Annual Report 2010 1

Delta Galil Industries Ltd.
2010 Annual Report
February 16, 2011
2010 Annual Report
Table of Contents: 1. Chapter A Description of the Corporations Business 2. Chapter B Board of Directors' Report on the State of Corporate Affairs 3. Chapter C Financial Statements 4. Chapter D Additional Information Regarding the Corporation 5. Chapter E Report on Effectiveness of Internal Control of Financial Reporting and Disclosure
Chapter A
Description of the Corporations Business As of December 31, 2010
Table of Contents
Page Part A Description of the Corporations Business

1.1.
3 3 11 12 15 17 18 19 19 22 24 24
The Corporations Activity and Description of the Development of its Business Introduction ...................... Changes in the Corporations Business.............................. Areas of Activity ................................................................ Investments in the Corporations Capital and Transactions with its Shares .................................................................... Investments in the Corporations Capital and Other Material Transactions by Interested Parties ....................... Dividend Distribution.........................................................
1.2. 1.3. 1.4.
1.5.
1.6.
Part B Other Information

1.7.
Financial Information Regarding the Corporations Segment.............................................................................. General Environment and Impact of External Factors on the Company ......................................................................
1.8.
Part C Description of the Corporations Business by Segment

1.9.
General Information on Areas of Activity: Delta U.S.A. mass market, and Global Division Upper Market Segment.............................................................................. Operating Segment: Delta Israel ........................................
1.10.
46 53 53 54 54 55 58 59
Part D Additional Information at the Corporate Level

1.11. 1.12. 1.13. 1.14. 1.15. 1.16.
The Companys Products ................................................... General Information on Areas of Activity ......................... Seasonal Factors................................................................. Fixed Assets and Facilities................................................. Research and Development................................................ Human Capital ...................................................................
Page
1.17. 1.18. 1.19. 1.20. 1.21. 1.22. 1.23. 1.24. 1.25.
Material Agreements.......................................................... Legal Proceedings .............................................................. Working Capital ................................................................. Finance ............................................................................... Goals and Business Strategy .............................................. Projected Developments in the Coming Year.................... Financial Information Regarding Geographical Segments Taxation.............................................................................. Discussion of Risk Factors.................................................
65 68 68 71 75 78 78 79 82
Introduction
The Company, Delta Galil Industries Ltd., hereby submits a report describing the corporation's business for December 31 2010, which reviews the description of the corporation and the development of its business, as they occurred in 2010 (the Reported Period). This report was prepare in accordance with the Securities Regulations (Periodic and Immediate Reports), 1970. The materiality of the information included in this periodic report including the description of material transactions was considered from the point of view of the Company, with additional descriptions provided in some of the cases in order to provide a more comprehensive view of the subjects described. This chapter, which deals with the description of the Company, its subsidiaries, their development, their business and the areas of their activity, also contains forward-looking information, as defined in the Securities Law, 1968. Forward-looking information is uncertain information regarding the future, based mainly on information existing at the Company on the report date and includes Company estimates, assumptions or intents as of the report as well as estimates and projections by third parties that may not be realized or may be realized in a partial fashion only. Therefore, actual results in whole or in part, may be materially different, for better or for worse, than the results estimated, derived or implied by this information. The Securities Law imposes reduced liability rules on the forward-looking information featured, inter alia, in this report, if three cumulative conditions noted in Section 23a of the Securities Law are met: (a) the information expressly states that it is forward-looking; (b) the key facts and data at the basis of the information are detailed along the information in question; (c) the main factors that must be referred to as potentially causing the information not to be realized are clearly emphasized.
Glossary For the sake of convenience, in this periodic report, the following abbreviations shall be assigned the meaning listed alongside them: The Company or Delta The Group or the Delta Group Delta USA "Burlen" "Auburn" Delta Galil USA Inc. Burlen Corp. Auburn Hosiery Mills (merged into Delta Galil USA Inc. starting January 2010) Tag Li Delta Textiles Gibor The Companies Law The Authority The Stock Exchange The Securities Law Periodic and Immediate Report Regulations Business Licensing Law Dollar The State U.S. Dollar The State of Israel The Business Licensing Law, 1968 Tag Li Ltd. (merged with Delta on January 1 2008) Delta Textiles Ltd. (merged with Delta on January 1 2008) Gibor Active Wear The Companies Law, 1999 The Securities Authority The Tel Aviv Stock Exchange Ltd. The Securities Law, 1968 Securities Regulations (Periodic and Immediate Reports), 1970 Delta Galil Industries Ltd. and its subsidiaries Delta Galil Industries Ltd.
Description of the Corporations Business

Part A Description of the General Development of the Corporations Business
1.1. The Corporations Activity and Description of the Development of its Business Introduction The following is information pertaining to the corporation's business, as of February 16 2011. 1.1.1. The Company was incorporated in Israel in 1975 as a private company in accordance with the Companies Order [New Version], 1983. In 1982 the Company went public on the Tel Aviv Stock Exchange Ltd. (hereinafter: the Stock Exchange). On March 25 1999 the Company issued American Depositary Shares (hereinafter: ADS) on the Nasdaq National Market (today the Nasdaq Global Market) (hereinafter: NASDAQ) in such a manner that each ADS represents a single ordinary 1 NIS NV Company share (hereinafter: Ordinary Share). 1.1.2. On January 25 2001 the Company began reporting in a dual company format, in accordance with Chapter E3 of the Securities Law and therefore starting from that date, its reports were in English and prepared according to the U.S. Securities Exchange Act of 1934. On March 27 2008 the Company removed the ADS from trade on the NASDAQ, and returned to reporting in accordance with Chapter F of the Securities Law. Starting from the transition date, March 27 2008, Company ADS may also be traded on the Tel Aviv Sock Exchange, after conversion to ordinary Company shares. In addition, Company ADS may also be traded on the U.S. "OTCQX International Prime. 1.1.3. The Company is engaged in the design, development, production, marketing and sales of undergarments and socks for men, women and children. As a rule, the Company markets its products in three ways (a) manufacturing for leading international private labels (such as Hugo Boss, Calvin Klein, Tommy Hilfiger and more) and for in-house labels of leading retail chains (such as Wal-Mart, Target, Victorias Secret, Marks & Spencer, J.C. Penny, Kohls and more); (b) manufacturing and marketing as part of franchise agreements for which the Company has acquired a license (such as Converse, Wilson, Maidenform , Tommy Hilfiger Daisy Fuentas, MLB Lucky etc.), and (c) marketing in Israel under the "Delta" label.
Delta designs and develops its products primarily in Israel and in the US whereas production is mostly done via sub-contractors and in its facilities in the Middle East and in the Far East. 1.1.4. Agreement to Purchase Assets and Activity in the Socks Segment 1.1.4.1. On April 2, 2009 the transaction of purchasing assets and part of the activity of Gibor sports active wear (GSAW) Ltd ("Gibor") in the design, development marketing and selling of socks was completed, after the stipulations posited in the agreement (which were detailed in the immediate report published by the company on February 16 2009, ref. no. 2009-01-038259), were met. 1.1.4.2. The purchase of Gibor's assets is synergic with the Company's activity in the socks segment and designated to expand and leverage its activity in this area. The purchase of Gibor's activity is in line with the Company's growth strategy in the field of socks in the last few years, the key points of which are: (1) Focusing on market leaders strengthening our position as strategic partners with Nike. (2) Strengthening and widening the Company's technological advantage getting into a technological niche with significant growth potential. 1.1.4.3. The activity purchased was in conjunction with Nike, which is an anchor customer, a market leader. Purchase of the activity will allowed quick and high-level entrance into the soccer socks niche, which is characterized by a relatively low offering of high-quality suppliers with above-average profit margins. 1.1.4.4. Due to the fact that most of the activity purchased was from Nike, it will allow synergy on a number of levels: (1) Reliance on the Companys existing marketing and sales array, with marginal reinforcement. (2) The manufacturing activity of Gibor focused on the Israeli, Jordanian and Turkish sites in which the Company has
significant presence. This fact helps the operations array absorb the activity in a relevantly short time and also allows operational flexibility in transferring manufacturing orders between the various sites. (3) Improving purchasing power with other materials suppliers and service providers. (4) Integrating part of the development array of the purchased activity within the Company's existing development array. 1.1.4.5. Implementation of the above synergies while reducing overhead in the purchased activity led to improvement in gross and operational profit margins of sock activity. The transaction significantly increased sock sales to Nike and constituted a major step in reinforcing the Company's relations with its customer, in that sock sales increased by $20 million on a yearly basis 85% of that in sales in Europe and the balance in the US; and made the Company a major socks supplier for Nike, in general, and in the special sports socks niche (Performance and Sport Culture) in particular. In addition, the agreement allowed the Company to penetrate new customers in the Segment and area in the field of soccer socks, a new category in which the Company had no activity. 1.1.4.6. The sales of the purchased activity in 2007 and 2008 amounted to $32.7 and $32.6, respectively. 1.1.4.7. The sales of purchased activity in the nine-month period from its purchase in 2009 amounted to $18.2 million, while the contribution to operating profit in the same period created by this activity amounted to $0.9 million. 1.1.4.8. For details regarding exemptions granted the Company by the Securities Authority from the presentation of pro forma data for the purchase of the activity and alternate disclosure reported by the Company, see the immediate report from August 24 2009 (reference no. 2009-01-207663) and the Q2 2009 Board of Directors Report published August 20 2010 (reference no. 200901-203892).
1.1.5. On October 27, 2009 4 the Company published a shelf offering report, by virtue of the Company's shelf prospectus from May 29, 2008, to offer by a way of rights to the Company's ordinary shareholders, who were listed in the Company's shareholders book at the end of the November 2 2009 trading day, in such a manner that each holder of 4 ordinary shares was entitled to purchase one right consisting of one ordinary company share at 17 NIS per share. The trading day for the rights was November 12 2009 (for details see immediate reports from October 21 2009 ref: 2009-01-261918 and from October 27 2009 ref: 2009-01-266835). On November 16, the Company announced that it completed its rights issue in which it issued 4,638,487 shares in return for 78 million NIS (for details see the November 16 2009 immediate report, ref: 209-01-286155, presented by way of referral). 1.1.6. On December 11, 2009 the Company published that it was in negotiations to purchase international branded apparel assets activity in the field of clothing. For details see immediate reports from December 11, 2009, ref: 2009-01-345972 and June, 3 2010, ref: 2010-01-509061. On June 29, 2010 the Company announced that the seller had decided to discontinue sales efforts and therefore negotiations between the parties were brought to a conclusion (see June 29 2010 immediate report, ref: 2010-01-535980). 1.1.7. On December 31, 2009 Midroog Ltd. informed the Company that its rating committee had assigned an (A3)stable rating for its debentures of up to $30 million. The rating report was published on the distribution site of the Securities Authority (MAGNA), on the Stock Exchange site (MAYA) and on the Midroog site. On December 19, 2010 Midroog Ltd. announced that it would be ratifying an A3/Stable rating for the debentures (Series K) issued by the Company and grant an A3/Stable rating for the debentures the Company would issue by way of expanding the series, at 105,000,000 NIS NV. For more details see immediate report from December 19 2010, reference no. 2010-01-721767. 1.1.8. On January 2010 the Company published the results of the debentures offering carried out by virtue of the shelf offering from January 18 2010 (in this paragraph the Shelf Offer Report"), which was published by virtue to the Company's May 29 2008 shelf prospectus.
In accordance with the shelf prospectus, the public was offered 113 million NIS NV debentures (Series K), registered in the owner's name, worth 1 NIS NV each, all as detailed in the Shelf Offer Report. The debentures were offered to the public in 113,000 units worth 1,000 NIS NV each, by way of a tender on the annual interest rate borne by the debentures (Series K) that will not exceed 7.25% per annum. The debentures (Series K) were offered at a price equal to 100% of their notational value. The immediate (gross) proceeds from the debentures (Series K) issued as per the Shelf Offer Report amounted to 113,000,000 NIS. For further information regarding the issue as per the Shelf Offering Report, an early tender carried out for institutional investors and the results of the issue; see referenced immediate reports from January 19 2010, ref. 2010-01-359094, January 17, 2010, ref. 2010-01-355935 and January 20 2010 ref. 2010-01-362040. 1.1.9. Entry Into an Agreement to Grant option to Purchase Real Estate Property in Nahariya On March 2, 2010, the Company announced it had signed an option agreement, whereby it granted a group of buyers an option to acquire real estate in Nahariya owned by the Company - 25.8 hectares, before expropriation, known as Block 18206 Lot 18 (hereinafter: the Real Estate), over the course of a period of four months form the signing of the option agreement (hereinafter: the Option Agreement). On June 22, 2010, the Company signed a revision to the Option Agreement, according to which the option exercise period was extended by an additional month (see report from June 23, 2010, ref. 2010-01-529776). On July 27, 2010, the Company signed an additional revision to the Option Agreement, according to which the option exercise period was extended by an additional two months, meaning up to October 3, 2010. This additional extension was requested by the option recipients so that they could study the influence - if any - of a regional outline plan from 2007 on the Real Estates construction rights (see report from July 28, 2010, ref. 2010-01-567957). In return for the option in question, the purchasers paid the Company a total of 2,000,000 NIS (plus VAT), which may not be refunded the purchasers even if they choose not to exercise the option. In addition, the purchasers deposited an additional 3,000,000 NIS (plus VAT) with a Company representative as a good
faith deposit. The option agreement states that if the option is exercised, the good faith deposit shall be used for payment as part of the proceeds and if the purchasers decide not to exercise the options, the purchasers shall have the good faith deposit returned, with interest. In return for the Companys agreement to extend the option, the Company received an additional sum of 500,000 NIS (plus VAT) to be deducted from the good faith deposit; so that if the option is not exercised, the Company shall receive a total of 2,500,000 NIS (plus VAT). At the same time it was agreed that if the purchasers choose to exercise the option and sign a full purchase agreement by the end of the option period, the proceeds owed the Company for the Real Estate would be reduced by said 500,000 NIS. 1.1.10. Entry into Sales Agreement for the Sale of the Nahariya Real Estate On October 3, 2010, the Company received written notice from the option holders of their intent to exercise the option and sign an agreement to purchase the Real Estate in Nahariya - some 25.8 hectares, before expropriation, known as Block 18206 Lot 18 (hereinafter: the Nahariya Land). According to the option agreement, the parties must sign a sales agreement within 15 days of receiving the exercise notice and if the option holders refuse to sign the agreement in question, this shall be seen as reneging on the option notice which shall award the Company with the proceeds given for the option (2.5 million NIS plus VAT). On October 6, the Company announced that on October 2010 5 it had signed a sales agreement, in which it sold the Nahariya Land to a buyers group (4 private companies). According to the sales agreement, the purchasers shall pay the Company $23,972,602 US (plus VAT) for the Nahariya Land, of which the Company has received $7.4 million, with the balance to be paid in installments according to a number of milestones spread out across a period of up to 39 months from the signing date of the sales agreement; it was agreed that total compensation in NIS shall be no less than 91 million NIS. As part of the agreement the Company assigned the rights (and obligations) to the purchasers according to a claim submitted by the Company to the Nahariya Design and Construction Local Council as per Section 197 of the Design and Construction Law for the Real Estate (as stated in the Company's July 28 2010 report). The capital gains expected for the Company are estimated at between $18 and $21 million US before tax and $17 to $19 million after tax.
In accordance with the preliminary decision (pre-rolling) the Company received from the Securities Authority, capital gains from the transaction will be recognized upon completing the terms included in the sales agreement which precede the third payment from the purchasers and include the removal of sludge and evacuation of tenants from the property. Accordingly, the Company continued to classify the property as real estate available for sale in its Financial Statements. For further details see immediate report dated January 4 2010 (ref. 2010-01633762), February 3 2010 (ref. 2010-01-400428), June 23 2010 (ref. 2010-01529776) and July 28 2010 (ref. 2010-01-567957), dated October 4 2010 (ref. 20001-633762) and dated October 6 2010 (ref. 2010-01-637704), presented by way of referral. 1.1.11. Entry into Sales Agreement for the Sale of the Daliyat al-Carmel Real Estate On October 13, 2010, the Company signed an agreement to sell 1 hectare of land in Daliyat al-Carmel, which it had leased from the Israel Land Administration, to a private company. On the land are structures with a total area of 3,600 square meters, which were used by the Company's rubber and elastic band plant until its closing in 2007. According to the agreement, the Company received, in return for the leasing rights, a total of $1.6 million according to the representative rate of exchange on the date of payment (but no less than 5.9 million NIS), with the first payment (to the amount of $0.3 million) to be paid in return for the listing of a warning notice in the buyers favor (after signing the sales agreement), and the balance was transferred by the end of January 2011. Possession was transferred to the purchaser in January 2011. 1.1.12. Publication of Shelf Prospectus On November 22, 2010 the Company submitted a shelf prospectus on the basis of its December 31, 2009 and June 30 2010 Financial Statements. For further details see immediate reports dated December 21 2010 (ref. 2010-01-687153). 1.1.13. On January 27, 2010,the Company announced the results of the issue of debentures by way of the expansion of Series T, carried out as per the shelf offering by the Company dated December 23 2010 (hereinafter "the Shelf Offering Report"), published pursuant to the Company's shelf prospectus dated November 22 2008.
For further information regarding the issue as per the Shelf Offering Report, an early tender carried out for institutional investors and the results of the issue; see referenced immediate reports from December 23 2010, ref. 2010-01-729624, December 23, 2010, ref. 2010-01-728115, and December 27 2010 ref. 2010-01731286. The immediate (gross) proceeds from the 92,632,000 debentures (Series T) issued according to the Shelf Offer Report amounted to 98,189,000 NIS. 1.1.14. On January 30, 2011 the Company announced that in light of the current situation in Egypt and the difficulty in conducting routine activity, Company management has decided, at its own initiative, not to open the gates of its Egyptian factory. The activity in Egypt, which is intended largely for the operations of the Global Division, Upper Market Share, is responsible for supplying 11% of the Company's sales, of which 9% is manufactured at the Company's plant, and the balance is provided by local subcontractors. On February 6, 2010 the Company announced that its Egyptian plant had reopened and that work was continuing as usual. Furthermore, it announced that due to the curfew in place, work at the factory would end an hour and a half before the regular closing time upon the postponement of the regular closing time, work will resume ending at its usual hour. The factory resumed working normal hours this week in light of the change in curfew hours. The Company estimates that a work stoppage of up to two weeks will have no material impact on its activities. Work at the plant depends on the situation in Egypt and Company management continues to keep a close eye on events. If necessary, the Company shall, in conjunction with its customers, consider finding alternatives for producing its products. For further details see immediate reports dated January 31 2011 and February 6 2011 ref. 2011-01-032037, 2011-01-039138. 1.1.15. The following is the structure of the Company's holdings in material subsidiaries as of December 31 2010:
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Delta Galil Industries Ltd,
Delta Galil Holland B.V.
Delta Galil USA Inc.
Delta Galil Europe Ltd.
Auburn Hosiery Mills Inc.
Burlen Corp.
Thai Progress Garment
Century Wear Corporation (*) (WLL)
Delta Textile Bulgaria Ltd.
Delta Textile Egypt S.A.E
(*)
50% stake.
1.2.
Changes in the Corporations Business 1.2.1. Restructuring Plans 1.2.1.1. 2010 Restructuring Plan In the first quarter of 2010, the Company decided to terminate its socks finishing operations in Jordan. The cost of this termination of operations amounted to $0.5 million, consisting primarily of impairment of fixed assets and severance pay to 90 terminated employees. 1.2.1.2. 2009 Restructuring Plan In Q3 2009 the Company decided to merge the distribution center and operational and administrative support arrays in sock activity in its subsidiary Auburn with existing Delta Galil USA Inc. arrays. This merger was possible after the completion of the transfer to a new ERP system on both subsidiaries. The cost of the aforementioned merger, to the amount of $0.5 million, was included in the Q3 2009
11
results as part of the restructuring costs and included compensation payments to 40 dismissed employees. Implementation of this plan was concluded in Q1 2010. 1.2.1.3. 2008 Restructuring Plan Discontinuation of the Activity of the Business Unit in Britain in its Previous Format Over the course of 2008 the Company decided to discontinue the activities of the UK unit in its previous format, and to make changes in work methods with customers and to take additional streamlining measures in order to improve its performance and competitive ability (for further details see also the November 19 2008 immediate report, reference no. 2008-01-322572). In its Q4 2008 reports, the Company included restructuring costs to the amount of $9.2 million, $8.1 million of which was in cash for employee compensation and future payment for minimal usage fees in a storage and distribution agreement in the UK, and $1.1 million not in cash for the reduction of fixed assets used for the UK activity. The Company completed implementation of the plan over the course of Q4 2009. Over the course of December 2009 the Company signed an amendment to the agreement with the Company operating the distribution center in the UK. As a result of this amendment, a $1.8 million liability due to the aforementioned minimal usage fees was written off. The cancelation of the liability in question was listed in the Companys Q4 2009 reports as restructuring revenue. 1.2.2. Realization of Investment in Subsidiary The Company has signed an agreement to sell a subsidiary in India engaged in the manufacture of socks. The capital loss from this sale amounted to $0.7 million and was included in the results for the first quarter of 2010. The transaction was completed in Q2 2010. 1.3. The Corporations Segment 1.3.1. The Company has three main areas of activity reported as business segments in its December 31 2010 Consolidated Financial Statements: (a) Delta USA Mass
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Market; (b) Global Upper Market (formerly Delta Israel); (c) Delta Israel (formerly Delta Marketing Israel).. 1.3.2. Group Management has set these operating segments based on the reports reviewed on a regular basis by the Company CEO and Board of Directors. The CEO and the Board of Directors have been identified as the strategic steering committee, acting as the Companys chief operating decision maker (hereinafter: CODM). The change in reporting analyzed by the CODM, which was first implemented in the December 31 2009 Financial Statements, was influenced by a structural change in the reported areas of activity, as follows: 1.3.2.1. Sock activity in the U.S. (Auburn) which was included under sock activity, is now included under Delta USA Mass Market. This change was made possible due to the merge of the distribution centers and operating support functions, as detailed in paragraph 1.2.1.1. Note that Auburn customers are part of Delta USA Mass Market operating segment. Also note that the sales, distribution, purchasing and support systems supporting Auburn and Delta Galil USA have similar characteristics. On January 1 2010 Auburn Hosiery Mills was merged with and into Delta Galil USA. 1.3.2.2. Sock activity (without Auburn) and the seamless sewing activity were merged with the upper market undergarment activity in the U.S. and Europe, which was named Global Division Upper Market Segment (formerly Delta Israel). 1.3.3. The following considerations led the Company to decide to make the change in question; as approved by the CODM: 1.3.3.1. Sales markets while Delta USAs Segment concentrates the Company's activity mainly in with customers in the U.S. and UK mass market sectors, the activities of the Global Upper Market segment are mainly with upper market customers in the U.S. and Europe. 1.3.3.2. Production array while Delta USAs Segment, mainly product purchases, is from East Asian subcontractors, in the Global Upper
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Market's Segment, roughly one half of product purchases is based on the Company's independent production capabilities in Israel, Egypt, Jordan and Bulgaria. 1.3.3.3. Location of management and supporting systems while for Delta USA all management, support arrays, distribution, design and development are in the U.S., these arrays are supervised by the Global Upper Market, in Israel 1.3.3.4. Changes in company management over the course of November 2009 Mr. Shlomo Doron began serving as Chief Operations Officer (COO) and Deputy CEO. As such, Mr. Doron is responsible for the Global Division Upper Market Segment. For details regarding the appointment and the terms of his employment, see the July 23 2009 immediate report (reference no. 2009-01-177156). The Segment of Delta Israel (formerly Delta Marketing Israel) remains independent and is represented separately due to it being retail and branded activity, unlike other operating segments, which are mainly private labels. 1.3.4. The following is a short description of each of the areas of activity in question: 1.3.4.1. Delta USA Mass Market Segment As part of this Segment, the Company deals mainly in the design, development, manufacture and marketing of undergarments and socks for women, men and children mainly to large U.S. retail chains as well as for brand names in accordance to franchises purchased such as Converse, Wilson, Maidenform, Tommy Hilfiger Daisy Fuentas, MLB, Lucky. Sales for this Segment are for private labels. Furthermore, this Segment concentrates the UK under garment activity. 1.3.4.2. Global Upper Market Segment As part of this Segment, the Company mainly deals in the design, development, manufacture and marketing of undergarments, socks and seamless items of clothing for women, men and children for
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retail chains and leading labels in Europe and the U.S. Most of the sales for this Segment are for private labels. For more details regarding these areas of activity see Section 1.9. 1.3.4.3. Delta Israel As part of this Segment the Company deals in the design, development, manufacture and marketing of branded
undergarments for women, men and children purchased mainly from East Asian subcontractors and distributed through the Company's Israeli retail outlets, as well as in wholesale activity for Israeli retail chains. For additional details regarding these areas of activity see Section 1.10. 1.4. Investments in the Corporations Capital and Transactions with its Shares The following are details regarding investments in the corporations capital and investment in its shares over the past two years: 1.4.1. Stock Sale Agreement between Mr. Dov Lautman and GMM Capital LLC 1.4.1.1. On July 1 2001 N.D.R.L. Investments (1998) Ltd. and Adinoam Properties Ltd., two companies through which Mr. Lautman holds Company shares (hereinafter, together: the Lautman Group) and GMM Capital (hereinafter: GMM), a private company registered in Delaware, U.S.A., controlled by Mr. Isaac Dabah and through which Mr. Dabah holds Company shares (hereinafter together: the Dabah Group) signed an agreement to sell 2,500,000 ordinary Company shares, which constitute 13.3% of the Companys stock capital as of the date of the agreement, held until that date by the Lautmann Group (hereinafter in this section: the Shares) to the Dabah Group, at a price of no less than $8.5 per share and no more than $10 per share (hereinafter: the Share Sale Agreement). The share price was set at $8.5 per share. The proceeds of the shares were paid in the following manner:
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(1)
GMM paid the Lautman Group a sum of $16,250,000 on the deal's closing date, July 12 2007, in return for the transfer of the shares.
(2)
GMM undertook to pay the Lautman Group the balance of the proceeds, which shall not exceed $8,750,000, no later than December 31 2008. The balance of the proceeds in question consisted of two parts: (1) the minimal balance of the proceeds to the amount of $5,000,000; (2) and the balance of the additional proceeds (if any) that were supposed to have been established in the following manner: if within a period of 60 consecutive calendar days between the signing of the agreement and December 31 2008, the closing price of the Company's stock on the Tel Aviv Securities Exchange exceeds $8.5 per share on each stock exchange trading day within those 60 days, the balance of the additional proceeds shall be calculated by multiplying 2.5 million by the difference between the lowest closing price on those 60 days and $8.5; if more than one 60-day period exists in which the stocks closing price exceeds $8.5, then the balance of the additional proceeds shall be the highest sum deriving from the aforementioned formula. The Company was informed that in February 2009, the Lautman Group and GMM decided to defer the minimal balance payments ($5 million) and that they would be paid, in installments, over the course of 2009. To the best of the Company's knowledge, this balance was paid the Lautman Group at the end of 2009.
1.4.1.2.
The transaction was completed on July 12 2007. At the same time, on July 5 2007 a new shareholders agreement was signed between the Lautman Group and the Dabah Group that replaced the previous shareholders agreement between the parties from August 30 2005; for further details regarding the shareholders agreement, see Section 1.19 below.
1.4.1.3.
As of this periodic report, the Lautman Group holds 2,443,117 shares, which constitutes 10.4% of the Companys issued and paidup capital, and Isaac Dabah holds (through GMM) 12,730,873
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shares, which represent 54.4% of the Company's issued and paid-up stock capital, and is the Company's controlling shareholder. 1.4.2. As of this periodic report, the Company has three active option plans for its employees and senior executives which, assuming their full exercise, together constitute as of February 16 2011, 8% of the Companys fully-diluted share capital.1 For details regarding the option plans in question see Note 14b to the Financial Statements. 1.5. Investments in the Corporations Capital and Other Material Transactions by Interested Parties The following are details of material transactions carried out by Delta interested parties over the past two years (starting January 1 2009):
Name of Interested Party
Date January 2009 March 2009 November 2009 (rights issue) Total purchased in 2009 June 2010 December 2010 Total purchased in 2010 November 2009 (rights issue)
Number of Ordinary Shares Purchased 1,130,512 48,325 2,629,931 3,808,768 22,197 1,000 23,197 72,696 14,500 3,700 8,524 26,724 20,000
Share Price (In Dollars) 1.80 1.45 4.53
Sum of Transaction (In Dollars) 2,034,926 70,071 11,900,000 14,004,997
GMM Capital LLC (American fund held by Isaac Dabah and Yvette Dabah (Mr. Dabahs wife))
7.10 7.98
157,715 7,986 165,701
4.53 7.34 7.70 8.45
329,313 106,536 28,524 72,028 207,088
Sterling Macro Fund (fund managed by Isaac Dabah)
June 2010 December 2010 January 2011 Total purchased in 2010
Gideon Chitayat
May 2009
2.80
56,000
Not including 1,206,971 ordinary dormant shares held by the Company and 147,106 ordinary shares held in
trust in relation to the Company's option plan.
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Name of Interested Party Chairman of the Board of Directors
Date June 2009 November 2009 (rights issue) Total purchased in 2009
Number of Ordinary Shares Purchased 20,000 10,000 50,000
Share Price (In Dollars) 3.03 4.53
Sum of Transaction (In Dollars) 60,690 45,300 161,990
1.6.
Dividend Distribution 1.6.1. As of this periodic report, the Company has no dividend distribution policy. From time to time, the Companys Board of Directors studies the distribution of dividends in accordance with the Companys financial results and financial and other needs, subject to the law. 1.6.2. In 2010 the Company distributed dividends as follows: 1.6.2.1. On March 2 2010 the Companys Board of Directors decided to distribute dividends to the amount of $1,500,000, paid June 16 2010. 1.6.2.2. On August 10 2010 the Company's Board of Directors decided to distribute dividends to the amount of $1,500,000, paid September 5 2010. 1.6.2.3. On November 28 2010 the Company's Board of Directors decided to distribute dividends to the amount of $2,000,000, paid December 21 2010. 1.6.2.4. On February 16 2011 the Companys Board of Directors decided to distribute dividends to the amount of $2,000,000, paid March 15 2011. 1.6.3. As of the date of the prospectus, the balance of profits eligible for distribution, as defined in the Companies Law, is $40,269,000. * Undesignated retained earnings less treasury shares.
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Part B Other Information

1.7. Financial Information Regarding the Companys Areas of Activity 2010 Delta USA Mass Market Global Upper Market Segment InterDivisional Write-Offs
Thousands of Dollars
Delta Israel
Others
Total
1. Sales
a. Area sales to externals b. Sales to other areas of activity c. Total 298,740 298,740 242,645 14,804 257,449 76,949 76,949 1,740 403 2,143 - 620,074 (15,207) -
(15,207) 620,074
2. Costs
a. Costs constituting revenues by another area in the corporation b. Other costs c. Total 5,664 585 88 (6,337) -
287,061 292,725
241,484 241,484
63,304 63,889
3,905 3,993
(8,888) 586,865 (15,225) 586,865
3. Operating profit (loss)

before restructuring expenses, loss from the sale of subsidiary and impairment of fixed assets 6,015 15,965 13,060 (1,849) 18 33,209
4. Restructuring expenses 5. Loss from the sale of

subsidiary
196,786
485 666 120,138
36,207
992 66,479
485 666 992
6. Impairment of fixed
assets
7. Total assets attributed as

of December 31 2010
- 419,611
8. Capital investments in
fixed and intangible assets on an accumulated basis (*) 1,005 1,618 1,265 1,240 5,128
(*) This data does not include minimum sums for franchise agreements to which the Company is a party.
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2009 Delta USA Mass Market Global Upper Market Segment InterDivisional Write-Offs
Delta Israel
Others
Total
1. Sales
a. Area sales to externals b. Sales to other areas of activity c. Total 268,465 101 268,566 228,804 14,772 243,576 72,804 18 72,822 2,461 721 3,182 - 572,534 (15,612) -
(15,612) 572,534
2. Costs
a. Costs constituting revenues by another area in the corporation b. Other costs c. Total 6,234 91 442 387 (7,875) -
256,405 262,639
242,059 242,149
61,916 62,358
3,567 3,954
(7,577) 556,388 (14,701) 556,368
3. Operating profit
(loss) before restructuring expenses (revenues) and impairment of fixed assets 5,927 1,428 10,464 (772) (881) 16,166
4. Restructuring expenses
(income)
474 -
(1,805) 1,945
(1,331) 1,945
5. Impairment of fixed
assets
6. Operating income
(loss) after restructuring expenses (revenues) and impairment of fixed assets. 5,453 1,288 10,464 (772) (881) 15,552
7. Total assets attributed

as of December 31 2009. 176,437 122,428 30,073 47,488 - 376,426
fixed and intangible assets and purchased activity on an accumulated basis (*) 1,302 7,350 642 776 10,070
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2008 Delta USA Mass Market Global Upper Market Segment InterDivisional Write-Offs
Delta Israel
Others
Total
1. Sales
a. Area sales to externals b. Sales to other areas of activity c. Total 292,512 292,512 249,683 6,151 255,834 77,496 49 77,545 3,143 779 3,922 (6,979) (6,979) 622,834 622,834
2. Costs
a. Costs constituting revenues by another area in the corporation b. Other costs c. Total 5,474 49 98 579 (6,797) -
279,352 284,826
272,731 272,780
64,723 64,821
5,979 6,558
(6,979)
622,006 622,006
3. Operating income
(loss) before restructuring expenses and impairment of goodwill. 7,686 (16,946) 12,724 (2,636) 828
4. Restructuring
expenses
5,586
9,162 1,806
9,162 7,392
5. Impairment of
goodwill
6. Operating income
(loss) after restructuring expenses and impairment of goodwill. 2,100 (27,914) 12,724 (2,636) - (15,726)
7. Total assets attributed

as of December 31 2008 186,620 137,540 31,676 24,310 380,146
fixed and intangible assets on an accumulated basis (*) 1,221 3,860 1,098 848 7,027
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1.7.1. Nature of Others The others item mainly consist of sales and costs not attributed to any of the other areas of activity. 1.7.2. Developments Occurring in Financial Results For explanation regarding developments in financial results, see explanations in the Board of Directors Report, Chapter B of the Periodic Report. 1.8. General Environment and Impact of External Factors on the Company 1.8.1. Parties responsible for the Companys market risk management: Market risk management at the Company is conducted in accordance with the risk management policy set by the Company Board of Directors. Mr. ISAAC DABAH, Company CEO, is the person responsible for market risk management at the Company. Mr. Yossi Hajaj, Company CFO, is responsible for management of market risk associated with exchange rates and interest. 1.8.2. Description of Market Risks to Which the Group is Exposed The Groups activity is exposed to several market risks among them: fluctuations in exchange rates, changes in the raw material prices (mainly due to the impact of raising prices of cotton and other materials) transportation costs (due to rising fuel costs) and changes in the dollars interest rate. 1.8.3. Group Policy with Respect to Market Risks Management Exchange Rate Volatility It is Company policy to maintain as high an alignment as possible between the currency in which its products are sold and the currency in which products and/or raw materials are purchased. The Company regularly reviews its balance sheet exposure and its economic exposure, in accordance with projected revenues and expenses for the coming 12 months. In October 2010 the Companys Board of Directors decided to increase flexibility given Company management so that the latter would be able to carry out defensive
22
agreements based on its yearly budget, even if it had not yet been approved and constitutes an initial indication only of its expected activity in various currencies. For details regarding hedging agreements carried out by the Company see Section 5.4 of the Board of Directors Report, Chapter B of this periodic report. The Company acts on several levels to mitigate its exposure to exchange rate volatility, as follows: a. Change of sales currency vis--vis UK and European customers (from GBP and EUR to USD). Starting 2010, most sales to a major customer in the UK are denominated in USD; hence exposure to a surplus or receipts over payments denominated in GBP is lower. Furthermore, starting 2011 sales have been made to a large European customer in USD, which means exposure to the euro is significantly lower, from $40 million a year to $20 million a year; see Section 5.3 of the Board of Directors Report, Chapter B of this periodic report. b. The Company significantly reduced its exposure to fluctuations in the USD/NIS exchange rate to a point of balance, by increasing sales in NIS and reducing costs denominated in NIS, due to lowered overhead in Israel. Change in USD Interest Rate For details the impact of changes in dollar interest rates on the Companys financial results see Section 5.6 of the Board of Directors Report, Chapter B of this periodic report. Over the course of 2010 the Company raised unlinked NIS debt at 7% interest on the Israeli stock exchange. The Company has entered into a swap agreement with a banking corporation to swap NIS cash flows for a dollar cash flow, and this reduced the effective interest rate to 6.08% on a yearly basis. The Company's activity is exposed to macroeconomic risks, industry risks and risks unique to its activity. Full details of these risks factors, to which the Group is exposed, can be found in Section 1.25 below.
23
Part C Description of the Corporations Business by Segment

