rate of exchange on the last day of each period, as published by
the Bank of Israel.
ADS
ORDINARY SHARES EQUIVALENTS
---------------------------- ------------
HIGH LOW HIGH LOW
NIS $ NIS $ $ $
----- ----- ----- ---- ----- ----
YEAR ENDING DECEMBER 31, 2002: 49.35 10.99 32.89 6.76 10.83 6.69
YEAR ENDING DECEMBER 31, 2003: 76.80 17.19 46.71 9.76 16.97 9.33
YEAR ENDING DECEMBER 31, 2004: 74.40 16.81 40.20 9.19 16.15 9.35
YEAR ENDING DECEMBER 31, 2005: 48.38 11.05 28.00 6.10 11.35 5.96
First Quarter ............. 48.38 11.05 38.92 8.89 11.35 9.14
Second Quarter ............ 41.67 9.53 29.56 6.46 9.81 6.50
Third Quarter ............. 36.07 8.06 28.05 6.08 8.10 5.97
Fourth Quarter ............ 33.20 7.08 28.00 6.10 7.26 5.96
YEAR ENDING DECEMBER 31, 2006: 44.33 10.34 27.67 6.01 10.54 6.05
First Quarter ............. 34.86 7.48 27.67 6.01 7.47 6.05
Second Quarter ............ 37.75 8.09 30.05 6.71 8.41 6.55
Third Quarter ............. 40.46 9.42 33.07 7.45 9.50 7.11
Fourth Quarter ............ 44.33 10.34 36.81 8.71 10.54 8.82
MOST RECENT SIX MONTHS:
September 2006 ............ 40.46 9.42 34.61 7.92 9.50 7.85
October 2006 .............. 41.70 9.76 38.36 9.03 9.80 8.82
November 2006 ............. 44.33 10.34 39.67 9.26 10.54 9.07
December 2006 ............. 40.85 9.67 36.81 8.71 9.79 8.86
January 2007 .............. 39.53 9.40 33.76 7.94 9.68 7.85
February 2007 ............. 34.14 8.03 30.29 7.19 8.27 7.40
As of March 26, 2007, the last reported price of the ordinary shares
on the TASE was NIS 28.85 ($6.86) and the last reported price per ADS on Nasdaq
was $7.13. Fluctuations in the exchange rate between the NIS and the dollar may
affect the price of the ordinary shares on the TASE and, as a result, may affect
the market price of the ADSs in the United States.
9B. PLAN OF DISTRIBUTION
Not applicable
9C. MARKETS
See Item "9A. Offer and Listing".
9D. SELLING SHAREHOLDERS
Not applicable
9E. DILUTION
Not applicable
9F. EXPENSE OF THE ISSUE
Not applicable
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ITEM 10: ADDITIONAL INFORMATION
10A. SHARE CAPITAL
Not applicable.
10B. MEMORANDUM AND ARTICLES OF ASSOCIATION
Delta Galil is registered with the Israeli Registrar of Companies as a
public company, with registration number 52-002560-2. Delta Galil's Articles of
Association provide that Delta Galil's objectives may include any activity
permitted by law, and that Delta Galil can also contribute reasonable amounts to
worthwhile causes even if such contributions are not based on profit-oriented
business considerations.
APPROVAL OF RELATED PARTY TRANSACTIONS UNDER ISRAELI LAW
The Companies Law governs the relationships between a company and its
"OFFICE HOLDERS." Under the Companies Law, an Office Holder is a director,
general manager, chief business manager, deputy general manager, vice general
manager, any other person assuming the responsibilities of any of the foregoing
positions without regard to such person's title or any other manager directly
subordinate to the general manager.
DISCLOSURE OF PERSONAL INTEREST
A director who has a personal interest in a transaction that is
considered at a meeting of the board of directors or the audit committee may not
be present during the board of directors or audit committee discussions and may
not vote on that matter. If a majority of the members of the audit committee or
of the board of directors has a personal interest in the matter, the director
can participate and vote at such audit committee or board meeting, provided,
however, that if the majority of the members or the directors has a personal
interest in the transaction, shareholder approval will be also required.
The Companies Law requires that an Office Holder and any controlling
shareholder promptly disclose to the company any personal interest that he may
have, including disclosure of any corporation in which he is a 5% or greater
shareholder, director or general manager or in which he has the right to appoint
at least one director or the general manager. In addition, an Office Holder and
any controlling shareholder must disclose any and all material information known
to him, in connection with any existing or proposed transaction by the company.
In addition, if the transaction is an "EXTRAORDINARY TRANSACTION", the Office
Holder or controlling shareholder must also disclose any personal interest held
by such person's spouse, siblings, parents, grandparents, descendants, spouse's
descendants and the spouses of any of the foregoing. An Extraordinary
Transaction is a transaction that is not in the company's ordinary course of
business, or not at market terms or that may materially affect the company's
profitability, assets or liabilities.
DIRECTORS' COMPENSATION
Delta Galil's Articles provide that, unless otherwise approved at a
general meeting, each director shall be paid the same remuneration as paid to
each of Delta Galil's external directors. Remuneration of external directors is
limited by regulations issued under the Companies Law. The directors will be
entitled to be reimbursed for reasonable expenses incurred by them in performing
their services as directors.
BOARD APPROVAL
As more fully described below, depending on the circumstances,
approvals of related-party transactions may be required at three levels: board
approval, audit committee approval and shareholder approval.
The Companies Law provides that transactions between a company and its
office holders as well as transactions with a company in which an office holder
has a personal interest, which are not Extraordinary Transactions, require the
approval of the board of directors, unless another manner of approval is
provided by the articles of association. The transaction may not be approved if
it is adverse to the company's interest. All arrangements as to compensation of
the General Manager, the Chief Executive Officer and the President require
approval of Delta Galil's board of directors. Unless otherwise determined by the
board of directors, the compensation arrangements of office holders, other than
the directors, General Manager, CEO and/or President, are at the discretion of
the General Manager of Delta Galil. With respect to transactions that are
related to the terms of service of a director see "Shareholder Approval" below.
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AUDIT COMMITTEE AND BOARD APPROVAL
The Companies Law requires approval by both the audit committee and
the board of directors for, inter alia, the following types of actions or
transactions:
o proposed transactions in which an office holder has a direct or indirect
personal interest and which is beyond the scope of the ordinary course of
the company's business, which is not in accordance with market conditions
or which may materially influence the earnings, assets or liabilities of
the company; and
o transactions concerning exculpation, indemnification or insurance of an
office holder, other than a director.
SHAREHOLDER APPROVAL
The Companies Law also provides that, in addition to approval of the
audit committee and the board of directors, the shareholders must approve the
following, unless the Companies Law or the regulations promulgated
thereunder provides an exemption for such a case:
o an Extraordinary Transaction between a public company and a controlling
shareholder, including a private placement in which a controlling
shareholder of the company has a personal interest;
o an Extraordinary Transaction with a third party in which a controlling
shareholder of the company has a personal interest;
o the terms of employment of a controlling shareholder (or of such person's
spouse, siblings, parents, grandparents, offspring, spouse's offspring and
the spouses of any of the foregoing), if he is an employee of the company;
and if he is an office holder of the company - the terms of his engagement
or service; and
o terms of service of directors, including exculpation, indemnification,
insurance or compensation and terms of their employment in other positions
in the company.
The shareholder approval required for such an Extraordinary
Transaction must constitute at least one-third of the voting shareholders who
have no personal interest in the transaction and does not include abstentions.
The transaction can be approved by shareholders without the required one-third
approval, if the total holdings of those shareholders who have no personal
interest and voted against the transaction do not represent more than 1% of the
voting rights in the company.
BORROWING POWERS
Article 50 of Delta's Articles of Association provides that Delta
Galil may, from time to time, at its discretion, borrow or secure the payment of
any sum or sums of money for its purposes. Article 51 provides that Delta Galil
may raise the funds for or secure the repayment of such sums in such manner, at
such times and upon such terms and conditions as it deems fit and, in
particular, by the issuance of bonds, perpetual or redeemable debentures,
debenture stock, or any mortgages or charges, on the present or future property
of Delta Galil, including its uncalled capital at that time and its called but
unpaid capital.
CHANGE OF CONTROL
The Companies Law provides that an acquisition of shares in a public
company must be made by means of a tender offer if, as a result of the
acquisition, the purchaser would become a 25% shareholder of the company. This
rule does not apply if there is already another 25% shareholder of the company
or if the acquisition is from a shareholder that holds 25% or more of the voting
rights of the company. Similarly, the Companies Law provides that an acquisition
of shares in a public company must be made by means of a tender offer if, as a
result of the acquisition, the purchaser would become a holder of more than 45%
of the voting rights of the company, unless there is another person holding at
that time more than 45% of the voting rights of the company or if the
acquisition is from a shareholder that holds 45% or more of the voting rights of
the company.
The Companies Law provides that mergers require the approval of the
board of directors and the shareholders of the merging parties. Under a recent
amendment to the Companies Law, a merger with a wholly owned subsidiary does not
require the approval of the target company's shareholders. Furthermore, a merger
does not require approval of the surviving company's shareholders if (i) the
merger does not require amending the surviving company's memorandum of
association or articles of association and (ii) the surviving company does not
transfer more than 25% of its voting power as a result of the merger and
pursuant to the transfer no shareholder would become a controlling shareholder.
Approval of the surviving company's shareholders would, nevertheless, be
required if the other party to the merger, or a person holding more than 25% of
the outstanding voting shares or means of appointing the board of directors of
the other party to the merger, holds any shares of the surviving company. For
purposes of the shareholder
-51-
vote of each party, unless a court rules otherwise, the merger will not be
deemed approved if a majority of the shares not held by the other party, or by
any person, including that person's relatives and any company that person
controls, who holds 25% or more of the shares or has the right to appoint 25% or
more of the directors of the other party, have voted against the merger.
Shareholder approval of mergers will be by a simple majority vote cast at a
general meeting of shareholders, not counting abstentions.
SHAREHOLDERS MEETINGS
Annual general meetings of shareholders are held once every year at
such time, within a period of not more than 15 months after the last annual
general meeting, and convene at such place as determined by the board of
directors. The board of directors may call an extraordinary general meetings of
shareholders and is obligated to do so upon a written request in accordance with
the Companies Law as described below. The Companies Law provides that an
extraordinary general meeting of shareholder may be called by the board of
directors or by a request by two directors or 25% of the directors in office, or
by shareholders holding at least 5% of the issued share capital of the company
and at least 1% of the voting rights, or of shareholders holding at least 5% of
the voting rights of the company. Delta Galil generally must give advanced
notice of a general meeting to its shareholders of record at least twenty-one
days prior to the meeting.
QUORUM; VOTING RIGHTS; RECORD DATE
The required quorum for any general meeting is two or more
shareholders present in person or by proxy and holding at least thirty-three and
one-third percent (33 1/3%) of the issued voting shares. On all matters
submitted to a vote of shareholders, holders of ordinary shares have one vote
for each ordinary share. Such voting rights may be affected by the grant of any
special voting rights to the holders of a class of shares with preferential
rights that may be authorized in the future. Under the Companies Law, the board
of directors can set a record date for the purpose of a shareholder vote. The
record date may be between four and twenty-one days before the date of the
meeting.
DIRECTORS
ELECTION OF DIRECTORS
Delta Galil's ordinary shares do not have cumulative voting rights
with regard to the election of directors. As a result, the holders of ordinary
shares that represent at least 51% of the voting power have the power to elect
all the directors. Directors are elected annually by the shareholders at the
annual meeting. Directors hold office until the conclusion of the next annual
meeting or until their removal or resignation at an earlier date. A director is
not required to retire at a certain age and need not be a shareholder of Delta
Galil.
MEETINGS OF THE BOARD OF DIRECTORS
The required quorum for any Board meeting is at least thirty percent
(30%) of the current number of directors.
DESCRIPTION OF SHARE CAPITAL
AUTHORIZED SHARES
Delta Galil's authorized share capital consists of 26,000,000 ordinary
shares, par value NIS 1.00 per share.
TRANSFER OF SHARES; NON-ASSESSABILITY
Fully paid ordinary shares are non-assessable and are issued in
registered form. They may be freely transferred pursuant to the Articles of
Association unless such transfer is restricted or prohibited by another
instrument.
FOREIGN OWNERSHIP
Delta Galil's Memorandum and Articles of Association do not restrict
in any way the ownership of ordinary shares by nonresidents of Israel and
neither the Memorandum of Association nor Israeli law restricts the voting
rights of non-residents of Israel, other than citizens or residents of countries
that are in a state of war with Israel.
DISTRIBUTION OF DIVIDENDS
Delta Galil's ordinary shares are entitled to the full amount of any
cash or share dividend, declared by the Company. Delta Galil may declare a
dividend to be paid to the holders of ordinary shares in accordance with their
rights and interests in the profits of Delta Galil. In the event of liquidation,
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after satisfaction of liabilities to creditors, the assets of Delta Galil will
be distributed to the holders of ordinary shares in proportion to the nominal
value of their respective holdings. This right may be affected by the grant of
preferential dividend or distribution rights to the holders of a class of shares
with preferential rights that may be authorized in the future by a special
resolution of the shareholders of Delta Galil.
Under the Companies Law, dividends may be paid only out of accumulated
earnings or out of net earnings for the two years preceding the distribution of
the dividends as calculated under the Companies Law. Dividends may be paid only
if there is no reasonable concern that the distribution of dividends will
prevent the company from meeting its existing and foreseeable obligations as
they become due.
The Articles provide that the distribution of cash dividends and the
amount to be distributed is made by the board of directors. The distribution of
dividends in kind requires shareholder approval after receiving the
recommendations of the board of directors.
MODIFICATION OF CLASS RIGHTS
The Articles may be amended by a resolution approved by the holders of
at least 66% of the shares represented at the shareholders' general meeting and
voting thereon, without taking abstentions into account. The rights attached to
any class of shares such as voting, dividends and the like, unless otherwise
provided for by the terms of issue of such class, may be varied with the consent
in writing of all of the holders of the issued shares of the class, or with the
adoption of a resolution by at least 66% of the ordinary shares present and
voting at a shareholders meeting. This special majority is greater than the
simple majority required by the Companies Law.
AMERICAN DEPOSITARY RECEIPTS
The description of American Depositary Receipts appearing in Delta
Galil's Registration Statement on Form F-1 (Registration No. 333-10062) filed
with the Securities and Exchange Commission on February 26, 1999 is incorporated
herein by reference.
DIRECTORS AND OFFICERS INDEMNIFICATION AND INSURANCE
Delta Galil has obtained directors' and officers' liability insurance
covering the officers and directors of Delta Galil and its subsidiaries for
claims arising from wrongful acts they committed in their capacity as an officer
or a director. Delta Galil has also issued indemnity undertakings to its office
holders to indemnify them for amounts that they may be obligated to pay in
litigation related to their service to Delta Galil arising in one of the types
of events enumerated in the undertaking. Such indemnification is capped at an
aggregate of $15 million for all office holders in respect of the same series of
events, less any amount reimbursed by Delta Galil's directors and officers
insurance, PROVIDED however, that the total amount of indemnity may not exceed
25% of the shareholders' equity of Delta Galil on the date of the payment of
amounts pursuant to the undertaking.
10C. MATERIAL CONTRACTS
Delta Galil entered into an amendment to the Stock Purchase Agreement
relating to the acquisition of Burlen Corporation. For a description of this
amendment see Item 4 "Information on the Company - Recent Acquisitions". During
2006 and in the beginning of 2007, Delta Galil amended its U.S bank credit
agreement. For a description of a recent amendment to the credit facility of
Delta Galil USA Inc. see "Item 5 - Operating and Financial Review and Prospects
- Liquidity and Capital Resources - Debt." In May 2006, Delta Galil adopted two
option plans. For a description see Item 6E "Share Ownership - Stock Option
Plans."
10D. EXCHANGE CONTROLS
Non-residents of Israel who acquire any of the ADSs or ordinary shares
using non-Israeli currencies will be able to convert dividends, liquidation
distributions and the proceeds from the sale of such ADSs or ordinary shares,
into non-Israeli currencies at the rate of exchange prevailing at the time of
conversion provided that Israeli income tax has been paid (or withheld) on such
amounts.
Israeli residents are eligible to purchase securities of Israeli and
non-Israeli companies, and are eligible to purchase the ADSs or ordinary shares.
10E. ISRAELI TAXATION
Following is a short summary of the tax regime applicable to
corporations in Israel, with special reference to its effect on Delta Galil.
This discussion also includes specified Israeli tax consequences to holders of
our ordinary shares and Israeli Government programs benefiting us. The following
is not
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intended, and should not be construed, as legal or professional tax advice and
is not exhaustive of all possible tax considerations.
CORPORATE TAX RATE
The regular tax rate in Israel in 2006 is 31%. This rate is currently
scheduled to decrease to 29% in 2007, and 25% until the year 2010 for
undistributed earnings. However, the effective tax rate of a company, which
derives income from an approved enterprise, may be considerably less, as further
discussed below.
LAW FOR THE ENCOURAGEMENT OF INDUSTRY (TAXES), 1969 (THE "INDUSTRY ENCOURAGEMENT
LAW")
Delta Galil believes that it currently qualifies as an Industrial
Company pursuant to the Industry Encouragement Law. As such, Delta Galil
qualifies for certain tax benefits, including amortization of the purchase price
of a good-faith acquisition of a patent or of certain other intangible property
rights at the rate of 12.5% per annum and the right to file consolidated tax
returns with its subsidiaries qualified as an Industrial Company and operating
under the same industry. The tax laws and regulations dealing with the
adjustment of taxable income for local inflation provide that industrial
enterprises such as Delta Galil which qualify as an Industrial Company can claim
special rates of depreciation such as up to 40% on a straight line basis for
industrial equipment.
Eligibility for the benefits under the Industry Encouragement Law is
not subject to receipt of prior approval from any government authority. Delta
Galil cannot assure you that it presently qualifies as an "Industrial Company,"
it will continue to qualify as such in the future, or that the benefits will be
granted in the future.