The following is a detailed description of the Companys areas of activity: Segment: Delta U.S.A. Mass Market and Global Upper Market Segment 1.9. General Information on the Areas of Activity: Delta U.S.A. Mass Market and Global Upper Market Segment The areas of activity detailed below have similar business characteristics and shall therefore be described together in this segment and referred to hereinafter in this segment as the Areas of Activity. Subjects specific to a certain Segment shall be clearly noted separately. 1.9.1. Structure of the Areas of Activity and Changes Occurring Thereof Over the course of Q4 2009, a change was made in reporting analyzed by the CODM, which was influenced by a structural change in the reported areas of activity as noted above: 1.9.1.1. Sock activity in the U.S. (Auburn) which was included under sock activity, is now included under Delta USA Mass Market. This change was made possible due to the merging of the distribution centers and operational support functions, as detailed in Section 1.2.1.1 Note that most Auburn customers belong to the Delta USA Mass Market operating segment. Also note that the sales, distribution, purchasing and support systems supporting Auburn and Delta Galil USA have similar characteristics. 1.9.1.2. Sock activity (without Auburn) and the seamless sewing activity were merged with the upper market undergarment activity in the U.S. and Europe, which was named Global Upper Market Segment. 1.9.2. The considerations that led the Company to the change in question are detailed in Section 1.3.3 above. 1.9.3. The following is a short description of each of the areas of activity in question:
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1.9.3.1.
Operating segment: DELTA USA Mass Market
As part of this Segment, the Company mainly deals in the design, development, manufacture and marketing of undergarments and socks for women, men and children, mainly for large U.S. retail chains. Sales for this Segment are to private labels as well as brand names in accordance with franchises purchased such as Converse, Wilson, Maidenform, Tommy Hilfiger Daisy Fuentas Lucky and MLB. The Company's activities in this area are carried out through its subsidiaries, Delta Galil USA and Burlen. Likewise for this Segment, the Company has a sales office in the UK operated through subsidiary Delta Galil Europe Ltd. which serves the undergarment activity. According to the Company's estimates, based on its experience in the relevant markets, the scope of the market for undergarment products for women, men and children for the customers and categories in which the Company is active is estimated at $6 billion a year. 1.9.3.2. Global Upper Market Segment
As part of this Segment, the Company mainly deals in the design, development, manufacture and marketing of undergarments, socks and seamless items for women, men and children for retail chains and leading labels in Europe and the U.S. as well as for brand names according to the franchises it purchased. Most of the sales for this Segment are for private labels. The marketing and distribution activity for this Segment is carried out by the Company. Likewise for this Segment, the Company has a sales office in the UK operated through subsidiary Delta Galil Europe Ltd. which serves the sock activity, while manufacturing activity is carried out by the Company in its Israeli plants as well as through subsidiaries operating out of Egypt, Jordan, Thailand and Bulgaria and through subcontractors in the Middle East and East Asia. Over the course of 2009 the Company completed purchase of the assets and some of the activities of Gibor in the field of socks (see Section 1.1.4 above) included in this area.
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According to the Company's estimates, based on its experience in the relevant markets, the scope of market for undergarments, socks and seamless items for women, men and children in the Global Division Upper Market for the customers and categories in which the Company is active is estimated at $5-6 billion a year. 1.9.4. Restrictions, Legislation, Standards and Special Constraints Applying to the Areas of Activity 1.9.4.1. Legality in the Countries in which the Company is Active
The Company is subject to relevant laws in the countries in which it is active, including general legal constraints pertaining to imports, customs, consumer protection, product labeling (when relevant), licensing and labor laws in the countries in which it employs employees. 1.9.4.2. Free Trade Agreements
Changes to global free trade agreements may lead to changes in customs and quotas procedures in the countries constituting the Company's chief target and production countries. The Company currently enjoys free trade agreements between Israel and the U.S., Canada, the EU and Mexico and the European Free Trade Association. The trade agreements allow the Company to sell the products manufactured in Israel to the U.S., Canada, Mexico and EU and EFTA member states exempt of customs and import quotas. The U.S. has expanded the benefits covered by the U.S-Israel free trade agreement to goods processed in the Companys Jordanian facilities, exempting these products from customs and quotas as well. In addition, the trade agreement between Israel and the U.S. was expanded so that products manufactured at the Companys Egyptian plants and which include certain rates of Israeli inputs, are exempt from U.S. customs and quotas. Following the free trade agreement between the EU and Egypt, the Companys products manufactured in Egypt are exempt of taxes and quotas required upon entry into EU member states.
26
1.9.4.3.
Cancellation of Textile Product Import Quotas
Starting January 1 2005, WTO member states have removed all quotas placed on textile products. Temporary quotas were placed on various textile products from China by the U.S. in 2005, these quotas were gradually lifted by 2009. These changes allow retailers, clothing companies and others to import unlimited amounts of textile products from member states in which production costs are low. 1.9.4.4. Regulatory Developments
As the Company is active in the international market, it is exposed to changes in foreign laws, export restrictions, protective tariffs, trade blocks and changes in tax laws. 1.9.5. Changes in Scope of Activity and Profitability of Areas Changes in global trade laws have increased competition in the areas of activity and have compelled the Company to restructure the Group. The restructuring steps taken by the Company, including related expenses, have impacted the Companys revenues and profitability, as described in the Board of Directors Report, Chapter 2 of the periodic report. 1.9.6. Developments in Markets of the Areas of Activity or Changes in the Customer Characteristics The target markets of the Company's products in the aforementioned areas of activity are the U.S. and Europe. The changes in the economic condition in these markets as expressed recently, by way of concerns of the recessions continuation, a reduction in consumption and constant pressure to reduce prices, may impact consumers consumption habits and levels. In addition, the garment industry is subject to changes in fashion preferences and consumer fashion trends. These changes lead to shortenings in production times and increase in the number of collections of desired items. 1.9.7. Technological Changes that May have a Material Impact on the Fields of Activities For details see Section 1.12.1 below.
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1.9.8. Success Factors in the Areas of Activity and Changes Occurring Thereof The Company estimates that success in the areas of activity depends on several key factors, the most prominent of which are as follows: 1.9.8.1. 1.9.8.2. Maintaining long-term relations with customers. Innovation investing resources in design and development departments while constantly focusing on local and global developments in the field of undergarments and customer taste and developing and designing fashion collections. 1.9.8.3. Fabric development the Company operates in a special fabric development center in Karmiel, which constitutes added value in the product development core. 1.9.8.4. Adapting products to changing fashions and to the needs of the relevant consumers, while taking care to provide constant innovation. 1.9.8.5. Upholding a marketing and distribution array that allows the Company to penetrate and establish itself in new markets. 1.9.8.6. Maintaining a broad variety of suppliers providing high-quality raw materials and high-quality finished products. 1.9.8.7. Upholding a sturdy, reliable and flexible independent
manufacturing infrastructure and manufacturing via subcontractors, providing competitiveness. 1.9.8.8. Guaranteeing product manufacturing quality and quality control in accordance with specifications and Company and customer demand. 1.9.8.9. Making use of the Companys size advantage, both in the sizes of purchase orders by customers and in the number of items ordered from each model manufactured, which helps reduce manufacturing costs.
28
1.9.8.10.
Efficient operational arrays and chain of supply providing full support for sales needs and meeting supply times, which have shortened in recent years.
The Company estimates that these success factors have been reinforced in light of the changes in its business environment which were expressed in increased competition, the erosion of sales prices and shortened supply times. 1.9.9. Changes in the Supplier Array and Raw Materials for Areas of Activity For details see Section 1.12.2 below. 1.9.10. Main Entry Blocks for the Areas of Activity and Changes Occurring Thereof According to the Company's estimates, the main entry blocks for the areas of activity are as follows: 1.9.10.1. Familiarity with and understanding of the fashion industrys requirements and bottom-line consumer tastes. 1.9.10.2. Stable, long-term relations with large customers (retail fashion outfits and companies owning fashion labels). 1.9.10.3. 1.9.10.4. Innovation in the development and design of fashion products. Large companies mainly require a commitment on behalf of the manufacturer to uphold the compliance process testing the fitness of the factory to their needs. In addition, during the commitment period, these customers often conduct periodic inspections of the production array. Failure to meet quality requirements and standards set by customers may lead to an end to the commitment with them. 1.9.11. Alternatives for the Products of the Areas of Activity and Changes Occurring Thereof There are many alternatives for the Companys products, offered both by wholesalers and manufacturers marketing products similar in quality to those of the Company. The Company is acting to reinforce and preserve its products advantage over alternative products, by differentiating itself and making itself more
29
conspicuous in terms of fashionability and quality, developing special fabrics and increasing the volume of labeled activity. 1.9.12. Structure of Competition in the Areas of Activity and Changes Occurring Thereof The garment industry in general, and the field of undergarments in particular, was characterized in recent years up to 2009 by a high level of competition and in reduced manufacturing costs and consumer prices due to the transfer of a significant portion of production to East Asian subcontractors. Many bodies, including manufacturers and wholesalers, compete with the Groups activity. In 2010 production costs began to increase and product prices for consumers started to rise gradually (see Section 1.12.2 below) Furthermore, a certain drop in the level of competition was evident, which was expresses in a reduction in the number of the Company's competitors. For further information regarding the competitive conditions in the areas of activity see Section 1.9.18 below. 1.9.13. Customers 1.9.13.1. A material Group customer, sales to which constitutes over 10% of the Company's total consolidated sales, is: The U.S. retail chain Wal-Mart constitutes the Groups largest customer in the Delta USA Mass Market field of activity. The Company has had a business relationship with Wal-Mart for over 40 years through its subsidiaries, Delta Galil USA and Burlen. The Company provides Wal-Mart with a broad variety of products for various departments of its network of stores, including products sold under the chains house labels and products sold as part of franchise agreements. Sales to Wal-Mart amounted to $108.5 million in 2010 (17.5% of consolidated sales) compared to $118.9 million in 2009 and $148.7 million in 2008.
30
The decrease in sales in 2010 compared to 2009 derived mainly from the customers decision to stop purchasing socks from the Company while the decrease in sales in 2009 vs. 008 derived mainly from the reduction of inventory levels at the customer due to changes in its inventory management policy. 1.9.13.2. Other important Group customers in the Delta US Mass Market field of activity include Target, J.C. Penney, Kohl's, Lane Bryant, K-Mart, Marks & Spencer and Primark. Note also that up until 2009, Marks & Spencer was also a material customer. 1.9.13.3. Other important customers in the Global Upper Market Segment Segment include: Victoria's Secret, Calvin Klein, Hugo Boss, Nike, Maidenform, Hema, Under Armour, and Spanx. 1.9.13.4. For a breakdown of sales by geographical attribution see Note 5c. to the Companys 2010 Financial Statements, in Chapter C of this annual report and Chapter 2.3.1 of the Board of Directors report, in Chapter B of this annual report. 1.9.14. Description of commitment with the Company's material customers: The Group maintains long-term relationships with its customers. The relationship between the Group and its material customers is generally outlined by a general framework agreement and the customers purchase orders from the group. The framework agreement includes general directives on the matter of relations between the customer and the Group. Merchandise amounts and supply dates to customers are established in the purchase order and change from order to order. In most cases the Companys agreements with its customers is carried out on the basis of preparing a product collection for a specific season. Up to 2009 the terms of payment used by material Company customers was between 30 and 70 days from the issue of invoices.
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Over the course of 2010, working relations with Wal-Mart were altered, in such a manner that a significant portion of the products are provided the customer based on orders (ad hoc) and not in the form of replenishment, as was practiced to date. As part of the change in question, the customer approached strategic suppliers and proposed joining a discount arrangement through a financial factor, under attractive commercial conditions (LIBOR + 1%) The Company chose to joint this arrangement over the course of Q2 2010. As a result of this change, credit days granted the customer are between 20 and 30 days. The method of sales to Wal-Mart is expected to change again in 2011 in such a manner that most products provided the customer shall be in the form of replenishment.2 1.9.15. Dependence on a Single Customer The Company believes that a negative reduction in the scope of purchases by WalMart may have a materially negative impact on its financial results. 1.9.16. Marketing and Distribution The Company adapts its marketing and sales strategy to its customers based on the geographic region each operates and according to the market segment it addresses. Thus, for instance, one marketing and sales group is responsible for customers in the upper market segment in Europe and the U.S. while a second marketing and sales group is responsible for customers in the U.S. mass market segment. The Company has sales departments located, based on the location of its target markets, in Europe, North America and Israel, which set its marketing strategy, in coordination with Company HQ. The Companys sales offices are operated by professional staffs which maintain long-term relationships with their customers and provide a direct and immediate response to their customers requirements.
Note that the above constitutes an estimate and forward-looking information, which may or may not
materialize or may differ from Company estimates and forecasts, due to circumstances outside of the Company's control, and due to being based on information available as of the report date, including Company estimates as of the report date.
32
The Company distributes its products in the U.S. through (owned) distribution centers as well as through direct supply to its customers from the various manufacturing facilities based on purchasing orders. To its European customers, the Company distributes its products directly from its factories. The Company takes care to manage a sufficient level of inventory at its distribution centers in order to satisfy its customers demands. 1.9.17. Accumulated Orders The Company employs two sales methods, ad hoc (specific) orders and replenishment. In replenishment, the Company holds inventory for its customers for a period of 8-12 weeks and the customer withdraws merchandise (call off) and issues purchase orders near the withdrawal date. Due to the structure of the industry and the method of commitment characterized by ad hoc orders and replenishment, the Company has accumulated orders referring to a relatively short period. Therefore, the Company believes that the accumulated orders do not provide a full indication of the scope of orders in practice in the field of garments. The following is a breakdown of the Company's accumulated orders in its various areas of activity, in the coming quarters in which recognition of revenues is expected (in millions of dollars): (a) Accumulated orders in the Delta USA Mass Market Segment: Accumulated Orders as of February 10, 2011 First quarter Second quarter Third Quarter Total 16.7 7.9 2.3 26.9 Accumulated Orders as of December 31, 2010 24.7 4.7 1.2 30.6 Accumulated Orders as of December 31, 2009 17.3 1.5 0.3 19.1
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(b) Accumulated orders in the Global Upper Market Segment: Accumulated Orders as of February 10, 2011 First quarter Second quarter Third Quarter Fourth quarter Total 1.9.18. Competition 1.9.18.1. General The Company operates in areas of activity considered competitive. Competition in the field of undergarments turns on three main parameters: product price, product quality and the level of customer service. The Company believes that it has several advantages over its competitors, among other reasons due to the factors detailed below: a. Innovative and high-quality product lines the Company manufactures a broad variety of fashionable, high-quality product lines, and packages its items in attractive containers. The Company invests significant sums in innovative design and in developing fabrics and products. For further details see section 1.15 below. b. Long-term relations with retailers and leading label marketers the Company has cultivated long-term relationships with its customers. Despite the fact that the Companys agreements with its customers are largely short-term and do not feature any minimum sales obligations, the Company maintains business relations with most of its main customers over a period of greater than five years. The Companys design, development and technology teams work in conjunction with customers with the goal of providing a comprehensive service package that includes, among other things, designing, developing, manufacturing and marketing new product lines. 32.8 33.8 2.6 0.4 69.6 Accumulated Orders as of December 31, 2010 49.4 16.9 0.2 0.3 66.8 60.7 Accumulated Orders as of December 31, 2009 43.8 16.5 0.4
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c. Unique status of free trade zones the Companys activity in Israel, Jordan and Egypt allows it to enjoy beneficial trade agreements. 1.9.18.2. Competitive conditions in the areas of activity: In recent years, retail chains have been trying to circumvent private companies designing and developing undergarments and enter into direct relationships with factories in order for them to manufacture products directly for them, so as to reduce product costs. For details see 1.25.3.4 below. 1.9.18.3. Names of primary competitors in the Segment: Activity in the U.S. and Europe has dozens of competitors, private companies from the U.S. and East Asia.
a. DELTA USA Mass Market

To the best of the Company's knowledge and according to its internal assessments, the size of the market in which Delta US Mass Market is active, as regards the customers and categories in which it is active in the field (including in the UK), is estimated at $6 billion per year. Company management estimates that the Company's share of this field is approximately 5%. The Companys competitors in this Segment include, among others: Ariella Intimates, Saramax Apparel Group Inc., Felina, Biflex Intimates Group Inc., Komar Company, Vanity Fair, Jockey, Fruit of the Loom, Hanes.
b. Global Upper Market Segment

To the best of the Company's knowledge and according to its internal assessments, the size of the market in which it is active, as regards the customers and categories in which it is active in the field, is between $5 and $6 billion per year. Company management estimates that the Company's share of this field averages at approximately 6% of the various categories and various customers in the field.
35
The Companys competitors in this Segment include, among others: MAS Holdings, ACE, Clover, Regina, Martins, (Courtaulds) Pacific Dunlop, Brandix Lanka Limited, Jeweltex, Renfro Corporation, Gildan Active wear Inc., Interloop and Adria. 1.9.18.4 Methods of dealing with competition: The Company invests a great deal of resources in the design and development of its products in order to provide its customers with innovation and fashionability, with the understanding that this innovation is what differentiates it from its many competitors. See also Section 1.15 below for further details. Likewise, in order to differentiate and create a competitive edge the Company invests a great deal of resources in purchasing new franchise agreements, in order to expand its branded activity, and is also acting to increase its brassiere activity with existing customers. 1.9.19. Manufacturing Capabilities 1.9.19.1. The following are details of the scope of sales created by Company subcontractors in 2010: In the Delta USA - Mass Market Segment, 98% of sales are of products purchased from subcontractors. In the Global Division Upper Market Segment Segment, 44% of the Companys sales are of products purchased from subcontractors. In the event of increased manufacturing needs, the process of entering into agreements with and preparing existing and additional subcontractors requires preparations, including approval by the end customer of the new factory as well as the new factorys compliance with quality standards defined by the Company regarding product quality, timetables and working conditions. To the best of the Company's estimates, such preparations do not take an extended amount of time that would limit the ability to increase production capabilities.
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1.9.19.2.
The production capabilities of the Companys factories in Egypt, Thailand, Jordan and Bulgaria which were used by the Global Division Upper Market Segment Segment, are detailed below:
a. In Egypt the production capability is 1.4 million products a

month, which constitutes 80% of maximum production capability.
b. In Thailand the Company manufactures 375,000 products a

month, which constitutes 90% of maximum production capability.
c. In Jordan the maximum production capability for 2010 was 0.5

million seamless products a month.
d. In Bulgaria the factorys potential production capability is 1.4

million pairs of socks per month, while in practice, an average of 1.4 million pairs of socks were manufactured per month. 1.9.20. Intangible Assets 1.9.20.1. Goodwill The Companys intangible assets in these areas of activity include goodwill and customer relations created by the Company over the years, mainly due to the purchase of three American companies starting 2000, including Burlen. The Company did not reduce the value of goodwill in 2009 and 2010, in light of the yearly examination conducted. In 2008, the Company deducted $7.4 million from the value of goodwill included in its financial statements, as a result of the examination in question. For further details see Note 9b to the Financial Statements in Chapter C of this periodic report.
1.9.20.2.
Agreements for the Receipt of Usage Rights for Labels From time to time the Company enters into agreements to receive usage rights for international labels such as Converse Wilson,
37
Tommy
Hilfiger
Daisy
Fuentas
Lucky,
MLB
and
Maidenform. The franchise agreements are usually for a period of 3 to 4 years, include the payment of royalties to the franchise owner of between 5% and 12% of revenues and usually feature a minimal royalties payment condition set based on the minimal sales levels over the course of the agreement. These agreements regulate the obligations of the Company as recipient of the franchise to manufacture products for labels (hereinafter in this section the Products), including in the matter of use of brand names, designing and developing products and transferring annual and semiannual sales plans. The agreements generally include commitments on behalf of the Company to provide the party granting the license a prototype and production forms of the products prior to their manufacture, and an obligation to constantly uphold the quality, reputation and image of the license granters products. The party granting the license has the right to inspect and supervise the manufacture of the products, with advance notice. Royalty expenses amounted to $10.5, $9.3 and $9.5 million in 2010, 2009 and 2008, respectively. The increase in royalty payments in 2010 vs. 2009 derived from the expansion in activity in the U.S. label market and mainly from the signing of a new franchise agreement with Lucky Brands in late 2009. 1.9.21. Raw Materials and Suppliers 1.9.21.1. Chief Raw Materials Used in Areas of Activity
Most purchases of the areas of activity are purchases of finished products. Self-manufacturing constitutes one quarter of the cost of sale of these areas of activity. The raw materials and accessories required for the Companys self-manufacturing activity are purchased from subcontractors and suppliers. The raw materials used by the Group for the manufacture of the variety of garments it manufactures itself are mainly cotton string, cotton mixes, synthetic string (such as cotton-Spandex, cotton-Lycra and cotton-Viscose) as well as additional materials such as elastic bands, lace and other textile components, which are sold in a broad price
38
range. The Group purchases the raw materials from a number of international and local manufacturers and has not encountered any difficulties in the past in securing the raw materials appropriate for its manufacturing requirements. Due to variable supply and demand conditions and other market factors over which the Company has no influence, the price of raw materials is exposed to fluctuations. Over the course of 2010 the price of cotton increased significantly, which led to a rise in the price of cotton string. This increase was caused, among other things, by a drop in crop yields as a result of natural disasters and an increase in global consumption. With the exception of cotton string, the Company purchases the raw materials it needed for the manufacture of its products only after receiving purchase orders from its customers. As a rule, the Company does not hold an inventory of raw materials for a period of more than eight weeks. In purchasing basic cotton string, Company practice is to enter into agreements from time to time and when market conditions are in its favor, with a number of suppliers of cotton string for a period of between three and six months. Recently, as a result of a rise in the prices of cotton string, the Company increases its purchases of raw material and finished product inventory, this in order to moderate the erosion in raw profit as a result of the amount of time required to adjust sales prices to customers. 1.9.21.2. Relations with Suppliers
The Company maintains ties with dozens of suppliers, most through regular accounts, and some through letters of credit. Usually, as is normal in the industry, the Company does not enter into agreements with these suppliers. Some of the suppliers employed by the Company are approved by customers and some are dictated by them. 1.9.21.3. Dependence on Suppliers and Products Regarding Which Dependence Exists on Suppliers The Company has no material dependence on the various suppliers of raw and finished materials due to the existence of multiple suppliers
39
and factories. However, in the event that a supplier is replace, the process of locating an appropriate customer that meets the standards of the Company and the end customer may take several months 1.9.21.4. Manufacturing Process at the Companys Plants
The Company provides its customers with a broad array of high-quality products in accordance with their specific requirements, at competitive prices. The Company manufactures some of the products itself and purchases some from subcontractors. The following are the stages of the production process:
a. Purchase of Raw Materials

The Group purchases the raw materials it uses for the manufacture of its products from a number of international and local supplies and has not encountered any difficulties in the past in finding raw materials meeting its manufacturing requirements. For details regarding the main raw materials used by the Group, see Section 1.9.21 above.
b. Knitting
The Company knits itself and purchases the remaining fabrics required to manufacture its products from suppliers. The Group operates some 50 automatic knitting machines in Egypt with the total manufacturing capacity of 200 tons of cloth per month, depending on the type of fabric manufactured. In 2010, the Group manufactured an average of some 130 tons of fabric per month compared 100 tons per month in 2009. The increase in production capability in 2010 compared to 2009 derived from an increase in sales to European customers. When the amount of fabric required by the Company exceeds the amount it is capable of producing, the Company engages subcontractors for the purchase of the remaining cloth it requires.
c. Sock Knitting
Starting from Q2 2010, the Company has operated some 500 knitting machines in its factories in Bulgaria and in Israel compared
40
to 750 machines in 2009 when it also operated its Indian factory, compared to 500 machines in 2008. In 2010 the Group manufactured and average of 1.9 million pairs per month, compared to 2.2 million pairs in 2009. The decrease in production capability in 2010 compared to 2009 derived from the sale of the Indian plant.
d. Coloring and Finishing

The Company colors most of the products it manufactures using Egyptian subcontractors.
e. Cutting
The Company operates computerized cutting equipment in its factories in Egypt and Thailand.
f. Sewing
After the cutting stage, products are sewed at Company plants in Egypt, Jordan and Thailand as well as through subcontractors in Egypt and East Asia.
g. Quality Assurance
The Company places a great deal of emphasis on the quality of the items of clothing it manufactures. For this purpose, it employs QA teams that examine the products throughout the process. The Companys QA standards meet the tough standards demanded by its customers.
h. Manufacture of Seamless Clothing

The Company applies a special manufacturing technology through the use of Santoni knitting machines for the purpose of manufacturing seamless clothing in the undergarment, shapewear and sportswear categories.
i. Outsourcing
The Company engages subcontractors for the purpose of manufacturing some of its products. In 2010 and 2009 some 77% of
41
its revenues derived from the sale of products manufactured by subcontractors. The company has relationships with subcontractors in Turkey, China, Pakistan and Bulgaria for the manufactured of socks and in Egypt, Jordan and East Asia for the manufacture of undergarments and seamless clothing for its other areas of activity. The Company is not dependent on any of these subcontractors; for details see 1.9.24.3 above. 1.9.22. Environment In late December 2006 the Company signed an agreement with ALA Environmental Infrastructures (hereinafter: ALA), which arranges the subject of disposal of waste from the Companys coloring plant to the depths of the sea off the coast of Akko, through existing ALA infrastructure. After delays came up in ALAs activity (due to a lack of a license from the City of Akko) and after a hearing was held at the Magistrates Court on February 12 2007 pursuant to the legal proceedings between ALA and the City of Akko the Court decided that ALA shall continue to operate under certain restrictions. In May 2007 a representative of the Company was summoned for an investigation on an alleged violation on the Company's behalf of the terms of the permit granted it on the matter of waste removal, but after interviewing the Companys representative, the committee put the demand to cancel the terms of the permit on hold. On August 15 2007 Delta was issued a court order instructing it to stop dumping the coloring plants waste into the sea off Akko, through ALA, and ordered it to send them to the Tel Aviv area via the SFDN. After holding a hearing on the issue, the permit given the Company allowing it to dispose of its waste in the sea of Akko (and not to the SFDN) was renewed. The Company has drastically reduced the activity of its coloring plant and for the few activities remaining, processes such as water softening and others are carried out, allowing it to dump its waste directly into the municipal sewage system, significantly reducing the use of ALA services. On February 21 2008 Tzallul, an environmental association, filed an administrative petition against nine respondents including the Ministry of the Environment, the Maritime Waste Disposal Permission Committee, ALA and a number of companies
42
employing ALAs services, including the Company. Tzalluls main complaints against the respondents are: (1) against the very practice of disposing of brines in the sea; (2) against the fact that ALA had been granted operation rights. After a hearing held on June 3 2008, on August 27 the Court ruled to reject Tzalluls petition. On April 19 2009 the Ministry of the Environment filed an indictment against the Company and against the person serving as its CEO during the relevant period and against an additional employee (who had served as Engineering and Waste Manager). The indictment claimed that the Company and its manager had exceeding the permits for waste disposal at sea that were in effect in 2006 and 2007. The indictment was issued on the basis of two legislative instructions disposing of waste in the sea contrary to the legally dumping permit and disposing waste in public. After a number of charges were dropped as a result of receiving statute of limitations arguments raised by the Company, a hearing was held on the case, as well as evidentiary hearings. After the prosecution completed presenting its case, the Company replied with a motion of no case to answer. After submitting the motion, the Ministry of the Environment was given the right to respond to this motion in writing. If the parties fail to reach an agreement and the Companys motion of no case to answer is rejected by the Court on March 6 2011 a second evidentiary hearing shall be held in which defense witnesses will testify and oral summations will be made. 1.9.23. Restrictions and Supervision on the Corporations Activity Activity Subject to Specific Laws/Business Licenses/Export Licenses The Company holds appropriate license and operates according to the specific laws of the countries in which it operates. For further information on this issue see section 1.9.4 above. 1.9.24. Material Agreements 1.9.24.1. Burlen Purchase Agreement In December 2004 the Company purchased Burlen, a manufacturer of womens undergarments, from its shareholders at the time. Burlens customers are retailers, with its largest customer being WalMart, with which it has had a business relationship for over forty years. Burlens shareholders, who sold their holdings to the
43
Company, are employed in executive positions by the Group. Design, sales promotion, marketing, logistics and distribution are carried out in the U.S. while manufacturing is mainly conducted through subcontractors in East Asia and the Dominican Republic. In return for the purchase, the Company paid some $60 million, in cash and in ordinary Company shares. In accordance with the purchase agreement, it was decided that the Company must pay additional sums amounting to $15 million to the selling shareholders, contingent on meeting certain levels of income and operational profit goals for a period of three years, from 2005 to 2007. Revision to the Burlen Purchase Agreement On February 16 2006 the purchase agreement was revised for all matters pertaining to the additional payments that were supposed to be paid to Burlen shareholders. The revision to the agreement derived from the parties desire to compensate earlier Burlen shareholders for the fact that although both parties had intended, upon signing, to concentrate all of the Companys activities in the field of womens products vis--vis Wal-Mart at Burlen, it was later agreed to act otherwise. According to the revision, the selling shareholders shall be entitled to an additional comprehensive payment not exceeding $18,000,000 (instead of the sum of $15,000,000 set in the original Burlen purchase agreement), which will be paid based on the Company meeting certain goals between 2006 and 2011 (with the commitment for meeting certain goals on behalf of the Company being until just 2007 in the original agreement). Any such additional payment shall be distributed to the earlier Burlen shareholders according to their relative stake in it before the sale and in the following manner: 75% shall be paid in cash and the balance shall be paid at the Companys discretion in cash or in ordinary Company shares, subject to stock transfer restrictions. On March 15 2006, Delta USA made an advance payment to the selling shareholders totaling $1.25 million. The advance payment is non-recourse, and bears 5% interest guaranteed on performance
44
payments that are supposed to be paid to recognized shareholders for 2007 and 2008. In March 2007 the Company paid an additional $2.4 million to the selling shareholders for the achievement of 2006 objectives. In April 2008, the Company paid $2.1 million to the selling shareholders for the achievement of 2007 objectives. The sum paid is after offsetting one half of the advance payment (amounting to $0.7 million) paid the shareholders in 2006 for meeting 2007-2008 goals, as noted above. In 2010 and 2009 the Company paid no additional sums due to its failure to meet the goals set for 2009 and 2008. As of this report, the Company has paid the selling shareholders a total sum of $5.75 million for meeting goals. In accordance with Burlens 2010 business results and its estimates for 2011, in is unlikely that additional sums will be paid the selling shareholders due to their failure to meet goals set for 2011. Accordingly, the liability for the payment of the sums in question was cancelled from the Companys December 2010 and 2009 balance sheets. For further details see Note 9.b.2 to the Financial Statements in Chapter C of this periodic report. 1.9.24.2. Agreement for the Purchase of Gibors Assets and Part of its Activities in the Field of Socks For details regarding the purchase of Gibors assets and some of its activities in the field of socks see 1.1.4 above. 1.9.24.3. Trademark Usage Rights For details regarding agreements granting the right to use labels see Section 1.9.20.2 above. 1.9.25. Working Capital For details regarding working capital used for the areas of activity see Section 1.19 below.
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Operating Segment: Delta Israel 1.10. General Information on Operating Segment: Delta Israel
1.10.1. The Company markets a variety of undergarments and socks in the retail field in Israel through its chain of Delta Shops, some of which it owns and some of which are operated by franchise holders, as well in the wholesale field by sales to retail chains and private shops. Most products marketed are purchased from suppliers in East Asia. The Company markets a number of labels in Israel, some of which it owns and for others it purchases franchises, which include, among others, the following brands: Delta, Matchtonim, Yorfat, FOX, Disney, Nike, Puma, Keds, Wilson, NICI and others. The Companys estimates that the labels it markets provides it with an advantage in the Israeli market. To the best of the Companys knowledge and according to its internal estimates, the financial scope of the Israeli undergarment and sock market moves between $500 and $600 million a year. 1.10.2. Structure of the Segment and Changes Occurring Therein Many bodies exist in the field of undergarments in Israel, most of them importers owning fashion outlets, competing with the Groups activity. The garment industry in general, and the field of undergarments in particular, continues to be characterized in recent years by a high level of competition and in reduced import costs and consumer prices due to the transfer of a significant portion of product purchases to East Asian subcontractors, mainly in China, as well as due to the reinforcement of the exchange rate of the NIS vs. the USD in recent years. 1.10.3. Restrictions, Legislation, Standards and Special Constraints Applying to the Field of Activity The Companys activity in Israel is subject to general legislation on the matter of imports, customs, consumer protections, product marking, in so much as these are relevant to its products, and labor and licensing laws insomuch as these pertain to the operation of the Company's shops. Furthermore, all of the Companys products are covered by legal restrictions regarding price marking and component marking and laundry instructions in accordance with the Consumer goods and Services Supervision Law, 1957 and resulting ordinances, and in accordance with the
46
Consumer Protection Law, 1981 and resulting ordinances. The Company is complying with all of the legal requirements in question. 1.10.4. Changes in Scope of Activity and Profitability of the Area In recent years, the scope of the Companys activities and its profits in its area of activities have increased, inter alia, due to the following factors: (a) the shift to purchasing products in countries with lower manufacturing costs, mainly East Asia; (b) the strengthening of the exchange rate of the NIS vs. the dollar; (c) the chains expansion and the growth of the Israeli economy. The increase in the Companys scope of activity and profitability in its Segment was expressed in an increase in the amount of its shops and expanding its product lines; see Section 2.3.3 in the Board of Directors Report, Chapter B of the Periodic Report. 1.10.5. Technological Changes that May have a Material Impact on the Segment For further details see section 1.12.1 below. 1.10.6. Critical Success Factors in the Segment and Changes Occurring Thereof The Company estimates that success in its Segment depends on several key factors, as detailed below: 1.10.6.1. Marketing and branding Company brands through constant investment in advertising and reinforcing Company brands in order to differentiate the brands and emphasize their advantages, innovation and fashionability as well as through the Companys customers club. 1.10.6.2. Investing resources in design and development departments while constantly focusing on local and global developments in the field of undergarments and customer taste and developing and designing fashion collections, while making sure to apply constant innovation. 1.10.6.3. 1.10.6.4. Nation-wide deployment and shop location. Upholding a steadfast manufacturing infrastructure through subcontractors, with it being steadfast, flexible and competitive abroad. 1.10.6.5. The existence of effective product QA system.
47
1.10.6.6.
The existence of efficient operational arrays, chains of supply and distributional systems providing full support for sales needs and meeting supply times, which have shortened in recent years.
1.10.7. Changes in the Supplier Array for the Segment In recent years, most of the products sold by the Company have been manufactured by East Asian subcontractors. At the same time, the Company is not dependent on a specific supplier and/or subcontractor, as the Company acts through agents and due to the fact that all of the products marketed in Israel as part of its Segment can be manufactured by a large number of suppliers and/or subcontractors in East Asia without a significant increase in production costs. The price of finished products increased in 2010 as a result of an increase in wages and other inputs in East Asia; see Section 1.12.2 below. The Company increased the prices of sales to its customers over the course of the year so that the gross profit rate of the Segment was preserved. 1.10.8. Main Entry Blocks for the Segment and Changes Occurring Thereof According to the Company's estimates, the main entry blocks for its areas of activity are as detailed below: 1.10.8.1. Construction of brands with significant awareness in the fashion market and preserving them on a long-term basis through significant investments in marketing and advertising. 1.10.8.2. Capital investments in the establishment of retail chain and shop maintenance. 1.10.8.3. The need for a critical mass of sales to allow a competitive operational costs structure. 1.10.9. Alternatives for the Products of the Segment and Changes Occurring Thereof There are many alternative to the Company's products offered by local manufacturers or importers marketing in Israel at a variety of locations. The Company is acting to reinforce and preserve its products advantage over alternative products, by differentiating itself and making itself more conspicuous in terms of fashionability, quality and assigning added value to its brands by
48
ensuring cutting-edge design, development, competitive pricing, product variety and advertising on various media. 1.10.10. Structure of Competition in the Segment and Changes Occurring Therein Fierce competition exists in the Segment between branded chains and private retailers. According to the Companys estimates, in recent years, national chains have strengthened at the expense of local retail shops such as Loggia (Gibor Sabrina), Jack Cuba, Aphrodita and Intima. To the best of the Companys knowledge, and based on its internal evaluations, the market it addresses is between $500 million and $600 million year in size. According to the Companys estimates, its share of the market is between 10% and 30%, depending on the category. 1.10.11. Customers in the Delta Israel Segment The Companys customers in this Segment are divided into retail and wholesale customers. The Companys retail customers are the consumers shopping at the Companys retail outlets. The Companys wholesale customers include department stores, supermarkets and fashion chains. Total sales of this Segment in Israel in 2010 and 2009 amounted to $77 and $73 million, 37% of which in 2010 was through department stores, supermarkets and private shops, and 63% of sales were through the Companys shops. As of this report the Company has 113 shops, 95 of which it owns and 18 of which are owned by franchise holders. According to the Companys estimates, it is not dependent on any of its customers in this Segment. 1.10.12. Marketing and Distribution in the Delta Israel Segment The Company markets its products through the following two marketing channels: wholesale marketing and marketing through its retail outlets. Distribution is from the Companys logistical centers. 1.10.12.1. Wholesale Marketing
The Companys products are sold through a variety of marketing channels, including department store chains, the New Mashbir
49
Latzarchan, H&O, food retailers (Supersal, Co-Op, Hatzi Hinam) and hundreds of private shops throughout the country. For marketing purposes, the Company operates an array consisting of sales agents, account executives, sales stewards and ushers. Alongside marketing the Companys labels, the Company also deals in management, manufacturing and marketing for private labels such as "LIFE" for Superpharm and Cherokee for Supersal. The company enters into general framework agreements with the retail chains, which do not include instructions pertaining to commitments with specific suppliers such as agreement durations or order amounts. 1.10.12.2. Retail Marketing
Marketing of products in this channel is through the Company's shops which, as of this report, number 113. The label shops are located inside malls, in town centers and in power centers throughout the country. 1.10.12.3. Distribution
The Companys products are stored in its logistical centers, from which they are distributed to shops and to wholesale customers, with orders collected through the private shops and supermarkets sales representatives and through a computerized system from the label shops and department stores. 1.10.13. Accumulated Orders The Company has no significant accumulation of orders in its area of activities and its sales are conducted on a regular basis at the chain shops. Total product returns from retail chains and private shops in the Segment amounted to $2.7, $3.0 and $3.9 in 2010, 2009 and 2008, respectively. The decrease in returns in 2010 vs. 2009 was mainly due to activity with food retailers. 1.10.14. Advertising The Company advertises its brands, its specific products and its sales. Advertising is on a variety of media, primarily television and print, as well as signage at shops and wholesale sales locations and catalogue distribution.
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The Companys total advertising expenses in 2010 in the Segment amounted to $2.5 million compared to $2.1 million in 2009 and $2.6 million in 2008. The increase in advertising in the reported year compared to 2009 derived from the costs involved in launching the customer club, setting up a website as well as the revaluation of the exchange rate of the NIS vs. the USD. 1.10.15. Competition The Company is active in a highly competitive market characterized by multiple competing brands, some international and some local. This competition compels the Company to set competitive prices and invest a great deal of money in marketing, advertising and sales. The Company's chief Israeli competitors in this Segment in the regular market are: Intima, Triumph, Gibor Sabrina, Go_Under, Jack Cuba, Hamashbir Latzarchan, Aphrodita, H&O and Srigamish. In addition, Israel has hundreds of shops marketing undergarments and socks. 1.10.16. Manufacturing Capabilities Products in the Delta Israel Segment are purchased from suppliers located mainly in East Asia and therefore there are no manufacturing capability restrictions in this Segment. 1.10.17. Intangible Assets The Company owns the following labels: Delta, Yodfat, Matchtonim and others which are listed in the Israeli trademarks registry. In addition, the Company has signed contracts for the receipt of franchises such as NICI, Disney, FOX, Keds, Puma, Nike, Wilson and others in the field of undergarments and socks. For further details, see Section 1.11.16.2 above. 1.10.18. Restrictions and Supervision of the Corporations Business The Company holds the required licenses. 1.10.19. Working Capital in the Delta Israel Segment The following are details regarding the average inventory used by Segment and inventory days for 2010 and 2009:
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2010 Average inventory (in 11.1
2009 11.0
millions of dollars) Inventory days 142 132
For more information regarding working capital see section 1.19 below. 1.10.20. Projected Developments in the Coming Year The Company intends to open a new retail chain selling childrens clothing in 2011, which will serve as a step in the Companys expansion and growth strategy. The Company intends to open 9 new independent shops (Delta Kids) and 8 additional combined shops that will be integrated in additional chain shops over the course of the year. The Company estimates that sales of childrens clothing, which in 2010 amounted to 40 million NIS, is expected to increase to 120 million NIS over four years, and to 40 shops by 2015. The Company estimates that the scope of the expected investment in the shops, equipment and working capital will amount to 20 million NIS3.
Note that the above is an estimate and forward-looking information, which may or may not materialize or
may differ from Company estimates and forecasts, due to circumstances outside of the Company's control, and due to being based on information available as of the report date, including Company estimates as of the report date.
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Part D Additional Information at the Corporate Level