LAW FOR THE ENCOURAGEMENT OF CAPITAL INVESTMENTS, 1959 (THE "INVESTMENT LAW")
Industrial projects of Delta Galil have been granted the status of an
"Approved Enterprise" under the Investment Law. This law provides that capital
investments in production facilities may, upon application to the Israel
Investment Center, be designated as an Approved Enterprise. Each certificate of
approval for an Approved Enterprise relates to a specific investment program
delineated both by its financial scope, including its capital sources, and by
its physical characteristics, i.e., the equipment to be purchased and utilized
pursuant to the program. The tax benefits derived from any such certificate of
approval relate only to taxable profits attributable to the specific program,
based upon criteria set in the certificate of approval. In the event that Delta
Galil, which has been granted Approved Enterprise status, is operating under
more than one approval or that its capital investments are only partly approved
(a "Mixed Enterprise"), its effective corporate tax rate will be the result of a
weighted combination of the various applicable rates.
Income derived from an Approved Enterprise is subject to a tax rate of
25%, rather than the usual rate in 2006 of 31% (as mentioned above, gradually
scheduled to be reduced to 29% in 2007 and to 25% until the year 2010), for a
period of ten years, commencing with the year in which the Approved Enterprise
first generates taxable income. This period cannot extend beyond 12 years from
the year of commencement of operations or 14 years from the year in which
approval was granted, whichever is earlier. Income derived from an Approved
Enterprise located in Area A, which have been approved after January 1, 1997 is
exempt from income tax in the first two years.
Delta Galil first derived income from some of the abovementioned
Approved Enterprises in 1999. In 1999, Delta Galil used tax benefits estimated
at approximately $ 1.6 million. Due to losses for tax purposes accumulated prior
to 1999 and in the years 2000 - 2006, Delta Galil had not used any of the tax
benefits to which it is entitled under these government programs in these years,
except with respect to accelerated depreciation on real estate property. The
remaining tax benefits may be available for use in future years, under the
abovementioned periods of 12 years from the year of commencement of operations
and 14 years from the year of the grant of approval.
Under the Approved Enterprise programs, Delta Galil has received
grants totaling $ 1.1 million in 2004 and none in 2005 and 2006. The government
of Israel has gradually reduced the investment grants available from 38% of
eligible capital expenditures in 1996 to 24% of eligible capital expenditures in
1998 and thereafter.
This lower grant rate applies to any applications in 1998 or
thereafter. There can be no assurance that the Israeli government will not
further reduce these investment grants.
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Delta Galil is a "Foreign Investors Company" ("FIC"), as defined by
the Investment Law, and is entitled to an extended period of ten years (rather
than seven years), commencing with the year in which the Approved Enterprise
first generates taxable income. This ten-year period cannot extend beyond 12
years from the year of commencement of operations or 14 years from the year in
which approval was granted, whichever is earlier. Delta Galil cannot assure you
that it will continue to qualify as an FIC in the future, or that the benefits
will be granted in the future.
The benefits available to an Approved Enterprise are contingent upon
Delta Galil's fulfilling the conditions stipulated by the Investment Law,
regulations published thereunder and the conditions of approval for the specific
investments in Approved Enterprises.
In the event that Delta Galil fails to comply with these conditions,
the benefits may be cancelled and Delta Galil may be required to refund the
amount of the benefits, in whole or in part, with the addition of linkage
differences to the Israeli consumer price index and interest.
The Israeli Government has enacted legislation in April 2005 that
extensively changes the Investment Law. However, according to a provision in
this legislation, changes in the Investment Law should not affect approved
enterprises plans that were approved as of December 31, 2004 or investments made
as of December 31, 2004. For the meantime, this would seem to preserve the
benefits for Delta Galil's approved enterprises, as described above. However,
there is currently no administrative or judicial guidance relating to the new
legislation. Additionally, there are indications that some of the new sections
may undergo revision or technical correction. Accordingly, Delta Galil provides
no assurances regarding the ongoing application of the Investment Law to current
or future Approved Enterprises.
TAXATION OF NON-ISRAELI SUBSIDIARIES
Non- Israeli subsidiaries are generally taxed based on the tax laws in
their countries of residence.
CAPITAL GAINS AND INCOME TAXES APPLICABLE TO ISRAELI SHAREHOLDERS
Prior to the tax reform, sales of our ordinary shares by individuals
were generally exempt from Israeli capital gains tax so long as (1) our ordinary
shares were quoted on NASDAQ or listed on a stock exchange in a country
appearing on a list approved by the Controller of Foreign Currency and (2) we
qualified as an Industrial Company within the definition of the Law for the
Encouragement of Industry (Taxes), 1969.
Pursuant to the Tax Reform, generally, capital gains tax is imposed on Israeli
residents at a rate of 15% on real gains derived on or after January 1, 2003 and
a rate of 20% on real gains derived on or after January 1, 2006 from the sale of
shares in : (1) companies publicly traded on the Tel Aviv Stock Exchange; or (2)
Israeli companies publicly traded on Nasdaq or a recognized stock exchange or a
regulated market outside of Israel as defined in income tax order (definition
stock exchange), 2004; or (3) companies dually traded on both the Tel Aviv Stock
Exchange and Nasdaq or a recognized stock exchange or a regulated market outside
of Israel. This tax rate is contingent upon the shareholder not claiming a
deduction for financing expenses, and does not apply to: (1) dealers in
securities; or (2) shareholders that report in accordance with the Inflationary
Adjustments Law, (3) shareholders who acquired their shares prior to an initial
public offering (that are subject to a different tax arrangement); (4) a sale to
a related party; (5)Where the seller is "substantive shareholder" as defined in
the ITO i.e, a person who directly or indirectly, alone or with another, holds
at least 10% of one or more categories of means of control in a body of persons,
when the shares were sold or at any time within 12 months before the sale, shall
be charged tax at a rate of 25%.
The tax basis of shares acquired prior to January 1, 2003, with
respect of which the shareholders had been exempted from capital gains tax prior
to January 1, 2003, will be determined in accordance with the average closing
share price in the three trading days preceding January 1, 2003. However, a
request may be made to the tax authorities to consider the actual adjusted cost
of the shares as the tax basis if it is higher than such average price.
TAX REFORM LEGISLATION
In July 2002, the Israeli Parliament approved a law introducing
extensive changes to Israel's tax law generally effective January 1, 2003. Among
the key provisions of this reform legislation are (1) changes which may result
in the imposition of taxes on dividends received by an Israeli company from its
foreign subsidiaries; and (2) the introduction of the controlled foreign
corporation concept according to which an Israeli company may become subject to
Israeli taxes on certain income of a non-Israeli subsidiary if the subsidiary's
primary source of income is passive income (such as interest, dividends,
royalties, rental income or certain capital gains). An Israeli company that is
subject to Israeli taxes on the income of its non-Israeli subsidiaries will
receive a credit for withholding tax to be paid upon distribution by the
subsidiary in its country of residence.
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CAPITAL GAINS AND INCOME TAXES APPLICABLE TO NON-ISRAELI SHAREHOLDERS
CAPITAL GAINS. The basic capital gains tax rate applicable to
corporations effective until December 31, 2002 had been 36%, and the maximum tax
rate for individuals was 50%. Effective January 1, 2003, the capital gains tax
rate imposed upon sale of capital assets acquired after that date was reduced to
25%; capital gains realized from assets acquired before that date are subject to
a blended tax rate based on the relative periods of time before and after that
date that the asset was held. In addition, if the ordinary shares are traded on
a recognized stock exchange (including the Tel Aviv Stock Exchange and the
NASDAQ), gains on the sale of ordinary shares held by non-Israeli tax resident
investors will generally be exempt from Israeli capital gains tax.
Notwithstanding the foregoing, dealers in securities in Israel are taxed at
regular tax rates applicable to business income.
Under an amendment to the Inflationary Adjustments Law, effective
January 1, 1999, corporate investors that hold listed securities (other than
corporations solely owned by individuals), will generally be subject to the
provisions of the Inflationary Adjustments Law. The Inflationary Adjustments Law
stipulates a comprehensive set of rules for determining the gains or losses from
the sale of listed securities. Gains from sale of negotiable shares which are
subject to the Inflationary Adjustments Law, are taxable at the regular
corporate tax rate. A literal reading of the Inflationary Adjustments Law, may
suggest that its provisions also apply to foreign corporations, although the
foreign corporation may have no activity in Israel other than the shareholding
in an Israeli company. Consequently, unless a tax treaty exemption is
applicable, the capital gain exemption available for individual shareholders may
not apply. A 2006 amendment to the Inflationary Adjustments Law removes the
uncertainty that foreign entities would not owe capital gains tax on traded
securities without the need for an interpretation from the relevant tax treaty.
Under the treaty between the United States and Israel, the capital
gain derived by a U.S. taxpayer from the sale, exchange or other disposition of
stock in an Israeli corporation would generally be tax exempt when the
shareholder did not own, within the 12 month period preceding such sale,
exchange or other disposition, shares constituting 10% or more of the voting
power in the Israeli corporation.
DIVIDENDS.
Individuals who are non-Israeli residents are subject to a graduated
income tax on income derived from sources in Israel. On the distribution of
dividends other than share dividends, income tax is withheld at the rate of 20%,
or 15% in the case of dividends distributed from taxable income attributable to
an Approved Enterprise, unless a different rate is provided in a treaty between
Israel and the shareholder's country of residence and a special certificate is
provided.
Under the United States-Israel Tax Treaty, the maximum withholding tax
in Israel on dividends paid to a holder of ordinary shares who is a resident of
the United States is 25%. This tax rate is reduced to 12.5% for a corporation
that has been holding in excess of 10% of the voting rights of Delta Galil
during Delta Galil's tax year preceding the distribution of the dividend and the
portion of Delta Galil's tax year in which the dividend was distributed.
Dividends of an Israeli company derived from the income of an Approved
Enterprise will be subject to a dividend withholding tax of only 15%. The
withheld tax is the final tax in Israel on dividends paid to non-residents who
do not conduct business in Israel.
Residents of the United States will generally have withholding tax in
Israel deducted at the source. They may be entitled to a credit or deduction for
U.S. federal income tax purposes in the amount of the taxes withheld, subject to
detailed rules contained in the United States-Israel Tax Treaty and in U.S. tax
legislation.
A non-Israeli resident who has derived interest, dividend or royalty
income from or accrued in Israel, from which tax was withheld at the source, is
generally exempt from the duty to file tax returns in Israel with respect to
such income, provided such income was not derived from a business conducted in
Israel by the taxpayer.
UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following discussion is a general summary of the material U.S.
federal income tax considerations applicable to U.S. Holders (as defined below)
of ADSs or ordinary shares, who hold such instruments as capital assets
(generally, property held for investment). This summary is based on provisions
of the U.S. Internal Revenue Code of 1986, as amended (the "Code"), existing and
proposed U.S. Treasury regulations promulgated thereunder and administrative and
judicial interpretations thereof,
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all in effect as of the date of this annual report and all of which are subject
to change (possibly with retroactive effect) and to differing interpretations.
In addition, this summary does not discuss all aspects of U.S. federal income
taxation that may be applicable to U.S. Holders in light of their particular
circumstances or to U.S. Holders who are subject to special treatment under U.S.
federal income tax law (including, for example, life insurance companies,
dealers in stocks or securities, financial institutions, tax-exempt
organizations, persons having a functional currency other than the U.S. dollar,
persons subject to the alternative minimum tax and persons who have directly,
indirectly or constructively owned 10% or more of the outstanding voting shares
of Delta Galil at any time. EACH U.S. HOLDER IS URGED TO CONSULT WITH ITS TAX
ADVISOR REGARDING THE TAX CONSEQUENCES OF ITS HOLDINGS, INCLUDING THE EFFECTS OF
FEDERAL, STATE, LOCAL, FOREIGN AND OTHER TAX LAWS.
This summary is based in part on representations of The Bank of New
York, Delta Galil's depositary, and assumes that each obligation provided for
in, or otherwise contemplated by, Delta Galil's deposit agreement with The Bank
of New York and any related agreement will be performed in accordance with its
terms.
As used herein, the term "U.S. Holder" signifies a holder of an ADR
evidencing an ADS, or of an ordinary share, who is an individual citizen or
resident of the United States, or that is (i) a corporation or partnership
created or organized in or under the laws of the United States or any political
subdivision thereof; (ii) an estate the income of which is subject to U.S.
federal income taxation regardless of its source or (iii) a trust if (A) a U.S.
court is able to exercise primary supervision over the trust's administration
and one or more U.S. persons have the authority to control all of the trust's
substantial decisions or (B) it has validly elected to be treated as a domestic
trust under the Code.
OWNERSHIP OF ADRS, ADSS AND ORDINARY SHARES
In general, for U.S. federal income tax purposes, U.S. Holders of ADRs
evidencing ADSs will be treated as the owners of the ordinary shares represented
by the ADSs.
DIVIDENDS PAID ON THE ADSS OR ORDINARY SHARES
A U.S. Holder will generally be required to include in gross income as
ordinary dividend income the amount of any distributions paid on the ADSs or
ordinary shares (including the amount of any Israeli taxes or depositary fees
withheld therefrom) to the extent that such distributions are paid out of Delta
Galil's current or accumulated earnings and profits as determined for U.S.
federal income tax purposes. Distributions in excess of such earnings and
profits will be applied against and will reduce the U.S. Holder's tax basis in
its ADSs or ordinary shares and, to the extent that they are in excess of such
tax basis, they will be treated as a gain from a sale or exchange of such ADSs
or ordinary shares. Such dividends will not qualify for the dividends-received
deduction applicable in certain cases to U.S. corporations.
Dividends received in respect of ordinary shares or ADSs will
generally be treated as foreign source income and be "passive category income"
or, in the case of certain U.S. Holders, "general category income" for U.S.
foreign tax credit purposes. Subject to the limitations in the Code (including
minimum holding period requirements), as modified by the United States-Israel
Tax Treaty, a U.S. Holder may elect to claim a foreign tax credit against its
U.S. federal income tax liability for Israeli income tax withheld from dividends
received in respect of ordinary shares or ADSs. A U.S. Holder who does not elect
to claim the foreign tax credit may instead claim a deduction for Israeli income
tax withheld, but only for a year in which the U.S. Holder does so with respect
to all foreign income taxes.
Certain U.S. Holders (including individuals) are eligible for reduced
rates of U.S. federal income tax in respect of "qualified dividend income"
received in taxable years beginning before January 1, 2011. For this purpose,
"qualified dividend income" generally includes dividends paid by a non-U.S.
corporation if, among other things, the U.S. Holders meet certain minimum
holding periods and the non-U.S. corporation satisfies certain requirements,
including that either (i) the shares (or ADSs) with respect to which the
dividend has been paid are readily tradable on an established securities market
in the United States, or (ii) the non-U.S. corporation is eligible for the
benefits of a comprehensive U.S. income tax treaty (such as the United
States-Israel Tax Treaty) that provides for the exchange of information.
Additional foreign tax credit limitations apply to non-U.S. withholding taxes
imposed on qualified dividend income. We believe that dividends paid with
respect to our ordinary shares and ADSs, should constitute qualified dividend
income for U.S. Federal income tax purposes.
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DISPOSITION OF ADSS OR ORDINARY SHARES
Upon the sale or other disposition of ADSs or ordinary shares, a U.S.
Holder will generally recognize capital gain or loss equal to the difference
between the amount realized on the disposition and such Holder's adjusted tax
basis in the ADSs or ordinary shares. Gain or loss upon the disposition of the
ADSs or ordinary shares will be long-term if, at the time of the disposition,
the holding period for the ADSs or ordinary shares exceeds one year. Long-term
capital gains realized by U.S. Holders that are individuals are generally
subject to a marginal U.S. federal income tax rate that is lower than the
ordinary marginal income tax rate. The deductibility of capital losses by a U.S.
Holder is subject to limitations.
In general, any gain recognized by a U.S. Holder on the sale or other
disposition of ADSs or ordinary shares will be U.S. source income for U.S.
foreign tax credit purposes. However, pursuant to the United States-Israel Tax
Treaty, gain from the sale or other disposition of ADSs or ordinary shares by a
holder who is a U.S. resident (determined under the United States-Israel Tax
Treaty) and who sells the ADSs or ordinary shares in Israel may be treated as
foreign source income for U.S. foreign tax credit purposes. Any loss on the sale
or other disposition of ADSs or ordinary shares may be required to be allocated
against foreign source income for U.S. foreign tax credit limitation purposes.
Exchanges, deposits and withdrawals by U.S. Holders of ordinary shares
for ADSs will not result in the recognition of gain or loss for U.S. federal
income tax purposes.
PASSIVE FOREIGN INVESTMENT COMPANY
A non-U.S. corporation classified as a passive foreign investment
company (a "PFIC") for any taxable year (and in some cases for future taxable
years as well) if (i) at least 75% of its gross income consists of passive
income (such as certain dividends, interest, rents, royalties and gains from the
disposition of certain (types of property) or (ii) at least 50% of the average
value of its assets consist of assets that produce, or are held for the
production of, passive income. We believe that we were not a PFIC for the year
ended December 31, 2006 or for any prior year. However, this conclusion is a
factual determination made at the close of each year and is based on, among
other things, a valuation of our ordinary shares, ADSs and assets, which will
likely change from time to time. If we were characterized as a PFIC for any
taxable year, a U.S. Holder would suffer adverse tax consequences, including (i)
having certain gains realized on the disposition of ordinary shares or ADSs
treated as ordinary income rather than capital gains and (ii) being subject to
punitive interest charges on certain dividends and on certain gains from the
disposition of ordinary shares or ADSs. Furthermore, dividends paid by a PFIC
are not eligible to be treated as "qualified dividend income" (discussed above).