The following is additional information at the corporate level, pertaining to all of the Companys areas of activity: 1.11. The Companys Products
1.11.1. Womens Undergarments The Company manufactures basic and designer undergarments for women, including panties, seamless garments, shapewear, brassieres, nightwear and others. 1.11.2. Mens Undergarments The Company manufactures basic and designer undergarments for men. 1.11.3. Socks The Company manufactures a variety of socks for men, women and children in formal, sportive and day-to-day styles, some of which feature prints of familiar cartoon characters as well as prints of other images the Company is licensed to use. 1.12. General Information on Areas of Activity
1.12.1. Technological Changes that May have a Material Impact on Activities The Company keeps regular track of relevant technological developments in its Segment and applies these technologies, when possible, to its production processes. Technological developments pertaining to the strings from which the fabric is woven has an indirect impact on the areas of activity, as they allow the manufacture of finished products characterized by innovation, such as products allowing more comfortable movement, high levels of ventilation etc. Such technological developments in the field of string allow the manufacture or advanced textile products, which grant products a distinct competitive advantage and reduce the possibility of pressure on behalf of customer to reduce prices. 1.12.2. Changes in the Supplier Array and Raw Materials for Areas of Activity In recent years, most manufacturing in the undergarment industry and in the Group has been carried out by subcontractors in East Asia. In accordance with this trend, the products in the Companys areas of activity are mostly manufactured by East Asian subcontractors. Recently, following the global economic crisis, the increase in wages
53
and raw material costs and shortages in textile workers in East Asia, the number of suppliers has dropped. This development led to pressure to increase prices and to erosion of gross profits due to the amount of time required to adapt sales prices to customers. Note that the Company is not dependent on any specific supplier and/or subcontractor. In recent years there were no material changes in the array of suppliers from which the Company purchases the raw materials used to manufacture its products. The Company is constantly searching for new suppliers, evaluating existing suppliers and performing quality inspections. 1.13. Seasonal Factors The Companys revenues are characterized by fluctuations that derive, inter alia, from periodic consumer purchases. The Companys revenues in the second half of the year generally exceed its revenues in the first half due to increased consumer purchases in the back to school period and during Christian holidays. The following are the Groups sales by quarter in the past three years in thousands of dollars:
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Total 2010 sales - USD 2010 sales - % 2009 sales - USD 2009 sales - % 2008 sales - USD 2008 sales - % 140,541 22.6% 123,426 21.6% 156,989 25.2% 156,665 25.3% 135,911 23.7% 154,669 24.8% 169,696 27.4% 162,506 28.4% 167,674 27.0% 153,172 620,074 24.7% 100%
150,691 572,534 26.3% 100%
143,502 622,834 23.0% 100%
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1.14.
Fixed Assets and Facilities
1.14.1. Real Estate and Facilities The Company has manufacturing facilities in Israel, Jordan, Egypt, Bulgaria and Thailand. As of this periodic report, the Company owns several real estate properties in Israel. Furthermore, the Company rents additional properties in Israel serving as warehouses, offices and shops. The rental agreements for the properties, including option periods for their extension, end between 2011 and 2015. The Company believes that it will be able to renew these rental agreements under terms not inferior to those in effect today. The Company rents offices in London and is currently studying the possibility of reducing the space rented by it from two floors to one. The Company rents manufacturing and storage facilities in Egypt for period of 25 years. This rental period is expected to expire between 2014 and 2029. The Companys joint Jordanian venture is located in Irbid and includes a number of sewing facilities and warehouses, rented by the Company. The Company rents warehouses and offices in the U.S. and China. These rental periods in these agreements are expected to expire between 2011 and 2018. The Company believes that it will be capable of renewing these rental agreements under terms not inferior to those in effect today. The above information pertaining to the Companys estimates regarding the extension of its rental agreements constitutes forward-looking information as defined in the Securities Law. No certainty may be attached to this estimate , this, inter alia, due to it being based on information existing on the report date and dependent on factors independent of the Company such as market conditions, agreements with landlords and more. The Company owns additional facilities in Bulgaria, the U.S. and Thailand. Company management believes that these facilities are in good operational condition, are properly maintained, and their area is appropriate to the Companys current level of activity. In addition, the Company believes that its activity and facilities are in compliance with current government standards pertaining to safety, health and environmental issues. As a rule, the Company has complied with these rules without
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said compliance having any material impact on the Companys expenses, profitability or competitive ability. The Company owns a logistical center in Hungary, which has been evacuated and is intended for sale but due to the low probability of its realization, was included under fixed assets and not under assets available for sale in current property. In accordance with an assessors evaluation conducted by the Company in late 2010, the cost of the property was reduced over the course of Q4 of the year by $1 million and amounts to $2.1 million as of the report. As of this report, real estate properties intended for sale include three properties in Israel the historic cost of which amounts to $2.8 million. The property in Daliyat AlCarmel classified as held for sale in 2009 was sold over the course of 2010. 1.14.2. The following table concentrates material real estate properties owned by the Company or rented by it as of this periodic report:
Country Israel*
Town
Area in M 14,014 structure; some 24,000 land
Main Use Fabric development and coloring and warehouses Seamless product manufacturing plant
Rented/Owned Owned
Karmiel
8,700 structure; some 20,000 land 7,500 2,500 structures 4,700 land
Leased from the state
Offices and warehouses Intended for sale, one rented to 3rd party
Rented Leased from the state
Nahariya**
255,484
Undeveloped property on the beach in Nahariya intended for sale Offices and warehouse Delta shops national retail chain Head office held for sale
Owned
Rosh Haayin A chain consisting of 95 shops, selfmanaged Tel Aviv
8,400 Some 12,000
Rented Rented
Some 1,000
Owned
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Country UK Jordan
Town London*** Irbid
Area in M 1,400 21,637
Main Use Offices Sewing workshops and warehouses and part rented to 3rd party Knitting, cutting and sewing plant, offices and warehouses Offices Offices Warehouse, logistical center and offices Warehouse, logistical center and offices Offices and space rented to third party factory Logistical center. Not in use and intended for sale. Sock manufacturing plant Cutting and sewing plant
Rented/Owned Rented Some rented and some via financial lease (rented to 3rd party) Rented
Egypt
Cairo
38,554
U.S.A.
New Jersey New York Williamsport, Pennsylvania Tifton, Georgia
3,437 2,160 34,931 45,987 11,666
Rented Rented Rented and owned Owned Rented
China
Guangzhou
Hungary
Tizalok
Some 12,000
Owned
Bulgaria Thailand
Rousse Ayutaya
8,640 1,707
Owned Owned
* The Company has signed an agreement according to which a compound with a built-up area of 11,500 square meters is supposed to be constructed for it, which upon completion will be rented by the Company for a warehouse and offices. This transaction is contingent on the receipt of building permits that have yet to be received as of the report. ** Over the course of 2010 an agreement was signed for the sale of the real estate in Nahariya, however, due to the fact that the conditions for recognizing income have not yet been fulfilled, the property was classified as held for sale in the Financial Statements; see Note 8.b.1 to the Financial Statements in Part C of this annual report. *** The Company intends to reduce the space rented by it. 1.14.3. Equipment
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1.14.3.1.
The Company operates some 60 automatic cloth knitting machines in its Egyptian plant and its Israeli cloth development facility.
1.14.3.2.
The Company operates some 500 knitting machines for its sock manufacturing process in Israel and Bulgaria.
1.14.3.3.
The Company operates some 3,100 sewing machines in its factories in Egypt, Jordan and Thailand.
1.14.3.4.
The Company operates some 200 seamless sewing machines in the Companys Israeli plant as well as through subcontractors in China.
1.15.
Research and Development The Company has a number of creative team with each design team featuring fashion, textile and graphic designers, knitting, finishing and coloring technologists, and in the field of products. These teams keep up to date on global market trends and relevant technological innovations. The Companys design and development teams work out of Israel and the U.S. Design and development work is carried out using SIP Systematic Innovation Process. This method is designed for innovative thinking intended to bring about groundbreaking products for Company Customers, which emphasize and maintain the Company's added value and competitive edge. The process includes integrated work by all disciplines design, marketing, development and technology, from the search stage, through research, development and design to presentation to the end customer and reaching conclusions. In addition, the Company creates cross-Company projects employing the same method, placing emphasis on creative thinking, designed to bring about breakthroughs for markets in the Companys product categories. The work of the development teams is integrated into the activity of the Companys manufacturing and marketing systems. In addition, the Company operates in a special fabric development center, which constitutes added value to the product development core.
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Design and development costs amounted to $25 and $27 million in 2010 and 2009, respectively. The decrease in design and development costs in 2010 vs. 2009 derives mainly as a result of a reduction in overhead in Delta U.S.A and the transfer of development functions nearer to manufacturing sources in order to lower costs. Over the course of 2010 the Company submitted two requests to the Israeli Chief Scientists Offices for the receipt of support of research and development activity for cloths and finished products within the framework of traditional industry. These requests were approved in December 2010. 1.16. Human Capital
1.16.1. Description of organizational structure: The following is a description of Group managements organizational structure and its areas of activity:
CEO
Segment Delta Israel
Segment Global Upper Market
Segment Delta USA Mass Market
Finance
Human Resources
Marketing and Strategic Development IT Systems
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1.16.2. Worker Roll As of December 31, 2010, the Group employs 6,760 employees. 1.16.3. The following is a breakdown of employees by countries in which they are employed: As of December 31 2010 Egypt Israel Far East (mainly Thailand) Jordan U.S.A. Others (mainly Bulgaria) Total employees 2,589 1,442 995 552 538 644 6,760 As of December 31 2009 2,835 1,447 1,310 830 500 578 7,500
1.16.4. Of the above employees, some 4,100 employees are employed in manufacturing activity and 2,660 employees are employed in development, logistics, marketing, sales and administrative activities. As of December 31 2009, 4,600 employees were employed in manufacturing activities and the balance was employed in other activities as stated above. 1.16.5. Material Changes to the Worker Roll Over the course of 2010 the number of Company employees decreased by 740 compared to December 31 2009. This decrease derives from the sale of the Companys factory in India which employed some 300 employees, from the discontinuation of sock finishing activity and reduction of sewing activity in Jordan (a decrease of 280 employees) and a decrease of 250 manufacturing employees in Egypt as a result of streamlining, which was partially offset by an increase in the number of employees in Bulgaria and the U.S. 1.16.6. Compensation Plans (Options) for Company Employees See Note 14b to the Financial Statements, in part C of this periodic report. 1.16.7. Structural Changes For details concerning structural changes carried out by the Company, see Section 1.2.1 above.
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1.16.8. Streamlining Plans and Worker Cuts For details concerning the Companys streamlining plans, see Section 1.2.1 above. 1.16.9. Benefits and the Nature of Employment Agreements As of December 31 2010, the Company employs 6,760 employees, 1,286 of which work in Israel, the Companys commitment with whom is based on general collective work agreements for the textile and garment industry and general expansion orders applicable to them and 156 employees hired by way of personal contracts. The Company generally enters into agreements with senior executives and management by way of personal contracts. The personal contracts the Company signs with its Israeli employees arrange, among other things, the following matters: monthly salaries, social rights such as yearly vacations, advance notice, provisions to pension funds, executive insurance and education funds. Each party may end the commitment by providing written notice of one to 2.5 days for each month of work and one months notice after one year of work.
1.16.10. Agreements with Senior Executives and Senior Management 1.16.10.1. Agreements with Senior Executives
Employment contracts of senior executives include, among other things, details of the senior executives' social rights such as yearly vacations, recovery fees, sick days, provisions to executive insurance, education funds and other benefits to which the senior executive is entitled. In addition to salaries, senior executives are generally entitled to a yearly bonus of up to 50% of their yearly pay, based on goals met and according to the formula set in their employment agreement. Likewise, in the event that results in practice exceed the goals set, the executive shall be entitled to additional benefits as set by management from time to time. Furthermore, the Company places at the senior executives disposal a vehicle and mobile phone and bears all related costs. Senior Company executives undertake to uphold absolute confidentiality in the matter of all issues pertaining to the Companys business, and to make no use of the confidential information even after the end of their employment at the Company. As a rule, the Company may end a
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senior executives employment by providing 90 days written notice, extended by an additional 30 days for each year of work past the third year at the Company up to six years, this to a maximum ceiling of 180 days, with the exception of predefined exceptional cases. In most cases, a senior executive may resign their position at the Company after providing it with 90 days written notice. 1.16.10.2. Employment Agreement of Company CEO
See details in Additional Information Regarding the Corporation, Chapter D of this periodic report. 1.16.10.3. Employment Agreement of Company Chief Operations Officer.
On July 23rd 2009 it was decided that Mr. Shlomo Doron would be appointed as Chief Operations Officer (COO) and Deputy CEO. The terms of his employment and service were approved by the Company's Audit Committee and Board of Directors (for more details see immediate report from July 23 2009 reference no. 209-01-177156). On November 9 2009 Mr. Doron started his employment at the Company (for further details see immediate report from November 9 20098 reference no. 2009-01-277797). On November 9 2009, the Company's Board of Directors approved the allocation of 250,000 options to Mr. Doron. The options allocation is in accordance with resolutions by the Audit Committee and Board of Directors as mentioned above and according to the conditions included in his employment agreement. The exercise price of each option is $3.072 and the value per option based on the Black and Scholes model is $2.44. 1.16.10.4. Granting Options to Company Directors and the Chairman of the Board The Audit Committee, Board of Directors and general meeting of the Company's shareholders (the meeting was held on October 20 2009) approved the allocation of 10,000 options (non-tradable) to each of the Company's directors: Israel Baum, Shaul Ben-Zeev, Tzipporah Carmon, Noam Lautmann and Dr. Gideon Shatiat exercisable as 10,000 ordinary Company shares worth 1 NIS NV each in return for an exercise price of $5
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per option. For details regarding the issues on the meetings agenda on October 20 2009, see immediate reports from September 6 2009, September 22 2009, October 18 2009 and October 20 2009 (reference nos. 2009-01224304, 2009-01-224325, 2009-01-237762, 2009-01-237765, 2009-01257625, 2009-01-257628 and 2009-01-260757). The Audit Committee, Board of Directors and general meeting of the Company's shareholders (the meeting was held on December 7 2009 approved the allocation, free of charge, of 10,000 options (non-tradable) to Mr. Dovrat, exercisable as 10,000 ordinary Company shares worth 1 NIS NV each, in accordance with the 2009 option allocation plan adopted by the Board of Directors on August 20 2009. For details regarding the issues on the meetings agenda on December 7 2009, see immediate reports from October 28 2009 and December 7 2009 (reference nos. 2009-01-267591 and 2009-01-312165). 1.16.10.5. Appointment of the Chairman of the Companys Board of Directors
On August 20 2009 the Companys Board of Directors decided to appoint Mr. Gideon Shatiat, Company director, to the position of Chairman of the Company's Board of Directors. The appointment shall remain in effect until March 31 2011. The terms of his service as Chairman of the Board of Directors were ratified by the General Meeting on October 20 2009 (after receiving the approval of the Audit Committee and the Company's Board of Directors) For details see immediate reports from September 22 2009 and October 20 2009 (reference nos. 2009-01-237762 and 2009-01-260757). 1.16.11. Group Executive Remuneration Plan Payment for Performance Starting 2006 the Company has been operating a remuneration plan for 300 Group executives; this plan consists of three components of the remuneration: (a) remuneration on the basis of personal goals achieved; (b) remuneration on the basis of achieving goals derived from the budget of the division in which the executive works (sales and profitability); (c) remuneration on the basis of achieving goals derived from the Companys consolidated budget. The remuneration mixture changes based on the rank of the executive and may change from year to year. Furthermore, goals change from year to year based on the decisions of Company management.
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The remuneration rate according to the plan is generally between 20% and 50% of the executives yearly salary. 1.16.12. Collective Work Agreements Some of the employees of the Group in Israel are employed according to the general collective agreement for the textile and garment industry signed between the General Histadrut and the Manufacturers Association of Israel and general expansion orders applicable to these agreements. The Company upholds the directives of this collective agreement. 1.16.13. Severance Pay Liability The Companys obligations resulting from the discontinuation of employeremployee relations for Group employees in Israel are mostly covered by provisions to executive insurance policies, comprehensive pension funds and Company provident funds or other provident funds. In other countries in which the Company has significant activity, which include mainly Thailand and Egypt, employees have no pension rights or other rights granting them compensation or other payments in the event of departure. 1.17. Material Agreements
1.17.1. Shareholders Agreement On July 12 2007 a shareholders agreement was signed between the Lautmann Group and GMM. The Shareholders Agreement establishes, among other things, the following principles: 1.17.1.1. Right of first refusal and restrictions on the sale of shares any transfer of Company shares, held as of the signing of the shareholders agreement by the Lautmann group, shall be subject to the following conditions: (a) with the exception of the transfer of shares to authorized recipients, as detailed below, any transfer of Company shares by any of the Lautmann Group is subject to the right of first refusal on behalf of GMM, in such a manner that the party seeking to sell (hereinafter: the Offerer must inform GMM
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in writing of their intention to sell shares and they must first offer the shares to GMM (hereinafter: the Sale Offer). The announcement in question shall note the number of shares offered for sale, the name of the recipient (unless the Offerer intends to sell the shares on the Tel Aviv Securities Exchange or on the NASDAQ) and the terms of the offer. In the event that the Offerer is interested in selling the shares through the stock exchange (TelAviv or NASDAQ), then the price of the offer shall be the weighted average of the closing price of the Company share on the stock exchange (Tel-Aviv or NASDAQ, as the case may be) on the three days of trade preceding the date of the Sale Offer. GMM has the right to accept the Sale Offer as is, for all offered shares and not a portion thereof, by providing a written purchase notice (hereinafter: the Purchase Notice) within five business days from the date of the Sales Offer when the offer refers to a sale not through the stock exchange (Tel-Aviv or NASDAQ), and within one business day when the offer refers to sale through the stock exchange (hereinafter: the Sale Offer Period). In spite of the above, as regards sales through the stock exchange or in the event that the Offerer noted in the sales notice to GMM that the sale notice is based on an agreement between the Offerer and a person willing to purchase fewer than the full number of shares offered in the sales offer, GMM shall have the right to accept the offer within the Sales Offer Period, regarding part of the offered shares. 1.17.1.2. Sending a purchase notice to the Offerer, as above, creates a binding agreement between the Offerer and GMM regarding the offered shares for which the Purchase Notice was received, free of any encumbrances, and at a price and under terms set in the Sale Offer. 1.17.1.3. GMM shall pay the proceeds for the Offered Shares within 14 days of receiving the Purchase Notice (or on a later date, in the event that the notice states as much), or, in the event that the Offerer asks to submit a sales offer through the stock exchange (Tel-Aviv or NASDAQ), then the payment will be paid within five business days of the purchase notice, and in any event in return for receiving stock
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transfer deeds and stock certificates for the offered shares, properly signed. 1.17.1.4. If GMM has not announced that it received the offer within the Sale Offer Period, GMM shall be seen as have refused the offer and the Offerer may sell the Offered Shares to the person noted in the offer, for a price and under terms no better than those noted in the offer, for a period of 45 days from the expiry date of the sale offer. If the offer is by way of a stock market sale (Tel-Aviv or NASDAQ, as the case may be), the selling price of the shares shall not be limited, and the Offerer shall have the right to sell the same number of shares on the stock exchange within the period of time in question (45 days) without being subject to the right of first refusal detailed in Subsection 1.17.1.4. If the Offerer has not sold the Offered Shares under the same conditions within the 45 day time period, the Offerers right to sell the offered shares shall again be subject to the right of first refusal as detailed in Section 1.17.1.1 above. In spite of the above, in the event of a sale that is supposed to be carried out through the stock exchange, after the offer but before the actual sale, the price of each shall on this date or prior to the sale in question drop by over 15% from the average price set in the offer, then the Offerer must carry out one of the following: (a) fulfill the conditions denoted in Sections 1.17.1.1-1.17.1.4 above before making the seller (b) withdraw the offer and not sell the shares. 1.17.1.5. In spite of the above, the Lautmann Group can transfer, sell or assign in some other manner the shares held by it to the following: (a) Lautmann family members, as defined in the agreement, or any trust benefitting or controlled by the Lautmann group or Lautmann family members; (b) a person or entity controlling or controlled by the Lautmann Group or members of the Lautmann family, as defined in the agreement; (c) in the event of a company, to its shareholders or their relatives, in accordance with their holdings in said company, on the date the shareholders agreement was signed; m(d) to any member of the Lautmann Group; (e) to a recognized charitable organization; (f) one or more transfers of up to 200,000 shares in any twelve month period starting from the date of the
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shareholders agreement. (Hereinafter together: the Authorized Recipients). 1.17.1.6. Any sale or transfer as detailed in Section 1.17.1.5 to the Authorized Transferees shall remain in effect only if the purchaser or the recipient has made a written commitment to GMM to be bound by all the conditions denoted above as if they were a party to them instead of the Offeree. 1.17.1.7. Any transfer of control in any corporation directly or indirectly holding the Companys share to a party not constituting an Authorized Transferee shall be considered transfer of Company shares held by such a corporation and shall be subject to the aforementioned right of first refusal. In such a case, the offering party must send GMM, prior to the transfer of control, an offer pertaining to the Company shares held by that party that shall be subject to all the conditions applicable to the sales offer not through sales on the stock exchange (Tel Aviv or NASDAQ) and giving that the price of said shares shall be the weighted average of the closing price of said shares on the Tel Aviv Securities Exchange over the course of the three days of trade preceding the Sale Offer Date. Regarding this subsection, control refers to holding 70% or more of the issued capital (or other voting rights) of the relevant corporation. 1.17.1.8. The shareholders agreement shall remain in effect until one of the following occurs, whichever comes first: (in) the date on which GMM ceases holding at least 20% of the Companys capital; (ii) the date on which the Lautmann Group, along with the Authorized Recipients, holds fewer than 500,000 Company shares. 1.18. Legal Proceedings The Company is not a party to any material pending legal proceedings exceeding 10% of the Companys current assets according to its 2010 Financial Statements. 1.19. Working Capital
1.19.1. Raw Material Inventory Holding Policy
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The chief raw materials used by the Company are cotton string, cotton mixture and synthetic string and other textile components. Most raw materials are purchased by the Company parallel to receiving manufacturing orders from customers, and therefore the Company does not generally hold raw material inventories for extended periods of time. Over the course of 2010 the Company changes its policy and increase the volume of raw material inventory in its possession due to rising cotton prices, see 1.9.21.1 above. 1.19.2. Finished Product Inventory Holding Policy The Companys sales are mostly conducted in two manners, either on the basis of specific production orders or on the basis of replenishment orders referring to a product or line of products sold earlier; for details see 1.9.17 above. The Company places a great deal of emphasis on high levels of inventory maintenance, so that its ability to satisfy customer demands is not impacted. The Company has recently changed its policy and increased its finished product inventory due to price increases, in such a manner so as to comply with sales projections. The following are details of the various stages in working capital holdings from the moment an order or agreed projection was received until collection of proceeds in the two different methods of sale and in the Delta Marketing Israel Segment: Ad-Hoc (Specific) Orders Process Length in Weeks Receiving order from customer Planning (including entering the order into the system) Arrival of materials and fabrics Manufacturing Shipping Payment to supplier (from invoice date) Collection from customer 0 1 5-6 4-6 0.5-3 5-6 Up to 9 Accumulated Time Axis in Weeks 0 1 7 12 14 17 23
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Replenishment Order Relevant Mainly to the Delta USA Mass Market Segment Accumulated Time Axis in Weeks 0 1 18 23 30 40
Process Length in Weeks Receipt of sales projection agreed upon by the customer Issuing manufacturing order to subcontractor Supply until arrival at Company distribution center Payment to supplier (from invoice date) Storage for customer Collection from customer Held Working Capital in Delta Israel Segment 0 1 15-20 5 10-14 10
The process starts at the fashion collection design stage, followed by transfer of product files to subcontractors for pricing. This stage takes 10-12 weeks but has no impact on wording capital. Process Length in Weeks Manufacturing order to supplier Development of product by supplier until approval is received Manufacturing Shipping Payment to supplier (from invoice date) Storage and distribution Collection from customer 0 16-18 2-4 4 8-12 15-20 2-8 Accumulated Time Axis in Weeks 0 0* 3 7 17 24 29
* Does not affect holding of working capital 1.19.3. Credit Policy The following are details of credit scope balance and credit days on a quarterly basis of Company customers and suppliers for 2010 and 2009
2010 Average Scope* of Credit Customers Suppliers 97 55 Average Scope* of Credit 97 49
2009
Credit Days 53 50
Credit Days 62 46
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* In millions of dollars on a yearly basis The debit balance of the Companys material customer (Wal-Mart) as of December 31 2010 amounted to $2.7 million. As of December 31 2009, when the Company had two material customers (Wal-Mart and Marks & Spencer), their balance in the balance sheet amounted to $26.8 million. Credit days practiced with Wal-Mart are between 20 and 30 days, respectively, from the date merchandise is shipped and invoices issued. For details regarding the change in Wal-Marts payment terms, see Section 1.9.14 above. The following are details regarding average inventory balance and inventory days, with the exception of the Delta Israel areas of activity (for details see Section 1.10.19 above) for 2010 and 2009. 2010 Average inventory (in millions of dollars) Inventory days 71 68 91.3 2009 83.1
The increase in average inventory in 2010 compared to 2009 derived from the accumulation of inventory mainly in the Delta Israel Segment, see Section 2.3.3 of the Board of Directors Report, which was offset by a reduction in inventory held for Marks & Spencer and other UK customers due to changes in work methods with them and the transition to FOB. 1.20. Finance
1.20.1. Average Interest Rate The average interest rate of short term bank loans as of December 31 2010 and December 31 2009 was 2.1% and 2.4%, respectively. 1.20.2. Restrictions Applicable to the Corporation in the Receipt of Credit For details see Bank Liabilities, in 1.20.6 below.
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1.20.3. The Corporations Credit Frameworks and their Terms and Unused Credit Balances as of the Report Total lines of credit provided the Company by the banks for short and long terms as of December 31 2010 amounted to a total of $175 million ($182 million in 2009), $110 million of which was unused ($44 million in 2009). In addition to these lines of credit, as of December 31 2010, the Company has a short-term bank deposit to the amount of $40 million, mainly due to the proceeds of the debenture issue made in January 2010, so that the sum of the Companys unused credit resources amounted to $150 million. Note that as of December 31 2010, out of the sum of credit sources denoted above, a sum of $22 million does not constitute binding lines of credit. 1.20.4. The Corporations Credit Rating On December 19 2010 Midroog Ltd. announced that it would be ratifying an A3/Stable rating for the debentures (Series K) issued by the Company and grant an A3/Stable rating for the debentures the Company would issue by way of expanding the series, at a scope of up to 105,000,000 NIS NV. See report from December 19 2010 (reference no. 2010-01-721767). 1.20.5. The Corporations Estimate Regarding the Need to Raise Sources of Finance The Company finances its operations from its cash flow from current activity, from bank credit frameworks and from the proceeds from the issuance of debentures (Series K). From time to time, based on market conditions and its changing needs, the Company studies the possibility of making its various sources of finance more variable. 1.20.6. Bank Liabilities 1.20.6.1. The Company has bank liabilities deriving mainly from the need to finance working capital and investments in fixed assets, as well as as a result of the purchase of companies. These liabilities are guaranteed by liens on assets of the Company and some of its subsidiaries. The Company's credit frameworks permit short-term loans including current maturities of long-term loans and the receipt of
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documentary credit. The Companys short-term loans reach their redemption date within a period of up to one year. The redemption date of some of the loans is shorter, in order to maintain flexibility in financial management. The redemption date of the long-term loans is on different dates up to 2014. The Company and some of its subsidiaries have provided each other with collateral against their debts. 1.20.6.2. In Israel, the Company has credit frameworks renewable for a period of up to one year from a number of banks. The banks have current liens on the Company's assets including its stock capital and goodwill. Interest for the credit frameworks is set from time to time in negotiations between the Company and each of the banks separately. The banks have entered into a pari passu agreement among themselves regarding the manner in which this collateral is realized. 1.20.6.3. On December 9 2004, subsidiary Delta USA signed a credit agreement with Bank Leumi U.S.A. and Bank Hapoalim Ltd., which is renewed each year. This credit agreement is guaranteed by an unlimited floating lien on the assets and rights of Delta U.S.A. and on some of the assets of its subsidiaries. As of December 31 2010, as part of the credit agreement, the balance of short-term loans amounted to $20.7 million. The unused line of credit at its disposal is $36.0 million. As of this report and in accordance with the latest amendment to the agreement made in April 2010, the credit rate for short-term loans is LIBOR + 2.75% per year or in certain cases the amendment to the agreement allows loans at Prime interest rates. In April 2010, the aforementioned credit agreement was renewed. Key points of the loan renewal agreement: a. the total short-term revolving loan is $80 million; b. the short-term interest rate is LIBOR + 2.75% per year and in certain cases the possibility of Prime interest loans is given; and c. the loan agreement depends upon the following financial stipulations: (1) Delta USAs net yearly profit shall not be below $1.
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(2)
Capital investments shall not exceed $2 million on the basis of the past twelve months (not including label purchases).
(3)
Tangible equity defined as equity less intangible assets (mainly goodwill) shall not drop below $28 million.
(4)
The ratio between financial liabilities and equity will not exceed 3.5.
The Subsidiary, Delta USA, was given the option of redeeming the loan granted it by the Company to the amount of $15 million under the condition that it complies with financial stipulations as well as the assumptions at the basis of the loan. As part of the renewal of the agreement, it was decided to add Bank Discount New York as a party to the credit agreement with Bank Hapoalim and Bank Leumi USA. The current agreement shall remain in effect until April 2011. In December 2010 the subsidiary received a loan from the parent company to the amount of $26.5 million and used the proceeds of the loan to redeem an identical sum of the balance of short-term loans. As of the balance sheet date and as of this report, the Company has complied with the financial stipulations in question. For further details see Note 20c to the financial statements in part C of this report. 1.20.6.4. Long-term loans from banking corporations over the course of February and April 2009 the Company received loans to the amount of $3 and $5.3 million, respectively, for 5 years.
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1.20.6.5.
The following is information on short-term credit and long-term loans taken by the Company from banks as of December 31 2010: In Millions of Dollars % Average Interest 2.1% 5.7% 5.7%
Short term loans Current maturities of long-term loans Long-term loans Total bank loans 1.20.7. Liabilities to Debenture Holders
57.4 2.1 3.6 63.1
Over the course of January 2010 the Company issued debentures (Series K) to the amount of 113 million NIS (some $30 million) in accordance with the shelf offer report published January 18 2010 by virtue of the Company's May 28 2008 shelf prospectus. For details see 1.1.8 above. The debentures began trade on the Tel-Aviv Securities Exchange on January 24 2010. Over the course of December 2010 the Company expanded its series of debentures (Series K) through a public offering to the amount of 98 million NIS (some $27.4 million) in accordance with the shelf offer report published December 23 2010 by virtue of the Company's November 22 2010 shelf prospectus. Of the total proceeds, $26.5 million were used to reduce a short-term bank debt in the U.S. by way of providing a loan to the subsidiary, see Section 1.20.6.3 above. The debentures in question entered trade on the Tel-Aviv Securities Exchange on December 28 2010. For further details regarding liabilities to debenture holders see Note 12a to the Financial Statements in Part C of this report. 1.21. Goals and Business Strategy
1.21.1. Strategic Acquisitions In order to achieve growth, the Company considers making strategic acquisitions that will fill in its product lines and improve its relations with customers.
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In examining these purchases, the Company focuses on increasing the scope of its branded activity. Due to the size of the North American market, the Company has marked the American market as a strategic target that can have a significant contribution to the Companys growth and profitability. By way of a series of acquisitions made by the Group in North America, its presence has increased significantly in this market in such a manner that the scope of sales to North America leapt from a total of $47 million in 1998, which constituted 16% of the Company's sales that year to $400 million in 2010, 65% of the Companys sales. Over the course of February 2009, the Company announced that it would be entering into an agreement to purchase assets and some of the activity of Gibor in the field of socks; for details see Section 1.1.4 above. Over the course of December 2009 through June 2010 the Company was engaged in negotiations to purchase international branded apparel assets activity in the field of garments, which was eventually discontinued in light of the sellers decision to end sales proceedings. In addition, the Company has marked the European market as having major expansion potential. 1.21.2. Customers One of the Companys chief assets is its customers. The Company places an emphasis on the level of service and innovation provided customers and acts on several levels to develop business with them, as follows: 1.21.2.1. Increasing Sales to Existing Customers The Company is interested in increasing the scope of sales of existing products and new products presented to existing Company customers. The Company believes that the broad selection of products it offers, placing an emphasis on customer service and reliability, provides the Company with a competitive advantage over its competitors, as retailers generally prefer engaging a small number of suppliers. The Company intends to continue this trend by reinforcing and expanding the scope of the Companys relationship with its customers.
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1.21.2.2.
Maintaining Relationships with Company Customers The Companys presence in the U.S. and in Europe allows the Companys design team to advise Company management on marketing and sales in Europe and the U.S. Despite the fact that a large portion of the Companys products are sold under its customers private brand names, the Company's development and design experts cooperate closely with the Company's customers in designing and developing products. The development and design teams prepare presentations for customers that include, among other things, an analysis of successes and failures from previous seasons, and develop, along with the customer, the basic idea, product and packaging, all in accordance with the customers needs. The Company believes that the comprehensive package of services it offers its customers is a significant factor in the steadfastness of relations with it.
1.21.2.3.
Developing Relations with New Customers The Company develops relations with new customers who demand high quality products to sell under their private labels, who are capable of making large-scale orders, as well as display significant growth potential and demand the high level of service offered by the Company. Among new customers acquired recently are: "Macy's", "Spanx", "Decathlon", "Triumph", "LuLu Lemon".
1.21.3. Innovation and Investment in Research and Development The Company invests a great deal of resources in the design and development of its products in order to provide innovation and fashionability to its customers, with the understanding that this innovation is what differentiates it from its competitors. 1.21.4. Streamlining Production Processes and the Chain of Supply The Company is constantly working to streamline its production processes, by continuing to transfer manufacturing processes requiring significant manpower to countries offering cheap workforce, automation of manufacturing processes and presenting new technologies.
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The Company invests in the development of its chain of supply while recognizing its importance in guaranteeing high standards of service to its customers. 1.21.5. Branding The importance of branding is constantly increasing and plays a major role in the end customers (the consumers) decision whether or not to purchase a product. Behind each brand name is a message that creates an emotional connection between the consumer and the product. The Company, which has acted in the past as a manufacturer for private labels, began acquiring licenses to market mens and womens undergarments and socks under leading brand names. The Company holds the right to use the following brands, among others: Wilson and Converse (for mens and womens socks and undergarments in European and North American markets), Tommy Hilfiger (for womens products in the U.S. and a number of other countries), Maidenform, Daisy Fuentes (for girls in the U.S.), MLB (socks) and Lucky" (for women and men in the U.S.). The Company intends to continue acquiring licenses for marketing under additional brand names. Over the course of Q1 2010 the Company acquired an additional usage right for the Nearly Nude brand name, in return for $0.6 million. 1.21.6. Reinforcing and Expanding Retail Activity The Company aims to reinforce the retail activity segment of its business, whether by expanding existing Israeli activity or by making strategic purchases. 1.21.7. For details regarding the opening of a new chain of shops selling childrens clothing in the Delta Israel Segment see Section 1.10.20 above. 1.22. Projected Developments in the Coming Year
1.22.1. Forecast of Material Acquisition of Fixed Assets and the Company's production capability after making the purchases in question. From time to time, the Company invests in the purchase of fixed asset items, such as knitting, coloring and sewing machine and other equipment based on requirements and needs at various production sites. As of this periodic report, the Company has no material obligations for purchases that do not appear in the Financial Statements.
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1.22.2. Projected Material Changes in Organizational Systems and Worker Rolls The Group does not forecast any material changes in its organizational systems and worker rolls. 1.22.3. For details regarding the opening of a new chain of shops selling childrens clothing in the Delta Israel Segment see Section 1.10.20 above. 1.23. Financial Information Regarding Geographical Segments The Company does not operate according to geographical segments. The following are details of the Companys sales by geographical region in 2010, 2009 and 2008, in thousands of dollars: 2010 North America Europe (except the UK) Israel UK Others Total sales 400,198 83,113 78,202 55,976 2,585 620,074 2009 352,455 65,178 75,204 77,827 1,870 572,534 2008 375,905 70,563 81,069 94,609 688 622,834
For further details see Note 5c to the Financial Statements. 1.24. Taxation
1.24.1. The Company: 1.24.1.1. Tax benefits under the Encouragement of Capital Investments Law, 1959 (in this section the Law). The Company received investment grants from the State of Israel. Entitlement to these grants and other benefits was stipulated on the fact that the Company will uphold the terms set in the Law, resulting regulations and letters of approval for certain investments in authorized factories. In the event that the conditions attached to these grants are not met, the Company may be asked to return the sum of the grants, in whole or in part, including CPI linkage differences from the date the grant was received.
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The Company placed floating liens on all of its assets for the State of Israel as collateral for the terms of the grant. The income from this approved program shall be tax free for the first two years, starting from the year the Company first had taxable income and will be charged corporate tax and a rate of 25% or lower according to corporate tax rate revisions and the rate of foreign investment in the Company in the balance of the benefit period, so long as 14 years have not passed from the year approval was granted and 12 years from the year the factory began operations. 1.24.1.2. Measurement of results for tax purposes in accordance with the Income Tax Law (Adjustments Due to Inflation), 1985 (hereinafter - the Adjustments Law) Pursuant to the Adjustments Law, results for tax purposes are measured in real values, according to changes in the Consumer Price Index. In accordance with the Income Tax Regulations, the Company and certain of its subsidiaries may adjust their results for tax purposes on the basis of changes in the dollars exchange rate, in lieu of changes in the CPI. The Company and one of its subsidiaries chose to do so. Pursuant to the Income Tax Law (Adjustments Due to Inflation) (Amendment 20), 2008 (hereinafter the Amendment), passed by the Knesset on February 26 2008, the provisions of the Adjustments Law would no longer apply to the Company starting from the 2008 tax year. In accordance with the regulations, transition orders were established regarding the end of the incidence of the Adjustments Law, which applied to the Company up to the end of the 2007 tax year. 1.24.1.3. Tax Rates The income of the Company and its subsidiaries is taxed at statutory tax rates. On July 23 2009 it was published in the 2203 Law Book, the Financial Reorganization Law (Legal Amendments to the
Implementation of the Financial Plan for 2009-2010) 2009 (hereinafter: "the Law"), that revised, among other things, the
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corporate tax rates set in a previous amendment. As a result of these amendments, the tax rates will decrease in the following manner: in 2011 24%, 2012 23%, 2013 22%, 2014 21%, 2015 20% and 2016 onward 18%. 1.24.2. Non-Israeli Subsidiaries Subsidiaries incorporated outside of Israel, excluding those incorporated in free trade zones, are assessed for tax purposes pursuant to the laws of the countries of their incorporation. The following is a summary of tax laws applicable to the U.S., in which the Company has material activity: As a rule, the (federal) corporate tax rate in the U.S. is 34%. Weighing in state tax in the various states in which Delta USA is active, the effective tax rate applying to it is between 36% and 38%. The U.S. and Israel have a treaty to prevent tax redundancy. As a rule, tax deduction rates at source according to the tax treaty between the U.S. and Israel are as follows: For dividends: 12.5%. For interest payments: 17.5%. For royalties: 15%. 1.24.3. Losses for Tax Purposes Transferrable to Subsequent Years Losses for tax purposes transferrable to subsequent years derive from the Company in Israel, and as of December 31, 2010 and 2009 amounted to $65 million and $85 million, respectively. The tax asset recognized as of December 31, 2010 $7 million. Transferable losses for tax purposes in Israel starting 2008, after the merger, may be offset over an unlimited period of time. 1.24.4. Structural Changes On March 2, 2008, the Tax Authority approved an application for tax-exempt restructuring of the Delta Group, effective from December 31 2007; pursuant to the restructuring, Delta Galil merged Delta Marketing and Tag Li into it in such a manner that Delta Marketing and Tag-Li transferred all their assets and liabilities to
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Delta Galil for no return, so that Delta Marketing and Tag Li were eliminated without being liquidated. Pursuant to the approval received, restrictions were imposed on offsetting losses, in such a manner that the amount that may be offset each year would not exceed 1/12 of total losses (some $7 million) or 50% of taxable Company revenues that year before offsetting losses from previous years, whichever is lower, as well as regarding the future sale or allocation of shares for two years from the merger date. 1.25. Discussion of Risk Factors This section includes forward-looking information. Forward-looking information is uncertain information regarding the future, based on information existing at the Company on the periodic report date and includes Company estimates or intents as of the periodic report. Results in practice may be materially different from the results estimated or implied from these assessments. In certain cases, segments featuring forward-looking information may be identified by the presence of words such as we estimate, we mean, we believe, we predict and so one, but this information may also appear with different wording. 1.25.1. Macro-Economic Risk Factors 1.25.1.1. Increased Costs of Purchasing Finished Products from East Asian Manufacturers. The Company purchases and manufactures a significant portion of the products it sells, from subcontractors or at its factories located in East Asian countries. Increases in the costs of finished products and selfmanufacturing costs, may erode the Companys gross profits. 1.25.1.2. Exchange Rate Volatility
As the Company is active in a variety of countries, it is exposed to risks deriving from changes in exchange rates of various currencies. Fluctuations in the exchange rates of various currencies may have an impact on the Companys operating results, mainly in light of the fact that the Companys sales are carried out around the world in a variety of currencies. In order to limit the Companys exposure to fluctuations in exchange rates between the various currencies, from time to time the Company considers taking action to protect its currency exposure so that
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purchases and other costs will be denominated in the sales currency, including by purchasing future contracts to convert foreign currency to the USD at a pre-fixed price, and it acts to change the sales currency to the USD. At the same time, these hedging agreements will not protect the Company if the depreciation of these currencies vs. the dollar continues after the end of the future contract periods. For further details, see Section 4.3 of the Board of Directors Report, Chapter B of the Periodic Report. 1.25.1.3. Free Trade Agreements
Changes to global free trade agreements may lead to changes in customs and quotas procedures in the countries constituting the Companys chief target and production countries the Company currently enjoys free trade agreements between Israel and the U.S., Canada, the EU and the European Free Trade Association as well as Mexico. The trade agreements allow the Company to sell the products manufactured in Israel to the U.S., Canada, and EU and EFTA member states exempt of customs and import quotas. The U.S. has expanded the benefits covered by the U.S-Israel free trade agreement to goods processed in the Companys Jordanian facilities, and as a result, the Companys products manufactured in Israel and Jordan are customs-free for EU and EFTA market. Following the free trade agreement between the EU, the U.S. and Egypt, the Companys products manufactured in Egypt are exempt of taxes and quotas for EU member states and the U.S. Loss of the free trade advantages will cancel one of the Companys most important competitive advantages and may lead to erosion in profitability. 1.25.1.4. Economic Situation in Target Markets
The economic situation in the target markets and concerns of deepening recession in these markets may impact consumer habits and the scope of their consumption in the areas of activity and may lead to a reduction in the Companys sales; for details see Section 4.3.1 of the Board of Directors Report, Chapter B of the Periodic Report. 1.25.1.5. Security and Political Situation.
The political, economic and security status of the State of Israel has a direct impact on the Company, the management, offices and some of the
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manufacturing facilities of which are located in Israel. Since the establishment of the State of Israel in 1948, Israel and its Arab neighbors were engaged in a number of armed conflicts. In July and August 2006, the State of Israel was involved in a war in the countrys north and over the course of January 2009 it was involved in a war in the countrys south. In spite of efforts to advance peace processes between the State of Israel, neighboring Arab states and the Palestinian people, the possibility of renewed and/or escalated hostilities against Israel still exists. These hostilities may set Israels international commerce activities back and have a material impact on the Companys activity. In addition, Israel features a reserve duty obligation, both on a yearly basis and/or during emergencies, applicable to citizens of the State of Israel and permanent residents. The Company cannot predict the full impact of this reserve duty on the Company's work force, in the event that some of the Companys workers and executives are called up to reserve duty. In light of the Companys activities in Jordan and Egypt, the security situation between Israel and the Arab states in general and between Israel and Jordan and Egypt in particular may impact the Companys activities and production capabilities in these countries. In addition, in January 2011 protests broke out in Egypt, demanding a change in their regime, and in light of this the Company shut down activity in its plant for a number of days, reopening it on February 6 2011. In light of the fact that operations in Egypt are responsible for supplying 11% of the Company's sales, a worsening of the political, economic and social instability in that country may impact the Companys activity. In addition, in light of the expected change in the Egyptian regime, uncertainty exists regarding the new regimes policy and relations between Egypt and Israel in particular and Israeli-identified companies in particular. 1.25.2. Industry Risk Factors 1.25.2.1. Competition
The Company might be incapable of dealing with competition on behalf of different manufacturers with economic, geographic and other advantages over the Company. The Company is in direct competition with a number of garment manufacturers who enjoy reduced manufacturing costs due to
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economy of scale, cheaper work force, geographic proximity to consumers and/or suppliers and who have larger economic resources and/or markets at their disposal. Increasing competition on behalf of the competitors may lead to pressure to reduce prices or to loss of market shares, and thus have a negative impact on the Company's revenues and profitability. No certainty exists that the Company will successfully handle competition with existing or new competitors. 1.25.2.2. Cancellation of Textile Product Import Quotas
Starting January 1 2005, the WTO member nations withdrew some of the quotas on textile products. As a result, some of the textile products manufactured in WTO member states are no longer limited by quotas. These changes allow retailers, clothing companies and others to import unlimited amounts of textile products from member states in which production costs are low. As a result, textile and garment prices around the world, including those of Company products, are facing pressure to lower prices, and these prices may continue dropping. In the event that prices decrease faster than the Companys ability to reduce costs, the Company's business and operating results may be negatively impacted. 1.25.2.3. Seasonal Factors
As a result of seasonal fluctuations, the results of the Company's activity on a quarterly basis might not reflect the Company's future performance. In light of seasonal consumer purchases, the Company's revenues underwent fluctuations in its yearly and quarterly operating results in certain years, in such a manner that the Companys revenues in the last two quarters of certain years exceeded the Companys revenues in the first two quarters thanks to holiday and back-to-school purchases. In light of this inconsistency, the results of the Company's activity on a quarterly basis might not reflect the Company's future performance. The above inconsistency may make it harder for investors to properly estimate the Company's future performance. 1.25.2.4. Changes in Fashion Preferences
The garment industry is subject to changes in fashion preferences and consumer fashion trends. The Companys sales rates may decrease if the
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Company and/or its customers err in evaluating current fashion. The Companys success is partially dependent on its ability to design and produce products its customers like and which withstand changes in fashion trends. The Company may fail in its attempt to predict fashion trends. In the event that the Company and its customers err in evaluating fashion trends, product orders from Company customers may decrease, which may have a negative impact on the Company. 1.25.2.5. Changes in Raw Material Costs and Shipping Prices
The Company has no control over changes in the prices of raw materials it uses as well as changes in shipping prices. Increases in costs of raw materials and/or shipping may harm the Companys profitability. The majority of raw materials used by the Company for the manufacture of its products are cotton strings, Lycra and rubber. The Companys financial results are to a large degree dependent on the cost and availability of raw materials. Raw material prices, as well as shipping prices, are unstable, in light of variable supply and demand conditions and other market factors over which the Company has no control. The Company might not be able to pass on the increase in costs in question to its customers. This situation may have a negative impact on the Company and on its economic status. 1.25.2.6. Regulatory Developments
As the Company is active in the international market, its is exposed to changes in foreign laws, export restrictions, protective tariffs, trade blocks, changes in tax laws, difficulties in hiring appropriate personnel and management of international operations, social, political and economic changes as well as other risks inherent to international business activity, any of which may have a significant impact on the Companys financial results. Any of the above factors may have a negative impact on the Companys ability to provide or receive merchandise under competitive conditions and under worthwhile timetables and may have a negative impact on its operating results. 1.25.2.7. Political Situation in the Countries in which the Company is Active
The political situation in the countries in which the Company is active, which include Egypt, Jordan, Israel, Turkey, Bangladesh and Pakistan may
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have an impact on the Companys activity, and therefore its financial results. 1.25.3. Risk Factors Unique to the Company 1.25.3.1. Dependence on Key Customers
A significant portion of the Companys revenues up to 2009 derived from sales to two material customers active in Europe and the U.S. As noted, in 2010 one of the customers in question ceased serving as a material customer as defined in the regulations. A reduction in orders from a key customer for Company products may have a material negative impact on the Companys revenues. The Companys agreements with its customers, including the customers detailed in this report, are short-term agreements and do not include minimum purchase requirements. Company customers may decide not to purchase Company products in the future at the same amount or under the same conditions as in the past. Any decrease in purchases on behalf of these key customers, or any material customer, may have a negative impact on the Company's economic results. 1.25.3.2. Deterioration in Relations between Israel and Neighboring States
The security situation in Israel and in the region may influence the Companys business. Deterioration in the relations between Israel and its neighbors, in some of which Company production facilities are located, may disrupt production processes and product purchases on behalf of the Company and harm its financial results. Of the Companys 2010 sales, some 17% derived from sales of merchandise manufactured in Egypt and Jordan. The Companys activity in these countries is dependent, to a great degree, on the relations between them and Israel. A state of hostility existed in the past between Israel and Jordan and Egypt. Furthermore, starting October 2000, the level of hostility between Israel and the Palestinians increased and as a result, a number of Arab states have lowered the level of their relations with Israel, particularly in terms of economic and commercial activity. Deterioration in the relationship between Israel and Jordan or Egypt may impact the Companys manufacturing and thus have a negative impact on the Company.
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Following the protest flotilla takeover incident on May 31 2010, severe diplomatic tension has arisen between Israel and Turkey, and relations between the two countries have deteriorated. Of the Companys 2010 sales, some 5% derived from sales of merchandise manufactured in Turkey by subcontractors. In the event that the relations between the countries worsen and reach the level of severance of diplomatic relations, this may have a negative impact on the Company. For further details, see Section 1.25.1.5 above. 1.25.3.3. Completion of Integration Proceedings with Subsidiaries
In recent years, the Group has purchase a number of companies, integration with which has not been completed and which claim administrative resources. The possibility exists that the Company fails to successfully complete the integration process. The Company is continuing with the integration process with the aim of merging and combining the facilities, IT systems and personnel of the purchased companies into the Company. For the purpose of this integration, the Company allocates a great deal of the time inputs of its senior management from their day-today activities, and as a result a significant work load is created for the Companys management team. Completion of the integration process may be negatively influenced by economic conditions, failure to integrate economic and operational systems, reactions from competitors or customers or regulatory developments, insomuch as such exist. Failure on behalf of the Company to successfully complete integration may have a negative impact on the Company. 1.25.3.4. Direct Engagement by Retailers with Far East Manufacturers
In recent years, a number of retail chains have been trying to circumvent companies designing and developing undergarments and enter into direct relationships with factories so that they manufacture products directly for them. The Company believes that this phenomenon will be found with basic products intended for the general market, where the design element is less significant. The Companys sales may be impacted in the event that this phenomenon becomes more common. 1.25.3.5. Reduction in the Market Share of Company Customers
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The Companys sales may be impacted in the event that Company customers are unsuccessful in competing in the competitive markets in which they are active. In the event that a central customers sales have decreased for some reason, whether or not it is has any connection to the Company and its product, the Companys sales to such a customer may also drop. 1.25.4. The following table shows the Companys evaluation of the degree of impact of the risk factors detailed above on the Company: Degree of Impact of Risk Factor on the Company Major Impact Macro risks Increased costs of purchasing finished products from East Asian manufacturers. Exchange rate volatility Free trade agreements Economic situation in target markets Security and political situation. Industry risks Competition Cancellation of textile product import quotas Seasonal factors Changes in fashion preferences Changes in raw material costs and shipping prices Regulatory developments Political situation in the countries in which the company is active Risk particular to the company Dependence on key customers Deterioration in relations between Israel and its neighbors Completion of integration processes with subsidiaries Direct engagement by retailers with East Asian manufacturers Reduction in the market share of Company customers X X X X X X X X X X X X X X X X X Medium Impact Minor Impact
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Part B
Report of the Board of Directors on the State of the Corporation's Affairs December 31, 2010
Report of the Board of Directors on the State of Corporate Affairs