INFORMATION REPORTING AND BACKUP WITHHOLDING
Dividend payments with respect to ordinary shares or ADSs and proceeds
from the sale, exchange or other disposition of ordinary shares or ADSs may be
subject to information reporting to the IRS and possible U.S. backup
withholding. Backup withholding will not apply, however, to a holder who
furnishes a correct taxpayer identification number or certificate of foreign
status and makes any other required certification or who is otherwise exempt
from backup withholding. U.S. persons who are required to establish their exempt
status generally must provide IRS Form W-9 (Request for Taxpayer Identification
Number and Certification). Non-U.S. Holders generally will not be subject to
U.S. information reporting or backup withholding. However, such holders may be
required to provide certification of non-U.S. status (generally on IRS Form
W-8BEN or W-8IMY) in connection with payments received in the United States or
through certain intermediaries.
Backup withholding is not an additional tax. Amounts withheld as
backup withholding may be credited against a holder's U.S. federal income tax
liability, and a holder may obtain a refund of any excess amounts withheld by
filing the appropriate claim for refund with the IRS and furnishing any required
information.
10F. DIVIDENDS AND PAYING AGENTS
Not applicable.
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10G. STATEMENT BY EXPERTS
Not applicable.
10H. DOCUMENTS ON DISPLAY
Delta Galil files reports and other information with the SEC. These
reports include certain financial and statistic information about Delta Galil,
and may be accompanied by exhibits. You may read and copy any document Delta
Galil files with the SEC at the SEC's Public Reference Room at 100 F Street
N.E., Washington D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further
information on the public reference rooms.
The SEC maintains an Internet website at http://www.sec.gov that
contains reports and other material that are filed through the SEC's Electronic
Data Gathering, Analysis and Retrieval ("EDGAR") system. Delta Galil began
filing through the EDGAR system beginning in October 2002.
10I. SUBSIDIARY INFORMATION
Not applicable.
ITEM 11: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
EXCHANGE RATE RISK
Although Delta Galil is an Israeli company, its functional currency is
the U.S. dollar. Delta Galil has operations and sales in many countries that are
not denominated in dollars, and is therefore exposed to fluctuations in the rate
of exchange between the dollar and those currencies. In 2006, Delta Galil
derived 24.3% of its revenues from customers in Pound Sterling, 8.5% of its
revenue were in NIS, and 7.6% were in Euros. More than 10% of Delta Galil's
expenses were in NIS in 2006.
Some of Delta Galil's expenses in Israel are linked to the Israeli
consumer price index. Consequently, Delta Galil is exposed to risk to the extent
that the rate of Israeli inflation exceeds the rate of the NIS devaluation in
relation to the dollar and to the extent that the timing of such devaluation
lags behind inflation in Israel.
In order to reduce the exposure to exchange rate fluctuations between
the dollar and other currencies Delta Galil generally carries out currency
transactions that hedge part of its exposure in respect of its net income in
non-dollar currency for periods of up to 12 months. The financial results in
respect of these hedging transactions are reflected in Delta Galil's
consolidated financial statements, together with the results of the hedged
items, such as revenues and cost of revenues.
As of December 31, 2006, Delta Galil had entered into hedging
transactions for the exchange of $10 million into pound sterling at an average
rate of $1.91 per Pound Sterling for the first quarter of 2007.
Based on current sales volumes, expenses and exchange rates, each one
percent devaluation in Pound Sterling or Euro against the dollar on an yearly
average would result in a decrease of approximately $1.0 million or $0.2
million, respectively, in Delta Galil's yearly operating income, and a
strengthening of the Pound Sterling or Euro would have the opposite effect. Each
one percent appreciation of the NIS against the dollar on yearly average would
result in a decrease of $0.5 million in yearly operating income, and a
devaluation of the NIS would have the opposite effect. Most of Delta Galil's
bank debt is generally denominated in U.S. dollars, and, therefore, is not
materially exposed to changes in currency exchange rates.
In addition, Delta Galil hedges part of its exposure to exchange rate
fluctuations between the Euro and the Pound Sterling rate and the U.S Dollar by
taking part of its bank loans in these currencies.
INTEREST RATE RISK
Most of Delta Galil's bank debt bears interest at a variable interest
rate linked to the London Inter-Bank Offer Rate, or LIBOR. An increase of 100
basis points, or one percentage point on an annual average basis, in the LIBOR
would increase Delta Galil's financing expenses by $1.6 million per year, based
on
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amounts outstanding at December 31, 2006. A decrease in the LIBOR would have the
opposite effect.
For further discussion of Delta Galil's use of financial derivatives
and instruments in the management of risks relating to currency and interest
rate fluctuations, see notes 1(r) and 12 of the notes to Delta Galil's
consolidated financial statements included in Item 18 of this annual report.
ITEM 12: DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
Not Applicable.
PART II
ITEM 13: DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
Not Applicable.
ITEM 14: MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF
PROCEEDS
Not Applicable.
ITEM 15: CONTROLS AND PROCEDURES
Delta Galil's Chief Executive Officer and Chief Financial Officer,
after evaluating the effectiveness of Delta Galil's disclosure controls and
procedures (as defined in Rule 13(a)-15(e) of the Securities Exchange Act 1934,
as amended) as of December 31, 2006 have concluded that, as of such date, Delta
Galil's disclosure controls and procedures were effective. Information required
to be disclosed by us in reports that we file or submit under the Exchange Act
is accumulated and communicated to Delta Galil's management, including Delta
Galil's chief executive officer and chief financial officer, to allow timely
decision regarding required disclosure and is recorded, processed, summarized
and reported within the periods specified by the SEC's rules and forms.
There were no changes in Delta Galil's internal controls over
financial reporting identified with the evaluation thereof that occurred during
the period covered by this annual report that have materially affected, or are
reasonable likely to materially affect Delta Galil's internal control over
financial reporting.
ITEM 16A: AUDIT COMMITTEE; FINANCIAL EXPERT
The Board of Directors and the Audit Committee have determined that
each of Mr. Amnon Neubach and Mr. Gideon Chitayat is an Audit Committee
Financial Expert.
ITEM 16B: CODE OF ETHICS
Delta Galil has adopted a code of ethics applicable to all employees
and directors. A copy is available upon request to the Chief Financial Officer,
Delta Galil Industries Ltd., 2 Kaufman Street, Tel-Aviv 68012, Israel.
ITEM 16C: PRINCIPAL ACCOUNTANT FEES AND SERVICES
Delta Galil paid the following fees for professional services rendered
by Kesselman & Kesselman and other members of PricewaterhouseCoopers
International Ltd., for the year ended December 31, 2005 and 2006:
2005 2006
-------- --------
Audit fees $520,000 $657,000
Tax fees 116,000 51,000
Other fees 90,000 84,000
-------- --------
Total $726,000 $792,000
======== ========
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Audit fees consist of audit work performed in the preparation of
financial statements and services that are normally provided in connection with
statutory and regulatory filings. Tax fees consist of audit work performed in
the preparation of tax returns and other tax planning.
POLICY ON PRE-APPROVAL OF AUDIT AND NON-AUDIT SERVICES
Delta Galil's audit committee charter provides that the audit
committee shall approve in advance all audit services and all non-audit services
provided by the independent registered public accounting firm based on a policy
attached to the charter.
Under the policy, proposed services either (i) may be pre-approved by
the audit committee without consideration of specific case-by-case services as
"general pre-approval"; or (ii) require the specific pre-approval of the Audit
Committee as "specific pre-approval". The appendices to the policy set out the
audit, audit-related and tax services that have received the general
pre-approval of the audit committee, including those described in the footnotes
to the table, above. These services are subject to annual review by the audit
committee.
All other audit, audit-related, tax and other services not mentioned
in the appendices to the charter must receive a specific pre-approval from the
audit committee. Requests or applications to provide services that require
specific approval by the audit committee are submitted to the audit committee by
the chief executive officer, the chief financial officer and the internal
auditor.
ITEM 16D: EXEMPTIONS FROM THE LISTING STANDARDS.
None.
ITEM 16E: PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
None.
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-60 hereof.
ITEM 19: EXHIBITS
See "Exhibit Index" and Schedule II to the Consolidated Financial
Statements.
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DELTA GALIL INDUSTRIES LTD.
(An Israeli corporation)
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 2006
DELTA GALIL INDUSTRIES LTD.
(An Israeli corporation)
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 2006
TABLE OF CONTENTS
PAGE
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REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM F-2
CONSOLIDATED FINANCIAL STATEMENTS:
Statements of operations 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-60
The amounts are stated in U.S. dollars ($) in thousands.
F-1
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, 2006 and 2005 and the
consolidated statements of operations, changes in shareholders' equity and cash
flows for each of the three years in the period ended December 31, 2006. These
financial statements are the responsibility of the Company's Board of Directors
and management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. 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 independent registered public
accounting firms provide a reasonable basis for our opinion.
In our opinion, based on our audits, 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, 2006
and 2005, and the consolidated results of their operations, and cash flows for
each of the three years in the period ended December 31, 2006, in conformity
with accounting principles generally accepted in the United States of America.
As discussed in Note 1 to the consolidated financial statements, the Company
changed its method of accounting for Share-Based Payments in accordance with
Statement of Financial Accounting Standards No. 123 (revised 2004) effective
January 1, 2006.
Tel-Aviv, Israel Kesselman & Kesselman
March 30, 2007 Certified Public Accountant (Isr.)
A member of PricewaterhouseCoopers
International Limited
F-2
DELTA GALIL INDUSTRIES LTD.
(An Israeli corporation)
CONSOLIDATED STATEMENTS OF OPERATIONS
(U.S. dollars in thousands, except earnings (loss) per share)
YEAR ENDED DECEMBER 31
------------------------------
2006 2005 2004
-------- -------- --------
NET REVENUES $706,699 $684,481 $654,269
COST OF REVENUES 574,246 582,799 533,036
-------- -------- --------
GROSS PROFIT 132,453 101,682 121,233
SELLING, MARKETING, GENERAL AND ADMINISTRATIVE EXPENSES 107,752 107,008 98,646
AMORTIZATION OF INTANGIBLE ASSET 739 779
LOSS (GAIN) ON SALE OF FIXED ASSETS (686) 77 (922)
IMPAIRMENT OF FIXED ASSETS 7,415
RESTRUCTURING EXPENSES 1,663 9,102 1,100
GOODWILL IMPAIRMENT 5,505
-------- -------- --------
OPERATING INCOME (LOSS) 22,985 (28,204) 22,409
FINANCIAL EXPENSES - net 13,558 10,218 6,231
OTHER INCOME (300) (958)
-------- -------- --------
INCOME (LOSS) BEFORE TAXES ON INCOME 9,427 (38,122) 17,136
INCOME TAX BENEFIT (EXPENSE) (5,784) 2,302 (2,846)
-------- -------- --------
3,643 (35,820) 14,290
SHARE IN LOSSES OF ASSOCIATED COMPANY (27) (237)
MINORITY INTERESTS, NET (495) (500) (1,368)
-------- -------- --------
NET INCOME (LOSS) $ 3,148 $(36,347) $ 12,685
======== ======== ========
EARNINGS (LOSS) PER SHARE:
Basic $ 0.17 $ (1.94) $ 0.69
======== ======== ========
Diluted $ 0.17 $ (1.94) $ 0.67
======== ======== ========
WEIGHTED AVERAGE NUMBER OF SHARES (IN THOUSANDS):
Basic 18,700 18,695 18,478
======== ======== ========
Diluted 18,742 18,695 18,834
======== ======== ========
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
-------------------
2006 2005
-------- --------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 10,342 $ 14,595
Restricted cash 4,000
Accounts receivable:
Trade 109,710 104,424
Other 7,573 13,244
Inventories 131,556 147,142
Assets held for sale 4,474 7,420
Deferred income taxes 4,779 4,726
-------- --------
Total current assets 272,434 291,551
-------- --------
INVESTMENTS AND LONG-TERM RECEIVABLES:
Funds in respect of employee rights upon retirement 7,001 7,021
Long-term receivables and deposits, net of current
maturities 1,023 148
Deferred income taxes 320 267
-------- --------
8,344 7,436
-------- --------
PROPERTY, PLANT AND EQUIPMENT,
net of accumulated depreciation and amortization 99,263 109,131
-------- --------
GOODWILL 57,334 53,689
-------- --------
INTANGIBLE ASSETS 13,259 14,499
-------- --------
DEFERRED CHARGES, net of accumulated amortization 228 267
-------- --------
Total assets $450,862 $476,573
======== ========
--------------------- ----------------------- ---------------------
D. LAUTMAN A. LAHAV G. MORAG
CHAIRMAN OF THE BOARD CHIEF EXECUTIVE OFFICER DIRECTOR
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
F-4
DELTA GALIL INDUSTRIES LTD.
(An Israeli corporation)
CONSOLIDATED BALANCE SHEETS
(U.S. dollars in thousands)
DECEMBER 31
-------------------
2006 2005
-------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term bank credit $107,058 $ 80,560
Current maturities of long-term bank loans and other
liability 16,981 29,623
Accounts payable and accruals:
Trade 59,038 61,255
Other 34,504 39,164
-------- --------
Total current liabilities 217,581 210,602
-------- --------
LONG-TERM LIABILITIES:
Bank loans and other liability, net of current
maturities 33,196 69,677
Liability for employee rights upon retirement 6,863 7,850
Deferred income taxes 2,159 1,267
-------- --------
Total long-term liabilities 42,218 78,794
-------- --------
COMMITMENTS AND CONTINGENT LIABILITIES, see note 8
Total liabilities 259,799 289,396
-------- --------
MINORITY INTERESTS 2,846 2,863
-------- --------
SHAREHOLDERS' EQUITY:
Ordinary shares of NIS 1 par value
December 31, 2006 and 2005:
Authorized - 26,000,000 shares;
Issued - 20,113,711 and 19,947,849 shares
respectively;
Issued and paid - 19,947,680 and 19,901,967 shares,
respectively 21,851 21,840
Additional paid-in capital 101,562 100,749
Retained earnings 75,781 72,633
Accumulated other comprehensive loss (1,277) (1,208)
Treasury shares, at cost (1,206,802 shares,
in December 31, 2006 and 2005) (9,700) (9,700)
-------- --------
Total shareholders' equity 188,217 184,314
-------- --------
Total liabilities and shareholders' equity $450,862 $476,573
======== ========
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
----------------
NUMBER ADDITIONAL ACCUMULATED OTHER TREASURY
OF PAID-IN RETAINED COMPREHENSIVE SHARES,
SHARES PAR VALUE CAPITAL EARNINGS INCOME (LOSS) AT COST TOTAL
------ --------- ---------- -------- -------------------------------- -------- --------
UNREALIZED
CURRENCY MINIMUM LOSS FROM
TRANSLATION PENSION CASHFLOW
ADJUSTMENTS LIABILITY HEDGE
----------- --------- ----------
BALANCE AT JANUARY 1, 2004 19,861 $21,830 $ 99,735 $104,607 $(788) $(1,715) $(11,335) $212,334
CHANGES DURING 2004:
Net income 12,685 12,685
Net changes 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 $45 $(833) -,- $ (9,700) $221,081
CHANGES DURING 2005:
Net loss (36,347) (36,347)
Differences from translation of
foreign currency financial
statements (321) (321)
Additional minimum pension liability
adjustment (net of related taxes
of $65,000) (99) (99)
--------
Total comprehensive loss (36,767)
------ ------- -------- -------- ----- ----- ------- -------- --------
BALANCE AT DECEMBER 31, 2005 19,902 $21,840 $100,749 $ 72,633 $(276) $(932) -,- $ (9,700) $184,314
CHANGES DURING 2006:
Net Income 3,148 3,148
Differences from translation of
foreign currency financial
statements 118 118
Additional minimum pension liability
adjustment (net of related taxes
of $54,000) 88 88
Loss in respect of derivative
instruments designated as a cash
flow hedge (275) (275)
--------
Total comprehensive income 3,079
Stock-based employee compensation 448 448
Exercise of employee stock options 46 11 365 376
------ ------- -------- -------- ----- ----- ------- -------- --------
BALANCE AT DECEMBER 31, 2006 19,948 $21,851 $101,562 $ 75,781 $(158) $(844) $ (275) $ (9,700) $188,217
====== ======= ======== ======== ===== ===== ======= ======== ========
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
-----------------------------
2006 2005 2004
------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 3,148 $(36,347) $ 12,685
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
Income and expenses not involving cash flows:
Minority interests net 495 500 1,368
Share in losses of associated company 27 237
Depreciation and amortization 15,626 15,811 15,185
Impairment of fixed assets 7,415
Goodwill impairment 5,505
Deferred income taxes - net 839 (4,872) (279)
Restructuring expenses 1,156 6,470 1,310
Changes in accrued liability for employee rights upon
retirement 856 (16) 1,023
Stock-based employees compensation 448
Loss (gain) on amounts funded in respect of employee
rights upon retirement (784) 120 (416)
Capital loss (gain) on sale of fixed assets (686) 77 (922)
Capital gain from realization of other investments (300) (958)
Erosion (Exchange differences) of long-term receivables 25 2 (6)
Erosion of principal of long-term bank loans (180)
Changes in operating assets and liabilities:
Long term deposit (278)
Decrease (increase) in accounts receivable (741) (2,130) 1,798
Increase (decrease) in accounts payable and accruals (9,468) (17,127) 12,204
Decrease (increase) in inventories 15,663 36,469 (20,078)
------- -------- --------
Net cash provided by operating activities - forward $26,299 $ 11,604 $ 22,971
======= ======== ========
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
------------------------------
2006 2005 2004
-------- -------- --------
Brought forward $ 26,299 $ 11,604 $ 22,971
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of subsidiaries (1) (1,000) (56,039)
Additional payment allocated to goodwill (1,245) (1,274) (6,700)
Purchase of property, plant and equipment (5,706) (13,034) (13,484)
Investment grants relating to property, plant and equipment 1,074
Other investments (58)
Amounts carried to intangible assets (500)
Proceeds from sale of property, plant and equipment 1,274 1,071 4,318
Proceeds from realization of assets held for sale 3,117
Proceeds from realization of other investments 300 2,640
Loans granted to employees (45) (85) (260)
Collection of employees loans 111 223 313
Collection of associated company's loan 526
Loans granted to associated company (80) (26)
Dividend from associated company 20
Restricted cash (4,000)
Investment in long term deposits (95)
Amounts funded in respect of employee rights upon
Retirement (998) (627) (667)
Amounts paid in respect of employee rights upon
Retirement 13
-------- -------- --------
Net cash used in investing activities (7,587) (14,447) (68,889)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Purchase of long-term bank loans and other long-term liabilities 119,000
Repayment of long-term loans and other long-term liabilities (49,123) (28,079) (10,430)
Dividend to the Company's shareholders (8,312)
Dividend to minority shareholders in a subsidiary (512) (1,366) (863)
Short-term bank credit - net 26,498 24,957 (48,890)
Amounts carried to deferred charges (263) (156) (597)
Proceeds from exercise of options 376 331
-------- -------- --------
Net cash provided by (used in) financing activities (23,024) (4,644) 50,239
-------- -------- --------
TRANSLATION DIFFERENCES ON CASH AND
CASH EQUIVALENTS OF FOREIGN CURRENCY
CONSOLIDATED SUBSIDIARY 59 (68) 130
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (4,312) (7,555) 4,451
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 14,595 22,150 17,699
-------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 10,342 $ 14,595 $ 22,150
======== ======== ========
(1) See next page for details.