We hereby present to you the report of the Board of Directors of DELTA GALIL Industries Ltd. (hereinafter: the Company or Delta) in reference to the Consolidated Financial Statements of the Company and its subsidiaries in Israel and overseas (hereinafter: the Group) for the year ending December 31 2010 in accordance with the Securities Regulations (Periodic and Immediate Reports), 1970. 1. Summary Description of the Corporation and its Business Environment 1.1. Overview The Company is engaged in the design, development, production, marketing and sales of undergarments and socks for men, women and children. Among the Groups customers are leading retail chains such as Wal-Mart, Target, Victoria's Secret, Marks & Spencer Kohl's, and Hema, as well as leading brands like Nike, Calvin Klein, Hugo Boss, Maidenform Tommy Hilfiger, Spanx, Under Armour and more. The Group also sells its products under franchise brands, including: Maidenform, Converse, Wilson, MLB, Tommy Hilfiger and Lucky etc. and under its Delta private label in its domestic operations in Israel. Delta designs and develops its products primarily in Israel, and the US whereas production is mostly done via sub-contractors and in its facilities in the Middle East and in the Far East. 1.2. Material Events in the Corporations Activities During and After the Reported Period 1.2.1. Dividends On May 23 2010 the Company declared that it would be distributing dividends to the amount of $1.5 million, at 6.41 cents per share, distributed on June 16 2010(see May 24 2010 immediate report, ref. 2010-01-489957).
On August 10 2010 the Company declared that it would be distributing dividends to the amount of $1.5 million, at 6.41 cents per share, distributed on September 5 2010 (see August 11 2010 immediate report, ref. 2010-01-582885).
On November 28 2010 the Company declared that it would be distributing dividends to the amount of $2 million, at 8.5 cents per share, distributed on December 21 2010(see November 29 2010 immediate report, ref. 2010-01698475). 1.2.2. Declaration of Dividends Distributed Subsequent to the Balance Sheet Date On February 16 2011 the Company decided to distribute dividends to the amount of $2 million, at 8.54 cents per share, to be distributed on March 15 2011 according to the dollars representative rate of exchange as published the day prior to the payment date. The determining date for this distribution shall be February 28 2011 and the X date shall be March 1 2011. For further details see Section 4 below.
1.2.3.
Purchase of Shares by Company CEO, Director and Controlling Shareholder, Mr. Isaac Dabah In the period between June 6 and June 10 2010 Mr. Isaac Dabah purchased (through GMM Capital LLC) 22,197 Company shares at an average price of 27 NIS, and an additional 1,000 Company shares were purchased in December at 29 NIS, so that after the purchase in question, his holdings in the Company's issued and paid-up stock capital and voting rights is 54.4% (see ref. 2010-01-512271, 2010-01-51393, 2010-01-515178, 2010-01-516789, 2010-01-518397, 2010-01710319). On June 9 and 10 2010 the Sterling Macro investment fund (managed by Mr. Isaac Dabah) purchased 14,500 Company shares at an average price of 28 NIS, with an additional 3,700 Company shares purchased at an average price of 28 NIS, so that after the purchases in question its holdings in the Company's issued and paid-up capital and voting rights is 1.6% (see ref. 2010-01-576798, 2010-01518400, 2010-01-705216 -.)878607-10-0102 On January 31 2011 the Sterling Macro investment fund (managed by Mr. Isaac Dabah) purchased 8,524 Company shares at an average price of 31.31 NIS, so that after the purchase in question its holdings in the Company's issued and paidup capital and voting rights is 1.67% (see ref. 2011-01-034515).
1.2.4.
Entering an Agreement to Grant option to Purchase Real Estate Property in Nahariyah On March 2, 2010, the Company announced it had signed an option agreement, whereby it granted a group of buyers an option to acquire real estate in Nahariyah owned by the Company - 25.8 hectares, before expropriation, known as Block 18206 Lot 18 (hereinafter: the Real Estate), over the course of a four month period starting with the signing of the option agreement (hereinafter: the Option). On June 22 2010, the Company signed a revision to the Option Agreement, according to which the option exercise period was extended by an additional month (see report from June 23 2010, ref. 2010-01-529776). On July 27 2010, the Company signed an additional revision to the Option Agreement, according to which the option exercise period was extended by an additional two months, meaning up to October 3 2010. This additional extension was requested by the option recipient so that they could study the influence - if any - of a regional outline plan from 2007 on the Real Estates construction rights (see report from July 28 2010, ref. 2010-01-567957).
In return for the option in question, the purchasers paid the Company a total of 2,000,000 NIS (plus tax), which will not be refunded the purchasers even if they choose not to exercise the option. In addition, the purchasers deposited an additional 3,000,000 NIS (plus tax) with a Company representative as a good faith deposit. The option agreement states that if the option is exercised, the good faith deposit shall be used for payment as part of the proceeds and if the purchasers decide not to exercise the options, the purchasers shall have their good faith deposit returned, with interest.
In return for the Companys agreement to extend the option, the Company received an additional sum of 500,000 NIS (plus tax) to be deducted from the good faith deposit; so that if the option is not exercised, the Company shall receive a total of 2,500,000 NIS (plus tax). At the same time it was agreed that if the purchasers choose to exercise the option and sign a full purchase agreement by the end of the option period, the sum of 500,000 NIS would be considered part of the proceeds owed the Company for the Real Estate.
1.2.5.
Entry into Sales Agreement for the Sale of the Nahariyah Real Estate On October 3 2010, the Company received written notice from the option holders of their intent to exercise the option and sign an agreement to purchase the Real Estate in Nahariyah - some 25.8 hectares, before expropriation, known as Block 82106 Lot 18 (hereinafter - the Nahariyah Land). According to the option agreement, the parties must sign a sales agreement within 15 days of receiving the exercise notice, and if the option holders refuse to sign the agreement in question, this shall be seen as reneging on the option notice which shall award the Company with the proceeds given for the option (2.5 million NIS plus tax).
On October 6 the Company announced that on October 5 2010 it signed a sales agreement, in which it sold the Nahariyah Land to a buyers group (4 private companies). According to the sales agreement, the purchasers shall pay the Company $23,972,602 US (plus tax) for the Nahariyah Land, of which the Company has received $7.4 million, with the balance paid in payments according to a number of milestones deployed across a period of up to 39 months from signing the sales agreement; it was agreed that total compensation in NIS shall be no less than 91,000,000 NIS.
As part of the agreement the Company assigned the rights (and obligations) to the purchasers according to a claim submitted by the Company to the Nahariyah Design and Construction Local Council as per Section 197 of the Design and Construction Law for the real estate (as stated in the Companys July 28 2010 report).
The capital gains expected for the Company are estimated at between $18 and $20 million US before tax, and between $16 and $18 million after tax.
In accordance with the preliminary decision (pre-rolling) the Company received from the Securities Authority, capital gains from the transaction will be recognized upon completing the terms included in the sales agreement which precede the third payment from the purchasers and include removal of the sludge and evacuation of the tenants from the property. Accordingly, the Company
continued to classify the property as real estate available for sale in its Financial Statements.
For further details see immediate report dated January 4 2010 (ref. 2010-01633762), March 2 2010 (ref. 2010-01-400428), June 23 2010 (ref. 2010-01529776) and July 28 2010 (ref. 2010-01-567957), dated October 4 2010 (ref. 200-01-633762) and dated October 6 2010 (ref. 2010-01-637704), presented by reference. 1.2.6. Following the June 3 2010 immediate report (ref. 2010-01-509061), on June 29 2010 the Company announced that negotiations for purchasing branded assets and activity in the field of clothing was discontinued due to the seller's decision to cease sales proceedings. For further details see immediate report dated June 29 2010 ref. 2010-01-535980. 1.2.7. Approval of Interested Party Terms of Employment
1.2.7.1. Approval of the terms of employment of the daughter of the Company controlling shareholder, acting as merchandising manager in a subsidiary. On October 13 2010 the Companys Audit Committee approved the terms of the employment of the daughter of the Company's CEO and controlling shareholder as product manager and merchandising manager at Delta Galil USA Inc. The terms of her employment were ratified at the Companys general meeting held December 27 2010. For further details, including on the matter of Ms. Dabahs employment, see referenced transaction with controlling shareholder and general meeting summons report published November 18 2010, ref. 2010-01-685278. 1.2.7.2. The approval of the terms of employment of Mr. Yitzhak Weinstock, Company director, as Chief Operations Manager of subsidiary. On October 13 2010 the Companys Audit Committee and Board of Directors approved the terms of the employment of Company director Mr. Yitzhak Weinstock at Delta Galil USA Inc. (in this section: the Subsidiary). In this position, starting January 1 2011 he shall serve as the Chief Operations Officer (COO) of the Companys activities in North America, including the activities of the subsidiary, as a full-time job. The
terms of his employment were ratified at the Companys general meeting held December 27 2010. For further details, including on the matter of Ms. Weinstocks employment, see referenced transaction with controlling shareholder and general meeting summons report published November 18 2010, ref. 2010-01-685278. 1.2.8. On November 21 2010 the Company submitted a draft shelf prospectus on the basis of its December 31 2009 and June 30 2010 Financial Statements (ref. 201001-687153). 1.2.9. On December 27 2010 a special general meeting was conducted in which the following resolutions were reached: 1.2.9.1. Appointment of directors appointment of part of the directors who are not external director (Israel Baum, Isaac Dabah, Yitzhak Weinstock, Tzipporah Carmon, Noam Lautman and Dr. Gideon Shetiat) to an additional term in office until the next annual assembly. 1.2.9.2. Appointment of Kesselman and Kesselman, C.P.A. as the Company's accountant and auditor for 2011 and authorizing the Company's Board of directors to set its fee according to the extent and nature of services given the Company during 2011. 1.2.9.3. Discussion of the Companys Financial Statements and Board of Directors Report for the year ending December 31, 2009. 1.2.9.4. Approval of the terms of employment of Ms. Gloria Dabah, daughter of the Companys controlling shareholder, as product manager and merchandising manager in a subsidiary, as detailed in 1.2.7.1 above. 1.2.9.5. Approval of the terms of employment of Mr. Yitzhak Weinstock as Chief Operations Manager of a subsidiary, as detailed in 1.2.7.2 above. For further information on the matters on the general meetings agenda see the November 18 2010 immediate report ref: 2010-01-685278. 1.2.10. Securities Issue 1.2.10.1. On January 20, 2010,the Company announced the results of the issue of debentures (Series C) carried out as per the shelf offering by the Company
dated January 18 2010 (hereinafter
"the Shelf Offering Report"),
published pursuant to the Company's shelf prospectus dated May 29, 2008. For further information regarding the issue as per the Shelf Offering Report, an early tender carried out for institutional investors and the results of the issue, see referenced immediate reports from January 19 2010, ref. 2010-01359094, January 17 2010, ref. 2010-01-355935 and January 20 2010 ref. 2010-01-362040. The immediate (gross) proceeds from the debentures (Series C) issued according to the Shelf Offer Report amounted to 113 million NIS. 1.2.10.2. On December 27, 2010, the Company announced the results of the issue of debentures (Series C) carried out by way of the expansion of the series as per the shelf offering by the Company dated December 23 2010, published pursuant to the Company's shelf prospectus dated November 22 2010. For further information regarding the issue as per the Shelf Offering Report, an early tender carried out for institutional investors and the results of the issue, see referenced immediate reports from December 23 2010, ref. 201001-729624, December 23 2010, ref. 2010-01-728115, and December 27 2010 ref. 2010-01-731286. The immediate (gross) proceeds from the 92,632,000 debentures (Series C) issued according to the Shelf Offer Report amounted to 98,189,000 NIS. The Company has entered into a swap agreement with a banking corporation, to swap NIS cash flows for a commitment to pay debenture holders with a dollar cash flow. The dollar interest set in the transaction is 6.08%. 1.2.10.3. On January 30 2011 the Company announced that in light of the current situation in Egypt and the difficulty in conducting routine activity, Company management has decided, at its own initiative, not to open the factory gates. The activity in Egypt, which is intended largely for the operations of the Global Division, Upper Market Share, is responsible for supplying 11% of the Company's sales, of that 9% is manufactured at the Company's plant and the balance is provided by local subcontractors.
On February 6 2010 the Company announced that its Egyptian plant had reopened and that work was continuing as usual. Furthermore, it announced that due to the curfew in place, work at the factory would end an hour and a half before the regular closing time upon the postponement of the regular closing time, work will resume ending at its usual hour. Work returned to its usual hours this week in light of the change in curfew times. The Company estimates that a work stoppage of up to two weeks will have no material impact on its activities. Work at the plant depends on the situation in Egypt and Company management continues to keep a close eye on events. If necessary, the Company shall consider, in conjunction with its customers, finding alternatives for manufacturing its products. For further details see immediate reports dated January 31 2011 and February 6 2011 ref. 2011-01-032037, 2011-01-039138. Board of Directors' Discussion of the State of Corporate Affairs 2. Analysis of Financial Position 2.1. Balance Sheet The Groups consolidated balance sheet as of December 31, 2010 amounted to $419.6 million, compared to $376.4 million on December 31 2009. The Groups consolidated current assets as of December 31, 2010 amounted to $273.4 million, compared to $222.7 million on December 31, 2009. The increase in current property and in the balance sheet total as of December 31 2010 compared to December 31 2009 derived mainly from a $40.6 million increase in inventory balance, largely due to the activity of Delta U.S.A. (Mass Market), see Section 2.3.3 below. Furthermore, the increase in current property was also derived from an $18.3 million increase in cash and cash equivalents as a result of depositing part of the proceeds of the debenture issue in a short-term banking deposit which was partially offset by a decrease in the customers item. The Groups consolidated current liabilities as of December 31, 2010 amounted to $154.9 million, compared to $187.2 million on December 31 2009. The decrease in current liabilities as of December 31 2010 vs. December 31 2009 derived mainly from the proceeds of the debenture offering made in December 2010 which was used to repay short-term credit.
Group equity as of December 31, 2010 amounted to $197.3 million, or 47.0% of the balance sheet total, compared to $178.5 million, or 47.4% of the balance sheet total as of December 31 2009. The increase in the Groups equity as of December 31 2010 compared to December 31 2009 derived mainly from the years profits less dividends distributed. 2.2. Operating Results 2.2.1. 2010 saw a continuation of the gradual improvement in the Company's results, an improvement that began in the second half of 2009 and is a result of streamlining steps and implementation of the reorganization plan declared by the Company in 2009. For details see 1.2.1 of Part A of this annual report. These steps included a decrease in overhead, improvement in supplying customers on time, reducing failure costs, improvements to inventory management and increasing inventory turnover, an increase in brassiere sales and assimilation of activity purchased from Gibor. The improved results were achieved in spite of rising costs of raw materials and the cost of finished products which led to an erosion of gross profits in the second half of the year, mainly in the Delta U.S. Mass Market activity, due to time needed to adapt sales prices to customers.
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2.2.2.
The following are concise Group statements of operations for 2010 and 2009 and by quarter in 2010 and for the fourth quarter of 2009:
Year 2010 2009 Audited 572,534 620,074 468,831 498,805 103,703 121,269 66,342 65,207 21,956 25,347 761 2,494 33,209 485 992 666 31,066 7,817 23,249 2,067 21,182 21,060 122 21,182 0.90 0.87 16,166 (1,331) 1,945 15,552 6,369 (41) 9,224 1,574 7,650 7,662 (12) 7,650 0.40 0.40 Q4 2009 150,691 121,482 29,209 15,802 5,993 527 7,941 (1,805) 1,945 7,801 1,326 6,475 684 5,791 5,957 (166) 5,791 0.29 0.29 Q3 2010 Un - Audited 169,696 153,172 136,251 123,013 33,445 30,159 16,531 16,676 6,608 6,430 (1,137) 2,069 9.122 992 8,130 2,088 6,042 (191) 6,233 6,203 30 6,233 0.27 0.26 9,169 9,169 2,098 7,071 558 6,513 6,483 30 6,513 0.28 0.27 Q4 2010 Q2 2010 156,665 127,192 29,473 16,263 6,220 615 7,605 7,605 1,591 6,014 1,450 4,564 4,534 30 4,564 0.19 0.19 Q1 2010 140,541 112,349 28,192 15,737 6,089 947 7,313 485 666 6,162 2,040 4,122 250 3,872 3,842 30 3,872 0.16 0.16
In Thousands of Dollars, Except for Earnings per Share Data
Sales Cost of sales Gross profit Selling and marketing expenses General and administrative expenses Other income (expenses), net Operating income before restructuring expenses, impairment of fixed assets and capital loss from realization of investment in subsidiary Restructuring expenses (income) Impairment of fixed assets Capital loss from sale of a subsidiary Operating profit Finance expenses, net Company share of loss of associate (income) Income (loss) before taxes on revenue Taxes on income (tax benefit) Net profit for the period Attribution of net income for the period: To Company shareholders To non-controlling interests Net earnings per share attributable to Company shareholders: Basic Diluted
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2.2.3.
The following tables lists major data in millions of dollars:

2010 2009 572.5 16.2 (1.3) 1.9 15.6 29.1 8.3 7.7 40.8 Q4 2010 153.2 9.1 1.0 8.1 11.9 7.2 6.2 3.7 Q4 2009 150.7 7.9 (1.8) 1.9 7.8 11.4 6.1 6.0 16.4
Sales Operating income before restructuring expenses (income), impairment of fixed assets and capital loss Restructuring expenses (income) Impairment of fixed assets Capital loss from the sale of subsidiary Operating profit Standardized EBITDA (*) Net earnings attributed to for Company shareholders before restructuring expenses (revenues), impairment of fixed assets and capital loss from realization of Net earning attributed to company shareholders Cash flow from current operations
620.1 33.2 0.5 1.0 0.7 31.1 44.3 23.2 21.1 14.3
The improvement in EBITDA in the reporting periods is due to the increase in operating profit. Calculating EBITDA
2010 Net earnings for the period - as reported Taxes on income (tax benefit) Finance expenses, net Restructuring expenses (income) Impairment of fixed assets Capital loss from the sale of subsidiary Depreciation and amortization Standardized EBITDA 21.2 2.1 7.8 0.5 1.0 0.7 11.0 44.3 2009 7.7 1.6 6.4 (1.3) 1.9 12.9 29.1 Q4 2010 6.2 (0.2) 2.1 1.0 2.8 11.9 Q4 2009 5.8 0.7 1.3 (1.8) 1.9 3.5 11.4
(*)
Adjusted EBITDA is a benchmark not in accordance with GAAP, which the Company uses to measure its results from continued operations; to the best of the Company's knowledge this is a benchmark commonly used by other companies in the Company's operating sectors. Standardized EBITDA is calculated as follows: net earnings plus taxes on income (tax benefit), net financing expenses, depreciation and amortization, impairment of fixed assets, restructuring expenses (income), and capital loss from the sale of a subsidiary.
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2.3. Analysis of Operating Results 2.3.1. Overview Group sales in 2010 amounted to $620.1 million compared to $572.5 million in 2009, an 8% increase. Group sales in origin currency in 2010 increased by 9% compared to 2009. Group sales in Q4 of 2010 amounted to $153.2 million, compared to $150.7 million in Q4 of 2009, a 2% increase. In Q4 2010 sales in original currency increased by 3% compared to 2009. The following is the distribution of Company sales by geographical regions in the fourth quarter and in 2010 and 2009, in millions of dollars:
Yearly % Change in Original Currency % Change %
Fourth Quarter
2010
% of Total
2009
% of Total
Change in Original Currency
% Change
2010
% of Total
2009
% of Total
North America Europe Israel UK Others Total
14
14
400.2
65
352.4
62
87.3
57
87.2
58
33 (1) (27) 38 9
27 4 (28) 38 8
83.1 78.2 56.0 2.6 620.1
13 13 9 100
65.2 75.2 77.8 1.9 572.5
11 13 14 100
51 (1) (22) 3
43 2 (25) (-) 2
24.9 23.5 16.9 0.6 153.2
17 15 11 100
17.4 23.0 22.5 0.7 150.7
12 15 15 100
The improvement in the Company's sales in North America, Israel and Europe in 2010 compared to 2009 matched the Company expectations and was due to the improvement of most selling markets, this following the recovery in sales of retain chains in the U.S. and Europe. North America North American sales increased 14% in 2010, amounting to $400.2 million, compared to $354.2 million in 2009. North American sales in the fourth quarter of the year remained almost unchanged and amounted to $87.3 million, compared to $87.2 million in the corresponding quarter last year.
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The increase in North American sales in 2010 compared to 2009 derived mainly from an increase in brassiere sales and a certain recovery in the sales of U.S. retail chains during the reported period. Europe European sales increased 43% and 27% in the fourth quarter and in 2010 compared to corresponding periods last year, respectively. In original currency terms, European sales increased 51% and 33% in the fourth quarter and in 2010 compared to corresponding periods last year, respectively. Most of the increase in sales derived from sales to existing customers due to the recovery in European sales and from sales to new customers. UK UK sakes decreased by 25% and 28% in the fourth quarter and in 2010, respectively, compared to corresponding reporting periods last year. Said decrease in sales derived mainly from a drop in activity with a certain customer and in accordance with Company plans, as well as the shift to FOB-based sales, which reduced sales prices. Israel Israeli sales increased by 4% in 2010 compared to 2009 in dollar terms but decreased by 1% in NIS. Sales in Israel in Q4 2010 increased by 2% in USD terms compared to the same quarter last year, while decreasing 1% in NIS terms. Gross profit in 2010 amounted to $121.3 million, or 19.6% of sales, compared to $103.7 million in 2009 or 18.1% of sales, an increased of 16.9%. Gross profit in Q4 of 2010 amounted to $30.2 million, or 19.7% of sales, compared to $29.2 million in Q4 of 2009, or 19.4% of sales, an increase of 3.3%. The increase in gross profits in 2010 as a whole and in Q4 2010 compared to corresponding periods last year is due to an increase in sales of brassieres to a U.S. customer, as well as steps taken by the Company in 2009 to improve efficiency, including exiting non-profitable categories of operations in the UK, a drop in overhead, improved on-time delivery to customers, decreased failure cost and improved inventory management.
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The increase in gross profits was achieved in spite of increased prices in raw material and finished product prices in the second half of the year, see 2.2.1 above. Selling and marketing expenses decreased by 1.7%, amounting to $65.2 million in 2010 (10.5% of sales), compared to $66.3 million in 2009 (11.6% of sales) Selling and marketing expenses increased by 5.5%, amounting to $16.7 million in Q4 2010 (10.9% of total sales), compared to $15.8 million in Q4 of 2009 (10.5% of total sales). The following table shows composition of selling and marketing expenses for the Delta Israel segment and for other Group operating segments, in millions of dollars:
2010 30.0 39.0% 35.2 6.5% 65.2 10.5% 2009 27.2 37.4% 39.1 7.8% 66.3 11.6% Q4 2010 8.2 35.2% 8.5 6.5% 16.7 10.9% Q4 2009 7.5 33.1% 8.3 6.5% 15.8 10.5%
Delta Israel Percentage of sales and marketing expenses from sales Other Segments Percentage of sales and marketing expenses from sales Total sales and marketing expenses Percentage of sales and marketing expenses from sales
The increase in selling and marketing expenses in Delta Israel activity the fourth quarter and in 2010 as a whole, over corresponding periods last year, is due to the expansion of retail chains, as well as the 4% average revaluation of the NIS over average exchange rates last year, which resulted in higher expenses in dollar terms. The drop in selling and marketing expenses in other Segment in 2010 derived mainly from streamlining as a result of the reduction of activity in the UK. In addition, selling and marketing expenses decreased due to the decrease in overhead and decrease in storage and distribution expenses following the transition to FOB activity in the UK. General and Administrative expenses increased by 15.4% in 2010 and amounted to $25.3 million, compared to $22.0 million in 2009. In Q4 2010 general and administrative expenses increased by 7.3% and amounted to $6.4 million, compared to $6.0 million in the same quarter last year. The increase in administrative and general expenses in 2010 vs. 2010 derived mainly from including expenses due to the examination of a $0.9 million transaction (see Section 1.2.6 above), due to the $0.9 increase of the benefit due to employee options component and an increase in salary expenses and provisions for
15
bonuses, due to an improvement in business results as well as the strengthening of the rate of exchange of the NIS vs. the USD by 4% compared to the average rate last year, which led to an increase in expenses in dollar terms. The increase in administrative and general expenses Q4 2010 compared to the same quarter last year derived mainly from an increase in the employee options benefit component as well as an increase in the provision to doubtful debts. Other net income in Q4 and in 2010 as a whole amounted to $2.1 and $2.5 million, respectively, compared to $0.5 and $0.8 million in corresponding reporting periods, as follows:
2010 1.8 0.7 2.5 2009 0.4 0.4 0.8 Q4 2010 1.6 0.5 2.1 Q4 2009 0.3 0.2 0.5
Revaluation from currency transactions Capital gain from the sale of fixed assets Total other income, net
Revaluation from currency transactions includes $0.9 million in profits from forward agreements worth $20 million closed over the course of Q4 2010 after reaching an agreement with a European customer to change the currency of sale from euros to dollars. The balance of revenues derives from forward agreements valuated according to the closing rate on the balance sheet date. Capital gains in Q4 2010 include mainly profits from the realization of a real estate property in Daliyat al-Carmel. Restructuring expenses - in the first quarter of 2010, the Company decided to terminate its socks finishing operations in Jordan. The cost of discontinuing of the operations in question amounted to $0.5 million, consisting primarily of impairment of fixed assets and severance pay to 90 terminated employees. Capital loss from sale of a subsidiary - the Company signed an agreement to sell its subsidiary in India engaged in manufacture of socks. The capital loss from this sale amounted to $0.7 million and was included in results of the first quarter of 2010. The transaction was completed in Q2 2010. Impairment of fixed assets during Q4 2010 the Company included amortization due to impairment to its fixed assets in the amount of $1.0 million. The amortization in question was calculated according to an assessors estimates regarding the value of real estate in Hungary that is not in use and which is available for sale.
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Operating income in 2010 amounted to $31.1 million compared to $15.6 million in 2009. In Q4 2010 operating income amounted to $8.1 million, compared $7.8 million in Q4 2009. Operating income in 2010 before restructuring expenses and impairment of fixed assets and capital loss from the realization of a subsidiary amounted to $33.2 million compared to $16.2 million in 2009. Operating income in Q4 2010 before the impairment of fixed assets amounted to $9.1 million compared to $7.9 million before one-time items in the corresponding quarter last year, a 15% increase. The improvement in operating profits in the fourth quarter and all of 2010, compared to corresponding periods last year, was largely due to the increase in sales and in gross profits as described above. Finance expenses increased by 22.7% in 2010, and amounted to $7.8 million compared to $6.4 million in 2009. Financing expenses increased by 57.4% in the fourth quarter of 2010, amounting to $2.1 million, compared to $1.3 million in the corresponding period last year. The table below presents the composition of financing expenses in the fourth quarters and entire years of 2010 and 2009 in millions of dollars:
Interest and commission expenses Exchange rate differences IFRS adjustments Total finance expenses 2010 6.1 1.2 0.5 7.8 2009 5.3 0.4 0.7 6.4 Q4 2010 1.5 0.5 0.1 2.1 Q4 2009 1.2 (0.1) 0.2 1.3
The increase in financing expenses Q4 and in 2010 as a whole compared to corresponding periods in 2009 derived from the issue of debentures, this in spite of a decrease in bank debt. The rate of interest on the debentures raised the average credit price of the Company's financial debt. Exchange rate difference expenses in the fourth quarter of 2010 and in 2010 as a whole amounted to $0.5 and $1.2 million compared to $0.1 million in revenue and $0.4 million in expenses in corresponding periods last year, deriving largely from fluctuations in the average rate of exchange of the euro vs. the USD.
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Tax expenses in 2009 amounted to $2.1 million compared to $1.6 million in 2009. Q4 2010 saw a tax benefit of $0.2 million listed compared to taxes on income to the amount of $0.7 in the same quarter last year. The Companys low effective tax rate in the reported period derives mainly from the use of losses to income tax in Israel, for which no deferred taxes were attributed. Profit attributed to Company shareholders amounted to $21.1 million in 2010, or $23.2 million before reorganization costs, the impairment of fixed assets and loss of capital from the sale of a subsidiary, this compared to $7.7 or $8.3 million in profits in 2009, respectively. Profit attributed to Company shareholders in amounted to $6.2 million in the fourth quarter of 2010, or $7.2 million before the impairment of fixed assets, this compared to $6.0 or $6.1 million in the same quarter last year, respectively.
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2.3.2.
Operating Segment Results Analysis
The following is a summary of the Companys consolidated business results, by accounting segments in its financial statements for the 2010 and 2009 and for their fourth quarters, in thousands of dollars:
Year Ending December 31 (Audited)
Sales 2010 Delta USA Mass Market" Global upper market Delta Israel Cancellation of sales and profits between companies Others Total sales and operating profit before restructuring expenses (income), loss of capital from realization of subsidiary and impairment of fixed assets. Restructuring expenses (income) Capital loss from the sale of a subsidiary Impairment of fixed assets Total operating profit in consolidated statements 298,740 257,449 76,949 (15,207) 2,143 2009 268,566 243,576 72,822 (15,612) 3,182 % Change 11 6 6
Operational Profit (loss) Before Restructuring Expenses, Capital Loss from the Sale of Subsidiary and Impairment of Fixed Assets 2010 6,015 15,965 13,060 18 (1,849) 2009 5,927 1,428 10,464 (881) (772) % Change 2 1,018 25
Restructuring expenses (income) 2010 485 2009 474 (1,805) -
Impairment of fixed assets 2010 992 2009 1,945 -
Capital loss from the sale of subsidiary 2010 666 -
620,074
572,534
33,209 485 666 992 31,066
16,166 (1,331) 1,945 15,552
105
485
(1,331)
992
1,945
666
19
Fourth quarter ending December 31 (Audited) Operating profit (Loss) before restructuring expenses and impairment of fixed assets % Change 3 (8) 3 2010 164 3,288 5,184 486 2009 1,682 2,156 5,474 (298) (1,073) % Change (90) 53 (5) Restructuring income 2010 2009 (1,805) Impairment of fixed assets 2010 992 2009 1,945 -
Sales 2010 Delta USA Mass Market Global upper market Delta Israel Cancellation of sales and profits between companies Others Total sales and operating profit before restructuring income and impairment of fixed assets. Restructuring income Impairment of fixed assets Total operating profit in consolidated statements 68,780 61,451 23,283 (792) 450 2009 66,957 67,146 22,598 (6,825) 815
153,172
150,691
9,122 992 8,130
7,941 (1,805) 1,945 7,801
15
(1,805)
992
1,945
20
2.3.3. Analysis of Business Results by Operating Segment DELTA USA Mass Market Sales in 2010 amounted to $298.7 million, compared to $268.6 million in 2009, an 11% increase. Sales in Q4 2010 amounted to $68.8 million, compared to $67.0 million in the corresponding period last year, a 3% increase. The increase in sales in the Segment in Q4 2010 and in all of the year over the same periods last year derived mainly from the expansion of brand activity for men and women as a result of the increase in UK activity and in spite of the decrease in sales to the main customer. Over the course of 2010, working relations with Wal-Mart were altered, in such a manner that a significant portion of the products are provided the customer based on orders (ad hoc) and not in the form of replenishment, as was practiced to date. As part of the change in question, the customer approached strategic suppliers and proposed joining a discount arrangement through a financial factor, under attractive commercial conditions (LIBOR + 1%). As a result of this change, customers are granted between 20 and 30 credit days. In 2011 the sales procedure for Wal-Mart is expected to change again in such a manner that most of the products provided customers shall be in the form of replenishment. The Company chose to join this arrangement over the course of Q2 2010, a fact that led to a $12 million reduction in the customer balance in the Companys balance sheet as of December 31 2010, compared to the balance in the balance sheet as of December 31 2009. Operating income in 2010 before restructuring expenses amounted to $6.0 million, compared to $5.9 million last year, a 2% increase. Operating income in the fourth quarter of 2010 amounted to $0.2 million, compared to $1.7 million in the corresponding quarter last year, a 90% decrease.
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The drop in operational profit in Q4 2010 compared to the same quarter last year derived from the impairment of inventory in branded activity due to supply delays and creation of surplus inventory sole at reduced cost as well as from the erosion of gross profit due to increases in product costs, mainly in light of the increase in cotton prices in the second half of 2010. The erosion of gross profits was mainly a result of the period of time required to adapt sales prices to customers. In order to deal with the price increase in question, the Company is active on two levels: a. Adapting sales prices to customers. Note that an increase in sales prices will mostly be expressed in the second half of 2011 2. b. An increase in inventory balances with the aim or reducing the exposure level to the increase in the price of the products in question. Inventory balance for the Segment as of December 2010, 31 amounted to $80 million, compared to $42 million as of December 31 2009. The increase in inventory balance derived from that stated in Section B above as well as the conversion of products from packages of 10 units per product (10pp) to packages of 3pp, as demanded by a key customer, which led to the accumulation of $9 million in inventory, which is expected to be sold over the course of 2011 in conjunction with the customer.1 Starting January 1 2011, Mr. Itzhak Weinstock began serving as Chief Operations Officer for this Segment (see Section 1.2.7.2 above). Global Upper Market Sales in 2010 amounted to $257.4 million, compared to $243.6 million last year, a 6% increase.
Note that the above is an estimate and constitutes foreword-looking information, which may or may
not materialize or may differ from Company estimates and forecasts, due to circumstances outside of the Company's control, and due to being based on information available as of the report date, including Company estimates as of the report date.
22
The increase in sales in this Segment in 2010 compared to the corresponding period last year derives from the increase in sales to existing customers in Europe and the US, and was achieved in spite of a drop in sales to a specific customer in the UK. Sales in Q4 2010 amounted to $61.5 million, compared to $67.1 million in the corresponding period last year, an 8% decrease. The decrease in sales in the fourth quarter of the year compared to the corresponding quarter last year derived mainly from a drop in sales to a specific customer in the UK. Operating income in 2010 before special items of the Segment amounted to $16.0 million compared to $1.4 million last year. Operating income before special items in Q4 2010 amounted to $3.3 million, compared to $2.2 million in Q4 last year, a 53% increase. The improvement in results in Q4 and in 2010 as a whole compared to corresponding periods last year, derived from an increase in sales in Europe and the U.S., particularly in brassieres, as well as a result of the streamlining efforts and the restructuring plan that began in Q4 2008 and as a result of exits from unprofitable categories. Delta Israel Sales in 2010 amounted to $76.9 million, compared to $72.8 million last year, a 6% increase. Sales in NIS in 2010 amounted to 287.3 million NIS, compared to 284.7 million NIS in 2009, a 1% increase. Sales in Q4 2010 amounted to $23.3 million, compared to $22.6 million in the corresponding period last year, a 3% increase. Sales in NIS in Q4 2010 amounted to 84.9 million NIS, compared to 85.1 million NIS in Q4 2009. The increase in NIS sales in 2010 over 2009 was largely due to the expansion of the retail store chain. Operating income in 2010 amounted to $13.1 million, compared to $10.5 million last year, a 25% increase.
23
In NIS terms, operating income in 2010 amounted to 48.9 million NIS, compared to 43.3 million NIS in 2009, a 13% increase. Operating income in the fourth quarter of 2010 amounted to $5.2 million, compared to $5.5 million in the corresponding quarter last year, a 5% decrease. In NIS terms, operating income in Q4 2010 amounted to 19.0 million NIS, compared to 18.8 million NIS in the same quarter last year, a 1% increase. The improvement in operating income in NIS terms in Q4 and in 2010 as a whole over corresponding periods last year was mainly due to improved gross profits achieved in spite of increases in the price of finished products mainly over the course of the second half of the year, through increased sales prices to customers. Starting 2010, the new Israeli shekel has become the main currency influencing the activity of Delta Israel. The circumstances that led to the change in operating currency derive from the fact that the area had become economically independent. As a result, Company management has decided that the operating currency in this area from USD to NIS. The change was carried out prospectively. 3. Liquidity and Financing Sources Condensed cash flow statement, in millions of dollars:
Fourth Quarter Ending 31 December 2010

Net cash from current operations Net cash from (used for) investment activity Net cash from (used in) financing activity Increase in cash and cash equivalents 3.7 3.4 4.0 11.1
For the Year Ending December 31 2010

14.3 1.9 1.9 18.1
2009
16.4 (0.2) 6.2 22.4
2009
40.8 (11.0) (6.1) 23.7
The Company finances its operations from its cash flow from current operations, from bank credit frameworks and from the issuance of debentures. The decrease in cash flow from current activity in the fourth quarter and in 2010 as a whole, compared to corresponding periods last year, was largely due to the increase in inventory in Delta USA, which was offset by a decrease in the customers item.
24
In 2010 and in the fourth quarter of the year the Company's cash flow from current operations was positive and amounted to $1.9 and $3.4 million, respectively, compared to a negative cash flow of $11.0 and $0.2 million in corresponding reported periods last year. The positive cash flow from the investment activity in question derived from the receipt of proceeds to the amount of $4.9 million, which constitutes the first payment resulting from the sale of the real estate in Nahariyah and the proceeds of the options for that agreement which was partially offset by the tax sums and the betterment excise referring to the sale. The following are several financial indicators for Q4 and for 2010 and 2009:
2010 Current ratio Quick ratio Customer credit days (quarterly basis)* Supplier credit days (quarterly basis) Inventory days (quarterly basis)* Cash flow from current operations (millions of dollars) year Cash flow from current operations (millions of dollars) Q4 Adjusted EBITDA (millions of dollars) year Adjusted EBITDA (millions of dollars) Q4 Net financial debt (millions of dollars) Bank debt coverage ratio to adjusted EBITDA Equity/balance sheet total Equity (in millions of dollars) 1.77 0.98 53 50 89 14.3 3.7 44.3 11.9 75.0 1.7 47.0% 197.3 2009 1.19 0.76 62 46 60 40.8 16.4 29.1 11.4 84.1 2.9 47.4% 178.5
* For an explanation regarding the decrease in customer credit days and the increase in inventory days, see Section 2.3.3 above.
Total net financial debt as of December 31 2010 amounted to $75.0 million, compared to $84.1 million as of December 31 2009 The decrease in net debt as of December 31 2010 compared to December 31 2010 derived mainly from the positive cash flow from current operations in 2010. The improvement in the current ratio and the quick ratio as of December 31 2010 compared to December 31 2009 derives from the issue of debentures in January and December 2010, which was used in part to redeem short-term credit, the balance of which
25
was deposited in a short-term bank deposit which was included under cash and cash equivalents. 4. Dividends 4.1. As of the balance sheet date the Company declared that it would be distributing dividends to the amount of $2 million, at 8.54 cents per share, to be distributed on March 15 2011 according to the dollars representative rate of exchange as published the day prior to the payment date. The determining date for this distribution shall be February 28 2011 and the X date shall be March 1 2011. The following are details regarding the examination carried out by the Board of Directors in relation to the receipt of the decision to distribute dividends as stated above: a. The Companys board of directors tested whether the Company passed the profit and repayment ability test set in Section 302(a) of the Companies Law, 1999, and following this examination confirmed that the Company had passed these tests in the matter of the distribution of the dividends in question. b. In the matter of passing the profit test, the Board of Directors approved the dividend distribution in question on the basis of the Company's retained earnings as of December 31 2010, which exceeds the sum of dividends approved. c. In the matter of passing the repayment test, the Board of Directors took the following into consideration: data regarding the Company's financial status including data regarding the Companys liquid reserves, the Company's debit balance and its net debit balance; the Company's unused bank credit frameworks, the projected cash flow for 2011 and expected interest and principal payments for the debentures (Series K) issued by the Company, including the series expansion made in December 2010. Following examination of the above, the Board of Directors confirmed that the Company passes the repayment ability test regarding the distribution of dividends in question, including in conservative scenarios. d. The Board of Directors estimates that the dividend distribution will have no material negative effect on the Companys financial status, including its
26
capital structure, leverage, liquidity and its ability to continue operating according to its existing format. e. The Board of Directors did not base its estimates on the Companys ability to sell assets or on financial sources deriving from companies held by the Company. f. The projected data and estimates in c. and d. above constitute forewordlooking information, as defined in the Securities Law, 1986, based on analysis of the data detailed in c. above carried out by the Company. These expectations and projects may not be realized, in whole or in part, or be realized in a materially different manner than projected, among other things due to changes in economic markets in Israel and in the world, changes in capital market conditions, exchange rates, and various market conditions in which the Company operates, which may impact the Company's activities and results. 5. Exposure to Market Risk and Management Thereof Exposure to Market Risk, Risk Factors and Management Thereof 5.1. The person responsible for market risk management at the Company: The Company manages the market risks based on a policy set by its Board of Directors and senior management. Mr. Isaac Dabah, the Company's CEO, is responsible for managing the Companys market risks. Mr. Yossi Hajaj, the Company's CFO, is responsible for managing the market risk associated with exchange rates and interest. 5.2. Description of market risk factors: The Group, in its operations, is exposed to multiple market risk factors, including the state of the economy in target markets in which the Company operates, as well as fluctuations in exchange rates in those markets vs. the Company's operating currency, the USD. For details of risk factors to which the Company is exposed, see Section 1.25 of Part A of this report. 5.3. Group Policy with Respect to Market Risk Management
27
(1) Increase in Cotton Prices 2010 saw a significant increase of 80% in average cotton prices compared to 2009. This increase led to a significant increase in the price of cotton string, the Company's main raw material. The Company tracks fluctuations in the price in question and tries to adapt its string and finished product inventory levels to sales projections. In addition, the Company acts to increase prices for customers, but this price adjustment may take several months.2 See Section 2.3.3 above. (2) Volatility of Exchange Rates of the Euro vs. the USD The Company had a surplus of receivables over payments denominated in Euro in 2010, estimated to $40 million. In the first half of 2010 the Company acted with an average exchange rate of $1.484 per euro, as a result of hedging transactions carried out in 2009. The Company carried out hedging transactions for the second half of 2010 with an average exchange rate of $1.292 per euro. In 2011, the Companys receipts in euros are expected to drop to just $20 million in light of the transfer for some of the Company's sales contracts with European customers to dollars (see Other Revenues, Net, Section 2.3.1). The Company carried out hedging transactions equaling $20 million in 2011, with an average exchange rate of $1.359 per euro, this in order to protect the receipt surplus in question, see 5.4 below.
Note that the above is an estimate and constitutes foreword-looking information, which may or may
not materialize or may differ from Company estimates and forecasts, due to circumstances outside of the Company's control, and due to being based on information available as of the report date, including Company estimates as of the report date.
28
The following are average euro/USD exchange rates for 2011 and 2010:
2011(**) First quarter Second quarter Third quarter Fourth quarter 1.308 1.362 1.382 1.384 2010 $1.384 $1.275 $1.291 $1.360 % Change (5%) 7% 7% 2%
(**) Average rate of exchange for hedging transactions carried out by the Company.
It is Company policy to maintain as high an alignment as possible between the currency in which its products are sold and the currency in which products and/or raw materials are bought. The Company regularly reviews its balance sheet exposure and its economic exposure in accordance with forecast revenues and expenses for the coming 12 months.
The Company's operations are exposed to macroeconomic risks, industry risks and risks unique to its operations. Full details of theses risks factors can be found in Section 1.25 if Part A of this periodic report.
5.4. Financial Instruments In its results for Q4 and 2010 as a whole the Company included under other revenues, net, the results of transactions completed during the reported period and the results of the revaluation of currency transactions referring to future reporting periods not recognized as accounting hedges against the euro to the amount of $1.6 and $1.8 million respectively.
29
The following positions are not recognized as an accounting hedge vs. the euro:
Redemption Date 10/1/11 8/2/11 10/3/11 Q1 2011 11/4/11 26/4/11 10/5/11 26/5/11 9/6/11 28/6/11 Q2 2011 11/7/11 8/8/11 8/9/11 Q3 2011 11/10/11 8/11/11 28/11/11 8/12/11 24/12/11 Q4 2011 Total transactions
Exchange Rate for Transaction (USD per 1) 1.308 1.309 1.308 1.336 1.404 1.336 1.403 1.335 1.402 1.382 1.382 1.382 1.831 1.380 1.395 1.380 1.394
Amount in Thousands of Dollars 1,300 1,300 2,400 5,000 1,000 300 1,000 300 1,000 1,400 5,000 2,000 1,500 1,500 5,000 1,200 1,200 100 1,100 1,400 5,000 20,000
Average Exchange Rate
1.308
1.362
1.382
1.384 1.359
30
5.5. Linkage basis report, in thousands of dollars: As of December 31, 2010 Audited
In Other Currencies 1,059 4,422 1,014 6,495 2,825 3,261 266 6,352 143 NonMonetary Balances 2,717 121,275 2,838 213 5,127 62,704 75,464 270,338 489 472 961 269,377
In USD Assets: Cash and cash equivalents Trade receivables Other accounts receivable Inventories Assets classified as held for sale Debit balances and long-term prepaid expenses Financial derivative Deferred tax assets Fixed assets, net of accumulated depreciation Intangible assets, net of accumulated amortization Total assets Liabilities: Credit from banking corporations Trade payables Other accounts payable Long-term loans from banking corporations Severance pay liabilities, net of plan assets Debentures (*) Long-term loans and other liabilities Total liabilities Balance sheet total, net 51,211 38,539 16,609 3,614 58,023 4,967 172,963 (62,653) 45,091 55,831 6,722 836 1,830 110,310
In Euro 44 10,842 1,095 11,981 8,317 3,415 862 12,594 (613)
In NIS 21 19,222 1,205 39 20,487 21 8,180 21,139 63 29,403 (8,916)
Total 46,215 90,317 12,753 121,275 2,838 1,088 1,830 5,127 62,704 75,464 419,611 59,549 52,959 42,360 3,614 472 58,023 5,296 222,273 197,338
(*) Debentures issued in January and December 2010, are denominated in NIS, bear fixed NIS interest and are not linked. The Company has entered into a swap agreement with a bank to swap NIS cash flows for a dollar cash flow, and vice versa, hence this liability is presented as linked to the USD.
31
As of December 31, 2009 Audited

In Pounds In USD Sterling In Euro NIS In Other Currencies NonMonetary Balances
Total
Assets: Cash and cash equivalents Trade receivables Other accounts receivable Inventories Assets classified as held for sale Long-term debit balances Deferred tax assets Surplus of plan assets over liabilities due to the termination of employee-employer relations Fixed assets, net of accumulated depreciation
Intangible assets, net of accumulated amortization
23,159 62,823 1,829 1,047 88,858 91,475 31,490 15,247 5,723
253 7,214 334 7,801 2 1,814 3,079 -
92 14,969 827 15,888 14,752 2,721 893 -
1,522 17,053 1,717 46 20,338 8 7,169 13,774 -
2,867 1,081 636 118 4,702 1,917 2,824 -
2,689 80,685 2,916 206 3,541 85 72,677 76,040 238,839 49 -
27,893 103,140 8,032 80,685 2,916 1,417 3,541 85 72,677 76,040 376,426 106,237 45,111 35,866 5,723
Total assets Liabilities: Credit from banking corporations Trade payables Other accounts payable Long-term loans from banking corporations Severance pay liabilities, net of plan assets Deferred taxes Long-term loans and other liabilities Total liabilities Balance sheet total, net
3,861 147,796
(58,938)
4,895
2,906
18,366
(2,478)
20,951
(613)
4,741
(39)
335 787 1,171

237,668
335 787 3,861 197,920

178,506
32
5.6. Sensitivity to changes in different exchange rates vs. the USD and changes in interest rates for December 31 2010. Sensitivity to change in NIS/USD exchange rate: Gain (Loss) from Changes 10% Increase Expected exchange rate
Cash and cash equivalents Customers balances Long-term debit balances Short-term corporations Trade payables Other accounts payable Other long-term liabilities Off-balance-sheet liabilities in respect of rental agreements 818 2,114 6 708 1,599 409 1,057 3 354 800 (8,180) (21,139) (63) (7,079) (15,995) (409) (1,057) (3) (354) (800) (818) (2,114) (6) (708) (1,599) credit from banking (4) 2 (2) 1 39 (21) 2 (1) 4 (2)
5
Gain (Loss) from Changes Fair Value

$1 = 3.55 NIS
5% Increase
$1 = 3.73 NIS
5% Decrease
$1 = 3.37 NIS
10% Decrease
$1 = 3.19 NIS
$1 = 3.90 NIS
(2) (1,922) (121)
(1) (961) (60)
21 19,222 1,205
1 961 60
2 1,922 121
Other accounts receivable and debit
Total
Sensitivity to changes in the discount rate of liabilities in respect of rental and franchise agreements denominated in NIS:
10% increase 1 Pre-tax change in fair value 6 69 5% increase 2 35 Discount rate of 12% (7,289) 5% Decrease 3 (35) 10% Decrease 4 (70)
Sensitivity to changes in EUR/USD exchange rates:

Gain (Loss) from Changes 10% Increase Expected exchange rate Cash and cash equivalents Customers Other balances Short-term credit from banking corporations Trade payables Other accounts payable Total (832) (342) (86) (61) (416) (171) (43) (31) (8,317) (3,415) (862) (613) 416 171 43 31 832 342 86 61
5
Gain (Loss) from Changes Fair Value 1 = $1.33 2 542 55 44 10,842 1,095 5% Decrease 1 = $1.27 (2) (542) (55) 10% Decrease 1 = $1.20 (4) (1,084) (110)
5% Increase 1 = $1.40 4
1 = $1.47 1,084
accounts
receivable
and
debit
110
33
Sensitivity to changes in the discount rate of liabilities in respect of franchise agreements denominated in Euro:
10% increase 1 Change in fair value, before tax 1 5% increase 2 Discount rate of 12% (169) 5% Decrease 3 10% Decrease 4 (1)
Sensitivity to change in 3-month LIBOR interest rate: The following calculation relates to cash flow exposure and not to changes in fair value to a loan portfolio amounting to $57.4 million (in thousands of dollars) while the weighted interest on the investment portfolio of December 31 2010 is 2.1%
Change in interest rate Interest rate expected after change Pre-tax gain (loss) due to changes 10% Increase 2.31% 120 5% Increase 2.21% (60) 5% Decrease 2.00% 60 10% Decrease 1.89% 120
The following are sensitivity analyses for the value of the SWAP contract the Company entered regarding the replacement of NIS cash flows to debenture holders with a dollar cash flow. Note that changes in the value of the contract shall be attributed to a capital fund in the Companys balance sheet with no impact on the Statement of Operations. Analysis of the sensitivity of the value of the SWAP contract to changes in the exchange rate (NIS/USD):
Rate of change Expected exchange rate Forward contract value Difference 10% Decrease $1 = 3.20 NIS 9,089 7,259 5% Decrease $1 = 3.37 NIS 5,269 3,438 Fair Value $1 = 3.55 NIS 1,831 5% Increase $1 = 3.73 NIS (1,280) (3,111) 10% Increase $1 = 3.90 NIS (4,107) (5,938)
Analysis of the sensitivity of the value of the swap contract to changes in NIS interest:
Rate of change Expected interest rate Forward contract value Difference 10% Decrease 6.30% 2,581 750 5% Decrease 6.70% 2,204 373 Fair Value 7.00% 1,831 5% Increase 7.35% 1,460 (371) 10% Increase 7.70% 1,092 (738)
Analysis of the sensitivity of the value of the swap contract to changes in dollar interest:
Rate of change Expected interest rate Forward contract value Difference
1
10% Decrease 5.47% 1,251 (580)
5% Decrease 5.78% 1,542 (289)
Fair Value 6.08% 1,831
5% Increase 6.38% 2,118 287
10% Increase 6.69% 2,403 572
For a 13.2% discount rate. 2 For a 12.6% discount rate. 3 For an 11.4% discount rate. 4 For a 10.8% discount rate. 5 The balance of trade receivables in the above tables is short-term, hence the fair value presented as it is in line with the balance reflected in the financial statements. 6 Most of the liabilities included in the above sensitivity analysis tables refer to rental agreements, while liabilities due to franchise and storage services agreements are of non-material sums.
34
Aspects of Corporate Governance

6. Charitable Donations The Company believes in involvement in the community the environment in which it works and in assisting populations with potential. For many years, Delta has been assisting in educational and cultural activities in Carmiel and has made contributions to co-existence and community assistance activities. Total donations made by the Company for education and cultural institutions amounted to approximately $93,000 and $80,000 in 2010 and 2009, respectively. In addition, the Company donates products to welfare organizations and to non-profit organizations. For details regarding a contribution in the amount of $45,000 to the "Ye'adim North foundation" intended for the "Ma'aseh Center", the Chairman of which is Mr. Noam Lautman, see immediate report published by the Company on February 17 2011. 7. Directors with Accounting and Financial Capabilities The Company Board of Directors has determined that the minimum appropriate number of directors with accounting and financial skills in the Company is two directors. This determination was made taking into account the size of the Company, the type of its operations and its complexity. As of this report, the Board members determined by the Board of Directors to have accounting and financial capabilities (who are not Company employees) are: Yechezkel Dovrat and Shaul Ben Zeev. For details indicating that these Board members have accounting and financial capabilities, see the Periodic Report (Part D), Regulation 26. Most of the other members of the Company's Board of Directors can also be considered to posses have accounting and financial expertise. Disclosure Regarding the Rate of Independent Directors As of the report date, the company did not adopt in its bylaws the instruction regarding the rate of independent directors (as defined in Section 219 to the Companies Law, 1999).
35
8. Auditing Accountants Fee The Companys independent CPA is the firm of Kesselman and Kesselman - PWC. The of the independent CPAs fees for auditing services, audit-related services and tax services rendered to the Company, and fees of CPAs of other material overseas subsidiaries amounted to $1,260,000 in 2010, compared to $785,000 in 2009, while the number of work hours increased from 10,900 in 2009 to 13,500 in 2010, as follows:
2010
2009
Thousands of Dollars Audit services Tax services and Others Total

725 535 1,260 622 163 785
The increase in fees for auditing services in 2010 compared to 2009 derived mainly from services pertaining to evaluations and inspections on the matter of the effectiveness of auditing work on the Goshen project. The increase in accounting fees attributed to tax and other services in 2010 compared to 2009 derives mainly from due diligence carried out regarding a purchase, see Section 1.2.6 above, and from the "Transfer Pricing" project. 9. Disclosure with Regard to the Corporations Internal Auditor The following is disclosure with regard to the Companys internal auditor, pursuant to regulation 10(b)(11) of the Security Regulations (Periodic and Immediate Reports), 1970: Details of internal auditor: Auditors name: Oren Groupi, CPA Start of term in office - March 2007. To the best of the Companys knowledge, the internal auditor meets all provisions set forth in section 3(a) of the Internal Audit Act, 1992. To the best of the Companys knowledge, the internal auditor meets provisions set forth in section 146(b) of the Companies Law, 1999 and provisions of Section 8 of the Internal Audit Law, 1992.
36
To the best of the Companys knowledge, the internal auditor does not hold securities of the Company or of any entity affiliated with the Company. To the best of the Companys knowledge, the internal auditor has no material business relationships or other material relationships with the Company or with its affiliated entities. The auditor is not employed by the corporation. Internal audit services are provided by the auditor, as a personal appointment, via the firm of KPMG Somekh-Chaykin which employs a staff with various skills, including internal auditing skills. Method of appointment: Appointment of Mr. Oren Groupi as internal auditor was approved by the Audit Committee and by the Board of Directors in Q1 2007. Appointment of the internal auditor was approved after intensive review of his education and extensive experience, and following meetings held with him and first-hand impressions by Company management and by the Audit Committee. Mr. Groupi was deemed suitable for the office of Company internal auditor, inter alia, based on the extent and complexity of Company operations. Identity of the internal auditors supervisor: The supervisor of the internal auditor is the Companys CEO. Work plan: The internal auditor's work plan is yearly. The yearly work plan followed by the internal auditor in 2010 was decided, inter alia, based on: Risk management conducted in the Company and relevant adjustments made as needed. Proposals by members of the Audit Committee and the Company Board of Directors based, inter alia, on proposals of the internal auditor and of Company management. Scope of Company operations, its organizational structure and the nature of its business operations. The annual work plan was approved by the Audit Committee based on recommendation of Company management.
37
The annual work plan contains no restrictions on deviating from said plan. The internal auditor may propose adding and/or replacing issues, subject to approval by the Audit Committee. The 2010 annual work plan included audits of the Company in Israel and of corporations fully-owned by the Company overseas. Scope of employment: In 2010, the internal auditor of the Group spent 825 hours in practice on internal auditing, of which 620 hours were for the audit of the Company in Israel and 205 hours for internal audits of overseas subsidiaries. Conducting the audit: According to the internal auditor's notification, the internal audit is conducted in accordance with the Internal Audit Law, 1992 and with standards published by the Israel Chamber of Internal Auditors. Access to information: The internal auditor was granted free access to the Companys documents and information systems, including its financial data, all provided for the purpose of carrying out his duties, as set forth in Section 9 of the Internal Audit Act, 1992. Internal auditors report: Reports of the internal auditor were submitted in writing to the Chairman of the Audit Committee, to its members and to Company management. The Audit Committee convened for 7 meetings during 2010, 4 of which involved the internal audit reports. Board of Directors assessment of internal auditors activities: The Board of Directors believes that the internal auditors actual scope of work in 2010, as set forth above, achieves the Companys internal auditing objectives. Compensation: In exchange for his work during the reported period, and as agreed with the internal auditor, his fee amounted to $51,000 in total. No securities were granted to the internal auditor as part of the terms of his employment.
38
The Companys Board of Directors believes that this compensation is reasonable and should not affect the internal auditors judgment when auditing the Company. 10. Disclosure Regarding the Approval Process of the Financial Statements The Companys Board of Directors has decided that the organ in charge of overall supervision of the Companys financial statements will be the Financial Statement Examination Committee. This committee consists of three directors, as follows: Yechezkel Dovrat, Chair of the Committee outside director, with expertise in accounting and finance. Shaul Ben Zeev outside director, with expertise in accounting and finance. Noam Lautman capable of reading and understanding the Financial Statements. Prior to their appointment, the three members of the Committee provided the Company with a statement in accordance with Section 3 of the Companies Regulations (Instructions and Conditions Pertaining to the Financial Statement Approval Process), 2010. Prior to the approval of the Companys Financial Statements, drafts of the Financial Statements and associated reports and notes to these Statements are sent to members of the Finance Committee, usually three days before the meeting and subject the law. Invited to the meeting of the Financial Statement Examination Committee to discuss the approval of the Financial Statements are: the Company CEO, CFO Company Comptroller as well as the independent CPAs who present the financial statements to Committee members and answer any questions. During the Financial Statement Examination Committees meeting on the Financial Statements, the Committee reviews and discusses the Company's Financial Statements, reviews major changes in them, refers to comments by Company management and the independent CPA and reviews the compliance between the financial statements and events that have occurred in the Company and standards used by the Company in the preparation of its financial statements. After the discussion, the Chair of the Financial Statement Examination Committee calls a vote on the recommendation of the Committee to the Board of Directors to approve the
39
Financial Statements, and makes queries whether any Committee members still have any unanswered questions or issues. After the Financial Statement Examination Committee recommends approval of the Financial Statements as set forth above, the Financial Statements and attached notes are brought to the Company Board of Directors for approval. Note also that if, during compilation of the financial statements, the CFO or the Company CEO have any material questions or issues requiring preliminary discussion before submitting the Financial Statements to the Board of Directors for approval, the CFO or the Company CEO will instruct that the Board of Directors convene for a preliminary meeting to discuss and resolve these issues. 11. Meetings of the Board of Directors and of the Audit Committee In 2010, the Board of Directors held 13 meetings, the Companys Audit Committee held 7 meetings, the Finance Committee held 4 meetings and the Copensation Committee held a single meeting. The names of the Finance Committee members who attended the meetings on February 13 and 14, 2011, at which the Committee recommended that the Companys Board of Directors approve the December 31 2010 Financial Statements in their entirety were: Yechezkel Dovrat, Chairman of the Committee, Shaul Ben Zeev and Noam Lautman. Also present at the February 14 2011 meeting was Company CEO Isaac Dabah. The names of Board members who attended the Board of Directors' meeting on February 16 2011 at which the December 31 2010 annual report was approved were: Chairman of the Board Gideon Chitayat, Israel Baum, Itzhak Weinstock, Noam Lautman, Shaul BenZeev, Tzipporah Carmon, Yechezkel Dovrat and Isaac Dabah. 12. Senior Employee Remuneration Regulation 21 Compensation given senior Company employees and interested parties is detailed in Section D of this periodic report. As part of the 2010 yearly report approval process, the Board of Directors held extensive discussions on the employment/service conditions of each of the Companys executives and interested parties, detailed pursuant to Regulation 21 of the Periodic and Immediate Reports Regulations, separately. The Board discussed, among other things, the relation between the sums of reimbursements given in 2010 to each of them and the contribution to the Company over the course of the reported period and their actions in 2010. For the
40
purpose of the discussion, the Board members were presented, in advance, with relevant data regarding each executive and interested party, as required by Regulation 21 of the Periodic and Immediate Reports Regulations. The Board of Directors noted that the compensation given each Company's senior executive, is determined, inter alia, taking into account the position the senior executive fulfils in the Group and their contribution to the group and its activity and in accordance with the Company's payment of performance compensation program. In addition, the Board of Directors noted that some of the bonuses given to some senior executives are contingent on goals achieved and on the results of the Companys activities and that the bonus and the options received by senior management constitute adequate incentives for the achievement of the Company's profits and the advancement of the Companys goals. The Board of Directors believes that payment received by each of the Company's senior executives and interested, are fair and reasonable. Directors' Compensation The Companys directors3, including outside directors, are entitled to identical directors' compensation not exceeding generally accepted levels and set according to the directives of the Companies Regulations (Rules Regarding Compensation and Expenses for Outside Directors), 2000, in accordance with the Company's rank and not exceeding the maximum sum as per those Regulations. The Company pays its directors yearly compensation of 60,000 NIS per year and participation compensation of approximately 2,200 NIS per meeting. Expense refund for Mr. Yizthak Weinstock Expense reimbursements for director Mr. Itzhak Weinstock amounted to $45,000 in 2010. The Company's Board of Directors believes that the reimbursement is reasonable and in compliance with Company procedure, has been granted for expenses made by Mr. Weinstock in relation to the fulfillment of his duties as Company director and did not exceed the $80,000 ceiling approved by the General Meeting.
With the exception of Chairman of the Board Mr. Shatiat, Company CEO Isaac Dabah so long as he
serves as Company CEO and Mr. Weinstock starting January 2011 so long as he serves as a COO of a subsidiary, for whom different terms of service were set.
41
Consultation Agreement with Mr. Israel Baum, Company Director The terms of the consultation agreement with Mr. Baum have been reviewed and discussed. Also discussed were the services provided by Mr. Baum to the Company over the course of 2010 as per the agreement. The members of the Board of Directors believe that payment given Mr. Baum for consultation services in 2010 is fair and reasonable. Disclosure Provisions with Regard to the Corporations Financial Reporting 13. Disclosure on Critical Accounting Estimates In preparing the Financial Statements according to generally accepted accounting practices, management is required to employ estimates and assessments that impact the reported information on assets and liabilities, on data on contingent assets and pending liabilities disclosed in the Financial Statements and on revenue and expense data for the reported period. These estimates sometimes require discretion in an uncertain environment, and materially impact presentation of data on the financial statements. Below is a description of critical accounting estimates used in compiling the financial statements, the formulation of which requires that the Company make assumptions with regard to circumstances and events involving significant uncertainty. In exercising its judgment for the purpose of making accounting estimates, the Company accounts for the relevant facts, past experience, impact of external factors and assumptions reasonable under the circumstances. Naturally, as these are merely estimates, actual results may differ. Inventory The inventory of Company products is a material component of total Group assets. The Companys inventory is recorded at cost or at net realization value, whichever is lower. The cost of purchased finished goods, as well as the cost of raw material and other materials is determined using the moving average method. The cost of in-process inventory or inventory of products manufactured at Company plants is estimated as follows: the cost of raw materials and packaging is measured using moving averages, whereas labor cost and indirect manufacturing expenses are measured based on an average for the manufacturing period. The Company makes monthly estimates for amortization of slow or dead inventory, based on past experience, remaining inventory from previous seasons and sales forecasts.
42
Goodwill The goodwill balance in the Companys Financial Statements is material to the sum of Company assets. Goodwill reflects surplus investment cost over the book value of subsidiaries acquired by the Group. In accordance with GAAP, the Company does not depreciate goodwill on a regular basis, but rather reviews the need for depreciation annually, on a fixed date. Based on the Company review conducted this year, there is no need for impairment of goodwill. Fixed Assets Fixed assets are a major component of total Group assets, and are presented at cost, net of referring grant amounts and amortization expenses which are calculated using the straight line method based on their estimated useful life for the Company. Residual values and useful life spans of assets are reviewed and adjusted as needed on a periodic basis. Additional depreciation of fixed asset costs is recorded up to the market value of said asset, if the future cash flow expected from its operation is lower than its carrying amount. According to the review conducted by the Company this year, the value of its real estate in Hungary is lower than its cost in the Companys books, and therefore impairment to its value is required. See Note 7 to the financial statements, in part C of this periodic report. For full details on accounting estimates and assumptions see Note 3 to the financial statements, in part C of this periodic report.
43
Special Disclosure for Debenture Holders 14. Outstanding Obligatory Notes The following is a description of outstanding Company debenture series as of this report:
Series
Issuing Date
K
113,000,000 NIS NV debentures listed for trade on January 24 2010 pursuant to a shelf offering report published by the Company on January 18 2010 pursuant to the Company's shelf prospectus dated May 29 2008. 92,632,000 NIS NV debentures listed for trade on December 28 2010 pursuant to a shelf offering report published by the Company on December 23 2010 pursuant to the Company's shelf prospectus dated November 22 2010.
Extent of N.V. debentures at issuance (in NIS) Extent of N.V. debentures as of December 31 2010 (in NIS) U, unlinked Start date of principal repayment Number of annual installments of principal repayment Accrued interest as of December 31, 2010 Stock market value U near December 31 2010 Interest type Effective interest upon issue of debentures (including issuance expenses) Effective interest upon issue of debenture expansion (including issuance expenses and premium) Interest payment dates
205,632,000
205,632,000
19.7.2012 1
$1.8 million 217.9 million NIS
Fixed - 7% 7.45%
6.62%
Semi-annual installments on July 19 and on January 19 of each of the years from 2010 through 2016 (first installment paid on July 19, 2010). Non-linked.
Linkage type
44
Series
Conversion right Right to early redemption or forced conversion
K
The debentures are not convertible. Should the stock exchange decide to de-list the debentures from trading due to a decline in the value of the debenture series below the threshold determined by the stock exchange, the Company shall not allow early redemption of debentures due to said de-listing. Not guaranteed by any liens. Rated A3/Stable by Midroog Ltd. (see report dated December 31 2009 (ref. 2009-01-338541) and December 19 2010 (ref: 2010-01-721767). Strauss Lazar Trust Company (1992) Ltd., 17 Yitzhak Sadeh Street, Tel Aviv (Tel. 03-623777, Fax: 03-5613824). Contact at the trustee is Mr. Ori Lazar, email: ori@slcpa.co.il.
Guarantee to secure payment U Rating
Details and contact information of trustee
As of the report, the Company is in compliance with all terms and conditions and commitments to holders of outstanding debentures, including those pursuant to the trust deed for said debentures, and there was no cause to demand immediate repayment of the debentures. Note that the debenture series (K including the expansion) is material and constitutes 77% of the Companys net financial debt and 26% of the Company's liabilities as of December 31 2010. The Company has entered into a swap agreement with a banking corporation, to swap NIS cash flows for a commitment to pay debenture holders with a dollar cash flow. The dollar interest set for the transaction is 6.08%. The Board of Directors and management express their deep appreciation of Delta employees and managers. Signed: February 16 2011.
Gideon Chitayat Chairman of the Board of Directors
Isaac Dabah CEO and Director
45

2010 Yearly Report
Delta Galil Industries Ltd. 2010 Yearly Report
Table of Contents
Page Independent Auditors' Report - Internal Controls over Financial Reporting Auditors Report Consolidated Financial Statements in USD: Balance Sheets Statements of Comprehensive Income (Loss) Statements of Changes to Equity Cash Flow Reports Notes to the Financial Statements Appendix A - Details of Investee Companies 5-6 7 8 9-10 11-83 3-4 2
______________ ___________________ ______________
Kesselman and Kesselman Certified Public Accountants Migdal Hashachar, 25 Hamered Tel Aviv 68125 P.O. Box 452 Tel Aviv 61003 Telephone no. 03-7954555 Fax 03-7954556 Auditors' Report To the Shareholders of