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
--------------------------
2006 2005 2004
------- ------ -------
SUPPLEMENTARY DISCLOSURE OF CASH FLOW
INFORMATION - CASH PAID DURING THE
YEAR FOR:
Interest $10,039 $8,527 $ 4,133
======= ====== =======
Income taxes $ 8,793 $2,268 $ 3,169
======= ====== =======
(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
Long-lived assets 9,636
Intangible asset 14,778
Goodwill arising on acquisition 4,930
-------
59,288
Reissuance of treasury shares (2,249)
Amount payable 1,000 (1,000)
------ -------
Cash paid - net $1,000 $56,039
====== =======
SUPPLEMENTARY INFORMATION ON INVESTING ACTIVITIES NOT INVOLVING CASH FLOWS:
In 2006, 2005 and 2004, the net changes in outstanding balances of trade
payables in respect of the purchase of property, plant and equipment were an
increase (decrease) of $(0.3) million, $0.6 million and $ 0.1 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 seven reportable operating
segments - Delta USA, U.S. Upper market, Europe, Socks,
Delta marketing Israel, Seam Less and China. As to the
Group's segments and principal markets see note 14.
A significant portion of the Group's revenues is derived
from three principal customers. See note 11a and 14c.
2) Accounting principles
The consolidated financial statements are prepared in
accordance with generally accepted accounting principles
("US GAAP") in the United States of America.
3) Use of estimates in the preparation of financial statements
The preparation of financial statements in conformity with
US 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.
4) 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.
The functional currencies of a subsidiary is it's local
currency (EURO). The financial statements of this subsidiary
is 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
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 statements 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.
F-10
DELTA GALIL INDUSTRIES LTD.
(An Israeli corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (continued):
C. 1. CASH EQUIVALENTS
The Group considers all highly liquid investments, which are
comprised 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.
2. RESTRICTED CASH
The restricted cash relates to a desposit of one of Delta's
subsidiaries in connection to it's agreement with banks. The
deposit was released during January 2007, see note 7e.
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 (on the "moving average" basis), labor and an
appropriate portion of indirect manufacturing costs.
Inventories are written down for estimated obsolescence, based on
assumptions about future demand and market conditions.
The Company adopted the provisions of FASB Statement No. 151,
"Inventory Costs," with effect from January 1, 2006. This
Statement requires that abnormal idle facility expenses be
recognized as current-period charges, and that allocation of
fixed production overhead costs to inventory be based on normal
capacity of the production facility.
The adoption of this standard did not have a material effect on
the financial statement of the company.
E. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost, net of
accumulated depreciation and of related investment grants in the
amount of $19.2 million and $ 21.9 million at December 31, 2006
and 2005, respectively.
A 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 2%-7%
(mainly 4%)
Machinery and equipment 7%-25%
(mainly 7%)
Vehicles 15%-20%
(mainly 15%)
Office furniture and equipment 6%-25%
(mainly 7%)
F-11
DELTA GALIL INDUSTRIES LTD.
(An Israeli corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (continued):
Leasehold improvements are amortized by the straight-line method
over the lease period, which is shorter than the estimated useful
life of the improvements.
Long-lived assets to be disposed of by sale are recorded in
accordance with the lower of carrying amount or fair value less
cost to sell. Costs to sell include incremental direct costs to
transact the sale and represent the costs that results directly
from and are essential to a sale transaction that would not have
been incurred by the Company had the decision to sell not been
made. Long-lived assets are not depreciated (amortized) while
classified as held for sale.
F. INTANGIBLE ASSETS
Intangible assets are comprised of customer relationships and
exclusive license agreement, and are recorded at cost, less
accumulated amortization. Customer relationships are amortized on
a straight line basis over their estimated useful life of 20
years, and the exclusive license is amortized on a straight line
basis over the estimated useful life of 3 years, which is
equivalent to the term of the license agreement.
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 performs its annual goodwill impairment test. As a
result of this test in 2005, the Company recorded an impairment
of $5.5 million. No impairment resulted from the annual review
performed on September 30, 2006.
H. DEFERRED CHARGES
Deferred charges represent mainly deferred financing charges with
respect to bank loans received by the Company which are amortized
over the credit period by the effective interest method.
Amortization of deferred charges included among "financial
expenses- net" were $302 thousand, $ 466 thousand and $ 353
thousand, for the years ended December 31, 2006, 2005 and 2004,
respectively.
I. IMPAIRMENT IN VALUE OF LONG-LIVED ASSETS AND INTANGIBLE ASSET
Under FAS 144 "Accounting for the Impairment or Disposal of Long-
Lived Assets" ("FAS 144"), the Company reviews long-lived assets
including intangible assets subject to amortization, 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.
For assets held for sale, impairment losses are recorded when the
carrying amount of the asset exceeds fair value less cost to
sell.
F-12
DELTA GALIL INDUSTRIES LTD.
(An Israeli corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (continued):
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.
Valuation allowance is recognized in respect of deferred tax
assets when it is considered more likely than not that such
assets will not be realized.
As stated in note 10a, 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.
The Group does not provide for an additional tax liability with
respect to the excess of the book value 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.
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.
F-13
DELTA GALIL INDUSTRIES LTD.
(An Israeli corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (continued):
M. CONCENTRATION OF CREDIT RISKS - ALLOWANCE FOR DOUBTFUL ACCOUNTS
The Group's cash and cash equivalents as of December 31, 2006 and
2005 were deposited mainly with major banks in United States of
America, United Kingdom 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 revenues is to 3 principal customers
(see also note 14d). The balance receivables from these principal
customers as of December 31, 2006 and 2005 were $51,514 thousands
and $ 41,070 thousands, respectively (see also note 11a). The
Group does not hold any collateral from these customers; however,
based on past experience with those customers and on their credit
rating, 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 net bad debt income for the years ended December 31, 2006,
2005 and 2004 aggregated $285 thousand, $ 143 thousand and $ 950
thousand, respectively. The net bad debt income include net
income that was credited directly to cost and expenses and were
not reflected in the allowance of doubtful accounts in the
amounts of $384 thousands, $469 thousands and $866 thousands for
the years ended December 31, 2006, 2005 and 2004, 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
operations. Shipping and handling costs for the years ended
December 31, 2006, 2005 and 2004 were approximately $19 million,
$18 million and $20 million, respectively.
O. ADVERTISING COSTS
These costs are expensed as incurred. Advertising costs for the
years ended December 31, 2006, 2005 and 2004 were $2.4 million,
$2.5 million and $2.1 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
Prior to January 1, 2006, the company accounted for employees'
share-based payment under the intrinsic value model in accordance
with Accounting Principles Board Opinion No. 25 - "Accounting for
Stock Issued to Employees" ("APB 25") and related
interpretations. In accordance with Statement of Financial
Accounting Standards No. 123 - "Accounting for Stock-Based
Compensation" ("FAS 123"), as amended by Statement of Financial
Accounting Standards No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure", the Company disclosed
pro forma information, assuming the Company had accounted for
employees' share-based payments using the fair value-based method
defined in FAS 123.
Effective January 1, 2006, the Company adopted Statement of
Financial Accounting Standards No. 123 (revised 2004),
"Share-based Payment" ("FAS 123(R)"). FAS 123(R) supersedes APB
25 and related interpretations and amends Statement of Financial
Accounting Standards No. 95, "Statement of Cash Flows" ("FAS
95"). FAS 123(R) requires awards classified as equity awards be
accounted for using the grant-date fair value method. The fair
value of share-based payment transactions is recognized as
expense over the requisite service period, net of estimated
forfeitures. The Company estimated forfeitures based on
historical experience and anticipated future conditions.
In March 2005, the Securities and Exchange Commission issued
Staff Accounting Bulletin No. 107 ("SAB 107"). SAB 107 provides
supplemental implementation guidance on FAS 123(R), including
guidance on valuation methods, inventory capitalization of
share-based compensation cost, income statement effects,
disclosures and other issues. SAB 107 requires share-based
payment to be classified in the same expense line items as cash
compensation. The Company has applied the provisions of SAB 107
in its adoption of FAS 123(R).
The Company recognize compensation cost for an award with service
and performance conditions that has a graded vesting schedule
using the accelerated multiple-option approach.
The Company elected to adopt the modified prospective transition
method, permitted by FAS 123(R). Under such transition method,
FAS 123(R) has been implemented as from the first quarter of 2006
with no restatement of prior periods. The valuation provisions of
FAS 123(R) apply to new awards and to awards modified,
repurchased, or cancelled after January 1, 2006. Additionally,
compensation cost for the portion of awards for which the
requisite service has not been rendered that are outstanding as
of January 1, 2006 are recognized over the remaining service
period using the grant-date fair value of those awards as
calculated for pro forma disclosure purposes under FAS 123.
In November 2005, the Financial Accounting Standards Board
("FASB") issued FASB Staff Position No. FAS 123(R)-3 "Transition
Election Related to Accounting for Tax Effects of Share-Based
Payment Awards". The Company has elected to adopt the alternative
transition method provided in the FASB Staff Position for
calculating the tax effects of stock-based compensation pursuant
to FAS 123(R). The alternative transition method includes
simplified methods to establish the beginning balance of the
additional paid-in capital pool ("APIC pool") related to the tax
effects of employee share-based payment, which is available to
absorb tax deficiencies recognized subsequent to the adoption of
FAS 123(R).
F-15
DELTA GALIL INDUSTRIES LTD.
(An Israeli corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (continued):
Upon adoption of SFAS 123R, for the year ended December 31, 2006
no cumulative effect from accounting form accounting change was
charged to income.
The fair value of stock options granted with service and
performance conditions was determined using the Black-Scholes
valuation model, which is consistent with the valuation
techniques previously utilized by the Company for options in
footnote disclosures required under SFAS 123, as amended by SFAS
No. 148 "Accounting for Stock-Based Compensation - Transition and
Disclosure." Such value is recognized as an expense over the
vesting period and in accordance with meeting the performance
conditions respectively, net of estimated forfeitures.
Share-based employee compensation cost for the years ended
December 31, 2005 and 2004 was determined using the intrinsic
value method. The following table provides pro forma financial
information as if Share-based employee compensation cost had been
computed under FAS 123:
YEAR ENDED DECEMBER 31
----------------------
2005 2004
---------- ---------
$ IN THOUSANDS (EXCEPT
PER SHARE DATA)
----------------------
Net income (loss), as reported $(36,347) $12,685
Add - stock-based employee compensation
expense included in reported net income (loss)
net of related tax effect NIL NIL
Less - stock-based employee compensation
expense determined under fair value method,
net of related tax effect (331) (690)
-------- -------
Pro forma net income (loss) $(36,678) $11,995
======== =======
Earnings (loss) per share:
Basic - as reported $ (1.94) $ 0.69
Basic - pro forma $ (1.96) $ 0.65
Diluted - as reported $ (1.94) $ 0.67
Diluted - pro forma $ (1.96) $ 0.64
For the assumptions used in estimating the fair value of the
options, see note 9b5.
F-16
DELTA GALIL INDUSTRIES LTD.
(An Israeli corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (continued):
Q. EARNINGS (LOSS) PER SHARE
Basic earnings (loss) per share are computed by dividing net
income (loss) by the weighted average number of shares
outstanding during the year, net of treasury shares.
Diluted earnings (loss) per share are computed by dividing net
income (loss) 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. In 2005 all outstanding stock options have
been excluded from the calculation of the diluted loss per share
since their effect was anti-dilutive.
In 2006, 2,452 thousands options were excluded from the
calculation of the diluted loss per share since their effect was
anti-dilutive.
R. DERIVATIVES
The Company enters into forward exchange contracts to hedge the
cash flows resulting from sales of products, in currencies other
than the functional currency. The Company does not hold
derivative financial instruments for trading purposes.
Under FAS 133 "Accounting for Derivative and 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 unrealized loss from cash flow
hedge 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 as
income among financial expenses. Changes in the fair value of
derivatives that do not qualify for hedge accounting are
recognized as 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.
Losses related to the portion of cash flow hedging instruments
that were excluded from assessment of hedge effectiveness had an
impact on earnings of $0.6 million for 2004, and the amount of
the loss was recorded in financial expenses. There was no impact
on earnings for 2005 and 2006.
S. COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) is composed of net income (loss) and
other comprehensive income (loss) which includes gains or losses
in respect of derivative instruments designated as cash-flow
hedge, differences from translation of foreign currency financial
statements and additional minimum pension liability adjustments,
net of related taxes.
F-17
DELTA GALIL INDUSTRIES LTD.
(An Israeli corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (continued):
T. NEWLY ISSUED AND RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENT
1) In September 2006, the FASB issued FAS 158, "Employers'
Accounting for Defined Benefit Pension and Other
Post-retirement Plans" ("FAS 158"). FAS 158 requires that
employers recognize the funded status of their defined
benefit pension and other postretirement plans on the
consolidated balance sheet. Gains or losses and prior
service costs or credits, net of related taxes, that have
not been recognized as components of net periodic benefit
cost, are recorded as a component of other comprehensive
income. The Company adopted the recognition and related
disclosure provisions of FAS 158, prospectively, on December
31, 2006, the impact was not material to the Company's
financial statements. FAS 158 also requires an entity to
measure plan assets and benefit obligation as of the date of
its fiscal year-end statement of financial position for
fiscal years ending after December 15, 2008. The requirement
to measure the Company's plan assets and benefit obligations
as of the date of December 31st, which the Company's fiscal
year-end, is effective for the Company's fiscal year ending
after December 31, 2008. The Company is presently evaluating
the impact of the measurement date change.
2) On February 15, 2007, the FASB issued SFAS No. 159, "The
Fair Value Option for Financial Assets and Financial
Liabilities" (SFAS 159). Under this Standard, the Company
may elect to report financial instruments and certain other
items at fair value on a contract-by-contract basis with
changes in value reported in earnings. This election is
irrevocable. SFAS 159 provides an opportunity to mitigate
volatility in reported earnings that is caused by measuring
hedged assets and liabilities that were previously required
to use a different accounting method than the related
hedging contracts when the complex provisions of SFAS 133
hedge accounting are not met.
SFAS 159 is effective for years beginning after November 15,
2007. Early adoption within 120 days of the beginning of the
Company's 2007 fiscal year is permissible, provided the
Company has not yet issued interim financial statements for
2007 and has adopted SFAS 157. The Company is currently
evaluating the impact of adopting SFAS 159 on its financial
position, cash flows, and results of operations.
3) In July 2006, the FASB issued FASB Interpretation No. 48
"Accounting for Uncertainty in Income Taxes - an
interpretation of FASB Statement 109" ("FIN 48"). FIN 48
prescribes a comprehensive model for recognizing, measuring
and presenting in the financial statements tax positions
taken or expected to be taken on a tax return. This
Interpretation also provides guidance on derecognition,
classification, interest and penalties and disclosure
requirements for uncertain tax positions. FIN 48 is
effective for fiscal years beginning on or after December
15, 2006 (January 1, 2007, for the Company). The provisions
of FIN 48 shall be applied to all tax positions upon initial
adoption of this Interpretation. Only tax positions that
meet the more likely than not recognition threshold at the
effective date may be recognized or continue to be
recognized upon adoption of this Interpretation.
The cumulative effects, if any, of applying this
Interpretation will be recorded as an adjustment to Retained
earnings, Goodwill, or Accumulated Gains and (Losses) not
Affecting Retained Earnings, as appropriate, as of the
beginning of the period of adoption. The Company is
currently evaluating the impact of adopting FIN 48 on its
financial position, cash flows, and results of operations.
F-18
DELTA GALIL INDUSTRIES LTD.
(An Israeli corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (continued):
4) In September 2006, the Securities and Exchange Commission
issued Staff Accounting Bulletin No. 108, "Considering the
Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements" ("SAB
108"), which provides interpretive guidance on the
consideration of the effects of prior year misstatements in
quantifying current year misstatements for the purpose of a
materiality assessment. SAB 108 is effective for fiscal
years ending after November 15, 2006. The Company adopted
the provisions of SAB 108 in connection with the preparation
of its financial statements for the year ended December 31,
2006, however adoption of SAB No.108 did not result in any
material corrections of the Company's financial statements.