We have inspected components of the internal controls of the financial reporting of Delta Galil Industries Ltd. (hereinafter the Company) and its subsidiaries (hereinafter together - the Company) as of December 31 2010. These control components have been set as explained in the following paragraph. The Bank's Board of Directors and management are responsible for maintaining effective internal controls over financial reporting, and for evaluating the effectiveness of the internal controls over financial reporting which is included in the periodic report for the date in question. Our responsibility is to express our opinion on the Bank's internal controls of the Companys financial reporting, based on our audit. The components of internal control of financial reporting inspected by use were determined according to Audit Standard 104 of the Institute of Certified Public Accountants in Israel Inspection of Components of Internal Controls for Financial Reporting (hereinafter Audit Standard 104). These components are: (1) organization-level controls, including controls of the process of preparing and closing financial reporting and general controls of information systems and including assessing the balance of goodwill; (2) controls for the inventory purchasing process, including inventory assessment and measurement, including provisions to impairment due to slow and/or dead inventory; (3) controls for the sales process (all of the above together are referred to as the Audited Control Components). We have conducted our audit in accordance with Audit Standard 104. According to this standard, we were required to plan the audit and carry it out with the aim of identifying the inspected control components and achieve a reasonable level of certainty as to whether these control components were upheld effectively in all material aspects. Our audit included achieving an understanding of the internal controls over financial reporting, evaluation of the risk of the presence of any material weakness in the inspected control components, as well as testing and evaluating those control components based on the evaluated risk. Our audit, regarding those control components, also included additional procedures that we believed to be necessary under the circumstances. Our audit referred solely to the audited control components, unlike an internal audit on all processes material to financial reporting, and therefore our opinion refers to the audited control components only. Furthermore, our audit did not refer to mutual influences between audited and unaudited control components and therefore, our opinion does not bring such negative impacts into account. We believe that our audit provides a sufficient basis for our opinion in the context described above. Due to their understandable limitations, internal controls over financial reporting in general, and components thereof in particular, may fail to prevent or discover a misrepresentation. Likewise, conclusions regarding future on the basis of any present effectiveness assessment may be exposed
to the risk that the controls become inappropriate due to changes in circumstances or that the application of the policy or the procedures changes to the worse. In our opinion, the Company has upheld in an effective manner, in all material aspects, its audited control components as of December 31 2010. We have also conducted an audit, in accordance with generally accepted Israeli auditing standards, the Companys Consolidated Financial Statements for December 31 2009 and 2010 and for each of the three years of the period ending December 31 2010 and our report, published February 16 2011, includes our unreserved opinion of those Financial Statements. Tel-Aviv February 16, 2011 Kesselman and Kesselman Certified Public Accountants
Kesselman and Kesselman Certified Public Accountants Migdal Hasachar, 25 Hamered Tel Aviv 68125 P.O. Box 452 Tel Aviv 61003 Telephone no. 03-7954555 Fax 03-7954556 Auditors' Report To the Shareholders of

We have audited the consolidated balance sheets of Delta Galil Industries Ltd. (hereinafter the Company) as of December 31 2010 and 2009 and the consolidated statements of income (loss), changes in equity and cash flow for each of the three years of the period ending December 31 2010. The Company's Board of Directors and management are responsible for these financial statements. Our responsibility is to express our opinion of these Financial Statements on the basis of our audit. We did not audit the financial statements of certain subsidiaries, whose assets included in the consolidation constitute 8% and 10% of the Company's total consolidated assets as of December 31, 2010 and 2009 respectively, and the assets of which included in the consolidation constitute approximately 1% of total consolidated revenues for the year ending December 31 2010. The financial statements of the above subsidiaries were audited by another independent auditor, whose reports have been provided to us, and our opinion, insofar as it relates to sums included for those companies, is based on the reports of the other independent auditor. We conducted our audit in accordance with generally accepted Israeli auditing standards, including standards prescribed in the Accountants Regulations (Methods of Operation of Accountant), 1973. These Standards require that we plan and perform the audit with the aim of obtaining reasonable assurance that the Financial Statements are free of material misrepresentations. The audit includes sampling of evidence supporting the sums and information in the Financial Statements. The audit also features an examination of the accounting rules implemented and of the material estimates made by the Companys Board of Directors and Management, as well as an evaluation of the propriety of presentation on the Financial Statements as a whole. We believe that our audits and the reports of the other auditor provide a reasonable basis for our opinion. In our opinion, based on our audit and the reports of the other independent auditor as mentioned above, the Consolidated Financial Statements in question adequately reflect, in all material respects, the financial status of the Company and its subsidiaries as of December 31 2010 and 2009 and the results of their operations and cash flows for each of the three years of the period ending December 2010, in accordance with the International Financial Reporting Standards (IFRS) and with the Israeli Securities Regulations (Preparation of Yearly Financial Statements), 2010.
We have also audited, in accordance with Audit Standard 104 of the Institute of Certified Public Accountants in Israel Inspection of Components of Internal Controls for Financial Reporting, components of internal controls of the Companys financial reporting as of December 31 2010, and our February 16 2011 report includes an unreserved opinion regarding the effective existence of those components.
Tel-Aviv February 16, 2010
Kesselman and Kesselman Certified Public Accountants

Consolidated Balance Sheets December 31 2010 2009 Thousands of Dollars
Note Assets Current assets: Cash and cash equivalents Accounts receivable: Trade receivables: Taxes on income receivable Others Inventory Assets classified as held for sale Total current assets Non-current assets: Long-term pre-paid expenses Long-term debit balances Surplus of plan assets over liabilities due to the termination of employee-employer relations Fixes assets, net of accumulated depreciation Intangible assets, net of accumulated amortization Deferred tax assets Financial derivative Total non-current assets Total assets 2n 20a
46,215 90,317 725 12,028 121,275 2,838 273,398 198 890 62,704 75,464 5,127 1,830 146,213 419,611
27,893 103,140 2,199 5,833 80,685 2,916 222,666 94 1,323 85 72,677 76,040 3,541 153,760 376,426
20b 8
10a 10b 16 7 9 15e 12b
) Gideon Chitayat, ) Chairman of the Board of Directors ) Isaac Dabah, ) CEO ) Yossi Hajaj, ) CFO Date of approval of Financial Statements by Company Board of Directors: February 16, 2011
Note Liabilities and capital Current liabilities: Short-term bank loans Current maturities of long-term loans from banking corporations Accounts payable: Trade payables Taxes on income - payable Others Total current liabilities Non-current liabilities: Loans from banking corporations Less current maturities Severance pay liabilities, less plan assets Other non-current liabilities Deferred tax reserve Debentures Commitments Total non-current liabilities: Total liabilities Capital Equity attributable to parent company shareholders: Share capital Share premium Other capital reserves Unassigned income balance Treasury shares Non-controlling interests Total equity Total liabilities and equity 20c 11a
December 31 2010 2009 Thousands of Dollars
57,439 2,110 52,959 854 41,506 154,868
104,127 2,110 45,111 864 35,002 187,214
20d
11a 16 13 15e 12a 18
3,614 472 5,296 58,023 67,405 222,273
5,723 335 3,861 787 10,706 197,920
14
23,091 120,966 1,465 58,969 (9,700) 194,791 2,547 197,338 419,611
23,086 120,854 41,721 (9,700) 175,961 2,545 178,506 376,426
The attached notes constitute an integral part of these Financial Statements.

Statements of Comprehensive Income (Loss) For the Year Ending December 31 Note
2010
2009
2008
Sales Cost of sales Gross profit Selling and marketing expenses General and administrative expenses Other revenues, net Restructuring expenses (income), net Impairment of fixed assets Impairment of goodwill Loss of capital from the sale of subsidiary Operating profit (loss) Finance expenses, net The Companys share in losses (profits) of affiliate Profit (loss) before taxes on income Taxes on income Yearly profit (loss) Other comprehensive profit (loss) Actuarial profits (losses) defined employee benefit plan Net change in cash flow hedging transactions Adjustments from the translation of financial statements prepared in foreign currency Taxes on income and expenses charged directly to other comprehensive profit (loss) Other comprehensive profit (loss) for the year, net of tax Net comprehensive income (loss) for the year Attribution of net income (loss) for the year: To shareholders of the parent company To non-controlling interests Total net income (loss) for the year: Attribution of total comprehensive profit (loss) for the year: To shareholders of the parent company To non-controlling interests Net comprehensive income (loss) for the year Earnings (loss) per share attributable to equity holders of the parent company: Basic Diluted
5c(1)-d 20g 20h 20h 20j 20e 7d 9b
20k
15
Thousands of Dollars (Except for per-share data) In USD 620,074 572,534 622,834 468,831 517,155 498,805 121,269 103,703 105,679 65,207 66,342 78,953 25,347 21,956 26,703 (2,494) (761) (805) 485 (1,331) 9,162 992 1,945 7,392 666 31,066 15,552 (15,726) 7,817 6,369 7,479 (41) 55 23,249 9,224 (23,260) 1,574 2,522 2,067 21,182 7,650 (25,782)
16 12b 15
(139) 47 1,429 54 1,391 22,573
23 (105) (82) 7,568
(233) 166 38 (29) (25,811)
21,060 122 21,182 22,451 122 22,573 2x, 17 0.90 0.87
7,662 (12) 7,650 7,580 (12) 7,568
(26,400) 618 (25,782) (26,429) 618 (25,811)
0.40 0.40
(1.41) (1.41)

Statements of Changes to Equity
Attributable to Company Shareholders Ordinary Share Capital Capital Reserve from Translation Differences (166) 166 -,-,1,429 1,429 Capital Reserves in Respect of Cash Flow Hedging -,-,36 36 Actuary Loss due to Severance Unassigned Pay Retained Liabilities Earnings Thousands of Dollars (1,148) 61,744 (195) (1,343) (82) (1,425) (74) (1,499) (26,400) (188) 35,156 7,662 27 301 43,146 21,060 (5,000) 1,262 60,468 NonControlling Interests 2,737 618 (365) 2,990 (12) (433) 2,545 122 (120) 2,547
Number of Shares Thousands Balance as of January 1, 2008 Movement in 2008: Comprehensive income (loss) Dividends to non-controlling interest holders Benefit component of options granted Balance as of December 31, 2008 Movement in 2009: Comprehensive income (loss) Rights issue (see Note 14a4) Dividends to non-controlling interest holders Uncollected dividends with respect to previous years Benefit component of options granted Balance as of December 31 2009: Movement in 2010: Comprehensive earnings Proceeds from exercise of options Dividends to non-controlling interest holders Dividend distribution Benefit component of options granted Balance as of December 31 2010 19,948 19,948 4,638 24,586 19 24,605
Sum 21,851 21,851 1,235 23,086 5 23,091
Share Premium 101,114 101,114 19,740 120,854 112 120,966
Treasury Shares (9,700) (9,700) (9,700) (9,700)
Total 173,695 (26,429) (188) 147,078 7,580 20,975 27 301 175,961 22,451 117 (5,000) 1,262 194,791
Total Capital 176,432 (25,811) (365) (188) 150,068 7,568 20,975 (433) 27 301 178,506 22,573 117 (120) (5,000) 1,262 197,338
1.

Consolidated Cash Flow Reports For the Year Ending December 31 2010 2009 2008 Thousands of Dollars Cash flow from current operations: Net income (loss) for the year Adjustments required to reflect cash flows from current operations Interest paid in cash Taxes on income refunded (paid) in cash, net Net cash from current operations Cash flow from investment activities: Business combination (see Appendix A) Proceeds from the sale of subsidiary, net (see Appendix B) Additional payments due to the adjustment of purchase cost Acquisition of fixed assets and intangible assets Proceeds from sale of fixed assets intended for sale Proceeds from the sale of fixed assets Proceeds from the sale of leased land Proceeds from the issue of option to sell asset available for sale Proceeds from the sale of land, net of attached tax payments Repayment of long-term receivables and deferred expenses Loan granted to affiliated company Repayment of loan from affiliated company Loans granted employees Repayment of loans to employees Long-term deposits Net cash (used in investment activities) deriving from investment activity Cash flows from financing activity: Dividends paid holders of rights not granting control of subsidiary Dividend paid Receipt of long-term loans Repayment of loans and other long-term liabilities Short-term credit from banking corporations, net Proceeds from the issuance of debentures, less issuance expenses Proceeds from exercise of employee options Proceeds from issuance of rights, net of issuance expenses Net cash provided by (used in) financing activities 21,182 448 (4,002) (3,368) 14,260 816 (5,217) 644 710 682 4,218 132 (12) 25 (80) 1,918 (120) (5,000) (2,220) (47,205) 56,331 117 1,903 7,650 35,370 (3,817) 1,621 40,824 (8,237) (4,072) 1,071 236 (13) 28 (2) (10,989) (433) 8,300 (8,746) (26,242) 20,975 (6,146) (25,782) 52,691 (6,132) (4,987) 15,790 (2,117) (7,781) 1,887 170 60 (81) 16 (91) 77 27 (7,833) (365) (8,289) (11,557) (20,211) (12,254) (198) 16,676 4,224
Net increase (decrease) in cash and cash equivalents 18,081 23,689 Profit (loss) due to exchange rate differentials on cash and cash equivalents 241 (20) Balance of cash and cash equivalents at the beginning of 4,224 27,893 the year Balance of cash and cash equivalents at the end of the 27,893 46,215 year The attached notes constitute an integral part of these Financial Statements. 9
2.

Consolidated Cash Flow Reports For the Year Ending December 31 2010 2009 2008 Thousands of Dollars Adjustments required to reflect cash flows from current operations: Revenues and expenses not involving cash flow: Depreciation Amortization Impairment of fixed assets Impairment of goodwill Loss of capital from the sale of subsidiary The Companys share in losses (profits) of affiliate Cash erosion, net Interest paid in cash Income taxes paid (received) in cash, net Interest component of liability for adjustment of acquisition cost Deferred taxes on income, net Severance pay liability, net Restructuring expenses Capital gain from sale of fixed assets Capital gain from realization of asset classified as held for sale Change in benefit component of options granted to employees Profit from changes in the fair value of derivatives Long-term pre-paid expenses Others Changes to operating assets and liabilities: Decrease (increase) in trade receivables Decrease (increase) in other receivables Increase (decrease) in trade payables Increase (decrease) in other payables Decrease (increase) in inventory 13,645 (1,379) 7,926 2,403 (40,795) (18,200) 448 (13,546) 2,166 (411) (5,691) 34,041 16,559 35,370 13,535 (1,108) (14,420) (7,559) 25,348 15,796 52,691 9,291 1,739 992 666 (241) 4,002 3,368 (2,319) 44 327 (249) (483) 1,262 (505) (6) 760 18,648 11,366 1,569 1,945 (41) 20 3,817 (1,621) 1,702 (79) 429 (375) 301 (448) (4) 230 18,811 11,073 1,275 7,392 55 106 6,132 4,987 (2,982) 1,027 (116) 8,861 (805) (188) (81) 159 36,895
Additional information on investment and finance activities not involving cash flows: December 31 2009 Thousands of Dollars 196 (89) (997) (508) 1,358 4,843 32 1,454 63 -
2010 Trade payables for non-cash acquisition of fixed and other assets Receivables for non-cash sale of leased lands Receivables with respect to the sale of non-cash fixed assets Liability for minimum royalty payments Liability payable for acquisition of consolidated company Liability for payment with respect to acquisition of operations Receivables as a result of the sale of subsidiary Payables as a result of the sale of subsidiary
2008 (754) (23) 60 5,326 (4,478) -
10
(End) - 3

Consolidated Cash Flow Reports
Appendix A: Business combinations (see also Note 6):
Year Ending December 31 2009 Thousands of Dollars Receivables Inventories Fixed assets Intangible assets Trade payables Other payables Total proceeds Plus receivables due to sale (79) (2,568) (3,638) (2,096) 31 81 (8,269) 32 (8,237)
Appendix B: Yield from the sale of company consolidated in the past:
Year Ending December 31 2010 Thousands of Dollars Trade receivables Other receivables Inventories Long-term deposits Fixed assets Trade payables Other payables Capitalization component from the sale of company Capital loss Total proceeds Less receivables due to sale of subsidiary 223 202 888 122 1,536 (307) 232 40 (666) 2,270 (1,454) 816 * Over the course of the second quarter the Company completed the sale of its Indian subsidiary. Total proceeds for the sale are $2.3 million, $0.9 million of which was received in cash, with the balance expected by the end of 2011.
11