5) In September 2006, the FASB issued Statement of Financial
Accounting Standards No. 157, "Fair Value Measurements"
("FAS 157"). FAS 157 defines fair value, establishes a
framework for measuring fair value in accordance with
generally accepted accounting principles, and expands
disclosures about fair value measurements; however, it does
not require any new fair value measurements. FAS 157 is
effective for fiscal years beginning after November 15, 2007
(January 1, 2008, for the Company). Earlier application is
encouraged, provided that the reporting entity has not yet
issued financial statements for that fiscal year, including
any financial statements for an interim period within that
fiscal year. The Company is currently evaluating the impact
of the provisions of FAS 157 on its financial position and
results of operations.
6) In June 2006, the Emerging Issues Task Force, reached a
consensus on Issue No. 06-03, "How Taxes Collected from
Customers and Remitted to Governmental Authorities Should be
Presented in the Income Statement (That Is, Gross versus Net
Presentation)". EITF 06-03 relates to any tax assessed by a
governmental authority that is directly imposed on a
revenue-producing transaction. EITF 06-03 states that the
presentation of the taxes, either on a gross or net basis,
is an accounting policy decision that should be disclosed
pursuant to Accounting Principles Board Opinion No. 22,
"Disclosure of Accounting Policies," if those amounts are
significant. EITF 06-03 should be applied to financial
reports for interim and annual reporting periods beginning
after December 15, 2006. The Company does not expect that
the adoption of EITF 06-03 will have a material effect on
its financial position and results of operations.
U. RECLASSIFICATIONS
Certain figures in respect of prior years have been reclassified
to conform with the current year presentation.
F-19
DELTA GALIL INDUSTRIES LTD.
(An Israeli corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 2 - ACQUISITIONS AND OTHER TRANSACTIONS
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 design, development, production,
sourcing 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 U.S. 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 were paid in 2005.
During 2005, the company paid an additional $1.3 million payment
to the selling shareholders with respect to additional cost as it
was agreed in the purchase agreement. This payment was recorded
as additional goodwill, see also note 5.
In addition, under the agreement the Company may pay additional
amounts to the selling shareholders, subject to achieving certain
revenues and operating profit targets over a period of 3 years,
2005-2007.
In February 2006, an amendment to the stock purchase agreement
was signed which specifies the additional amounts that would be
paid to the selling shareholders, subject to achieving certain
targets over a period of 6 years, 2006-2011 up to a maximum of
$18 million. The purpose of the amendment to the stock purchase
agreement was to reflect in it the changes in sales volumes, due
to changes in the structure of the company which were
contemplated at the time of the original agreement but were not
executed by the company. On March 15, 2006 a non-refundable
payment of $1.3 million was made against future consideration
with respect to 2007 and 2008 targets. The Company considered
this payment as additional purchase cost.
In March 2007, the Company paid additional $2.4 million to the
selling shareholders with respect to 2006 targets, as agreed in
the purchase agreement. This amount was recorded on December 31,
2006, as additional goodwill.
After the said contingent consideration, the maximum outstanding
contingent consideration amounts to $14.3 million.
The intangible asset acquired, which amounted to $ 14.8 million,
represents customer relationships and is amortized over a period
of 20 years.
F-20
DELTA GALIL INDUSTRIES LTD.
(An Israeli corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 2 - ACQUISITIONS AND OTHER TRANSACTIONS (continued):
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 relationships 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
=======
B. ACQUISITION OF A 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 was
paid to settle debt of the former shareholders. In addition, the
Company assumed bank debt of $0.7 million. The acquired
manufacturing facility in Thailand constitutes a "business" under
EITF 98-3 - "Determining Whether a Nonmonetary Transaction
Involves Receipt of Productive Assets or of a Business".
F-21
DELTA GALIL INDUSTRIES LTD.
(An Israeli corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 2 - ACQUISITIONS AND OTHER TRANSACTIONS (continued):
The main strategy behind 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 of 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
======
C. Hereafter are certain unaudited pro forma combined income data
which assumes that the acquisition of Burlen had occurred on
January 1, 2004. The unaudited pro forma financial information is
not necessarily indicative of the combined results that would
have been attained had the acquisition of Burlen occurred as of
January 1, 2004 nor is it necessarily indicative of future
results.
YEAR ENDED
DECEMBER 31
----------------
2004
----------------
IN THOUSANDS
(EXCEPT EARNINGS
PER SHARE)
----------------
(UNAUDITED)
----------------
Net Revenues $763,375
========
Net Income $ 19,853
========
Earning per share - Basic $ 1.06
========
Earning per share - Diluted $ 1.04
========
F-22
DELTA GALIL INDUSTRIES LTD.
(An Israeli corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 3 - LONG-TERM RECEIVABLES AND DEPOSITS
COMPOSITION:
DECEMBER 31
-------------
2006 2005
------ ----
IN THOUSANDS
-------------
Long term loans to employees (*) $ 37 $148
Long term Deposits and prepaid expenses (**) 798
Long term trade receivable (***) 188
------ ----
$1,023 $148
====== ====
(*) Represent long-term loans to employees - mainly linked to the Israeli
consumer price index ("CPI") and bearing interest at the rate of 4%.
(**) Deposits are composed mainly for vehicles under operational lease for a
period of 3 years, and for offices and other rented facilities over the
rental period.
(***) Will be paid in 9 equal yearly installments.
F-23
DELTA GALIL INDUSTRIES LTD.
(An Israeli corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 4 - PROPERTY, PLANT AND EQUIPMENT:
A. Composition of property, plant and equipment, grouped by major
classifications, is as follows:
DECEMBER 31
-------------------
2006 2005
-------- --------
IN THOUSANDS
-------------------
Land and buildings, see (*) and b $ 33,143 $ 32,205
Machinery and equipment 110,421 112,507
Vehicles, office furniture and equipment
and leasehold improvements 44,779 48,205
-------- --------
188,343 192,917
Less - accumulated depreciation and
amortization (89,080) (83,786)
-------- --------
$ 99,263 $109,131
======== ========
(*) Including building leased under capital lease see note 1e:
Cost $ 1,414 $ 1,414
Less - accumulated depreciation 593 501
-------- --------
$ 821 $ 913
======== ========
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.
Investment projects of the Company and its subsidiary have been
approved by the Israeli Investment Center, under the Law for the
Encouragement of Capital Investment, 1959. The Company has filed
final reports to the Investment Center during 2005.
C. Depreciation and amortization in respect of property, plant and
equipment totaled $14.1, $14.6 and $14.8 million in the years
ended December 31, 2006, 2005 and 2004 (excluding impairment of
assets see f. below and impairment of assets relating to
restructuring, see note 11e).
D. As to pledges on assets, see notes 7d and 10a.
E. ASSETS HELD FOR SALE
In connection with the 2005 restructuring plan, management
committed to a plan to sell certain real estate properties
located in Israel, Scotland, Hungary and the US. As a result,
these assets were classified at carrying value of $7.4 million as
current assets under the category of "assets held for sale" on
the balance sheet as at December 31, 2005. During 2006 the
Company sold the properties in Ireland, Scotland and certain
assets in the US, resulting in net gain on sale of assets of $170
thousand in 2006. The remaining assets, which have a carrying
value of $4.5 million, were not sold in 2006 however the assets
are actively being marketed for sale in 2007. The Company
estimates that the rest of the assets will be disposed of during
2007. See also note 14b, for segmental data.
During January 2007 the Company sold its asset held for sale in
the US.
F-24
DELTA GALIL INDUSTRIES LTD.
(An Israeli corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 4 - PROPERTY, PLANT AND EQUIPMENT (continued):
F. During 2005, as a result of the restructuring plan, following the
change in operation in various divisions and the erosion in
profitability, the Company tested the carrying amount of it's
long-lived assets and as a result recorded a total impairment of
$9.8 million, of which $2.4 is included among restructuring
expenses and $7.4 million is included among impairment of assets.
The long-lived assets which were impaired include mainly
machinery and equipment in the fabric and Seam-Less facilities in
Israel, and leasehold improvements in real-estate which would be
abandoned as part of the Company's plan to consolidate most of
it's premises in Carmiel, Israel.
During 2006, as a result of the restructuring plan in the Far
East which included the Company's decision to discontinue sewing
operations in China, the Company tested the carrying value of
long lived assets and as a result recorded a total impairment of
$1.2 million, which is included among restructuring expenses. The
long lived assets which were impaired were mainly lease hold
improvements. See also note 14, for segment information.
F-25
DELTA GALIL INDUSTRIES LTD.
(An Israeli corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 5 - INTANGIBLE ASSETS AND GOODWILL
A. INTANGIBLE ASSETS
The intangible assets include: a) customer relationship at the
amount of $ 14.8 million, which is amortized over 20 years
period, see also note 2a, the amortized customer relationship as
of December 31, 2006 and 2005 amounts to $13.3 million and $14
million, respectively; b) exclusive license as of December 31,
2006 and 2005 at the amount of Nil and $ 0.5 million,
respectively (as to the write-down during 2006, see below).
Aggregate amortization expenses for the years ended December 31,
2006, 2005 and 2004 were $0.7 million, $0.7 million and NIL
respectively. Estimated amortization expenses over the years
2007-2011, is $0.7 million per year, and $9.6 million in
aggregate for the years 2012-2024.
At the end of 2006, an exclusive license agreement with Levi's
was terminated, as a result of Levi's decision to cease its Jeans
operations in Europe. In connection with the early termination of
the license, the Company received a $0.3 million as a termination
payment from Levi's. The payment received was recorded against
the carrying value of the license intangible of $0.3 million.
B. GOODWILL
The Company has selected September 30 of each year as the date on
which it performs its annual goodwill impairment test. As a
result of this test in 2005, the Company recorded an impairment
of $5.5 million.
Financial results of the U.S Upper Market and Socks segments and
the expected results of these segments have been reevaluated
during the goodwill impairment test. The erosion in selling
prices, due to the changes in the business environment, indicated
a decrease in the fair value of the reporting unit, which
resulted in the above mentioned impairment.
The fair value of these reporting units were estimated using the
multiple method. No impairment resulted from the annual review,
performed in September 30, 2006.
Changes in the carrying amount of goodwill for the two years
ended December 31 2006, are as follows:
YEAR ENDED
DECEMBER 31, 2006
--------------------------
IN THOUSANDS
--------------------------
DELTA
USA EUROPE TOTAL
------- ------ -------
Goodwill at beginning of year $51,879 $1,810 $53,689
Changes during the year:
Adjustment to purchase
price, see note 2a 3,645 3,645
------- ------ -------
Goodwill at end of year $55,524 $1,810 $57,334
======= ====== =======
F-26
DELTA GALIL INDUSTRIES LTD.
(An Israeli corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 5 - INTANGIBLE ASSETS AND GOODWILL (continue):
YEAR ENDED DECEMBER 31, 2005
-----------------------------------------------
IN THOUSANDS
-----------------------------------------------
DELTA US UPPER
USA MARKET EUROPE SOCKS TOTAL
------- -------- ------ ------- -------
Goodwill at beginning of year $50,605 $ 2,119 $1,810 $ 3,386 $57,920
Changes during the year:
Impairment of Goodwill (2,119) (3,386) (5,505)
Adjustment to purchase
price, see note 2a 1,274 1,274
------- -------- ------ ------- -------
Goodwill at end of year $51,879 -,- $1,810 -,- $53,689
======= ======== ====== ======= =======
F-27
DELTA GALIL INDUSTRIES LTD.
(An Israeli corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 6 - EMPLOYEE RIGHTS UPON RETIREMENT:
A. Employees related obligations are composed as follows:
DECEMBER 31
---------------
2006 2005
------ ------
IN THOUSANDS
---------------
Accrued severance pay $6,826 $6,360
Obligation in respect of defined
benefit plans 37 1,490
------ ------
$6,863 $7,850
====== ======
As of December 31, 2006 and 2005, the Group had deposits of $7
million and $5.8 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. The amounts deposited with insurance companies
are marked to market at each balance sheet date, with gains and
losses recorded in the statement of operations as part of the
financial expenses. 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, 2006, 2005 and 2004 were $5.8 million, $6.2
million and $7.5 million respectively (in 2006, 2005 and 2004,
excluding $507 thousand, $5,894 thousand and $190 thousand,
respectively, relating to the termination of employment, which
were charged to restructuring expenses, see note 11e).
The accumulated comprehensive loss from minimum pension liability
for the years ended December 31, 2006, 2005 and 2004, is net of
related taxes of $506 thousand, $560 thousand and 495 thousand,
respectively.
The profit (loss) from deposits in respect of severance pay were
$784 thousand, $(120) thousand and $416 thousand in the years
ended December 31, 2006, 2005 and 2004, 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.
F-28
DELTA GALIL INDUSTRIES LTD.
(An Israeli corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 6 - EMPLOYEE RIGHTS UPON RETIREMENT (continued):
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:
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.
a) 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.
b) 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, 2006, 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.
The Company maintains two defined contribution 401(k) plans.
Contributions 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, depending on the plan. The Company's matching
contribution was $239 thousand and $308 thousand for the
years ended December 31, 2006 and 2005, respectively.
F-29
DELTA GALIL INDUSTRIES LTD.
(An Israeli corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 6 - EMPLOYEE RIGHTS UPON RETIREMENT (continued):
C. CERTAIN DETAILS RELATING TO DEFINED BENEFIT PLANS:
2006 2005
------- -------
IN THOUSANDS
-----------------
CHANGE IN BENEFIT OBLIGATION:
Benefit obligation at beginning of year $ 3,330 $ 3,140
Interest cost 169 178
Actuarial (gain) loss (196) 204
Benefit paid (198) (192)
------- -------
Benefit obligation at end of year $ 3,105 $ 3,330
------- -------
CHANGE IN PLAN ASSETS:
Fair value of plan assets at beginning of year $ 3,088 $ 2,999
Actual return on plan assets 90 188
Employer contribution 125 125
Benefit paid, including plan expenses (235) (223)
------- -------
Fair value of plan assets at end of year $ 3,068 $ 3,089
------- -------
RECONCILIATION OF FUNDED STATUS:
Funded status (carryforward obligations) $ (37) $ (241)
Unrecognized net actuarial loss 1,346 1,490
Adjustment to recognize minimum liability (1,346) (1,490)
------- -------
Accrued pension cost $ (37) $ (241)
======= =======
The estimated future benefit payments in each of the five years subsequent
to 2006 are as follows (in thousands):
2007 178
2008 181
2009 192
2010 195
2011 196
2012-2016 1,009
-----
1,951
=====
The actuarial assumptions used to determine the benefit obligations and
costs are as follows:
2006 2005 2004
----- ----- -----
WEIGHTED AVERAGE ASSUMPTIONS
AT END OF YEAR:
Discount rate 5.41% 5.41% 5.75%
Expected return on plan assets 6.00% 6.00% 6.25%
Interest rate 5.72% N/A N/A
Rate of compensation increase N/A N/A N/A
F-30
DELTA GALIL INDUSTRIES LTD.
(An Israeli corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 6 - EMPLOYEE RIGHTS UPON RETIREMENT (continued):
ADDITIONAL INFORMATION
Increase (decrease) in minimum liability included other comprehensive
income, net of tax, $88 thousand and $99 thousand in year 2006 and 2005
respectively.
Information for a pension plan with an accumulated benefit obligation in
excess of plan assets is as follows (in thousands):
2006 2005
------ ------
Projected benefit obligation $3,105 $3,330
Fair value of plan assets 3,068 3,089
Contributions totaling $125 thousand were made in the years ended December
31, 2006 and 2005. For the year ended December 31, 2007, the Company
anticipates satisfying any minimum funding requirements by making
contributions of $178 thousand.
The consolidated components of net periodic benefits costs are as follows:
YEAR ENDED
DECEMBER 31
---------------------
2006 2005 2004
----- ----- -----
IN THOUSANDS
---------------------
Interest cost $ 169 $ 178 $ 179
Expected return on plan assets (179) (182) (122)
Recognized net actuarial cost 74 72 10
----- ----- -----
$ 64 $ 68 $ 67
===== ===== =====
At December 31, 2006 and 2005, the assets of the defined benefit plan are
primarily invested in group annuity contracts with an insurance Company.
The Company recorded the minimum pension liability required by the
provisions of Financial Accounting Standards Board Statement No. 87,
Employers Accounting for Pensions.
F-31
DELTA GALIL INDUSTRIES LTD.
(An Israeli corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 6 - EMPLOYEE RIGHTS UPON RETIREMENT (continued):
D. CASH FLOWS INFORMATION REGARDING THE COMPANY'S LIABILITY FOR
EMPLOYEE RIGHTS UPON RETIREMENT:
1. The Company expects to contribute in 2007, $600 thousand to
insurance companies and $NIL thousand 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
----------------------
2007 297
2008 261
2009 652
2010 167
2011 247
Years 2012-2016 879
-----
2,503
=====
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
additional amounts that might be paid to employees that will
cease working with the Company before their normal
retirement age.
F-32
DELTA GALIL INDUSTRIES LTD.
(An Israeli corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 7 - LONG-TERM LIABILITIES - BANK LOANS AND OTHER LIABILITY:
A. COMPOSITION:
WEIGHTED
AVERAGE
INTEREST RATE
------------- DECEMBER 31
DECEMBER 31, -------------------
2006 2006 2005
------------- --------- -------
% IN THOUSANDS
------------- -------------------
Bank loans - in dollars 6.6 $49,289 $98,337
Other liability - obligation under capital lease,
see note 1e and c below - in dollars 8.6
888 963
--------- -------
50,177 99,300
Less - current maturities (*)16,981 29,623
--------- -------
$33,196 $69,677
========= =======
B. TOTAL LIABILITIES (NET OF CURRENT MATURITIES) MATURE IN THE
FOLLOWING YEARS AFTER BALANCE SHEET DATES:
DECEMBER 31, 2006
-----------------
IN THOUSANDS
-----------------
2008 (*)$16,987
2009 (*)15,587
2010 105
2011 114
2012 year and thereafter 403
----------
$33,196
==========
(*) In January 2007 the Company settled $22.5 million of long
term loans in the U.S., see amendment No.4 to the credit
agreement in e3 bellow.
F-33
DELTA GALIL INDUSTRIES LTD.
(An Israeli corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 7 - LONG-TERM LIABILITIES - BANK LOANS AND OTHER LIABILITY (continued):
C. A subsidiary of the Company has entered into capital lease
agreements for a building it uses; the lease will expire in 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, 2006:
IN
THOUSANDS
---------
2007 - current maturities $ 158
2008 158
2009 158
2010 158
2011 158
2012 and thereafter 474
-------
1,264
Less - amount representing interest 376
-------
$ 888
=======
D. Liabilities to banks are fully secured by floating charges in an
unlimited amount on all the assets and rights of the Company and
the assets of part of its subsidiaries.
E. Delta Galil USA Inc., a subsidiary of the Company is a party to a
credit agreement, as amended on 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.As of December 31,2006 the credit agreement provided
for up to $22.5 million long terms loans, and up to $60 million
are short term loans. The loan bears interest at a variable rate
that is linked to the Libor. As of December 31, 2006, the
interest rate on the long term loan was 7.0% and on the
short-term credit was 6.7%. As of December 31, 2006 the
unutilized credit line was $15.0 million.
The credit agreement included covenants based on (1) the ratio of
Delta Galil USA's earnings before interest, taxes, depreciation
and amortization, or EBITDA, to fixed charges; (2) the ratio of
net worth to total assets of Delta Galil USA; and (3) the ratio
of the sum of Delta Galil USA's (a) loans (b) letters of credit,
and (c) acceptances to EBITDA.
Delta Galil USA did not satisfy the covenants as in effect prior
to the amendment in the agreement, for the years ended December
31, 2006 and 2005. Amendment no. 4 from January 2007 replaced the
covenants as of December 31, 2006 and for 2007. Management
believed that Delta Galil USA will satisfy the covenants as
included in the new amendment.
2006 Amendment
Delta Galil USA and the banks amended the credit agreement in
January 2006 and in May 2006. The material changes contained in
those amendments were the following: A prepayment of $25 million
of the principal amount of the long term loan; a reduction in the
quarterly payment on the long term loan from $3.5 million to $1.9
million; an extension of the expiration date of the revolving
loan facility from January 15, 2006 to January 31, 2007; a
deposit of $4 million with Bank Leumi USA and a pledge of that
deposit to the banks, an increase of 0.25% in the interest rate;
and a change of the covenant mentioned above as follows:
F-34
DELTA GALIL INDUSTRIES LTD.
(An Israeli corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 7 - LONG-TERM LIABILITIES - BANK LOANS AND OTHER LIABILITY (continued):
1. The ratio of Delta Galil USA's EBITDA to fixed charges, as
defined in the credit agreement, may not be below 1 to 1 for
each three -month period ending June 30, September 30, and
December 31, 2006, with such ratio rising to 1.5 to 1 for
the twelve months ending March 31, June 30, September 30,
and December 31, 2007, and 1.6 to 1 for the twelve months
ending March 31, June 30, September 30, and December 31 2008
and 2009;
2. The ratio of net worth to total assets of Delta Galil USA
may not be below 0.25 to 1 for the twelve months ending
March 31, 2006 and June 30, 2006, and a ratio of 0.28 to 1
for the twelve months ending September 30, 2006 and for the
twelve-month period ending December 31, 2006, with such
ratio rising to 0.4 to 1 for the twelve months ending March
31, 2007 and for the end of each subsequent quarter until
maturity;
3. The ratio of the sum of Delta Galil's (a) loans (b) letters
of credit, and (c) acceptances (or, collectively, debt) to
EBITDA may not exceed 6.70 to 1 for the twelve months ending
March 31, 2006; 5.70 to 1 for the twelve months ending June
30, 2006, and 4 to 1 for the twelve months ending each of
September 30, 2006 and December 31, 2006, with such ratio
rising to 3.5 to 1 for the twelve months ending March 31,
June 30, September 30, and December 31, 2007, 3.0 to 1 for
the twelve months ending March 31, 2008 and for each twelve
months period ending at the end of each subsequent quarter
until maturity.
In May 2006, Delta Galil USA and the banks further amended
the credit agreement to revise, among other things, the
prepayment terms of the term loan.
2007 Amendment No. 4
In January 2007, Delta Galil USA and the banks entered into
Amendment no. 4 to the credit agreement. The material
changes contained in this amendment are the following:
A prepayment of the outstanding long term loan in the
principal amount of $22.5 million; An increase of the Short
Term revolving loan from $60 million to $90 million. a
change to the term loan interest rate to LIBOR + 1.5%; an
extension of the expiration date of the revolving loan
facility from January 31, 2007 to January 31, 2008; a
subordination of the Company's loan to Delta Galil USA in
the amount of $20 million for a period ending December 1,
2009; a conversion of $5 million of the outstanding
Company's loan to Delta Galil USA into equity of Delta Galil
USA.; a release of the $4 million deposit with Bank Leumi
USA; a change to the financial covenants as follows:
1. The ratio of net worth to total assets of Delta Galil
USA may not be below a ratio of 0.28 to 1 as of
December 31, 2006 and as of March 31, June 30 and
September 30, 2007, and a ratio of 0.3 to 1 as of
December 31, 2007;
2. The net worth of Delta Galil USA may not be less than
$60 million as of December 31, 2006 and as of March 31,
June 30 and September 30, 2007, and $65 million as of
December 31, 2007; and
3. For the twelve month period ending December 31, 2006,
and for the rolling twelve month period ending on each
subsequent fiscal quarter thereafter, Delta Galil USA
shall have a profit of at least $1.00.
F-35
DELTA GALIL INDUSTRIES LTD.
(An Israeli corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 8 - COMMITMENTS AND CONTINGENT LIABILITIES:
A. COMMITMENTS
The Company and its subsidiaries lease 27 facilities under
operating leases. The leases (including extension options) for 20
facilities expire on various dates between 2008 and 2029 and the
remaining leases expired in 2007. The Company intends to renew
some of these leases. The minimum future annual lease payment
over each of the years 2007 to 2011 will amount to $8.7, $8.1,
$7.2, $3.8 and $2.8 million, respectively. In the period from
2012 to the end of the lease periods, the cumulative lease
payments will amount to $17.8 million. The lease expenses for
each of the years 2006, 2005 and 2004 were $8.5 million, $9.3
million, $8.6 million respectively.
B. The Company entered into agreements which granted the Company
rights to market certain of its products under brand names owned
by other parties. Royalties under these agreements are calculated
as a percentage of the sales. The royalties rate range from 3% to
15% of sales, the minimum future guaranteed royalties over the
years 2007 to 2010 will amount to $4.3, $2.1, $2.0 and $1.5
million, respectively.
C. CONTINGENT LIABILITIES - GUARANTEES
The Company and part of its subsidiaries signed a guarantee, each
for other, which is unlimited in amount to all of the group's
liabilities.
D. As to contingent consideration, see note 2a.
NOTE 9 - 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, 2006, the closing price per ADS on Nasdaq
was $9.08; the shares were quoted on the TASE on that date
at NIS 36.81 ($8.7).
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) As of December 31, 2006 and 2005, 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
are 166,031 and 45,882 respectively.
4) The shares held by the Company ("treasury shares") have no
voting rights and are not entitled to receive dividends.
F-36
DELTA GALIL INDUSTRIES LTD.
(An Israeli corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 9 - SHAREHOLDERS' EQUITY (continued):
B. STOCK OPTION PLANS FOR EMPLOYEE:
The company Company adopted various option plans subject to service
conditions and performance conditions:
1. Stock Option plans under subject to service conditions:
a. On June 4, 2000, the Company's Board of Directors approved
an employee stock option plan for the grant, without
consideration, of 809,000 options (including 100,000 options
to its former CEO), exercisable of 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 vested in four equal batches and as of December
31, 2006, all are fully vested. The options are exercisable
over a three years period, commencing one year after the
vesting date of each batch.
Any option not exercised within the said three years will
expire. The options expire over the years 2005-2008.
b. On October 23, 2002, the Company's Board of Directors
approved an employee stock option plan for the grant,
without consideration, of 1,100,000 options (including
100,000 options to its Former 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 Former CEO) at an exercise price of $ 9. The
options vest in four equal batches and as of December 31,
2006 all are fully vested. 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.
In May 2003 the Company granted 30,000 options to three
employees of the Group at an exercise price of $10.76. The
first three batches vested in May 2004, 2005 and 2006
respectively and the fourth batch will vest in May 2007. 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 first, second, third and fourth
batches will vest in March and August 2005, 2006, 2007 and
2008 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, 2006 112,250 options remain available for
grant under this plan.
F-37
DELTA GALIL INDUSTRIES LTD.
(An Israeli corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 9 - SHAREHOLDERS' EQUITY (continued):
c. In May 2006 the company's Board of Directors approved
two option plans, one for Israeli and other non-U.S.
employees and another plan for U.S. employees. A total
of up to 1,400,000 options, representing approximately
6.5% of Delta Galil's issued capital on a fully diluted
basis, may be issued under the plans. Of such number,
1,100,000 options are issuable under the plan for
Israeli and other non-U.S. employees and 300,000
options are issuable under the plan for U.S. employees.
Each option may be exercised for one ordinary share NIS
1 par value of the Company pursuant to terms of the
relevant option plan.
A total of 1,018,018 options were granted subject to
service condition. The exercise price of 568,016
options granted in May 2006 is $8.43. The exercise
price of 425,000 options granted in June 7, 2006 is
$7.26, and the exercise price of 25,002 options granted
on June 25, 2006 is $7.59. Of the 1,018,018 options
granted, 489,014 were granted to executive officers.
On September 21, 2006 the Company granted 50,000
options to an employee of the group at an exercise
price of $9.20. The options are vested over a three
years period, subject to the same terms as defined in
the option plan from May 2006.
The options vest and are exercisable as follows:
First quarter- vest on the first anniversary of the
Date of Grant and are exercisable for three years from
the second anniversary of the Date of Grant.
Second quarter - vest on the second anniversary of the
Date of Grant and are exercisable for three years
thereafter
Third quarter - vest on the third anniversary of the
Date of Grant and are exercisable for three years
thereafter
Final quarter - vest on the fourth anniversary of the
Date of Grant and are exercisable for three years
thereafter.
As of December 31, 2006, 72,286 options granted to
certain employees who left the Company, were forfeited.
As of December 31, 2006 and 197,268 options remain
available for grant under the plan from May 2006.
d. The weighted-average grant-date fair value of options
granted during the years 2006, 2005, and 2004 was
$1,900, $NIL, and $420 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:
2006 2004
----- -----
Dividend yield 4.0% 3.5%
===== =====
Expected volatility (*) 31.00% 28.00%
===== =====
Risk-free interest rate 5% 4%
===== =====
Expected life - in years 4.38 4.25
===== =====
(*) Based on the historical volatility
F-38
DELTA GALIL INDUSTRIES LTD.
(An Israeli corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 9 - SHAREHOLDERS' EQUITY (continued):
The total unrecognized compensation cost on employee
stock options at December 31, 2006 is $1,497 thousand
(net of forefeiture rate), and it is expected to be
recognized over a weighted average period of 3.5 years.
The total cash received from employees as a result of
employee stock option exercises for the years ended
December 31, 2006, 2005 and 2004 was $376, NIL and $331
thousands, respectively. In connection with these
exercises, the tax benefits realized by the company for
the years ended December 31, 2006, 2005 and 2004 were
NIL, NIL and $100 thousands respectively.
2. Stock options subject to performance conditions:
In May 2006, a total of 277,000 options were granted
under May 2006 plans (see 1b ahead) to 11 executive
officers, are subject to achievement of certain
performance goals. The exercise price of the options is
$8.43, equal to the closing price of the ordinary
shares of the Company on the Tel Aviv Stock Exchange on
May 11, 2006 converted to US dollars based on the
exchange rate of the US dollar on that date. The
vesting of 141,000 and 136,000 options is subject to
the Company's pre-tax net income, excluding one-time
capital gains, in 2007, and 2008, respectively.
The options vest over a period of two years subject to
achievement of certain performance goals and service
conditions. One half of the options, which are vested
in 2008, will be exercisable for a period of three
years commencing two years from the date of grant. The
second half of the options, which are vested in 2008,
will be exercisable for a period of three years
commencing three years from the date of grant. One half
of the options, which are vested in 2009, will be
exercisable for a period of three years commencing
three years from the date of grant. The second half of
the options, which are vested in 2009, will be
exercisable for a period of four years commencing four
years from the date of grant.
As of December 31, 2006, 71,000 options granted to
certain employees who left the Company, were forfeited.
The fair value of option granted during 2006, based on
the Black & Scholes option pricing model was $518
thousands and will be recorded in the financial
statement over the vesting period, subject to
occurrence of the performance conditions.
F-39
DELTA GALIL INDUSTRIES LTD.
(An Israeli corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 9 - SHAREHOLDERS' EQUITY (continued):
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:
2006
--------
WEIGHTED
AVERAGE
--------
Dividend yield 4.0%
=====
Expected volatility 31.00%
=====
Risk-free interest rate 5%
=====
Expected life - in years 4.38
=====
The expenses relating to the options which are subject
to achievement of certain performance goals were not
recorded in the financial statements in 2006 due to the
fact that the probability of meeting those goals was
improbable.
The total unrecognized compensation cost before tax on
employee stock options at December 31, 2006 is $518
thousands.
3. The grant of options until 2004 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. The grant of options in 2006 is subject to
the track chosen by the company and pursuant to the
terms thereof, the company is not allowed to claim, as
an expense for tax purposes, the amounts credited to
employees as a benefit, including amounts recorded as
salary benefits in the company's accounts, in respect
of options granted to employees under the plan - with
the exception of the work-income benefit component, if
any, determined on the grant date. Treatment of the
options granted under the plan for U.S. employees as
incentive stock options, which have certain tax
benefits for those receiving the options.
4. 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.
F-40
DELTA GALIL INDUSTRIES LTD.
(An Israeli corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 9 - SHAREHOLDERS' EQUITY (continued):
5. Following is a summary of the status of the Company's
stock option plans:
a. Options subject to service conditions:
YEAR ENDED DECEMBER 31
---------------------------------------------------------------------
2006 2005 2004
--------------------- --------------------- ---------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
NUMBER(**) PRICE NUMBER(**) PRICE NUMBER(**) PRICE
---------- -------- ---------- -------- ---------- --------
Options outstanding at beginning of year 1,562,005 $13.21 1,832,071 $13.84 1,830,702 $13.50
Changes during the year:
Granted - at market price 1,068,018 $ 7.98 110,000 $14.65
Exercised(*) (45,713) $ 8.31 (41,756) $ 7.91
Forfeited (88,536) $ 8.86 (23,000) $ 9.00 (66,875) $ 9.34
Expired (208,167) $19.14 (247,066) $18.30
--------- --------- ---------
Options outstanding at end of year 2,287,607 $10.50 1,562,005 $13.21 1,832,071 $13.84
========= ========= =========
Options exercisable at end of year 1,235,875 $12.39 1,238,005 $13.79 1,106,821 $14.69
========= ========= =========
(*) The total intrinsic value of options exercised during the years ended
December 31, 2006, 2005, and 2004, was $0.2 $NIL, and $0.1 millions,
respectively.
(**) Represents the number of shares arising upon exercise of options, based on
the conversion rat.
b. Options subject to performance conditions:
2006
------------------
WEIGHTED
AVERAGE
EXERCISE
NUMBER* PRICE
------- --------
Options outstanding at beginning of year -,-
Options outstanding at beginning of year -,-
Changes during the year:
Granted - at market price 277,000 $8.43
Forfeited (71,000) $8.43
-------
Options outstanding at end of year 206,000 $8.43
-------
Options exercisable at end of year -,-
-------
(*) The weighted-average grant-date fair value of options granted
during the years 2006, 2005, and 2004 was $0.5 millions, $NIL,
and $NIL, respectively.
F-41
DELTA GALIL INDUSTRIES LTD.
(An Israeli corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 9 - SHAREHOLDERS' EQUITY (continued):
6. The following table summarizes information regarding
options outstanding at December 31, 2006:
NUMBER OF SHARES ISSUABLE UPON EXERCISE OF OPTIONS
------------------------------------------------------------------
VESTED AND
OUTSTANDING EXERCISABLE
--------------------------------------------------- ------------
WEIGHTED
AVERAGE
BALANCE AT REMAINING BALANCE AT
EXERCISE DECEMBER 31, CONTRACTUAL DECEMBER 31,
DATE OF PLAN PRICES 2006 LIFE 2006
------------ -------- ------------ ----------- ------------
(YEARS)
June 2000 $21.07 318,125 1.1 318,125
October 2002 $ 9.00 840,250 1.6 840,250
October 2002 $10.76 30,000 2.1 22,500
October 2002 $15.35 80,000 3.1 40,000
October 2002 $12.74 22,500 3.3 15,000
May 2006 $ 8.43 496,730 5.2
May 2006 -
Performance
conditioned $ 8.43 206,000 6
May 2006 $ 7.26 425,000 5.5
May 2006 $ 7.59 25,002 5.5
May 2006 $ 9.20 50,000 5.5
--------- ---------
2,493,607 1,235,875
========= =========
Weighted average of exercise prices of the total outstanding and
of total vested and exercisable options is $10.33 and $12.39
respectively.
Weighted average of remaining contractual life of the total
outstanding and the total vested and exercisable options is 3.5
years 1.55 years respectively.
Weighted average of intrinsic value of the total outstanding and
of total vested and exercisable options is $1.31 and $3.42
respectively.
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.
F-42
DELTA GALIL INDUSTRIES LTD.
(An Israeli corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 10 - TAXES ON INCOME (continued):
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. The entitlement
to the above benefits is conditional upon the companies
fulfilling the conditions stipulated by the law, regulation
published thereunder and the instruments of approval for the
specific investments in approved enterprises. 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, see note 4.
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.
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. The Company and one of its subsidiaries
chose to do so.