Notes to the Financial Statements Note 1 Overview Delta Galil Industries Ltd. (hereinafter: the Company) is an Israeli corporation that together with its subsidiaries (hereinafter: the Group) is engaged primarily in the manufacturing and marketing of undergarments, and is active in three operating segments USA Mass Market, Global Division Upper Market and Delta Israel. Information on Group's operating segments and principle markets is presented in Note 5. Company shares were traded through March 2008 on the Nasdaq Global Market (NASDAQ) and on the Tel Aviv Stock Exchange Ltd. (the Stock Exchange). In March 2008 the Company applied to de-list its shares from trade and to discontinue its registration in the U.S. On March 27, 2008, Company shares were de-listed from NASDAQ. From that date forward, the main stock exchange on which the Company is traded is the Israeli Stock Exchange in Tel-Aviv. The Companys official address is 2 Kaufman Street, Tel Aviv. Note 2 Principal Accounting Policies: a. Basis of Preparation of the Financial Statements 1) The Groups Financial Statements as of December 31 2010 and December 31 2009 and for each of the three years in the period ending December 31 2010, were prepared in accordance with IFRS standards, interpretations to IFRS standards made by the IFRIC, and include the additional disclosure required in accordance with the Securities Regulations (Yearly Financial Statements, 2010. The principal account policies, described below, have been applied consistently in relation to all years presented, unless noted otherwise. The Consolidated Financial Statements have been prepared according to the historical cost convention, subject to the adjustment of financial assets at fair value through gain/loss and the revaluation of derivatives and compensation fund assets, presented at fair value. The preparation of the Financial Statements in accordance with the IFRS requires the use of certain critical accounting estimates. It also requires that Group management exercise its judgment in the process of applying the groups accounting policies. Note 3 discloses the areas involving a higher degree of judgment or complexity, or areas where assumptions and estimates have a material impact on the consolidated financial statements. Results in practice may be fundamentally different from the estimates and assumptions employed by Company management. 2) 3) The Groups operational turnover period is 12 months. The Group analyses the expenses acknowledged in the Statement of Operations according to a classification method based on the expenses activity characteristic.
12
b. Consolidated Financial Statements: 1) Subsidiaries Subsidiaries are entities in which the Company has control of their financial and operational policy, usually due to holding over half of the voting rights. The existence of potential voting rights that may be exercised or converted at any time is taken into account when considering whether one company has control of another. Subsidiaries are fully consolidated starting on the date when the Group achieves control over them. Their consolidation ceases on the date control ends. The Group applies the acquisition method in its accounting treatment of business combinations. The proceeds transferred for the purchase of a subsidiary (hereinafter the Purchased Company) is calculated as the sum of the fair value qualities of the assets transferred by the Group, the liabilities created for the Group to the previous owners of the purchased company and the capital rights issued by the Group as part of the business combination agreement. The transferred proceeds include the fair value of any asset or liability deriving as a result of a conditional yield arrangement. Costs pertaining to the purchase are recognized under gain or loss upon creation. Identified assets purchased as well as liabilities and pending liabilities the Group takes upon itself as part of business combinations (with the exception of certain cases detailed in IFRS 3 Business Combinations (Revised) (IFRS 3R)), are first measured at fair value upon purchase. Pursuant to any business combination agreement, the Group determines whether to recognize noncontrolling interests in the purchased company according to their fair value or according to the relative stake of the non-controlling interests in the fair value of the net recognized assets of the purchased company. This determination is made for each transaction separately. The surplus of proceeds transferred, the sum of any rights not granting control of the purchased company, and the fair value on the date of purchase of any earlier rights to the capital of the purchased company, above a net sum, as of the purchase date, of identifiable assets purchased and liabilities taken, all measured as denoted above, is recognized as goodwill (see also f. below). In the event that the net sum, on the date of purchase, of identifiable assets purchased and liabilities taken, exceeds the total sum of proceeds transferred, the sum of any rights not granting control of the purchased company, and the fair value on the date of purchase of any earlier rights to the capital of the purchased company, as above, the difference shall be recognized directly to gain or loss on the date of purchase. Transactions, balances and profits not yet realized in transactions between Group members have been written off. Unrealized losses were also written off, unless circumstances indicate the impairment of the transferred asset. Accounting policy implemented for subsidiaries was changed as necessary, in order to guarantee consistency with the accounting policy adopted by the Group. 2) Affiliates An affiliated company is an entity in which the Company has material influence, but not control, which is mostly expressed in a 20% to 50% stake in 13
voting rights. Investment in affiliates is presented using the book value method, and is first recognized at cost. The affiliated company is not active and is undergoing liquidation. Profits/losses included in the Companys reports mainly refer to expenses pertaining to liquidation expenses and/or the legal suit against the affiliate. c. Segment-Based Reporting Operating segments report according to the same basis used for internal reporting purposes submitted to the Groups operational decision makers. For details see Note 5. d. Translation of Balances and Transactions with Foreign Currency 1) Functional and Presentation Currency Items included in the Financial Statements of each Group member are measured using the currency of the primary economic environment in which that entity operates (hereinafter Functional Currency). The Consolidated Financial Statements are presented in USD, which is both the Companys functional and its presentation currency. Following are the changes occurring during the reported periods in the exchange rate of the U.S. dollar (hereinafter the USD) versus the NIS and the rate of the euro versus the USD: Change in USD/NIS Exchange Rate % (5.99) (0.71) (1.14) Change in Euro/USD Exchange Rate % (7.39) 3.46 (5.31)
Year ending December 31 2010 Year ending December 31 2009 Year ending December 31 2008
The exchange rate of the USD vs. the NIS on December 31 2010 is $1 = 3.549 NIS. The exchange rate of the euro vs. the USD on December 31 2010 is 1 = $1.3350 2) Transactions and Balances Transactions in currency other than the functional currency (hereinafter Foreign Currency) are translated into the functional currency using the exchange rates in effect on the transaction date. Exchange rate differences resulting from the settlement of such transactions and from the translation monetary assets and liabilities denominated in foreign currencies according to exchange rates at the end of the period are charged to gain/loss, except when charged in a different comprehensive profit framework as a cash flow hedge. Profit and loss from exchange rate differences pertaining to monetary assets or liabilities are presented in the Profit (Loss) Report under Financing Expenses, Net". 3) Translation of Financial Statements of Group Members The results and financial status of all group members (the functional currency of none of which is a currency from a hyperinflationary economy) the functional currency of which differs from the Companys presentation currency are translated to the presentation currency in the following manner: 14
(a) Assets and liabilities in the Balance Sheet are translated according to the closing rate on the date of that report (b) Revenues and expenses in the Report on Comprehensive Earnings are translated according to average exchange rates for the period. (c) All exchange rate differences created are created as a separate component within the framework of other comprehensive earnings. 4) Currency Change in the Delta Israel Area of Activity Starting in 2010 most parameters influencing the Delta Israel area of activity are measured in NIS, and as a result Company management has decided to change the functional currency of this area from USD to NIS. e. Fixed Assets Fixed assets are presented at cost net of accumulated depreciation, provision to impairment and deduction of referring investment grant sum. Historic cost includes expenses directly attributable to the acquisition of the items. Impairment of assets, other than owned land that is not depreciated, is calculated using the straight line method over the estimated useful life of the fixed asset items in the following manner: % Structures Machinery and equipment Furnishings, office equipment and vehicles 2-7 Mainly 4% 7-25 (Mainly 7%) 6-25 (Mainly 7%) General significant renovation costs are amortized across the assets remaining useful life span, or until the next general renovation, whichever comes first. Improvements to rental properties are amortized using the equal depreciation method over the term of the lease or the expected life span of these improvements, whichever is shorter. Assets' residual values, their depreciation method and useful life span are reviewed and adjusted on a case-by-case basis, on each balance sheet date. The reduction of an asset to its book value is recognized immediately, if its book value is larger than an estimate of its recoverable sum (see also Section G below). f. Intangible Assets 1) Goodwill Goodwill represents the surplus of proceeds transferred due to the purchase of a subsidiary, the sum of any rights not granting control of the purchased subsidiary and the fair value on the date of purchase of any capital rights to the purchased subsidiary held earlier by the Group over the net sum on the date of purchase of identifiable assets purchased and liabilities. Goodwill is included under intangible assets. The Group reviews goodwill for impairment once a year. Goodwill is presented at cost, less losses accumulated due to impairments, if any. Losses from the impairment of goodwill are not written off by later revaluations. Goodwill is charged to cash-generating units for the purpose of testing impairment. The allocation is carried out for each cash-generating unit or group 15
of cash-generating units that are expected to benefit from the business combination from which the goodwill was derived, which is no greater than the operating segment. Regarding impairment of goodwill, see note 9b. 2) Contractual Customer Relations Customer relationships acquired as part of the business combination are included at their fair value on the date of purchase and amortized using the straight line method over their useful life span - 20 years. 3) Trademark Usage Rights Rights to use trademarks are recorded at the discounted sum of the liability for minimum royalty payments, and are amortized over their contract period (usually 3-4 years) or their estimated period of use, whichever is shorter; see also note 9c. 4) Computer Software Acquired computer software licenses are capitalized on the basis of the costs accumulated in the acquisition and utilization of the software. These costs are amortized over the estimated useful life span of the software (4 years). Costs associated with development or maintenance of computer software are recognized as expenses upon creation. Costs directly associated with the development of unique and identified software products under Group control and for which a high probability exists that they will generate economic benefits in excess of their costs including direct costs related to employees, accumulated as a result of the software's development and an appropriate part of the relevant indirect expenses. Costs of purchasing computer software recognized as assets are amortized across their estimated useful life span (but for no longer than 4 years). g. Impairment of Non-Financial Assets Assets with an indefinite useful life span, such as goodwill, are not subjected to amortization and are tested annually for impairment. Assets subject to amortization are reviewed for impairment whenever events or changes in circumstances indicate that their book value may not be recoverable. The impairment loss recognized for impairment is equal to the sum by which the asset's book value exceeds its recoverable sum. The recoverable sum is the fair value of the asset, less sales costs, or its value of use, whichever is higher. For the purpose of assessing impairment, assets are distributed at the lowest levels for which there are separate identifiable cash flows (cash-generating units). Non-financial assets other than goodwill that suffer impairment are reviewed for possible reversal of the impairment recognized for them at each financial status reporting date. h. Non-Current Assets Held for Sale Non-current assets (or disposal groups) are classified as assets held for sale when the Group is about to recover their book value, mainly through a sales transaction, and the assessment is that and a sale is expected to highly probable. These assets are recognized at their book value or their fair value less sales costs, whichever is lower, this in the event that the Group expects to recover the book value mainly through a sales transaction, and not through continuous use of the assets. i. Government Grants Government grants referring to fixed assets are included as a deduction from the book value of the referred assets, and are recognized in the report on comprehensive 16
earnings (loss) through a reduced assignment of depreciation across the expected life span of the referred assets. Government grants referring to participation in R&D expenses shall be included in the Statement of Operations as a reduction of the costs included in the sakes cost and sales and marketing costs item. j. Financial Assets 1) Classification The Group classifies its financial assets into the following categories: Financial Assets at Fair Value through Gain and Loss and Loans and Receivables. Classification is determined according to the goal for which the financial assets were purchased. Group management determines the classification of the financial assets upon first recognition. a. Financial Assets Measured at Fair Value Through Gain/Loss Derivative financial instruments are classified as available for sale, unless they are intended for hedging purposes. The company does not have financial assets held for maturity or financial assets available for sale. b. Loans and Accounts Receivable Loans and receivables are non-derivative financial assets with fixed or fixable payments that are not quoted on an active market. These assets are included under current assets, with the exception of cases in which the period until redemption exceeds one year from the balance sheet date, in which assets are classified as non-current. The Groups loans and receivables are included under cash and cash equivalents, other receivables and long-term receivables. 2) Recognition and Measurement Regular purchases and sales of financial assets are listed in the Groups books on the date the transaction is cleared, which is the date on which the asset is delivered to the Group or delivered by the Group. Financial assets presented at fair value through gain/loss are first recognized at fair value, and the transaction expenses are charged to the Statement of Operations. Financial assets are subtracted when the rights to receive cash flows from the investments expire or are passed on, and the Group has passed on all risks and yields from ownership of these assets. Financial values at fair value via gain/loss are presented in consecutive periods at fair value. Loans and receivables first recognized at fair value plus transaction costs are presented at amortized cost, on the basis of the effective interest method. As for the method by which the fair value of the Groups financial assets is measured see Note 4. 3) Offsetting Financial Instruments Financial assets and liabilities are offset and the net sums presented in the Balance Sheet when there is a legally enforceable right to offset the recognized sums, and there is an intention to clear the financial assets and financial liabilities on a net basis, or realize the asset and clear the liability simultaneously.
17
4) Impairment of Financial Assets On each balance sheet date, the Group assesses whether objective evidence exists that a financial asset or group of financial assets has been impaired. A financial asset of a group of financial assets is impaired and impairment losses are incurred only if there is objective evidence of impairment as result of one or more events that occurred after the initial recognition of the asset (Loss Event) and that loss event (or events) has an impact on the estimated future cash flows of the financial assets or group of financial assets that can be estimated reliably. The group first assesses whether objective evidence of impairment exists. In the event of such evidence, the sum of the impairment loss recognized in the Financial Statements is measured as the difference between the asset's book value and the present value of estimated future cash lows (excluding future credit losses that have not been incurred) discounted at the financial asset's original effective interest rate (meaning the effective interest rate calculated upon first recognition in the Financial Statements). The assets book value is impaired and the sum of the loss is recognized in the Report on Comprehensive Earnings (Loss). If a loan or investment held for redemption bears variable interest rates, the discount rate used to measure any impairment loss is the current effective interest set according to the contract. As a practical expedient, the Group may measure impairment on the basis of an instrument's fair value using an observable market price. If in a subsequent period, the amount of the impairment loss decreases and the decrease can be attributed objectively to an event occurring after the impairment was recognized (such as an improvement to the debtor's credit rating), the reversal of the previously recognized impairment loss shall be recognized in gain/loss. Impairment testing of trade receivables is described in m. below. k. Derivative Financial Instruments and Hedging Activities Derivative instruments are initially recognized at their fair value upon engagement in the derivative contract, and are measured anew in consecutive periods at fair value. The method for recognizing gain or loss deriving from changes in fair value depends on the question whether the derived instrument is intended as a hedging instrument, and if so, on the nature of the protected item. Changes to the fair value or derivative financial instruments not fit for hedging are charged to gain or loss. Derivatives embedded in financial instruments or any other hosting contract are separated from the hosting contract only if: (a) their characteristics and economic risks are not closely related to the host contract's economic characteristics and risks; (b) a separate instrument with the same conditions as the embedded derivative would meet the definition of derivative; and (c) the mixed instrument as a whole (including the embedded derivative) is not measured at fair value through gain or loss. Changes to the fair value of derivative financial instruments separated as above are charged to gain or loss. The Group designates specific derivative instruments to be of the following types of hedging: 1) Hedging the fair value of assets or liabilities recognized or of steadfast commitment (hereinafter Fair Value Hedging); 18
2)
Hedging a specific risk attributed to a recognized asset or liability or to a highly expected transaction (hereinafter Cash Flow Hedging);
The Group documents, as of the hedge's creation, the link between protecting instruments and protected items, as well as the goals of risk management and strategy as they pertain to various hedging agreements. In addition, the Group documents its estimates, both on the date the hedging was created and on a continuing basis, as to whether the derivative instruments, used in hedging transactions, which are highly effective in achieving changes, offset the fair value or cash flows of hedged items. The fair value of derivative instruments used for hedging purposes is detailed in Note 12b. Movements in hedging funds are charged to other comprehensive earnings and are presented as part of the Report on Changes in Capital. The full fair value of a hedging derivative is classified as a non-current asset or liability, when the time remaining until the redemption of the hedged item is no longer than 12 months after the balance sheet date, or as a non-current asset or liability, when the time remaining until the redemption of the hedged item is less than 12 months after the balance sheet date. Derivative instruments for commercial purposes are classified as current assets or liabilities. 1) Fair Value Hedging Changes in the fair value of derivative instruments intended and fit to serve as fair value hedging are charged to gain/loss along with any change in the fair value of the hedged assets or liabilities, attributed to the hedged risk. The Group applies fair value hedging accounting, only for hedging fixed interest risks on loans. The gain or loss connected to the effective part of the interest rate swap agreements hedging loans at fixed interest rates, are recognized in the Statement of Operations under financing expenses. The gain or loss connected to the non-effective part is recognized in the Statement of Operations under Other Income (Expenses) Net. Changes in the fair value of hedged loans at fixed interest rates, attributed to interest rate risk, are recognized in the Statement of Operations under financing expenses. If the hedging no longer upholds the criteria for hedging accounts, the adjustment to book value of a hedged item, for which use was made of the effective interest method, is depreciated to gain or loss across the period until the items redemption. 2) Cash Flow Hedges: The effective portion of changes in the fair value of derivative instruments intended and fit for use in hedging cash flows, is recognized under other comprehensive earnings. The gain or loss connected to the non-effective part is recognized in the Statement of Operations under Other Income (Expenses) Net. Sums accumulated in capital are reclassified into the Statement of Operations in periods during which the hedged item influence profit or loss (for instance, when a projected sale, that is hedged, takes place). The gain or loss attributed to the effective part of the interest rate swap agreements hedging loans at fixed interest rates is recognized in the Statement of Operations under financing expenses. The gain or loss connected to the non-effective part is recognized in the Statement of Operations under Other Income (Expenses) Net.
19
At the same time, when a projected hedged transaction brings about the recognition of a non-financial asset (for instance, inventory or fixed asset), the profits or losses rejected in the past within the framework of equity are transferred from equity and are included in the initial measurement of the assets cost. The deferred sums are recognized, eventually, in the sales cost item, in the event of inventory, or under impairment costs, in the event of fixed assets. When a hedging instrument expires or is sold, or when the hedging no longer upholds the criteria for hedge accounting, the accumulated profit or loss recognized in equity as of that date, remains recognized in equity, and shall be recognized in the Statement of Operations when the projected transaction itself is eventually recognized in the Statement of Operations. When the projected transaction is not yet expected to take place, the accumulated profit or loss, recognized earlier within the framework of equity, is immediately transferred to the Statement of Operations, under Other Income (Expenses) Net. l. Inventory Inventory is assessed at cost or according to its realization value, whichever is lower. Cost is determined based on a moving average. The cost of finished products and mid-process inventory includes direct manufacturing costs, cost of labor and loading indirect costs according to normal capacity. Amortization of inventory values is carried out in accordance with projections of its discontinuation, based on assumptions regarding demand and future market conditions. The net realization price is the estimated sales price over the normal course of business, less completion and sales costs. m. Customers Customers are initially recognized at fair value less provision to doubtful debt. The provision to doubtful debt is created when objective evidence exists of the fact that the Group is unable to collect all sums owed it according to the original terns of the debit balances. Material customer difficulties, the probability they will go bankrupt or undergo economic reorganization and insolvency or material delays in payments are considered indicative of the fact that the value of the debtors balance has decreased. The debts book value is reduced through the provision account, and the sum of the loss is recognized in the Report on Comprehensive Earnings (loss) under administrative and general expenses. When a customer debt cannot be collected, it is erased against the provision to doubtful debt. The Company performs a discount to the debit balance of a central customer. The discount takes place through a U.S. banking institution, with no recourse. The results of the discount action are charged to financing expenses on the date of the transaction. n. Cash and Cash Equivalents Cash and cash equivalents include cash in hand, short-term bank deposits, other short-term highly liquid investments with original maturities of three months or less. o. Share Capital The Companys ordinary shares are classified as share capital. Incremental costs directly attributable to share or option issuance are presented in equity as a deduction from issuing proceeds net of tax.
20
When the Company acquires its own shares (treasury shares), the cost of purchase in question, including any direct and incremental costs less tax, is deducted from equity attributed to the owners of the parent company until the shares are cancelled or reissued. On the matter of rights issues, see Note 14.(a).(4). p. Trade Payables Trade payable balances include obligations on behalf of the Company/Group to pay for goods or services purchased from suppliers over the normal course of business. Trade payable balances are classified as current liabilities when payment is supposed to be made within one year (or during the businesss normal operational turnover, in the event that it is longer than a year); otherwise they are presented as non-current liabilities. q. Loans Received and Debentures Loans received and debentures are initially recognized at fair value, less transaction costs. In subsequent periods, the loans are presented at amortized cost with the difference between the sum of the loan initially recognized and the redemption value is recognized in the Report on Comprehensive Earnings (loss) across the loan period or debentures using the effective interest method. Loans are classified as current liabilities unless the Group has the unconditional right to defer repayment of the liability for at least 12 months after the balance sheet date. r. Current and Deferred Taxes Taxes on income include current and deferred taxes. Taxes on income are charged to gain/loss, with the exception of items charged to other comprehensive earnings (loss) or directly to equity, respectively, along with the item for which they were created. In these cases, the tax influence is also charged to other comprehensive earnings (loss). Current taxes are tax sums expected to be payable for taxable income, calculated according to tax rates and tax statutes legislated or effectively legislated as of the balance sheet date, in countries in which the Company and its subsidiaries are active, including tax payments referring to previous years. From time to time, Group management studies tax aspects applicable to its taxable income, in accordance with relevant tax laws, and creates provisions as needed. Deferred taxes are calculated in full, using the liability method for all temporary differences between the sums of assets and liabilities as reported in the Consolidated Financial Statements, and sums taken into account for tax purposes, with the exception of temporary differences created upon first-time recognition of reputation, and temporary differences created upon initial recognition of the asset or liability with no impact on profit or loss on that date whether for accounting purposes or that reported for tax purposes (unless the temporary difference arises from an initial recognition of a business combination transaction). Recognition of deferred tax assets is conducted for all temporary differences deductable for tax purposes, within the sum of the differentials that may be expected to be used in the future in return for taxable revenues. Deferred tax assets are reviewed at each reporting date and are impaired if it is no longer probable that the related tax benefit will be realized.
21
Deferred tax balances are calculated using tax rates expected to apply upon realization of the deferred tax asset, or settlement of the deferred tax liability, in accordance with tax rates and tax laws that have been enacted, or effectively enacted, in the countries in which those companies are active, as of the balance sheet date. In calculating of deferred taxes, taxes which would have been created in the event of realization of investments in subsidiaries are not taken into account, as it is Company policy to hold these investments and not realize them. The Group may be liable for additional taxes in the event of inter-company dividend distribution. This added tax has not been accounted for in light of Company policy not to have dividends involving additional tax distributed in the foreseeable future. s. Employee Benefits 1) Retirement/Pension Compensation Liability a. Defined Benefit Plans: In accordance with labor laws and labor agreements in Israel and according to Group member practices, Group members must pay severance pay to employees who are dismissed or retire from their positions under certain circumstances. The Group members severance pay liability is treated as a defined benefit plan, and regarding some of the employees, as a defined deposit plan. In accordance with the obligations borne by Group members to employees covered by a plan constituting a defined benefit plan, the sums of benefits received by the employee entitled to compensation upon retirement are based on their years of seniority and their last paycheck. The obligation borne by the Company toward employees covered by a defined deposit plan is to make fixed deposits to a separate and independent entity, with Group members having no legal or implied obligations to make additional deposits, in situations in which the sums of the fund will be insufficient to pay all of the employees for all the benefits owed for work services in the current period and in earlier periods. The retirement compensation liability presented in the balance sheet is the current value of the defined benefit liabilities as of the balance sheet date, less the fair value of the plans assets and plus adjustments due to actuary profits or losses not yet recognized and the cost of past services not year recognized. The defined benefit liability is measured on a yearly basis by an actuary, using the projected unit credit method. The current value of the liability is determined by discounting expected future cash flows (after taking into account expected pay increase rates), on the basis of interest rates on government debentures in Israel and on the basis of corporate debenture rates in the U.S. subsidiary, denominated in the currency in which the benefits will be paid, the validity of which until redemption is near the period of the liabilities referring to retirement compensation. In accordance with International accounting Standard 19 Employee Benefits (hereinafter IAS 19), the discount rate used to calculate actuary obligation shall be determined using market yields as of the balance sheet date on highquality corporate debentures. At the same time, IAS 19 notes that in countries lacking a deep market for these debentures, market yields as of the balance sheet date on government debentures must be used.
22
As noted, the interest rate used by the Company to capitalize expected future cash flows for the purpose of calculating actuary obligation was determined based on interest rates of high-rated government debentures, as Company management believes that Israel lacks a deep market for corporate debentures while in the U.S., the interest rate used by the subsidiary to capitalize future cash flows was determined based on interest rates of corporate debentures, this as Company management believes that the U.S. has a deep market for such debentures. The Group charges actuary profits or losses created as a result in changes in actuary assumptions and as a result of the difference between assumptions made in the past and results in practice, directly to surpluses, under other comprehensive earnings, in the period they were created. b. Defined Deposit Plan The Group members operate a number of pension plans. The plans are generally finance by payments made to insurance companies or pension funds held in trust. These plans constitute defined deposit plans as the Group members make regular deposits to a separate and independent entity. The Group has no obligation, legal or implied, to make additional deposits, in situations in which the funds assets are not sufficient to pay all employees the benefits for work services in the current period and during earlier periods. As noted above, the Company purchases insurance policies and makes deposits in pension and compensation funds in return for its pension payment and retirement compensation obligation, which constitute a defined deposit plan. Upon making the deposits, it is not obligated to make additional payments. The deposits are recognized as expenses for employee benefits when they are carried out. Advance deposits are recognized as an asset, in the event that the Group is entitled to refunds for sums deposited in cash or to a reduction in future payments. Furthermore, the American subsidiary operates two defined deposit pension plans pursuant to section 401(K); the benefit is based on a percentage of employees yearly salary. The Company usually matches 50% of any employee contribution, pre-tax, up to 4% of the employees annual compensation, depending on the plan. 2) Vacation and Convalescence Pay According to labor laws in Israel and in some of the other countries in which the Group is active, each employee is entitled to vacation days and convalescence days, both calculated on a yearly basis. This right is established throughout the employees employment at the Company. The Group recognizes the liability and expense for vacation and convalescence pay based on the benefit created for each employee on a non-capitalized basis. 3) Executive Compensation The Company recognizes its liability and expense for executive compensation based on various compensation components that vary according to the rank of the executive and may change from year to year based on the decision of Company management. The Company recognizes the provision in question when a contractual obligation exists or when practice in the past created an implies obligation
23
t.
Share-Based Payments The Companys Board of Directors approves a plan for the issue of options to Group members from time to time; see Note 14; some of the options granted are occasionally dependent on achieving operational goals. The fair value of the options upon issue is charged as a salary expense concurrent with an increase in capital, across the period in which the employees become entitled to options and it upholds all of the defined conditions for the maturation of a share-based payment arrangement. The sum charged as an expense is adapted in order to reflect the numbers to shares expected to vest. When the options to purchase the shares are exercised, the resulting exercise bonus is charged to stock capital (according to their notational value) and stock premium.
u. Provisions Provisions for re-structuring cost are recognized in the Financial Statements when the Group has a legal or implied liability as a result of past events; the Group is expected to bear the cash flows in order to redeem the liabilities and the sum can be reliably estimated. Provisions for restructuring expenses include employee compensation payments when the Group approves a formal and detailed restructuring plan, and when the restructuring begins in practice, or when it is announced (see Note 20e). The provisions do not include future operational costs. The provisions are measured according to the current value of managements best estimates regarding the cash flows expected to be required to clear existing commitments as of the balance sheet date. v. Revenues The Groups sales reflect revenues from the sale of goods. The Group's revenues are measured at fair value of proceeds received or proceeds the group is entitled to receive in respect of sales over the ordinary course of the Groups business. The revenues are presented net of VAT, returns, credits and discounts and after writing off inter-group revenues. The Group recognizes revenues from the sale of goods when all the following conditions are met: (a) the significant risks and rewards arising from ownership of the goods have been transferred to the buyer; (b) the Group no longer maintains effective control of goods or continuous administrative involvement of a level
characterizing ownership; (c) the sum of revenues may be reliably measured; (d) the economic benefits associated with the transaction are expected to accrue to the company; and (e) all costs incurred or which will be incurred with regard to the transaction may be measured reliably.
Discounts given to customers at the point of sale or as a function of purchase volume, whether pursuant to an agreement with the customer or not, are deducted from revenues in the Financial Statements. The Company bases its estimates on past experience, taking into account the type of customer, type of transaction and the specific details of each arrangement. w. Lease Agreements Leases in which a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases. Payments made under operating leases are charged to the Report on Comprehensive Earnings (loss) on a straight-line basis for the duration of the lease. The group leases certain property, plant and equipment items. Leases of fixed assets, in which the Group has been transferred for all effects and purposes all the risks and 24
rewards of ownership are classified as financial leases. Finance leases are capitalized and recognized as assets and liabilities at the commencement of the lease at the fair value of the leased property or the present value of the minimum lease payments, whichever is lower. All lease payments are attributed between liability repayments and financing expenses, in such a manner that the interest rate on the balance of the liability remains unchanged. The lease liabilities in question, less the finance element, are included under loans and other non-current liabilities. The interest component of the liabilities is charged to the Report on Comprehensive Earnings (loss) over the lease period. Fixed assets purchased pursuant to financial leases are depreciated across the assets useful life span or the lease period, whichever is shorter. Advance payments for land leasing rights for the period of 38-40 years for which the company has paid capitalized lease payments to the Administration are presented under prepaid expenses and depreciated over usage period of the rights in question. The lease agreements grant the Company the right to extend the agreement period by and additional 49 years. x. Net Profit (loss) per Share The calculation of basic net profit (loss) per share is based, as a rule, on the net profit (loss) divided to ordinary shareholders, divided by the weighted average of the number of ordinary shares in circulation during the period, less Company shares held by the company itself. In calculating the diluted profit or loss per share, the weighted average of the number of shares issued is also added to the ordinary share average, assuming that all diluted potential shares will be converted to shares. The potential shares are only taken into account as above when their effect is non-diluting (decreasing profit or increasing loss per share). y. New International Standards, Amendments to the Standards and New Interpretations 1) Standards and amendments to the existing standards coming into effect and binding for reporting periods starting January 1 2010: a. Revision to International Financial Reporting Standard 8 Operating Segments (hereinafter the IFRS Revision). The revision in question is part of the IASB annual improvement project published in April 2009. The IFRS Revision includes minor wording corrections in order to clarify that disclosure regarding segment assets will only be given if information regarding segment assets is provided the chief operational decision maker on a regular basis. The IFRS 8 Revision applies retroactively to yearly periods starting on or after January 1, 2010. The Company has applied the revision to the reported period. b. Revision to International Accounting Standard 1 Presentation of Financial Statements (hereinafter the IAS 1 Revision). The revision in question
constitutes part of the IFRS improvement paper published May 2010.The IAS 1 Revision allows entities to present an analysis of the
components of other comprehensive earnings pursuant to the report on changes in equity or as part of the notes to the Financial Statements. The
Group intends to apply the revision in question starting January 1 2011. The Group is testing the impact, if any, the revision in question will have on its Financial Statements.
25
c. Revision to International Accounting Standard 34 Financial Reporting for Interim Periods (Hereinafter the IAS 34 Revision). The revision in question constitutes part of the IFRS improvement paper published May 2010.The IAS revision clarifies and corrects the disclosure requirements in the interim reports regarding material transactions or events or other matters. This standard shall be applied retroactively to yearly reporting periods starting January 1 2011 or subsequently. Early application is possible. The Group intends to apply the revision in question starting January 1 2011. The firsttime application of this revision is not expected to have a material impact on the Groups Financial Statements. d. International Accounting Standard 27 (Revised) Consolidated and Separate Financial Statements (hereinafter IAS 27R) (in effect for annual reporting periods starting on or after July 1, 2009). IAS 27R stipulates that the impact of all transactions with non-controlling interests that do not result in the loss of control of a subsidiary be recognized in equity, and accordingly, such transactions would no longer result in the creation of goodwill or gain/loss. IAS 27R also deals with the accounting treatment upon loss of control of an investee. Any remaining interest in the entity upon loss of control is measured anew at fair value, and gain or loss received (any difference created from all the listings pertaining to the transaction in which control was lost) is recognized in gain/loss. The first-time application of this revision is not expected to have a material impact on the Groups Financial Statements. e. Revision to International Financial Reporting Standard 7 Financial Instruments: Disclosure (hereinafter IFRS 7) published October 2010.The revision to IFRS 7 expands disclosure rights as regards financial assets transferred to a second party, which are still included in the Company's balance sheet as well as regards related financial liabilities, including the connection between the assets and the liabilities in question. In addition, the revision to IFRS 7 expands disclosure requirements regarding subtracted financial assets, for which exposure to certain risks and yields connected to the transferred asset still remain. The revision to IFRS 7 will be applied to yearly reporting periods starting July 1 2011 or subsequently. Early application is possible. The Group intends to apply the revision in question starting January 1 2011. The first-time application of this revision is not expected to have a material impact on the Groups Financial Statements. f. International Financial Reporting Standard 9 Financial Instruments (Hereinafter IFRS9). The first part of IFRS 9 dealing with the classification and measurement of financial assets was published in November 2009 (hereinafter the First Part of IFRS 9) and constitutes the first part of the project for the replacement of International Financial Reporting Standard 39 Financial Instruments: Recognition and Measurement with a new standard. The First Part of IFRS sets new requirements for the classification and measurement of financial assets and may impact the accounting treatment of the Companys/Groups financial assets. Among other things, the First Part of IFRS 9 states that financial assets shall be classified according to one of the following two categories: financial assets measured after first recognition at fair value and financial assets measured after first recognition at reduced cost. The decision as to what category a financial asset is to be classified to is carried out upon first recognition. The classification is based on the manner in which the entity manages its financial instruments (its business model) and the characteristics of the instruments contractual cash flows. In October 2010 an additional part of IFRS 9 was published (hereinafter the Second Part of IFRS 9) constituting the second part of the project for the replacement of IAS 39. The Second Part of IFRS 9 includes directives 26
regarding financial liabilities and regarding the subtraction of financial instruments. The instructions added to IFRS 9 as part of the Second Part of IFRS 9, including those pertaining to the measurement and classification of financial liabilities and treatment derivatives embedded in instruments in which the host contract is a financial liability, were copies as is from the instructions featured in IAS 39 regarding the issues in question, this with the exception of the instructions pertaining to financial liabilities intended to fair value via gain/loss (hereinafter FVTPL). In accordance with the new instructions in question, with the exception of the detailed cases, entities with financial liabilities intended for FVTPL will recognize changes to the fair value of the liabilities in question deriving from changes in credit risk pertaining to liabilities, directly to other comprehensive earnings, this in lieu of recognizing them under gain/loss. Regarding sums recognized in other comprehensive earnings, they shall not be later recycled to gain/loss. At the same time, accumulated profits or losses may be transferred between capital items. The two parts of IFRS 9 shall apply to yearly reporting periods starting January 1 2013 or subsequently. Entities may choose to apply IFRS 9 by way of early application, but the Second Part of IFRS 9 cannot be applied without simultaneously applying the First Part of IFRS 9. Alternately, the First Part of IFRS 9 can be applied without simultaneously applying the Second Part of IFRS 9. Entities that apply IFRS 9 early regarding reporting periods starting prior to January 1 2012 shall not be required to correct their comparison numbers during the initial application. At this stage, the Company has not adopted IFRS 9 by way of early adoption. The Group is studying the expected impact of IFRS 9 on its Financial Statements and the timing of its adoption.
Note 3 Material Accounting Estimates and Judgments As part of the financial reporting process, Company management is required to make certain assumptions and estimates which may impact the value of its assets, liabilities, revenues, expenses and part of the disclosures provided in the Groups consolidated statements. By their nature, these estimates may be subjective and complex, and may therefore differ from results in practice. The accounting estimates and assumptions used in preparing the Financial Statements are reviewed regularly and are based on past experience and other factors, including future events which are reasonably likely to occur in view of current circumstances. Below is a description of critical accounting estimates used in preparing the Financial Statements, the formulation of which required the Company to make assumptions with regard to circumstances and events which involve significant uncertainty. In exercising its judgment for the purpose of making accounting estimates, the Company takes into account, respectively, the relevant facts, past experience, the impact of external factors and assumptions reasonable under the circumstances. a. Critical Accounting Estimates and Assumptions 1) Inventory The Company makes monthly estimates for the purpose of amortization of slow or dead inventory, based on past experience, remaining inventory balances from previous seasons and sales forecasts. 27
2) Goodwill Once a year, the Company reviews the need to recognize the impairment of goodwill, based on management forecasts regarding the discounted amount of the cash flow expected from the cash generating unit to which goodwill refers. 3) Fixed Assets Depreciation expenses due to fixed assets are calculated using the straight line method on the basis of the estimated period of time they will be used by the Company. In addition, the Company reviews the need for additional depreciation whenever it deems that indications exist for the need for such a review. Additional depreciation of fixed asset costs is recorded up to the market value of said asset, in the event that the future cash flows expected from the operation of the asset are lower than its carrying amount. 4) Customer Relationships The customer relationships asset is attributed to a primary customer and an additional Company customer. In the event that the engagement with one of these customers is discontinued, the Company shall be required to depreciate the asset in question. In addition, the Company reviews the need for depreciation whenever it sees any indication of the need for such a review. b. Judgments with a Material Impact on the Implementation of the Entitys Accounting Policy 1) Taxes on Income and Deferred Taxes The Company is assessed for tax purposes in a large number of jurisdictions, and accordingly, Group management is required to apply considerable judgment in order to determine the overall provision for taxes on income. The Group lists provisions in its books based on its estimates regarding the possible likelihood of additional tax payments for these transactions. When the final tax liability determined by the tax authorities differs from the tax liability accounted for in previous periods, the difference shall be charged to gain/loss in the period when the final assessment in question was made by the tax authorities. Furthermore, the Group records deferred tax assets and deferred tax liabilities on the basis of differences between carrying amounts of assets and liabilities and their sums taken into account for tax purposes. The Group regularly reviews the recoverability of deferred tax assets included in its accounts, on the basis of historical taxable revenues, projected taxable revenues, the timing of the expected reversal of temporary differences and implementation of tax planning strategies. If the Company is unable to derive sufficient future taxable revenues, or in the event of a material change in effective tax rates in the period during which the temporary differences become taxable or deductible, the Group may be required to reverse part of its deferred tax assets or to increase its deferred tax liabilities, which may increase its effective tax rate and negatively impact its operating results 2) Assets Classified as Held for Sale Assets are classified as held for sale if the expectation exists that the investment will be recovered by way of sale. The Company exercises judgment, taking into account the relevant facts for the purpose of estimating the expected date of the assets realization. 28
Note 4 Financial Instruments and Financial Risk Management a. Financial Risk Factors The Group's activities are exposed to a variety of financial risks: market risks (including exchange rate risk, cash flow interest rate risk and price risk), credit risks and liquidity risks. The Groups risk management program focuses on the uncertainty of financial markets and sees ways to minimize potential adverse effects on Group financial performance. The Group makes use from time to time of financial derivatives to hedge certain risk exposures. The Group manages financial risks based on a policy approved by its Board of Directors and senior management. This policy refers to the management of exchange rate risk, credit risk and cash management. 1) Market risks: a) Exchange Rate Risks The Group operates on a global scale and is exposed to exchange rate fluctuations, primarily of the euro/dollar rate. Exchange rate risks arise from commercial transactions, assets or liabilities denominated in foreign currency and net investments in foreign operations. The Company invests from time to time in foreign currency derivatives forward contracts - in order to protect itself from the risk in which cash flow from sale of products is impacted by changes in exchange rates. The duration of these contracts is usually under one year. These transactions are primarily intended to protect against change in the exchange rates in question, but as of the balance sheet date, do not constitute accounting hedges. Regarding hedging agreements for cash flows from the issue of NIS debentures, see Note 12b. Exchange rate risk exists when future commercial transactions or assets and liabilities recognized in the Financial Statements are measured and denominated in a currency other than the entitys functional currency. As of December 2010, 2010, if the group's functional currency had weakened/strengthened by 5% against the NIS with all other variables held constant, pre-tax profit for the year would have been higher/lower by $446,000 (2009 $30,000), mainly as a result of profits from changes in exchange rates due to the translation of net financial balances presented in the Company's balance sheet denominated in NIS. As of December 2010, 2009, if the group's functional currency had weakened/strengthened by 5% against the euro with all other variables held constant, pre-tax profit/loss for the year would have been higher/lower by $31,000 (2009 $124,000), mainly as a result of profits/losses from exchange rate differences due to the translation of net financial balances presented in the Companys balance sheet denominated in euro.
29
Note on linking financial items: In Dollars Assets: Current assets: Cash and cash equivalents Trade receivables Other accounts receivable Long-term debit balances Financial derivatives Total assets Liabilities: Current liabilities: Short-term loans and current maturities of longterm loans from banking corporations Trade payables Other accounts payable Long term loans from banking corporations Other non-current liabilities Debentures (**) Total liabilities Balance sheet total, net As of December 31 2010 (*) In Other In Currencies Euros In NIS Others Thousands of Dollars
Total
45,091 55,831 6,722 836 1,830 110,310
44 10,842 1,095 11,981
21 19,222 1,205 39 20,487
1,059 4,422 1,014 6,495
46,215 90,317 10,035 875 1,830 149,273
51,211 38,539 16,609 3,614 4,967 58,023 172,963 (62,653)
8,317 21 3,415 8,180 862 21,139 63 12,594 29,403 (613) (8,916)
59,549 2,825 52,959 3,261 41,871 3,614 266 5,296 58,023 6,352 221,312 143 (72,039)
In Dollars Assets: Current assets: Cash and cash equivalents Trade receivables Other accounts receivable Long-term debit balances Total assets Liabilities: Current liabilities: Short-term loans and current maturities of long-term loans from banking corporations Trade payables Other accounts payable Long term loans from banking corporations Other non-current liabilities Total liabilities Balance sheet total, net (*)
In Pounds Sterling
As of December 31, 2009 In Other In Currencies Euros In NIS Others Thousands of Dollars
Total
23,159 62,823 1,829 1,047 88,858
253 7,214 334 7,801
92 14,969 827 15,888
1,522 17,053 1,717 46 20,338
2,867 1,081 636 118 4,702
27,893 103,140 5,343 1,211 137,587
91,475 31,490 15,247 5,723 3,861 147,796 (58,938)
2 1,814 3,079 4,895 2,906
14,752 2,721 893 18,366 (2,478)
8 7,169 13,774 20,951 (613)
1,917 2,824 4,741 (39)
106,237 45,111 35,817 5,723 3,861 196,749 (59,162)
Starting 2010, the pound sterling no longer constitutes a material currency in terms of the Company's balance sheet exposure. (**) Debentures issued in January and December 2010 are denominated in NIS, bear fixed NIS interest and are unlinked. The Company has entered into a swap agreement with a bank to swap NIS cash flows for a dollar cash flow, and vice versa, hence this liability is presented as linked to the USD. 30
b) Price Risk The Group is not exposed to significant price risks due to financial instruments and does not hold capital instruments in the reported periods. c) Cash Flow and Fair Value due to Interest Rate Risk. Risks related to interest rates derive from changes to interest rates which may have a negative impact on the Group's net profit or cash flow. The changes in interest rates lead to changes in the Groups revenues and interest expenses due to interest-bearing assets and liabilities. As the Group has no material interest-bearing assets, the Groups revenues and operational cash flows are not affected by changes in market interest rates. The Group has a number of interest-bearing liabilities defined as longterm loans as well as short-term and long-term loans from banking corporations. The Company has no policy for protection against interest risks on cash flow and does not generally perform interest rate swap agreements. If interest rates had been 10% higher/lower than current rates, and given the balance of assets and liabilities subject to variable interest as of December 31 2010 and December 31 2009, with all other variables being equal, profit before tax for the year would have been impacted by $0.1 million and $0.3 million, respectively. The Company has no fair value exposure, as the fixed interest is close to the market interest. 2) Credit Risks Credit risks are managed at the Group level. Credit risks derive primarily from cash and cash equivalents, bank deposits and credit exposure to customers. The Company assesses risk associated with the quality of customer credit by weighing the customers financial standing, past experience and other factors. Sales to Company customers are carried out under credit terms of up to 90 days; sales to retail customers are made in cash or credit card, through the major credit card companies. The Groups cash and cash equivalents as of December 31 20109 are mainly deposited with in Union Bank of Israel, the credit rating of which as published by Midroog is P-1 Stable. The Company estimates that credit risk with regard to balances in this bank is low. In 2010 and as of December 31 of that year the Company has a single primary customer, the rate of sales to which out of total sales is 17.5%. In 2009 the rate of sales to the two primary customers was 31%. This receivable debit balance as of December 31 2010 is $2.7 million or 3% of total customer debt. Receivables from these two customers as of December 31 2009 amounted to $26.8 million, or 26.0% of total receivables in the Companys balance sheet as of that date. 31
The Company rates this debt grade based on past experience with this customer and on its credit rating as published by Moodys as follows: Wal-Mart -"AA" The Company has no guarantees from this customer and it does not anticipate any difficulty collecting its debt. The receivables balance is composed of a large number of customers which constitute a homogenous group for the purpose of credit rating analysis. Provision for doubtful debts is made based on a specific provision for debts collection of which is in doubt. Regarding the discount arrangement with a material customer see Note 20(a)(1)(b). 3) Liquidity Risks Prudent liquidity risk management requires the maintenance of sufficient cash and available credit frameworks to finance activity; in light of the dynamic nature of its business activity, the Group maintains financial flexibility by taking care to maintain available credit frameworks (see Note 20(c)). The following table analyzes the Groups financial liabilities according to redemption dates based on the balance for the period as of the projected repayment date. The sums presented in the table represent a non-capitalized cash flow. Less Than 1 Year December 31, 2010: Debentures Credit and loans from banking corporations Trade and other payables Other liabilities December 31, 2009: Credit and loans from banking corporations Trade and other payables Other liabilities
1-2 Years 2-6 Years Thousands of Dollars 15,644 2,261 3,458 21,363 54,464 1,545 2,744 58,753
Total
4,056 59,819 91,055 4,507 159,437
74,164 63,625 91,055 10,709 239,553
106,691 75,052 6,305 188,048
2,380 2,675 5,055
3,805 2,135 5,940
112,876 75,052 11,114 199,042
Group management periodically reviews the ratio between future cash flows derived from maturities of its liabilities and future cash flows derived from maturities of its financial assets. If needed, the Group modifies its liability mix and their maturities. In the opinion of Group management, the Groups liquidity risk is low. b. Capital Risk Management The Groups capital risk objectives are to safeguard the Groups ability to continue operating as a going concern in order to provide returns on shareholder investments and benefits to other interested parties, and to maintain an optimal capital structure in order to reduce the cost of capital. From time to time, as needed, the Company considers the need to raise outside capital. 32
Over the course of Q4 2009 the Company raised $21 million through the issue of rights; see Note 14(a)(4). c. Fair Value Assessments Starting January 1 2009, the Company adopted the IFRS 7 Revision pertaining to financial assets measured in the balance sheet at fair value. The revision requires that fair value be measured according to the following measurement hierarchy: Quoted prices (unadjusted) in active markets in which identical assets or liabilities are traded (Level 1). Data other than quoted prices included in level 1, which may be directly or indirectly observed regarding the asset or liability, whether directly (meaning as prices) or indirectly (meaning derived from the prices) (Level 2). Data regarding the asset or liability not based on observable market information (unobservable input) (Level 3).
The Groups financial instruments primarily include non-derivative assets and liabilities of non-material amounts (items included under working capital, longterm receivables and long-term liabilities). As of December 31 2010, the Company has forward agreements to the amount of $20 million, measured according to non-quoted prices, that can be predicted regarding an asset or liability, whether (meaning prices) or indirectly (meaning derived from prices). These contracts are measured at Level (2); see Note 20(a)(2). The fair value of the receivables and payables balances is determined based on their book value less the provision in question. The fair value of long-term loans is also close to their cost, as the interest they bear is in part variable interest and in part fixed interest at rates close to market rates. Note that the swap agreement has no observable quoted price and is therefore included under Level 3; regarding the fair value of the swap agreement see Note 12b.
Note 5 Segment-Based Reporting a. Operating segments: 1) Overview Group Management has determined the operational segments on the basis of the reports examined by the Company's CEO and Board of Directors on a regular basis. The CEO and Board of Directors were identified as the Company's strategic steering committee, which makes the Companys strategic decisions. The following is a short description of each of the reported areas of activity: (a) Delta USA Mass Market this segment is engaged in the development and marketing of undergarments and socks and for women, men and girls; (b) Global Division Upper Market Segment (formerly Delta Israel) this segment is engaged in the production, development and marketing of undergarments, socks and seamless products for women, men and children in the U.S. and European upper market segment; (c) Delta Israel (formerly Delta Marketing Israel) this segment is engaged in marketing of branded undergarments mainly under the "Delta brand, to various customers in Israel through retail and wholesale activity. 33
2)
Information on sales, segment earnings (losses) and assets of reportable segments: (a) Measuring sales, segment earnings (losses) and segment assets: Measuring sales, segment earnings (losses) and segment assets is based on the same accounting principles applied in the Consolidated Financial Statements. Segment earnings (losses) reflect the profit (loss) from the segments activities, and exclude net financing expenses, taxes on income, profit (loss) from affiliates and cash flow hedging transactions, as these items are not attributed to segments and are not analyzed by the CODM by segment. Sales prices between segments are based on negotiations between the segments, when possible, on market prices. (b) Segment assets mostly include fixed assets, intangible assets, inventory, trade receivables and other accounts receivable. Assets not attributed to segments include mainly cash and cash equivalents, deferred taxes and assets held for sale. In addition, the CODM does not test liabilities as part of segment data.
34
b.
Data related to the operating segments:

Delta USA Mass Market Global Upper Market Delta Israel Others Thousands of Dollars 76,949 76,949 1,740 403 2,143 InterDivisional Write-Offs
Total
For the year ending December 31, 2010: Sales to external customers Inter-segment Total sales, net Segment profits (loss) before restructuring expenses, capital loss from the sale of subsidiary and impairment of fixed assets Restructuring expenses, net Capital loss from the sale of subsidiary Impairment of fixed assets Segment profits (loss) after restructuring expenses, capital loss from the sale of subsidiary and impairment of fixed assets Finance expenses, net Pre-tax income Assets at the end of the year Assets classified as held for sale Depreciation and amortization Capital gain, net Capital investments in fixed and intangible assets (*) 298,740 298,740 242,645 14,804 257,449
(15,207) (15,207)
620,074 620,074
6,015 6,015
15,965 485 666 14,814
13,060 13,060
(1,849) 992 (2,841) 7,817
18 18
33,209 485 666 992 31,066 7,817 23,249 416,773 2,838 11,030 732 5,128
196,786 2,358 241 1,005
120,138 7,145 (5) 1,618
36,207 654 1,265
63,641 2,838 873 496 1,240
35
Delta USA Mass Market For the year ending December 31, 2009: Sales to external customers Inter-segment Total sales, net Segment income (loss) before restructuring expenses and impairment of fixed assets Restructuring expenses (income), net Impairment of fixed assets Segment earnings (loss) after restructuring and impairment of fixed assets Finance expenses, net Company share of income of affiliate Pre-tax income Assets at the end of the year Assets classified as held for sale Depreciation and amortization Capital gain, net Capital investments in fixed assets, intangible assets and purchased activity (*) 268,465 101 268,566
Global Upper Market
Delta Israel Others Thousands of Dollars 72,804 18 72,822 2,461 721 3,182
InterDivisional Write-Offs
Total
228,804 14,772 243,576
(15,612) (15,612)
572,534 572,534
5,927 474 5,453
1,428 (1,805) 1,945 1,288
10,464 10,464
(772) (772) 6,369 41
(881) (881)
16,166 (1,331) 1,945 15,552 6,369 41 9,224 373,510 2,916 12,935 375 10,070
176,437 2,554 202 1,302
122,428 8,551 169 7,350
30,073 828 642
44,572 2,916 1,002 4 776
36
Delta USA Mass Market For the year ending December 31, 2008: Sales to external customers Inter-segment Total sales, net Segment earnings (loss) before restructuring expenses and impairment of goodwill Restructuring expenses Impairment of goodwill Segment earnings (loss) after restructuring and impairment of goodwill Finance expenses, net The Companys share in losses of affiliate Loss before tax Assets at the end of the year Assets classified as held for sale Depreciation and amortization Capital profit (loss), net Capital investments in fixed and intangible assets (*)
Global Upper Market
Delta Israel Others Thousands of Dollars 77,496 49 77,545 3,143 779 3,922
InterDivisional Write-Offs
Total
292,512 292,512
249,683 6,151 255,834
(6,979) (6,979)
622,834 622,834
7,686 5,586 2,100
(16,946) 9,162 1,806 (27,914)
12,724 12,724
(2,636) (2,636) 7,479 55
828 9,162 7,392 (15,726) 7,479 55 (23,260) 377,230 2,916 12,348 805 7,027
186,620 2,982 432 1,221
137,540 7,997 348 3,860
31,676 550 1 1,098
21,394 2,916 819 24 848
37
c. Additional information on a geographical basis: 1) Sales on a geographical basis (based on customer location): For the Year Ending on December 31 2010 2009 Thousands of Dollars North America Europe (except the UK) Israel UK Others 400,198 83,113 78,202 55,976 2,585 620,074 352,455 65,178 75,204 77,827 1,870 572,534 375,905 70,563 81,069 94,609 688 622,834 2008
2)
The balance of non-current assets (*) on a geographical basis is detailed below: December 31 2010 2009 Thousands of Dollars United States Israel Egypt Bulgaria and Hungary East Asia (mainly Thailand) Jordan Others 79,759 33,751 14,876 8,437 2,980 1,243 40 141,086 82,146 35,013 16,775 8,624 4,973 2,415 188 150,134 84,313 34,072 20,642 8,894 5,336 2,621 533 156,411 2008
(*)
With the exception of deferred taxes and the surplus of plan assets over severance pay liabilities net.
d. Sales information by product category: For the Year Ending on December 31 2010 2009 2008 Thousands of Dollars 381,538 354,008 371,387 122,302 125,884 124,596 104,649 78,958 110,132 13,684 16,719 11,585 620,074 572,534 622,834
Womens underwear Socks Mens underwear Others
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e. Sales to major customers: For the Year Ending December 31 2009 2008 2010 Thousands of Dollars Customer A belongs to Delta USA Mass Market segment Customer B belongs to Delta USA Mass Market segment and Global Upper Market * * 108,486 118,889 59,249 148,726 78,348
Starting 2010 this customer is not considered a main customer.
Note 6 Business Combinations a. On April 2, 2009 the agreement for the purchase of assets and part of the activity of Gibor Sports Active Wear (GSAW) Ltd ("Gibor") in the field of design, development, manufacturing, marketing and sale of socks was completed, after the contingent terms for carrying out the agreement were completed. The purchase of Gibor's assets was carried out in order to expand and leverage the Companys activity in the field of socks. As part of the agreement, the Company purchased from Gibor all equipment and machinery owned by Gibor in the field of sock activity (hereinafter the Area of Activity); a list of customers in the area of activity and relations with them (insomuch as these can be transferred) without a commitment on behalf of Gibor to continue activity with them, all of Gibors knowledge in the area of activity and 100% of the issued capital of the company owned by Gibor in Jordan. The Company has purchased the inventories held by Gibor on the completion of the agreement, as detailed in the contract. Total proceeds for assets purchased, including purchase costs and for no return for the inventory, amounted to $5.7 million. The proceeds were attributed as follows $3.6 million was attributed to fixed assets, $2.1 million was attributed to customer relations and the balance was attributed to current assets and liabilities. In addition, the Company purchased the inventory in Gibors possession on the date of the transactions completion, as stated above, in return for $2.6 million. In the nine-month period ending December 31 2009 sales of the purchased activity amounted to $18.3 million and the contribution to operational profits amounted to $0.9 million. b. On December 11 2009 the Company published that it was in negotiations to purchase international branded apparel assets and activity in the field of garments. On June 29, 2010 the Company announced that the seller had decided to discontinue sales efforts and therefore negotiations between the parties were brought to a conclusion.
39
Delta Galil Industries Ltd. NOTES TO THE FINANCIAL STATEMENTS (continued) Note 7 Fixed Assets a. Composition of the cost of fixed assets and the depreciation and amortization accrued as a result, by main groups, and movement thereof in 2010, is as follows:
Cost Balance at the Beginning of the Year Land and buildings Machinery and equipment Office furnishings and equipment, vehicles and improvements to rental properties 30,120 90,542 Additions During the Year 287 752 Realization of Investment in Subsidiary (1,927) Disposals Writing Off Assets During the Depreciated in Full Year and Are Not in Use Thousands of Dollars (1,866) (18) (708) (835) Adjustments and Other Sorting* (217) (151) Capital Reserve from Translation Differences Balance at the End of the Year 28,306 87,673
43,566 164,228
2,369 3,408
(38) (1,965)
(998) (3,572)
(1,644) (2,497)
(403) (771)
1,384 1,384
44,236 160,215
Accrued depreciation and devaluation Balance at the Beginning of the Year Land and buildings Machinery and equipment Office furnishings and equipment, vehicles and improvements to rental properties 19,040 49,233 Additions During the Year 649 5,719 Realization of Investment in Subsidiary (409) Disposals Writing Off Assets During the Depreciated in Full Year and Are Not in Use Thousands of Dollars (726) (18) (896) (835) Adjustments and Other Sorting* 695 (69) Capital Reserve from Translation Differences Balance at the End of the Year 19,640 52,743
23,278 91,551
2,923 9,291
(19) (428)
(331) (1,953)
(1,644) (2,497)
(155) 471
1,076 1,076
25,128 97,511
40
Land and buildings Machinery and equipment Office furnishings and equipment, vehicles and improvements to rental properties
Depreciated Balance December 31 2010 2009 Thousands of Dollars 8,666 11,080 34,930 41,309
19,108 62,704
20,288 72,677
* Includes assets classified starting from this report as held for sale and depreciation (see Section d. below) and writing-off of fixed assets as a result of restructuring (see Section e. below). The composition of the cost of fixed assets and the depreciation and amortization accrued as a result, by main groups, and movement thereof in 2009, is as follows:
Cost Writing Off Assets Depreciated In Full and are Not In Use (36) (2,824) Accumulated depreciation and amortization Writing Off Assets Depreciated In Full and Not In Use (36) (2,824) Depreciated Balance
Balance For the Beginning of The Year Land and buildings Machinery and equipment Office furnishings and equipment, vehicles and improvements to rental properties 30,328 92,984
Additions Throughout The Year 275 1,478
Purchase Activity 3,091
Disposals Throughout The Year (447) (4,187)
Balance For the End of the Year 30,120 90,542
Balance Added For the Depreciation Beginning Throughout The Year The Year Thousands of Dollars 18,391 46,436 787 7,107
Purchase Activity 22
Disposals Throughout The Year (102) (3,453)
Changes Others* 1,945
Balance For the End of the Year 19,040 49,233
December 31 2009 2008 11,080 41,309 11,937 46,548
44,050 167,362
1,600 3,353
646 3,737
(215) (4,849)
(2,515) (5,375)
43,566 164,228
22,422 87,249
3,472 11,366
77 99
(178) (3,733)
(2,515) (5,375)
1,945
23,278
20,288
21,628 80,113
91,551 72,677
(*) See Section d. below.