As explained in note 1a(4), the financial statements were
measured in dollars. 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
The income of the Company and its Israeli subsidiaries is
taxed at the statutory rate. In July 2004, Amendment No. 140
to the Income Tax Ordinance was enacted. In August 2005, a
further amendment (No. 147) was published, which makes a
further revision to the corporate tax rates prescribed by
Amendment No. 140. As a result of the aforementioned
amendments, the corporate tax rates for 2006 and thereafter
are as follows: 2006 - 31%, 2007 - 29%, 2008 - 27%, 2009 -
26% and for 2010 and thereafter - 25%.
As a result of the changes in the tax rates, the Company
adjusted - in each of the years 2004 and 2005 - at the time
the aforementioned amendments were made, its deferred tax
balances, in accordance with the tax rates expected to be in
effect when the deferred tax asset or liability is expected
to be settled or realized. The effect of the change has been
carried to income on a current basis.
Capital gains are taxed at a reduced rate of 25% on the
capital gains derived after January 1, 2003, and at the
regular corporate tax rate on the gains derived through the
aforementioned date.
F-43
DELTA GALIL INDUSTRIES LTD..
(An Israeli corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 10 - 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 mainly derived from the Israeli companies
as of December 31, 2006 and 2005, aggregate to $75 million and
$59 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
2006 2005
-------- --------
IN THOUSANDS
-------------------
Property, plant and equipment $ 7,442 $ 8,198
Inventories (1,906) (1,824)
Provisions for employee related obligations (1,113) (1,377)
Intangible assets 862 255
Other (907) (371)
In respect of carry forward tax losses
(see c above) (19,572) (17,539)
Valuation Allowance 12,254 8,932
-------- --------
$ (2,940) $ (3,726)
======== ========
F-44
DELTA GALIL INDUSTRIES LTD.
(An Israeli corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 10 - TAXES ON INCOME (continued):
2) Deferred income taxes are presented in the balance sheets as
follows:
DECEMBER 31
-----------------
2006 2005
------- -------
Among current assets $(4,779) $(4,726)
Among non-current assets (320) (267)
Among long term liabilities 2,159 1,267
------- -------
$(2,940) $(3,726)
======= =======
E. INCOME (LOSS) BEFORE TAXES ON INCOME IS COMPOSED AS FOLLOWS:
YEAR ENDED DECEMBER 31
----------------------------
2006 2005 2004
------- -------- -------
IN THOUSANDS
----------------------------
The Company and its Israeli
subsidiaries $(1,674) $(26,757) $ 3,190
Non-Israeli subsidiaries 11,101 (11,365) 13,946
------- -------- -------
$ 9,427 $(38,122) $17,136
======= ======== =======
F. INCOME TAX EXPENSE (BENEFIT) INCLUDED IN THE STATEMENTS OF
OPERATIONS:
YEAR ENDED DECEMBER 31
-------------------------
2006 2005 2004
------ ------- ------
IN THOUSANDS
-------------------------
Current:
Israeli $1,954 $ 1,422 $1,636
Non-Israeli 3,498 2,911 1,941
------ ------- ------
5,452 4,333 3,577
------ ------- ------
Deferred:
Israeli $ 53 $(2,970) $ (498)
Non-Israeli 786 (1,902) 219
------ ------- ------
839 (4,872) (279)
------ ------- ------
For previous years:
Israeli $ (80) $ (173) $ (516)
Non-Israeli (427) (1,590) 64
------ ------- ------
(507) (1,763) (452)
------ ------- ------
$5,784 $(2,302) $2,846
====== ======= ======
F-45
DELTA GALIL INDUSTRIES LTD.
(An Israeli corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 10 - TAXES ON INCOME (continued):
G. Following is a reconciliation of the theoretical tax expense
(benefit), assuming all income is taxed at the regular tax rates
applicable to income of companies in Israel (35% in 2004, 34% in
2005 and 31% in 2006) and the actual tax expense (benefit):
YEAR ENDED DECEMBER 31
---------------------------
2006 2005 2004
------ -------- -------
IN THOUSANDS
---------------------------
Income (loss) before taxes on income, as reported
in the consolidated statements of operations $9,427 $(38,122) $17,136
====== ======== =======
Theoretical tax expense (benefit) $2,922 $(12,961) $ 5,997
Additional tax expenses arising from reduced tax
rate on losses from an approved enterprise 73
Increase (decrease) in tax arising from different tax
rate applicable to non-Israeli subsidiaries 129 1,926 (2,575)
------ -------- -------
3,051 (11,035) 3,495
Increase (decrease) in taxes resulting from
permanent differences:
Disallowable deductions 380 2,455 110
Adjustments from previous years (507) (1,763) (452)
Difference between the basis of measurement
of income reported for tax purposes and
the basis of measurement of income for
financial reporting purposes - net (636) 453 (807)
Valuation allowance 3,322 8,932
Change in the tax rates on which tax expense was computed 1,154
Other - net 174 (2,498) 500
------ -------- -------
Taxes on income - in the consolidated statements
of operations $5,784 $ (2,302) $ 2,846
====== ======== =======
H. TAX ASSESSMENTS
Tax assessments for the Company and most of its Israeli
subsidiaries are considered final through the tax year 2001.
F-46
DELTA GALIL INDUSTRIES LTD.
(An Israeli corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 11 - SUPPLEMENTARY FINANCIAL STATEMENT INFORMATION:
BALANCE SHEETS:
DECEMBER 31
-------------------
2006 2005
-------- --------
IN THOUSANDS
-------------------
A. ACCOUNTS RECEIVABLE:
1) Trade:
Outside Israel $ 94,850 $ 91,126
In Israel 14,860 13,298
-------- --------
$109,710 $104,424
======== ========
Principal customers (see note 1n and 14d):
Customer 1 $ 12,681 $ 8,556
======== ========
Customer 2 $ 27,910 $ 21,361
======== ========
Customer 3 $ 10,923 $ 11,153
======== ========
2) Other:
Government departments $ 1,651 $ 2,935
Prepaid expenses 2,601 2,365
Deposits 164 1,009
Income receivable 78 103
Employees 384 311
Receivables from subcontractors 1,253 4,159
Sundry 1,442 2,362
-------- --------
$ 7,573 $ 13,244
======== ========
DECEMBER 31
-------------------
2006 2005
-------- --------
IN THOUSANDS
-------------------
B. INVENTORIES:
Finished products $ 99,154 $108,984
Products in process 12,451 16,247
Raw materials and supplies 14,612 15,914
Packaging and maintenance materials 5,339 5,997
-------- --------
$131,556 $147,142
======== ========
C. SHORT-TERM BANK CREDIT
The weighted average interest rate of short-term bank credit as
of December 31, 2006 and 2005 is 6.3% and 5.1%, respectively. A
subsidiary is a party to a credit agreement, which was amended,
as of December 9 2004, 2006 and during 2007, 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 $90 million
in short term credit (see note 7e).
F-47
DELTA GALIL INDUSTRIES LTD.
(An Israeli corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 11 - SUPPLEMENTARY FINANCIAL STATEMENT INFORMATION (continued):
Unutilized short-term credit lines of the Group (under the USA
credit agreement and other credit agreements) as of December 31,
2006 and 2005 aggregated to $90 million and $109 million,
respectively.
DECEMBER 31
-----------------
2006 2005
------- -------
IN THOUSANDS
-----------------
D. ACCOUNTS PAYABLE AND ACCRUALS - OTHER:
Employees and employee institutions $10,163 $ 8,532
Provision for vacation and recreation pay 3,594 3,179
Government department 4,294 6,571
Accrued expenses 13,481 17,008
Accrued expenses - restructuring expenses 136 3,250
Provision for additional payment to Burlen's
previous shareholders, see note 2a 2,400
Other 436 624
------- -------
$34,504 $39,164
======= =======
STATEMENTS OF OPERATIONS:
E. RESTRUCTURING EXPENSES:
1) Consolidated statements of operations for the year ended December
31, 2006 include restructuring expenses in China totaling $1.7
million. Consolidated statements of operations for the year ended
December 31, 2005 include restructuring expenses in Delta USA, US
Upper market, Europe and Socks segments totaling approximately
$9.1 million. During the year ended December 31, 2004 the Company
implemented restructuring plan in the European segment totaling
approximately $1.1 million.
2) The primary components of the restructuring expenses are:
YEAR ENDED DECEMBER 31
------------------------
2006 2005 2004
------ ------ ------
IN THOUSANDS
------------------------
Costs relating to workforce reduction $ 507 $5,894 $ 190
Write-off of fixed assets 1,156 2,370 50
Receivables write-off 180 860
Costs relating to other expenses 658
------ ------ ------
$1,663 $9,102 $1,100
====== ====== ======
F-48
DELTA GALIL INDUSTRIES LTD.
(An Israeli corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 11 - SUPPLEMENTARY FINANCIAL STATEMENT INFORMATION (continued):
THE 2006 PROGRAM
During 2006 the Company decided to restructure operations in the Far
East and closed its sewing plant in China (the "2006 program"), due to
a decision to focus the Chinese operations on procurement of finished
goods, raw materials and product development, and also due to
re-imposed quotas productions in China starting 2006. Restructuring
expenses included $1.2 million for impairment of leasehold
improvements and $0.5 million provision for severance payments related
to employee dismissal.
The implementation of the 2006 program in China, resulted in the
dismissal of approximately 700 employees.
The restructuring program was completed by the end of 2006.
THE 2005 PROGRAM
During 2005 the Company initiated a restructuring program designated
to reduce its cost structure and increase efficiency (the "2005
program"). Restructuring expenses include the closure of a sewing
plant in Carmiel, Israel in a total cost of $0.4 million and a
dismissal of approximately 200 employees and the following steps
included in the restructuring program initiated in the third quarter
of 2005 both designated to reduce its cost structure and increase
efficiency:
a. Closure of a sewing plant in Central America and moving the
production to subcontractors in the Far East, and a distribution
center in New Jersey, both served Delta Galil USA segments. The
closure of this sewing plant resulted in total restructuring
costs of $1.1 million and resulted in the dismissal of
approximately 1,400 employees.
b. Closure of a socks manufacturing plant in Toronto, Canada and
moving its production to subcontractors in Central America and
the Far East. The closure of this plant, resulted in a total
restructuring costs of $2.4 million and resulted in the dismissal
of approximately 100 employees.
c. Reduction of manufacturing facilities in Israel and transfer the
operations to lower labor cost countries. These actions resulted
in a total restructuring costs of $4.1 million and will result in
the dismissal of approximately 585 employees.
d. Consolidation of various departments into one building in
Carmiel, Israel in order to reduce maintenance and other overhead
costs. This action resulted in a total cost of $1.1 million.
e. The plan was completed in 2006.
THE 2004 PROGRAM
During the fourth quarter of 2004 the Company initiated a
restructuring program designed 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 in 2005.
F-49
DELTA GALIL INDUSTRIES LTD.
(An Israeli corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 11 - SUPPLEMENTARY FINANCIAL STATEMENT INFORMATION (continued):
3) The following table summarizes changes to in the restructuring
accrual and other recognized restructuring expenses for the 3
years ended December 31, 2006, in thousand:
YEAR ENDED DECEMBER 31, 2006
-----------------------------------------------------------------
ACCRUAL ACCRUAL
BALANCE AT BALANCE AT
DECEMBER 31, RESTRUCTURING DECEMBER 31,
2005 EXPENSE WRITE-OFF PAYMENT 2006
------------ ------------- --------- ------- ------------
Cost relating to:
Workforce reduction (*)$3,408 $ 507 $(3,505) (*)410
Asset write-off 1,156 (1,156)
Other expenses 512 (512)
--------- ------ ------- ------- ------
$3,920 $1,663 $(1,156) $(4,017) 410
========= ====== ======= ======= ======
YEAR ENDED DECEMBER 31, 2005
-----------------------------------------------------------------
ACCRUAL ACCRUAL
BALANCE AT BALANCE AT
DECEMBER 31, RESTRUCTURING DECEMBER 31,
2004 EXPENSE WRITE-OFF PAYMENT 2005
------------ ------------- --------- ------- ------------
Cost relating to:
Workforce reduction -,- (*)$5,894 $(2,486) (*)$3,408
Fixed asset write-off 2,370 (2,370)
Other expenses 658 (146) 512
Receivable write-off 180 (180)
--- -------- ------- ------- ---------
-,- $9,102 $(2,550) $(2,632) $3,920
=== ======== ======= ======= =========
YEAR ENDED DECEMBER 31, 2004
----------------------------------------------------------------------------
ACCRUAL ACCRUAL
BALANCE AT BALANCE AT
DECEMBER 31, RESTRUCTURING DECEMBER 31,
2003 EXPENSE REVERSAL WRITE-OFF PAYMENT 2004
------------ ------------- -------- --------- ------- -----------
Cost relating to:
Workforce reduction $ 190 $ (190) -,-
Workforce reduction -relating
to acquisition of subsidiary 2,063 (2,063)
Fixed asset write-off 50 (50)
Other accruals related to
acquisition of subsidiary 4,100 (**)500 (1,863) (2,737)
Receivable write-off 860 (860)
------ ---------- ------- ----- ------- ---
$6,163 (**)$1,600 $(1,863) $(910) $(4,990) -,-
====== ========== ======= ===== ======= ===
(*) As of December 31, 2006 and 2005, Including $410 and $670 thousand,
respectively for long term workforce reduction accruals. The Company will
pay this accrual in 14 equal quarterly installments.
(**) The amount of $500 thousands was charged to other comprehensive loss
related to differences from translations of foreign currency financial
statements.
F-50
DELTA GALIL INDUSTRIES LTD.
(An Israeli corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 11 - SUPPLEMENTARY FINANCIAL STATEMENT INFORMATION (continued):
F. FINANCIAL EXPENSES - NET:
YEARS ENDED DECEMBER 31
---------------------------
2006 2005 2004
------- -------- ------
IN THOUSANDS
---------------------------
Interest expenses $11,907 $9,891 $4,923
Interest income (520) (245) (42)
Exchange differences and other - net 2,010 572 763
Losses from derivatives instruments 161 587
------- ------- ------
$13,558 $10,218 $6,231
======= ======= ======
G. EARNINGS (LOSS) PER SHARE
Following is data relating to the weighted average number of
shares used in the computation of diluted earnings (loss) per
share:
2006 2005 2004
------ ------ ------
IN THOUSANDS
------------------------
Weighted average number of
shares used in the computation of
basic earnings (loss) per share 18,700 18,695 18,478
Add:
Net additional shares from the anticipated
exercise of stock options 42 356
------ ------ ------
Weighted average number of
shares used in the computation of
diluted earnings per share 18,742 18,695 18,834
====== ====== ======
Options which were not included in the
computation of diluted earnings (loss) per
share due to anti dilutive effect 2,452 1,560 798
====== ====== ======
F-51
DELTA GALIL INDUSTRIES LTD.
(An Israeli corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 12 - 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 US dollar. The group utilize
derivative financial instruments ("derivatives") to reduce these
risks, as explained in this note. As the counter parties to these
derivatives are Israeli banks, the Company considered the
inherent credit risks remote. The Company did not hold or issue
derivative financial instruments for trading purposes.
B. FOREIGN EXCHANGE RISK MANAGEMENT
The Company usually enters into 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 would be affected by changes in exchange rates.
The term of these contracts is less than one year.
These transactions were mainly for the exchange of pounds
sterling and Euro into US dollars.
For forward exchange contracts designated as cash flow hedges,
gains and losses were recorded in other comprehensive income
(loss) until the foreign currency denominated sales, were
recognized in earnings.
The following table summarizes changes in other comprehensive
income (loss) related to derivatives that were classified as cash
flow hedges held by the Company during the reported years:
2006 2005 2004
----- ---- -------
$ IN THOUSANDS
----------------------
Balance at beginning of year -,- $(1,715)
Changes in effective portion of derivatives
designated as cash flow hedges $(275) 691
Reclassification into earnings from other
comprehensive income 1,822
Tax effect (798)
----- --- -------
Balance at end of year $(275) -;- -;-
===== === =======
Loss related to the portion of cash flow hedging instruments excluded
from assessment of hedge effectiveness had impact on earnings for
2006, 2005 and 2004 of NIL, NIL and $0.6 million loss respectively,
classified in financial expenses.
The fair value of the hedge instrument as of December 31, 2006 and
2005 are $272 thousand and NIL.
F-52
DELTA GALIL INDUSTRIES LTD.
(An Israeli corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 12 - FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (continued):
C. FAIR VALUE OF FINANCIAL INSTRUMENTS
The financial instruments of the Group consist mainly of
non-derivative assets and liabilities in insignificant amounts
(items included in working capital, long-term receivables and
long-term liabilities); the Group also has derivatives financial
instruments.
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.
NOTE 13 - RELATED PARTIES - TRANSACTIONS AND BALANCES:
A. TRANSACTIONS WITH RELATED PARTIES:
YEAR ENDED DECEMBER 31
-----------------------
2006 2005 2004
---- ---- ------
IN THOUSANDS
-----------------------
Net revenues $540 $409 $1,303
==== ==== ======
Purchases and other expenses -,- $ 7 $ 21
==== ==== ======
The above transactions were made with a company which is held by
one of the main 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 former CEO, see note 9b.
B. RELATED PARTIES BALANCES:
DECEMBER 31
------------
2006 2005
---- -----
IN THOUSANDS
------------
Current receivables - presented in the balance
sheets among "accounts receivable - trade" $128 -,-
==== ===
F-53
DELTA GALIL INDUSTRIES LTD.
(An Israeli corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 14 - SEGMENT INFORMATION :
A. INFORMATION ON OPERATING SEGMENTS:
OPERATING SEGMENTS:
1) General:
The Company conducts its worldwide operations in seven
operating segments as follows:
(i) Delta USA (Mass market); (ii) U.S upper market and (iii)
Europe - these segments are engaged in manufacturing and
marketing of intimate apparel to various customers in the
U.S and European markets; (iv) Socks- the segment is engaged
in manufacturing and marketing of socks to various customers
in the U.S and European markets; (v) Delta marketing Israel
- this segment is engaged in marketing of intimate apparel,
mainly under the Delta Brand name, to various customers in
Israel through retail and wholesale operations; (vi)
Seam-less operation and (vii) China.
The Company's reportable segments are based on the 7
divisions internally reported and regularly reviewed by the
Company's CEO. The Company's CEO is the Company's chief
operating decision maker (CODM), for the purpose of making
decisions about resources to be allocated to the segment and
for assessing its performance. These 7 operating segments do
not qualify for aggregation for segment reporting purposes.
Commencing early 2006, the Company made certain changes to
the structure of it's internal organization in a manner that
caused the composition of its reportable segments to change.
As a result, the Company has restated the corresponding
items of segment information for the prior periods presented
in a manner consistent with segment presentation for 2006.
Changes to our reportable segments are as follows:
1. The Elastic Tape facility, which was previously managed
within the US Upper Market segment, is no longer being
managed within this segment, therefore it is has been
reclassified within "others" segment.
2. The Seam less operations, which were previously managed
and reported as part of the US Upper Market segment are
now separately managed and evaluated by the CODM.
Therefore, operations have been reclassified as a
separate reportable segment, entitled, "Seam-less".
F-54
DELTA GALIL INDUSTRIES LTD.
(An Israeli corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 14 - SEGMENT INFORMATION (continued):
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 losses
of associated company and minority interest, since those
items are not allocated to the segments.
Selling prices of intersegment revenues are based on
negotiation between the segments and when applicable upon
market price.
F-55
DELTA GALIL INDUSTRIES LTD.
(An Israeli corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 14 - SEGMENT INFORMATION (continued):
b) Financial data relating to reportable operating segments:
US DELTA
DELTA UPPER MARKETING
USA MARKET EUROPE SOCKS ISRAEL SEAM-LESS CHINA OTHER ADJUSTMENTS TOTAL
-------- ------- -------- -------- --------- --------- --------- -------- ----------- --------
(U.S. $ IN THOUSANDS)
------------------------------------------------------------------------------------------------------
Year ended December 31, 2006:
Net revenues:
To unaffiliated customers $269,722 $94,543 $158,646 $121,980 $54,209 $ 3,015 $ 803 $ 2,634 $ 1,147 $706,699
Intersegment $ 754 $ 8,630 $ 504 $ 99 $14,956 $ 1,020 $ 3,577 $(29,540)
-------- ------- -------- -------- ------- ------- ------- -------- -------- --------
Total net revenues $269,722 $95,297 $167,276 $122,484 $54,308 $17,971 $ 1,823 $ 6,211 $(28,393) $706,699
======== ======= ======== ======== ======= ======= ======= ======== ======== ========
Operating income (loss) $ 13,254 $ 692 $ 7,693 $ 1,374 $ 6,777 $(2,452) (3)$(4,116) $ 599 (1)$ (836) $ 22,985
======== ======= ======== ======== ======= ======= ======= ======== ======== ========
Assets (at end of year) $195,101 $46,695 $ 80,811 $ 49,402 $24,955 $18,002 $ 2,547 $ 3,519 (2)$ 25,356 $446,388
======== ======= ======== ======== ======= ======= ======= ======== ======== ========
Assets held for sale $ 191 $ 3,517 $ 766 $ 4,474
======== ======= ======== ======== ======= ======= ======= ======== ======== ========
Depreciation and amortization $ 2,639 $ 2,760 $ 5,130 $ 1,900 $ 790 $ 1,100 $ 600 $ 260 $ 447 $ 15,626
======== ======= ======== ======== ======= ======= ======= ======== ======== ========
(1) Includes general corporate expenses not assignable to segments.
(2) Includes general corporate assets not assignable to segments.
(3) Includes restructuring expenses in the amount of $1.7 million with respect
of the closing of the sewing activity.
F-56
DELTA GALIL INDUSTRIES LTD.
(An Israeli corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 14 - SEGMENT INFORMATION (continued):
b) Financial data relating to reportable operating segments:
DELTA
US UPPER MARKETING
DELTA USA MARKET(*) EUROPE SOCKS ISRAEL
----------- ----------- ----------- ----------- ---------
(U.S. $ IN THOUSANDS)
-------------------------------------------------------------
Year ended December 31, 2005:
Net revenues:
To unaffiliated customers $267,887 $ 75,306 $163,245 $126,760 $49,038
Intersegment $ 384 $ 214 $ 4,126
-------- -------- -------- -------- -------
Total net revenues $267,887 $ 75,690 $163,459 $130,886 $49,038
======== ======== ======== ======== =======
Operating income (loss) (1)$ 5,625 (2)$(12,623) (3)$ (8,827) (4)$ (4,990) $ 5,010
======== ======== ======== ======== =======
Assets (at end of year) $194,515 $ 45,456 $101,789 $ 50,085 $24,847
======== ======== ======== ======== =======
Assets held for sale $ 990 $ 4,723 $ 941
======== ======== ======== ======== =======
Depreciation and amortization $ 3,168 $ 3,026 $ 4,416 $ 2,220 $ 442
======== ======== ======== ======== =======
SEAM-
LESS(*) CHINA OTHER(*) ADJUSTMENTS(*) TOTAL
---------- ------- -------- -------------- ---------
(U.S. $ IN THOUSANDS)
--------------------------------------------------------
Year ended December 31, 2005:
Net revenues:
To unaffiliated customers $ 140 $2,105 $684,481
Intersegment $19,413 $ 718 $3,898 $(28,753)
------- ------- ------ -------- --------
Total net revenues $19,553 $ 718 $6,003 $(28,753) $684,481
======= ======= ====== ======== ========
Operating income (loss) (5)$(9,126) $(2,313) $ 168 (6)$ (1,128) $(28,204)
======= ======= ====== ======== ========
Assets (at end of year) $21,533 $ 4,760 $4,008 (7)$ 22,160 $469,153
======= ======= ====== ======== ========
Assets held for sale (7)$ 766 $ 7,420
======= ======= ====== ======== ========
Depreciation and amortization $ 1,671 $ 72 $ 262 $ 534 $ 15,811
======= ======= ====== ======== ========
(1) Includes restructuring expenses in the amount of $1.1 million and
impairment of fixed assets in the amount of $1.5 million.
(2) Includes restructuring expenses in the amount of $1.6 million, impairment
of goodwill in the amount of $2.1 million and impairment of fixed assets in
the amount of $3.5 million.
(3) Includes restructuring expenses in the amount of $2.1 million.
(4) Includes restructuring expenses in the amount of $4.1 million and
impairment of goodwill in the amount of $3.4 million.
(5) Includes impairment of fixes assets in the amount of $2.4 million.
(6) Includes general corporate expenses not assignable to segments.
(7) Includes general corporate assets not assignable to segments.
(*) See a1.
F-57
DELTA GALIL INDUSTRIES LTD.
(An Israeli corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 14 - SEGMENT INFORMATION (continued):
b) Financial data relating to reportable operating segments
(continued):
DELTA
DELTA US UPPER MARKETING SEAM-
USA MARKET(*) EUROPE SOCKS ISRAEL LESS(*) OTHER (*) ADJUSTMENT(*) TOTAL
-------- --------- ----------- -------- --------- ------- --------- ------------- --------
(U.S. $ IN THOUSANDS)
--------------------------------------------------------------------------------------------------
Year ended December 31, 2004:
Net revenues:
To unaffiliated customers $186,280 $88,564 $193,638 $138,749 $46,460 $ 558 $1,418 (1)$ (1,398) $654,269
Intersegment $ 1,781 $ 165 $ 5,435 $19,413 $5,000 $(31,794)
-------- ------- -------- -------- ------- ------- ------ -------- --------
Total net revenues $186,280 $90,345 $193,803 $144,184 $46,460 $19,971 $6,418 $(33,192) $654,269
======== ======= ======== ======== ------- ------- ------ -------- ========
Operating income (loss) $ 5,911 $ 604 (4)$ 4,906 $ 9,137 $ 4,753 $(1,361) $ 189 (2)$ (1,730) $ 22,409
======== ======= ======== ======== ======= ======= ====== ======== ========
Assets (at end of year) $225,744 $64,949 $100,264 $ 56,271 $23,866 $29,227 $3,879 (3)$ 30,297 $534,497
======== ======= ======== ======== ======= ======= ====== ======== ========
Depreciation and amortization $ 1,438 $ 3,964 $ 4,326 $ 2,463 $ 450 $ 1,876 $ 257 $ 411 $ 15,185
======== ======= ======== ======== ======= ======= ====== ======== ========
(1) Includes results of hedge transactions.
(2) Includes mainly the effect of hedge transactions in an amount of $1.7
million.
(3) Includes general corporate assets not assignable to segments.
(4) Includes restructuring expenses in the amount of $1.5 million relating to
the closure of a logistic center in Hungary.
(*) See a1.
F-58
DELTA GALIL INDUSTRIES LTD.
(An Israeli corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 14 - SEGMENT INFORMATION (continued):
B. GEOGRAPHICAL INFORMATION:
YEAR ENDED DECEMBER 31
------------------------------
2006 2005 2004
-------- -------- --------
IN THOUSANDS
------------------------------
1) Net revenues
attributed to geographic area
(based on the location of the
customers):
North America $417,985 $401,050 $334,833
United Kingdom 171,879 177,950 202,831
Europe (other than U.K.) 53,896 52,360 64,605
Israel 60,132 53,121 52,000
Other 2,807
-------- -------- --------
$706,699 $684,481 $654,269
======== ======== ========
2) The net balance of the Company's long-lived assets, by geographic
location, are as follows:
DECEMBER 31
-----------------------------
2006 2005 2004
------- -------- --------
IN THOUSANDS
-----------------------------
Israel $42,015 $ 45,508 $ 57,685
Egypt 24,616 26,270 24,464
United States 12,061 13,582 15,637
Jordan 7,066 8,212 9,470
Eastern Europe 4,470 5,243 11,370
China 2,387 4,761
Thailand 3,452 2,923 2,108
United Kingdom 1,683 2,076 3,831
India 1,131
Ireland 129 1,184
Other 382 427 2,592
------- -------- --------
$99,263 $109,131 $128,341
======= ======== ========
C. SALES BY PRODUCT CATEGORY INFORMATION:
YEAR ENDED DECEMBER 31
------------------------------
2006 2005 2004
-------- -------- --------
IN THOUSANDS
------------------------------
1) Net revenues
Ladies intimate apparel $408,807 $417,942 $350,688
Socks 136,134 138,499 150,482
Men's underwear 104,256 75,722 84,400
Leisurewear 25,267 20,899 24,207
Babywear 23,367 17,193 28,788
Fabrics and Other 8,868 14,226 15,704
-------- -------- --------
$706,699 $684,481 $654,269
======== ======== ========
F - 59
DELTA GALIL INDUSTRIES LTD.
(An Israeli corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 14 - SEGMENT INFORMATION (continued):
D. REVENUES FROM PRINCIPAL CUSTOMERS:
YEAR ENDED DECEMBER 31
------------------------------
2006 2005 2004
-------- -------- --------
IN THOUSANDS
------------------------------
Customer 1 (Europe and Socks segments) $155,827 $161,348 $188,947
======== ======== ========
Customer 2 (Delta USA and Socks segments) $151,474 $150,556 $ 86,177
======== ======== ========
Customer 3 (Delta USA segment) $ 57,977 $ 67,064 $ 70,157
======== ======== ========
NOTE 15 - SUBSEQUENT EVENTS:
Options
a. On March 2007 the Company granted 122,000 options to 8 employees at an
exercise price of $6.95.
Of the total options granted, 120,000 are vest and exercisable as
follows: First third vest on the second anniversary of the date of
grant and are exercisable for three years thereafter, second third
vest on the third anniversary of the date of grant and are exercisable
for three years thereafter and the final third vest on the fourth
anniversary of the date of grant and are exercisable for three years
thereafter.
The remaining 2,000 options are vest and exercisable as follows: First
quarter vest on the first anniversary of the date of grant and are
exercisable for three years from the second anniversary of the date of
grant, second quarter vest on the second anniversary of the date of
grant and are exercisable for three years thereafter, third quarter
vest on the third anniversary of the date of grant and are exercisable
for three years thereafter and the final third vest on the fourth
anniversary of the date of grant and are exercisable for three years
thereafter.
The fair value of the options granted, based on the Black-Scholes
Option-Pricing Model, is approximately $0.2 million and will be
included in the financial statement over the vesting period.
b. Restructuring Plan For 2007
On March 28, 2007, the Company approved a restructuring plan, which
includes the planned closure of certain manufacturing facilities in
Israel, and the downsizing of operations that may involve certain
changes to the Company's operational structure, development and design
functions, and marketing, sales and finance operations. The Company
estimates the costs associated with this restructuring plan to range
between $10 million to $12 million. The implementation of the
restructuring plan is expected to take place commencing in the second
quarter of 2007.
F-60
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON FINANCIAL STATEMENT
SCHEDULE
To the shareholders of
DELTA GALIL INDUSTRIES LTD.
Our audits of the consolidated financial statements, referred to in our report
dated March 30, 2007 appearing in the 2006 Annual Report on form 20-F of Delta
Galil Industries Ltd. also included an audit of Financial Statement Schedule
II-Valuation and Qualifying Accounts - included as an exhibit in Item 19 of this
Form 20-F. In our opinion, the financial statement schedule presents fairly, in
all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements
Tel-Aviv, Israel Kesselman & Kesselman
March 30, 2007 Certified Public Accountant (Isr.)
A member of PricewaterhouseCoopers
International Limited
DELTA GALIL INDUSTRIES LTD.
(An Israeli corporation)
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
THREE YEARS ENDED DECEMBER 31, 2006
(U.S. $ IN THOUSAND)
ADDITION - DEDUCTION- DEDUCTION-
BALANCE AT CHARGED TO CHARGED TO CHARGED TO BALANCE AT
BEGINNING COSTS AND ACCOUNTS COST & END OF
OF YEAR EXPENSES RECEIVABLE EXPENSES YEAR
---------- ---------- ---------- ---------- ----------
ALLOWANCE FOR DOUBTFUL ACCOUNTS:
Year ended December 31, 2006 $ 453 $ 211 $ (112) $ 552
======= ======= ======== =======
Year ended December 31, 2005 $ 127 $ 340 $ (14) $ 453
======= ======= ======== =======
Year ended December 31, 2004 $ 1,038 $ 26 $(827) $ (110) $ 127
======= ======= ===== ======== =======
ALLOWANCE FOR SALES RETURN:
Year ended December 31, 2006 $ 174 $ 572 $ (174) $ 572
======= ======= ======== =======
Year ended December 31, 2005 $ 81 $ 174 $ (81) $ 174
======= ======= ======== =======
Year ended December 31, 2004 $ 80 $ 81 $ (80) $ 81
======= ======= ======== =======
ALLOWANCE FOR OBSOLETE AND SLOW
MOVING INVENTORY:
Year ended December 31, 2006 $27,879 $26,732 $(27,879) $26,732
======= ======= ======== =======
Year ended December 31, 2005 $26,292 $27,879 $(26,292) $27,879
======= ======= ======== =======
Year ended December 31, 2004 $25,926 $26,292 $(25,926) $26,292
======= ======= ======== =======
VALUATION ALLOWANCE IN RESPECT OF
DEFERRED INCOME TAXES:
Year ended December 31, 2006 $ 8,932 $ 3,322 $12,254
======= ======= =======
Year ended December 31, 2005 -,- $ 8,932 $ 8,932
======= ======= =======
Year ended December 31, 2004 -,- -,-
======= =======
SIGNATURE
The registrant hereby certifies that it meets all of the requirements
for filing on Form 20-F and that it has duly caused and authorized the
undersigned to sign this annual report on its behalf.
DELTA GALIL INDUSTRIES LTD.
By: /s/ Yossi Hajaj
------------------------------------
Name: Yossi Hajaj
Title: Chief Financial Officer
Date: March 30, 2007
-62-
EXHIBIT INDEX
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 Restated 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 Amendment No.1 to Burlen Stock Purchase Agreement ^*******
4.4 Amendment No.1, dated January 12, 2006, and Amendment No. 2, dated May 9,
2006, to the Second Amended and Restated Credit and Security Agreement
*******
4.5 Amendment No. 3, dated July 31, 2006, to the Second Amended and Restated
Credit and Security Agreement.
4.6 Amendment No. 4, dated January 26, 2007, to the Second Amended and
Restated Credit and Security Agreement.
4.7 Option Plan to 13 employees of Delta Galil and/or its subsidiaries*
4.8 Option Plan to Arnon Tiberg* (Delta's Former CEO)
4.9 Option Plan to 70 employees of Delta Galil and/or its subsidiaries***
4.10 Delta Galil Industries Ltd. 2002 Share Option Plan*****
4.11 Form of Indemnification Undertaking******
4.12 2006 Incentive Plan*******
4.13 Delta Galil Industries Ltd. 2006 Option Plan *******
8.1 List of significant subsidiaries *******
12.1 Section 302 Certification of Aviram Lahav.
12.2 Section 302 Certification of Yossi Hajaj.
13.1 Section 906 Certification of Aviram Lahav.
13.2 Section 906 Certification of Yossi Hajaj.
14.1 Consent of Resselman & Kesselman, a memeber of PricewaterhouseCoopers,
International Limited
----------
* 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.
*** 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
-63-
with the Securities and Exchange Commission on June 27, 2005 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 filled as an exhibit to Delta Galil's Annual Report on Form
F-20 (file No. 0-50020) filed with the Securities and Exchange
Commission on June 28, 2006 and incorporated herein by reference.
^ Portions of this exhibit have been omitted and filed separately with the
secretary of the Securities and Exchange Commission pursuant to a
confidential treatment request.
-64-