41
b. Land and Buildings

The Group owns land and buildings used for its operations, which are located in Israel, the U.S., Bulgaria, Egypt and Thailand. For land and buildings classified by the Group as held for sale - see Note 8 below. c. Encumbrances on Assets - see Note 11b. d. Impairment Over the course of 2010 the Group noted a depreciation provision to the amount of $1 million to the value of fixed assets in its Financial Statements. The depreciation in question is due to real estate in Hungary no longer in use. The recoverable sum of the real estate in question was determined based on an assessors evaluation Over the course of 2009 the Group noted a depreciation provision to the amount of $1.9 to the value of fixed assets in its Financial Statements. The depreciation in question was carried out due to knitting and sewing machinery in the Egyptian plan that are not in use. The recoverable sum of the machinery in question is determined based on the fair value less sales costs, which is higher than the machines value in use. The fair value less sales costs is based on the prices of similar machines on an active market. e. Restructuring Expenses Over the course of 2010, as a result of the restructuring plan described in Note 20e, the Group included in its Financial Statements a write-off to the amount of $0.3 in the value of fixed assets in its sock finishing plant in Jordan, which mainly consisted of improvements to rental properties. Over the course of 2008, as a result of the restructuring plan described in Note 20e, the Group included in its Financial Statements a write-off to the amount of $1.1 of fixed assets. The property write-off in question mainly consisted of improvements to rental properties in the distribution center that were passed on to a third party of management and the abandoned UK distribution center. f. For classification of depreciation expenses in Report on Comprehensive Earnings (Loss), see Note 20.
Note 8 Assets Classified as Held for Sale a. As of December 31, 2010, the Group has several assets in Israel held for sale, which are included in the Financial Statements at their net historical cost of $2.8 million. Note that for one of the three assets in question, the Nahariya real estate, a sales contract was signed over the course of Q4 2010. For further details regarding the inclusion of this asset under assets held for sale see Section b.1 below. These assets are classified as held for sale as-is, and the Company is committed and making efforts to locate a buyer. The Company estimates that the realization value net of realization costs of these assets exceeds their cost in the Financial Statements.
42
b. Sale of Assets Classified for Sale in the Report Period 1. Sale of Real Estate Property in Nahariya In March 2010 the Company signed an agreement with a group of buyers in which it granted the option to purchase real estate in Nahariya in its possession (hereinafter the Nahariya Real Estate), for a period of four months. In return for the option, the Company received 2 million NIS ($538,000), which will not be refunded the purchasers even if they choose not to exercise the option. In the event that the purchasers choose to exercise the option and sign a full purchase order, over the course of those four months, the purchasers shall pay the Company 91 million NIS ($24 million) for the land, in installments over the course of a period of three years from the signing of the purchase agreement. On June 23 2010 the Company signed a correction to the option agreement to purchase real estate properties in Nahariya, according to which the exercise period for the option to purchase the real estate was extended by an additional month, in return for which the Company received an additional 500,000 NIS ($129,000). On July 28 2010 the Company announced another revision of the real estate purchase option, according to which the option was extended by an additional two months, while at the same time a prudence claim was filed to the Nahariya Local Design and Construction Committee, in order to compensate it for the damages caused by the real estates impairment, in the event that it is determined by a certified design agency contrary to the position of the Company and its advisors that the 2/9 Regional Outline Plan harms the rights to build on the property. On October 3 2010, the Company received written notice from the option recipients of their intent to exercise the option and sign an agreement to purchase the Nahariya Real Estate in its possession. According to the option agreement, the parties must sign a sales agreement within 15 days of receiving the exercise notice, and if the option holders refuse to sign the agreement in question, this shall be seen as reneging on the exercise notice on behalf of the option holders which shall award the Company with the proceeds given for the option (2.5 million NIS plus tax). On October 2 2010 the Company signed a sales agreement, in which it sold the Nahariya Real Estate in its possession to a buyers group (4 private companies) some 25.8 hectares, before expropriation, known as Block 18206 Lot 18. According to the sales agreement, the purchasers shall pay the Company $23,972,602 US (plus tax) for the real estate, of which the Company has received $7.4 million, with the balance to be paid in installments according to a number of milestones spread out across a period of up to 39 months from signing the sales agreement; it was agreed that total compensation in NIS shall be no less than 91 million NIS. As part of the agreement the Company assigned the rights (and obligations) to the purchasers according to a claim submitted by the Company to the Nahariya Design and Construction Local Council as per Section 197 of the Design and Construction Law for the real estate. The capital gains expected for the Company are estimated at between $18 and $20 million US before tax. In accordance with the preliminary decision (pre-rolling) the Company received from the Securities Authority, capital gains from the transaction will be 43
recognized upon completing the terms included in the sales agreement which precede the third payment from the purchasers and include removal of sludge and evacuation of tenants from the property. Accordingly, the Company continued to classify the property as real estate available for sale in its Financial Statements. The Company presented the proceeds from the option and the sale of real estate pursuant to net liabilities net of betterment tax payments and advance payments due to betterment tax deriving from the sale and paid in 2010. 2. Sale of Real Estate in Daliyat al-Carmel On October 13 2010, the Company signed an agreement to sell 1 hectare of land in Daliyat al-Carmel, which it had leased from the Israel Land Administration, to a private company. On the land are structures with a total area of 3,600 square meters, which were used by the Company's rubber plant until its closing in 2007. According to the agreement and as of the report publication date, the Company received the full yield set in the contract in return for the leasing rights. Of the sum in question, the Company received $997,000 in 2011. The capital gain the Company generated from this sale amounted to $0.5 million and was included under other revenues, net.
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Note 9 Intangible Assets a. Composition of intangible assets and amortization accumulated as a result, by main groups: Goodwill (b) On January 1 2008: Cost Accumulated amortization Balance as of January 1, 2008 In 2008: Balance as of January 1, 2008 Additions Changes to payment estimates of contingent yield, (see b. below) Software write-off Amortization Balance as of December 31, 2008 On December 31, 2008: Cost Accumulated amortization Balance as of December 31, 2008 In 2009: Balance as of January 1, 2009 Additions Additions purchase of activity (see Note 6 below) Amortization Balance as of December 31, 2009 On December 31, 2009: Cost Accumulated amortization Balance as of December 31, 2009 In 2010: Balance as of January 1 2010 Capital Reserve from Translation Differences Additions Amortization Balance as of December 31, 2010 On December 31, 2010: Cost Accumulated amortization Balance as of December 31, 2010 Customer Relations Computer Software
Trademarks (c) Thousands of Dollars 19,013 (9,840) 9,173 9,173 5,326 (4,558) 9,941 24,339 (14,398) 9,941 9,941 4,843 (5,125) 9,659 29,182 (19,523) 9,659 9,659 1,958 (1,967) 9,650 31,140 (21,490) 9,650
Total
63,208 63,208 63,208 (4,478) (7,392) 51,338 58,730 (7,392) 51,338 51,338 51,338 58,730 (7,392) 51,338 51,338 51,338 58,730 (7,392) 51,338
14,778 (2,258) 12,520 12,520 (739) 11,781 14,778 (2,997) 11,781 11,781 2,096 (817) 13,060 16,874 (3,814) 13,060 13,060 (844) 12,216 16,874 (4,658) 12,216
3,834 (2,473) 1,361 1,361 924 (5) (499) 1,781 4,708 (2,927) 1,781 1,781 915 (713) 1,983 5,623 (3,640) 1,983 1,983 10 1,122 (855) 2,260 6,755 (4,495) 2,260
100,833 (14,571) 86,262 86,262 6,250 (4,478) (5) (13,188) 74,841 102,555 (27,714) 74,841 74,841 5,758 2,096 (6,655) 76,040 110,409 (34,369) 76,040 76,040 10 3,080 (3,666) 75,464 113,499 (38,035) 75,464
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b. Goodwill
There were no changes in the balance of goodwill in the years ending December 31 2010 and 2009. The balance of goodwill for December 31 2010 and 2009 was due to the Delta USA Mass Market segment. Test to Determine Impairment of Goodwill The Group reviews the need for goodwill depreciation once a year. As a result of the aforementioned 2008 review, the Company recognized impairment to the amount of $5,586,000 for goodwill attributed to Delta USA and $1,806,000 for goodwill for attributed to the Global Division Upper Market segment. This impairment was charged to gain/loss under impairment of goodwill. As a result of the reviews conducted in 2009 and 2010, no need arose for such impairment. The recoverable amount of cash-generating units is determined based on calculations of value in use. The cash flow forecast is based on the budget for the coming year, approved by management, and on other assumptions regarding growth rates of sales and expense in the following four years. The cash flow beyond the next 5 years is extrapolated using the expected growth rates indicated below. The following basic assumptions were used in calculating the value in use: Delta USA - Mass Market 2010 2009 17.3% 20% 3% 3% 17.9% 18.3%
Gross profit rate(1) Growth rate (2) Pre-tax capitalization rate (3)
The Group uses the above assumptions to analyze the value of goodwill of cash generating units in the different segments: 1) Long-term representative gross profit. The gross profit rate is determined based on past experience and Group forecasts of market developments. 2) The weighted average growth rate used to estimate cash flows past the budget period. 3) Pre-tax capitalization rate applied to the cash flow forecast. Discount rate set according to segment risks The Group is assisted by an external expert for the purpose of reviewing the value of goodwill included in the Financial Statements. Adjustments to Acquisition Price In 2004 the Group acquired, via a wholly-owned subsidiary, all of the shares of Burlen Inc. (Burlen), a private US-based company engaged in the design, development, manufacturing and marketing of womens undergarments. The acquisition cost amounted to $60 million. Pursuant to the purchase agreement, and due to a change to the agreement signed in February 2006, it was agreed that the Group would be liable for additional payment to the selling shareholders, subject to achievement of certain revenue and operating income objectives during a 6-year period (2006-2011).
46
According to Company forecasts of said additional payments, an amount of $11.7 million was charged to goodwill, in addition to the amount paid upon acquisition. This amount was adjusted so that in 2006-2007 the amount decreased by $2.2 million due to changes in payment projections. Over the course of 2006-2008 the Company made an advance payment to shareholders amounting to $5.8 million for meeting budget goals. In 2010, 2009 and 2008 the company didnt meet the defined goals, and therefore and in light of the expected failure to achieve 2011 goals, as it is more likely than not that additional payment will be required on behalf of the Group for the purchase of Burlen, the conditional payment liability was zeroed on December 31 2008 and accordingly, the adjustment to the purchase cost as charged in the past to the reputation asset was cancelled. c. Trademark Usage Rights The Company has entered into agreements which confer on it the right to market products under brand names owned by other parties, usually for periods of 3-4 years. Royalties for these agreements are calculated as a percentage of sales. Royalty rates range from 5% and 12% of sales; pursuant to with these agreements, the Company is liable for minimum royalty payments, as set forth in these agreements, and the discounted sums of which are included under this item.
Note 10 Pre-Paid Expenses and Long Term Debit Balances a. Long-Term Pre-Paid Expenses As of December 31 2009 2010 Thousands of Dollars Land leased from the Israel Land Authority Less current maturities (1) Pre-paid expenses for leased vehicles (2) Others
32 155 11 198
38 40 16 94
1. Some Company facilities are located on land leased from the Israel Land Authority for a period expiring in 2016. Lease payments have been pre-paid by the Company at a capitalized sum at the beginning of the lease contract. The balance as of December 31 2010 and 2009 is net of current maturities amounting to $8,000 each year. 2. Mainly consists of pre-payment for 3 months of operational leasing of vehicles.
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b.
Long-term debit balances As of December 31 2009 2010 Thousands of Dollars Long-term employee receivables Long-term debit balance for sale of fixed assets (1) Long-term deposits (2) Long-term loan to supplier Less current maturities Less provision to doubtful debt 15 826 334 15 1,190 (300) 890 1. 23 798 480 132 1,433 (110) 1,323
The debt balance for machinery sold by a subsidiary over the course of 2007 in return for $1.1 million. This debt does not bear interest and is repayable in monthly installments from July 2008 to July 31 2015. This balance is presented in the Financial Statements at its capitalized value. The Company has a fixed lien on assets sold until full repayment of the debt. As of December 31 2010 the entire debit balance was presented less the $300,000 provision to doubtful debt as a long-term debt, due to the fat that the debtor has encountered difficulties and his activity was discontinued until a bank arrangement could be achieved. According to the Companys estimates, the above debt shall be received in coming years and as of the balance sheet date, represents the recoverable sum of the assets sold. 2. Mostly includes non-interest-bearing deposits for operational leases of buildings (see Note 18a). The fair value of long term debit balances is not materially different from their book value.
Note 11b Long-Term Loans from Banking Corporations: a. Composition: Average Interest Rate December 31 December 31 2009 2010 and 2009 2010 In Thousands of Dollars % 5,724 7,833 2,110 2,110 5,723 3,614 * USD loans from banking corporations are at fixed dollar interest. b. Liabilities to banks are fully secured by an unlimited floating lien on all Company assets and rights and on assets of some of its subsidiaries and by fixed liens on equipment and machinery due to the purchase of Gibor activity. c. On the matter of unused bank credit frameworks see Note 20c. Dollar loans from banking corporations* Less current maturities 5.7
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d. The fair value of the liabilities is equal to their book value as fixed interest is close to market interest. e. The following are details of long-term bank liabilities payable by year: December 31 2010 2009 Thousands of Dollars 2011 2012 2013 2014 2,110 1,354 150 3,614 2,110 2,110 1,354 149 5,723
Note 12a Debentures 1. On January 2010 the Company published the results of the debentures offering carried out according to the Companys shelf offering from January 18 2010(in hereinafter the Shelf Offering Report"), that was published according to the Company's shelf prospectus from May 29 2008. The fund shall be redeemed in 5 equal monthly payments from 2012 to 2016 (the average duration for the end of 2010 is 3.5 years), on July 19 each year. Interest is paid in semiannual payments on January 19 and in July. The listed interest rate is 7%. The debentures are not guaranteed by liens. The immediate (gross) proceeds from the 113,000 units of debentures (Series K) issued according to the Shelf Offer Report amounted to 113 million NIS ($30 million). The Company has entered into an agreement with a banking corporation, to swap NIS cash flows for a commitment to pay debenture holders with a dollar cash flow. The dollar interest set in the transaction is 6.08%. Over the course of July 2010 the Company paid the debenture holders the first interest payment. 2. On January 27, 2010,the Company announced the results of the issue of debentures (Series K) carried out as per the shelf offering by the Company dated December 23 2010 published according to the Companys November 22 2010 shelf prospectus. The (gross) proceeds from the debentures (Series K) issued according to the Shelf Offer Report amounted to 98.1 million NIS, some $27.4 million. 3. The following are details of liabilities (principal and interest) for the debentures, payable by year: December 31 2010 Thousands of Dollars 2,149 14,134 12,507 29,233 58,023
2011 2012 2013 2014 onward
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4.
The following are additional details regarding the debentures issued: Debentures Issued on January 20 2010 375 7.45% 119,746 999 1,646 Series Expansion Debentures Issued on December 27 2010 346 6.62% 98,162 826 184
Issuing costs (thousands of dollars) Effective interest (in %) Market value as of December 31, 2010 (thousands of NIS) Interest payable as of December 31, 2010 (thousands of dollars) Value of swap agreement as of December 31 2010 (thousands of dollars)
Total 721 217,908 1,825 1,830
Note 12b Financial Derivatives 1. Agreements Hedging the Cash Flow from the Issue of Debentures Series K The Companys functional currency is the dollar and therefore the Company has decided to enter a bilateral agreement to replace cash flows with those identical to the repayment date of the debentures according to a fixed formula with a banking corporation to hedge cash flows for the payment of debentures against exchange rate risk. This hedging creates a steady cash flow for the Company in dollar terms. Therefore, on January 20 2010 the Company entered into a swap agreement. The sum of the initial NIS fund is 113 million NIS while the initial USD fund is $30.5 million. According to the agreement, the Company undertakes to transfer a dollar payment according to a fixed 6.08% interest rate and receive NIS payment from the banking corporation according to a fixed 7% interest rate, according to the debentures clearance table. This transaction is back to back with refunds due to the debentures required by the Company. The Company treats the swap agreement as cash flow hedging. 2. Agreements Hedging the Cash Flow from the Expansion of Debentures Series K Following the January 20 2010 swap agreement, the Company decided to hedge cash flows fixed in dollar terms for the series expansion as well. On December 29 2010 the Company entered into a swap agreement; the sum of the initial NIS fund is 92.6 million NIS while the initial USD fund is $25.9 million. This swap agreement was carried out under the same conditions at which the Company entered into the agreement for the issue of debentures on January 20 2010 (see 12(b)(1) above) The maximum exposure limit the banking corporation set for this transaction is $5 million. The Company will be asked to provide collateral in the event that the exposure exceeds the sum in question, as the bank demands.
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Note 13 Other Non-Current Liabilities December 31 2009 2010 Thousands of Dollars 9,042 9,164 622 518 9,560 9,786 5,925 4,264 5,296 3,861
Minimum royalty payment liability (1) Minimum financial lease payments (2) Total liabilities (3) Less current maturities Total long-term liabilities 1. 2. See Note 9c.
One of the Group members is a party to a financial lease agreement for a building and land used by it. This agreement shall remain in effect through 2014. Starting in 2007, due to reduced manufacturing activity in Jordan, the Company leases the building under an operational sub-lease. Below are other details of other liabilities payable by year: December 31 2009 2010 Thousands of Dollars 6,305 4,507 2,675 3,458 1,458 2,585 519 159 159 (1,330) (1,149) 9,560 9,786
3.
2010 2011 2012 2013 2014 onward Less interest component
Note 14 - Capital a. Equity, funds and surpluses: 1) Composed of ordinary shares worth 1 NIS NV, as follows: Number of Shares As of December 31 2010 2009 Listed capital (3) Issued and paid up (after neutralizing treasury shares and shares held in trust in relation to option plan) Treasury Shares 36,000,000 36,000,000
23,398,121 1,206,971
23,379,365 1,206,971
As of December 31 2010, Company shares are traded on the Tel Aviv Stock Exchange at $9.52 (32.75 NIS) per ordinary share. 2) As of December 31 2010 and 2009 the balance of shares issued by the Company and held in trust for the purpose of future exercise of employee options, amounted to 147,106 and 165,862, respectively.
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3)
On October 2009 an increase of the Companys listed capital by 10,000,000 ordinary shares worth 1 NIS NV each was approved, so that the Companys registered capital amounted to 36,000,000 NIS divided into 36,000,000 ordinary shares worth 1 NIS NV each.
4) On October 27 2009 the Company published a shelf offering report fore the issue of rights and listing on the stock exchange. The offered shares were offered by way of rights to the Company's ordinary shareholders, which were listed in the shareholders registry at the end of the November 2 2009 trading day, in such a manner that each holder of 4 ordinary shares would be entitled to purchase one right to one share for a price of 17 NIS ($4.53). Until the last day the rights could be used, November 16 2009, the Company received right usage notices for the purchase of 4,638,487 ordinary Company shares worth 1 NIS NV each. The (gross) proceeds for the use of the rights in question amounted to a total of 78 million NIS ($21 million). 5) On May 23 2010 the Company declared that it would be distributing dividends to the amount of $1.5 million, at 6.41 cents per share, distributed on Jun 16 2010. The determining date for the distribution was June 2 2010 and the X date was June 3 2010. On August 10 2010 the Company declared that it would be distributing dividends to the amount of $1.5 million, at 6.41 cents per share, distributed on September 5 2010. The determining date for the distribution was August 22 2010 and the X date was August 23 2010. On November 28 2010 the Company declared that it would be distributing dividends to the amount of $2million, at 8.51 cents per share, distributed on December 21 2010. The determining date for the distribution was December 6 2010 and the X date was December 7 2010. The shares held by the Company (treasury shares) as well as the shares held in trust do not grant voting rights and do not grant dividends. The Company has adopted various option plans subject to service conditions and performance levels. b. Share-based payment: 1. Stock option plans subject to service conditions: a) On October 23, 2002, the Company Board of Directors approved an employee stock option plan whereby 1,100,000 options would be granted at no cost (including 100,000 options to the Companys former CEO), exercisable into 1,100,000 ordinary Company shares worth 1 NIS NV. The exercise price for each option is $9. On November 22, 2002, the Company granted 1,004,500 options to 97 senior Group employees (including 100,000 options to the Companys former CEO). As of December 31 2010, these options have expired in full. In May 2003, the Company granted 30,000 options to 3 Group employees at an exercise price of $10.76, which have fully vested as of December 31, 2009. In March and August 2004, the Company granted 80,000 and 30,000
52
options, respectively, to 6 and 1 Group employees, respectively, at an exercise price of $15.35 and $12.74, respectively. As of December 31 2009, theses options are fully vested. The options may be exercised during a three-year period starting one year after the vesting date of the first batch, and on the vesting date of the 2nd, 3rd and 4th batches. As of December 31, 2010, the first three batches of options with an exercise price of $10.76 and the three batches of options with an exercise price of $15.35 expired. The four batches of options with an exercise price of $12.74 also expired. No options remained to be granted as part of this plan. b) In May 2006, the Company Board of Directors approved two stock option plans, one for Israeli and non-US employees, and the other for US-based employees. The plan consists of 1,400,000 options, of which 1,100,000 options may be issued in conjunction with the plan for Israeli and other non-US employees, and 300,000 options may be issued in conjunction with the plan for US-based employees. Each option is exercisable into one ordinary Company share worth 1 NIS NV. A total of 1,068,019 options have been granted subject to completing a period of employment. In May 2006, in June 2006 and in September 2006 the Company granted 568,016, 25,002 and 50,000 options, respectively, at exercise prices of $8.43, $7.59 and $9.2, respectively. In June 2006, the Company granted the Company CEO at the time, Aviram Lahav, 425,001 options at an exercise price of $7.26 per option. These options were forfeited during the course of 2008 in light of the CEO's departure. Furthermore, 50,000 options granted at a price of $9.2 to the manager of Delta USA were forfeited in 2008 in light of his departure. 342,980 of the options granted in 2006 would vest and be exercisable in 4 batches as follows: First quarter - these options vested 1 year after their granting date and may be exercised during a 3-year period starting 1 year after the vesting date. Second quarter - these options would vest 2 years after their granting date and may be exercised during the subsequent 3 years. Third quarter - these options would vest 3 years after their granting date and may be exercised during the subsequent 3 years. Last quarter - these options would vest 4 years after their granting (June 2010) date and may be exercised during the subsequent 3 years. In March 2007, the Company granted 2,000 additional options at an exercise price of $6.95, subject to the above vesting and exercise terms. 725,039 of the options granted in 2006 will vest and will be exercisable in 3 batches as follows: First batch - these options would vest 2 years after their granting date and may be exercised during the subsequent 3 years. Second batch - these options would vest 3 years after their granting date and may be exercised during the subsequent 3 years. Third batch - these options would vest 4 years after their granting date (June 2010) and may be exercised during the subsequent 3 years. In March 2007, the Company granted 120,000 additional options at an exercise price of $6.95, subject to the vesting and exercise terms set forth above. Out of this allocation, over the course of 2008, 35,000 options have
53
been forfeited by 2 employees who had left the Company; out of the total options in question, 6,666 were exercised. The number of options remaining in this granted amounted to 78,334, 28,333 of which have yet to vest as of December 31 2010. In March 2008, the Company granted 85,000 additional options at an exercise price of $5.13, subject to the vesting and exercise terms set forth above. As of December 31 2010 75,000 options have been forfeited due to the departure of a Company employee. 3,333 options were exercised and 81,667 remain, 6,667 of which have yet to vest. In addition, on March 2008, 50,000 and 25,000 options were granted at an exercise price of $5.13 the vesting date of which was June 30 2010 and December 31 2010 respectively, and may be exercised three years from the vesting date. As of the balance sheet date these options have vested in full. In August 2008, the Company granted 50,000 additional options at an exercise price of $4.7, subject to the vesting and exercise terms set forth above, in three batches as follows: 16,667 have vested as of the balance sheet date and the balance has yet to vest. In August 2008, the Company granted 15,000 additional options at an exercise price of $4.7. These options shall vest and will be exercisable in the following three batches: one half, 7,500 options have vested as of the balance sheet date and the balance has yet to vest. On July 13 2009 the Company granted 325,500 options to 120 employees at an exercise price of $3.02. The exercise price was determined based on the average share price in the 30 days of trade prior to the decision. According to the vesting and exercise terms for the four batches detailed above. 66,500 options of the options in question are contingent on achieving objectives; see Section 2 below. During 2009 7,900 options were forfeited due to departure of two Company employees. Over the course of 2010 1,250 options were exercised, 24,740 options were forfeited due to the departure of six Company employees and 15,000 conditional options were forfeited. In addition, 40,500 conditional options expired due to a failure to meet objectives set. As of December 31 2010, 58,150 options (first batch) have vested, as well as 11,000 options stipulated upon achieving objectives. On September 3 2009 the company granted 30,000 options at an exercise price of $3.35 per option. The vesting period of 10,000 of the options was 12 months from their granting date and as of December 31 2010 they have already vested. The vesting of the remaining options is stipulated on achieving objectives, see Section 2 below. On November 2009, the company granted 250,000 options to the COO and Deputy CEO at an exercise price of $3.072 per option. The vesting period of these options is three years. At the end of each full year of employment starting May 9 2010 a third of the options will vest so 54
long that the COO is employed in practice at the end of each of the years in question. On January 14, 2010, the Company Board of Directors resolved to grant, out of options available for allocation under the 2006 program, 40,000 options to 7 employees at an exercise price of $6.93 per option. Of these options: 20,000 options are contingent on the results of the U.S. subsidiary in 2010; these options shall vest within 15 months of issue. The theoretical economic value of each option as calculated according to the Black & Scholes formula is $2.91 per option; see Section 2 below. An additional 20,000 options were granted in three equal batches; these options will vest in two, three and four years from their date of issue. The theoretical economic value of each option is calculated according to the Black & Scholes formula is $4.20 per option. Of the allocation in question, 20,000 options expired due to a failure to meet goals and 10,000 options expired due to the departure of a Company employee. On April 21, 2010, the Company Board of Directors resolved to grant 65,000 options at an exercise price of $8.98 per option from the 2006 nonAmerican employee options plan. Of these options: 15,000 options will vest 18 months from their granting date their benefit component as per Black & Scholes is $3.05 per option; and an additional 50,000 options were granted in four equal batches - these options will vest at the end of one, two, three and four years from their date of issue; their benefit component as per Black & Scholes is $3.75 per option. On October 13 2010, the Company Board of Directors resolved to grant 150,000 options at an exercise price of $8.00 per option to a Company executive. The benefit component as per Black & Scholes is $4.01 per option. The options were granted in four equal batches, which will vest after one, two, three and four years from their date of issue. As of December 31 2010 419,561 options were forfeited pursuant to this plan due to employees leaving the company, 15,194 were exercised and 174,611 remain available for granting. c) On August 2009 the Company's Board of Directors decided to adopt an additional options plan for the compensation of employees, executives, directors, consultants and other services suppliers of the Company or its subsidiaries and related companies (hereinafter the Recipients). The options shall be granted free of charge. Pursuant to the plan, the Company is entitled to grant up to 800,000 non-tradable options, that can be exercised into 800,000 ordinary Company shares worth 1 NIS NV each. The exercise price of each option will be determined by the company's Board of Directors at its sole discretion in accordance with the law. In addition, the Board of Directors decided to adopt an option plan for the compensation of American employees of the Company and its subsidiaries. Pursuant to this plan, the Company shall be entitled to grant 300,000 options that can be excised as up to 300,000 ordinary Company shares worth 1 NIS NV each.
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On October 20, 2009, the special and general meeting approved the grant of 50,000 options to five Company directors in exercise price of $5 per option, exercisable as up to 50,000 ordinary Company shares. In addition, a grant of 10,000 options was approved to the Chairman of the Board of Directors, exercisable as up to 10,000 ordinary Company shares of at the same exercise price. The options vesting period will be three years from their granting date, so that at the end of each full year of employment as director, a third of the options granted each director will vest. The average economic value of the options according to the Black & Scholes Model is $1.13. Furthermore, an allocation of 720,000 options to the Company's CEO, Mr. Isaac Dabach, contingent on achieving goals, was also approved; see Section 2 below. On October 28 2009, the Company granted 10,000 options to an external director at an exercise price of $5 per option exercisable as up to 10,000 ordinary Company shares. These options vesting period will be 3 years from their granting date, so that at the end of each full year of employment as director, a third of the options granted will vest. On April 21, 2010, the Company Board of Directors resolved to grant 50,000 options from the 2009 American employee options plan at an exercise price of $8.98 per option. Of these options: 25,000 options are contingent on operational objectives of a U.S. subsidiary in 2010. These options expired due to the failure to meet the goals set; see 2 below. The benefit component as per Black & Scholes is $3.65 per option; an additional 25,000 options will vest within one year of granting the theoretical economic value of each option calculated according to Black & Scholes is $3.52 per option. On August 10 2010 the Companys Board of Directors decided to grant 10,000 options at an exercise price of $6.70 per option to a Delta U.S. employee. The theoretical economic value of each option calculated according to the Black & Scholes formula is $2.43 per option. The options were granted in three equal batches, which will vest after one, two, three and four years from their date of issue. d) The fair value of the options granted during 2010, 2009 and 2008 as of their date of issue amounted to $1,191,000, $2,136,000 and $400,000, respectively. The fair value of each option granted (with the exception of options contingent on achieving objectives) is estimated on date of grant using the Black &Scholes option pricing model with the following assumptions: 2010 Dividend yield Expected standard deviation (*) Risk-free interest rate Expected life span - in years 2% / 0% 58% 3.7% - 2.8% 3.9 2009 2% / 0% 64% 4.45% - 2.5% 4.0 2008 2% / 0% 48% 3.0% - 2.5% 4.5
(*) Based on historical volatility of Company shares over periods corresponding to the option's expected life span until its exercise date. 56
e)
The sums of the expenses (revenues) attached to the options included in the Financial Statements for 2010, 2009, and 2008 are $1,259,000, $301,000 and ($188,000), respectively. The balance of benefits not yet recognized for all of the option plans, as of December 31 2010, assuming the achievement of all goals set, amounts to a total of $1,714,000 (less the forfeiture rate where relevant), and its recognition is expected over the course of the coming 4 years.
2. Stock options subject to performance stipulations: a) In May 2006, the Company granted 277,000 options to 11 senior executives pursuant to the May 2006 stock option plan (see Note 1c below). These options were subject to achieving of performance objectives and vested as of December 2009, due to a failure to achieve the goals. In March 2008, 25,000 options were granted to one of the Company's executives, contingent on achieving certain performance objectives. The exercise price $5.13 per option. As of December 31 2009 those options have been forfeited due to the executives departure from the Company. On July 13 2009 the company granted 66,500 options contingent on achieving performance objectives at an exercise price of $3.02 per option. As of December 31 2010, 15,000 options were forfeited as a result of the departure of three employees from the Company and 40,500 options expired due to a failure to meet goals. On September 3 2009 the Company granted 30,000 options at an exercise price of $3.35 per option, 20,000 of which are contingent on achieving operational profit goals, as follows: 10,000 options will vest on March 31 2011 subject to the Delta Israel division achieving an operational profit of no less than $10.8 million in 2010. These options have vested in light of the achievement of the goal set. 10,000 additional options will be vest on March 31 subject to Delta Israel achieving an operational profit rate of no less then 13% of sales in 2011. In January 2010 20,000 options were granted to two senior executives of a U.S. subsidiary as part of the May 2006 option plan, these options were contingent on performance objectives and expired as of December 2010, due to a failure to achieve the objectives. In April 2010, 25,000 options were granted to a senior executive at a U.S. subsidiary pursuant to the August 2009 option plan. These options were contingent on operational goals and expired as of December 2010, due to a failure to achieve objectives. b) On October 20 2009, the shareholders general and special meeting approved the issue of options to Mr. Isaac Dabach, Company CEO and Director and its controlling shareholder. Mr. Dabach was granted 720,000 options at the price of $3.27 per option, exercisable as 720,000 Company shares. The vesting of the options in question is contingent on achieving objectives pertaining to the operational earnings from regular actions not including the impact of one-time items (hereinafter EBIT), over the course of 2010-2013:
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1) Subject to achieving EBIT to the amount of $35 million in 2010, 200,000 options will vest on March 31 2011. These options have not yet vested as of December 31 2010 due to the failure to achieve the goal set. 2) Subject to achieving an accumulated EBIT of $70 million in 2010 and 2011, 200,000 options will vest on March 31 2012; in this case the recipient will also be entitled, on the same date, to the vesting of the options mentioned in Section (1) above (if they do not vest earlier). 3) Subject to achieving an accumulated EBIT of $105 million in 2010 2012, 200,000 additional options will vest on March 31 2013 In this case the recipient will also be entitled, on the same date, to the maturation of the options mentioned in Sections (1) and (2) above (if they do not mature earlier). 4) An additional 50,000 options will mature on March 31 2012 if the accumulated EBIT for 2010 and 2011 will reach $75 million and 70,000 additional options will mature on March 31 2013 if the accumulated EBIT for 2010, 2011 and 2012 will reach of $121 million. If the accumulated EBIT for 2010, 2011 and 2012 will reach $121 million while the EBIT in question does not reach $75 million, the recipient shall be entitled, on March 31 2013, to the maturation of the 50,000 options denoted at the beginning of this section (4). The average economic value of the options according to the Black & Scholes Model as of their date of issue is $1.64. The theoretical economic value to the options subject to the achievement of goals granted in 2010 and 2009 was estimated on the date of issue using the Black & Scholes option pricing model, using the following average assumptions: 2010 2009 2008 Dividend yield Expected standard deviation (*) Risk-free interest rate Expected life span - in years 2% 66% 3.1%-3.5% 2.8 0% 61% 3.4% 4.0 2% 47% 2.5% 4.0%
(*) Based on historical volatility of Company shares over periods similar to the expected life of the option through its exercise date. 3. Options granted to Israeli employees up to 2004 pursuant to Company plans are subject to the conditions denoted in sections 102 and 102a of the Income Tax Ordinance. This section stipulates, inter alia, that the Company may claim as a tax deductible expense the sums granted employees as benefits, with the related tax paid by the employee. The option allocation starting 2006 is subject to the capital track of section 102 chosen by the Company and consequently, the Company may not claim sums credited as a benefit to employees as an expense for tax purposes, including sums recorded as salary benefits in the Company's accounts, in respect of options granted employees pursuant to the plan, other than the benefit component as salary, if any, determined on the granting date. 4. The rights granted by the ordinary shares issued upon the exercise of the options would be identical to those of the other ordinary Company shares. 5. The movements in the number of options not yet exercised and the relevant weighted averages of the exercise prices are as follows:
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a.
Options not contingent of meeting performance goals: 2010 Average Weighted Exercise price $5.49 $8.20 $9.09 $6.61 $5.80 $7.52 2009 Average Weighted Exercise price $8.29 $3.28 $6.37 $10.29 $5.49 $9.41 2008 Average Weighted Exercise price $9.8 $5.01 $7.67 $14.04 $8.29 $10.21
Quantity In circulation at the beginning of the year Granted - market price Forfeited Expired Exercised Outstanding at end of the year Exercisable at end of the year 1,128,206 270,000 (81,317) (15,194) 1,301,695 433,595
Quantity 928,490 589,000 (140,684) (248,600) 1,128,206 267,432
Quantity 1,688,435 225,000 (603,770) (381,175) 928,490 437,750
b.
Stock options subject to meeting performance goals:

2010 Average Weighted Exercise Price Quantity 2009 Average Weighted Exercise Price Quantity 25,000 806,500 (25,000) 806,500 -,$5.13 $3.25 $5.13 $3.25 2008 Average Weighted Exercise Price Quantity 69,000 25,000 (44,000) (25,000) 25,000 -,$8.43 $5.13 $8.43 $8.43 $5.13
In circulation at the beginning of the 806,500 year Granted at market price 45,000 Forfeited (15,000) Expired (85,500) Outstanding at end of the year 751,000 Balance of options exercisable at the -,end of the year
$3.25 $8.07 $3.02 $5.68 $3.27
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6. Details of Option Balance as of December 31 2010 according to plans: Average Weighted Balance of Projected Life Span (Years) 0.33 1.34 1.50 2.35 2.60 3.53 4.24 3.25 3.67 4.17 3.67 5.00 5.05 6.29 3.79 4.18 4.31 5.61 2.89
Plan Date October 2002 May 2006 May 2006 May 2006 May 2006 May 2006 May 2006 May 2006 May 2006 May 2006 May 2006 May 2006 May 2006 May 2006 October 2009 October 2009 October 2009 October 2009 October 2002 May 2006 June 2006 March 2007 March 2008 August 2008 July 2009
Granting Date
Exercise Price ($) (**) 15.35 8.43 7.59 6.95 5.13 4.70 3.02 3.02 3.35 3.35 3.07 6.93 8.98 8.00 5.00 3.27 8.98 6.70 4.87
Balance of Options Granted and not yet Exercised 17,500 217,092 25,002 80,334 81,667 65,000 225,100 11,000 10,000 20,000 250,000 10,000 65,000 150,000 70,000 720,000 25,000 10,000 2,052,695
July 2009 contingent on performance September 2009 September 2009 contingent on performance November 2009 January 2010 April 2010 October 2010 October 2009 granted to Directors October 2009 contingent on performance granted to CEO April 2010 August 2010
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Details of balance of options as of December 31 2009 according to plans*: Average Weighted Balance of Projected Life Span (Years) 0.3 0.8 0.6 2.3 2.5 3.3 3.6 4.6 5.25 4.25 4.67 5.17 4.67 4.79 5.18 4.40
Plan Date October 2002 October 2002 October 2002 May 2006 May 2006 May 2006 May 2006 May 2006 May 2006 May 2006 May 2006 May 2006 May 2006 October 2009 October 2009 October 2002 October 2002 October 2002 May 2006 June 2006 March 2007 March 2008 August 2008 July 2009
Granting Date
Price Exercise ($) (**) 10.76 15.35 12.74 8.43 7.59 6.95 5.13 4.70 3.02 3.02 3.35 3.35 3.07 5.00 3.27 4.55
Balance of Options Granted and not yet Exercised 6,250 40,000 7,500 231,354 25,002 87,000 85,000 65,000 251,100 66,500 10,000 20,000 250,000 70,000 720,000 1,934,706
July 2009 contingent on performance September 2009 September 2009 contingent on performance November 2009 October 2009 granted to Directors October 2009 contingent on performance granted to CEO
* See also 6d below. ** The exercise price in the above table is the original price before adaptation due to the distribution of dividends in the relevant plans. c. On July 2009 the Board of Directors decided to revise the May 2006 option plan so that the exercise price paid for each option would be adjusted by the dividend rate declared by the Company from time to time. This adjustment is not in accordance with the original plan, and in it features a benefit to options owners as of December 31 2009 to the amount of $314,000. d. According to the shelf offering report published by the Company on October 27 2009, according to which the Company made an offering by way of rights to the Company's ordinary shareholders, the Company adjusted the options which were granted as part of the 2002 and 2006 plans and which have not yet vested according to terms of the original plan. According to the option plans in question (2002 and 2006), at the vesting date each exerciser of 4 options would be entitled to 5 shares in return for the payment of 4 times the exercise price plus the rights usage price from the issue of the rights set at 17 NIS ($4.53). In light of the above and as of December 31 2010 and assuming the exercise of all of the options existing in the 2002 and 2006 plans and which were allocated to non-American recipients, 4,375 and 136,106 shares,
61
respectively, will be added to the ordinary shares converted (the conversion ratio shall be 5 shares for each 4 options, instead of 1:1). e. As for the options granted subsequent to the balance sheet date, see Note f. Surpluses In determining the sums available for distribution as dividends, according to the Companies Law, the total number of Company shares bought back (presented under a separate item in equity) should be deducted from retained earnings presented under Company equity. Note 15 Taxes on Income
a.
The Company: 1) Starting from tax year 2008 onward the Companys results are measured, for tax purposes, in nominal sums. By the end of tax year 2007, the Companys and its Israeli subsidiaries results for tax purposes were measured taking into account changes in the CPI, in accordance with the Income Tax Law (Adjustments Due to Inflation), 1985 (hereinafter - the Adjustments Law). Tax Rates The income of the Company and its subsidiaries is taxed at statutory tax rates. On July 14, 2009, the Knesset enacted the Economic Efficiency Law (Legislative Changes for Implementation of the Economic Plan for 2009 2010), 2010 (hereinafter: the Law), which revises, inter alia, corporate tax rates set pursuant to a previous amendment. As a result of these amendments, corporate tax rates will decrease in the following manner: in 2011 24%, 2012 23%, 2013 22%, 2014 21%, 2015 20% and 2016 onward 18%. 3) Tax benefits under the Encouragement of Capital Investments Law, 1959 (hereinafter the Law). The Company received investment grants from the State of Israel. Entitlement to these benefits was stipulated on the fact that the Company will uphold the terms set in the Law, resulting regulations and letters of approval for certain investments in authorized factories. In the event that the conditions attached to these grants are not met, the Company may be asked to return the sum of the grants, in whole or in part, including CPI linkage differences from the date the grant was received. The Company placed floating liens on all of its assets in favor of the State of Israel as collateral for the terms of the grant. The income from this approved program shall be tax free for the first two years, starting from the year the Company first had taxable income and will be charged corporate tax and a rate of 25% for the subsequent 5 years, so long as 14 years have not passed from the year approval was granted and 12 years from the year the factory began operations.
2)
4)
Amendment to the Encouragement of Capital Investments Law, 1959
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Pursuant to the 2011 and 2012 Economic Policy Law, 2011, which was approved by the Knesset on december 29 2010, the Capital Investment Encouragement Law, 1959 was also amended (hereinafter the Amendment). The Amendment comes into effect January 1 2011. Pursuant to the Amendment benefit plans were estavlished, in lieu of the plans currently existing in the Capital Investment Encouragement Law, 1959 (hereinafter the Law), as follows: a grants plan for factories in Development Area A and two tax benefit plans (preferred factory and special preferrred factory), dealing with the incidence of a uniform tax rate on all of the Companys preferred revenues, as defined in the Amendment. The Company is studying the Laws impact on its activity. b. Non-Israeli Subsidiaries Subsidiaries incorporated outside of Israel, in free trade zones, are assessed for tax purposes according to the laws in the countries of their residence. The tax rate applicable to the main subsidiary incorporated in the U.S. is 36%-38% (including federal and state tax). As a rule, inter-company transactions between the company and the foreign subsidiaries are subject to the provisions of the Income Tax Regulations (Determination of Market Terms), 2006. c. Losses for Tax Purposes Carried On to Subsequent Years Deferred tax assets for losses for tax purposes carried on to subsequent years are recognized in the event that realization of the tax benefit in question through the existence of future taxable income is expected. Losses for tax purposes to be carried on to subsequent years derive mainly from the Company in Israel, and as of December 31, 2010 and 2009 amounted to $65 million and $85 million, respectively. The tax asset recognized as of December 31, 2010 and December 31 2009 amounted to $7.0 million and $6.1 million, respectively. Carried on losses for tax purposes accumulated in Israel may be offset over an unlimited period of time; see also D below. d. Mergers On March 2, 2008, the Tax Authority approved an application for a tax-exempt restructuring of the Delta Group, effective from December 31 2007. Pursuant to the restructuring, Delta Galil merged Delta Marketing and Tag LI into itself in such a manner that that Delta Marketing and Tag-Li transferred all their assets and liabilities to Delta Galil for no return, so that Delta Marketing and Tag Li were eliminated with no liquidation. Pursuant to the confirmation received, some restrictions were imposed on offsetting losses, such that the amount that may be offset each year would not exceed 1/12 of total losses (some $7 million), or 50% of the Companys taxable revenues for that year before offsetting losses from previous years, whichever is lower.
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e.
Deferred taxes on income: 1) Composition of deferred taxes as of the balance sheet dates and transactions in said years are as follows: For Balance Sheet Items Provision to Employee Benefits Inventory Others Thousands of Dollars 1,805 1,029 838 (997) 808 (215) (59) 38 1,008 (181) 97 23 899 1,737 (897) (40) With Respect to Losses for Tax Purposes 7,209 (30) 7,179 834 (1,945) -
Fixed Assets Balance as of January 1 Changes in 2008: Charged to Statement of Operations Sums charged to other comprehensive earnings Balance on December 31, 2008 Changes in 2009: Charged to Statement of Operations Influence of change in tax rates on deferred tax balances. Sums charged to other comprehensive earnings Influence of change in tax rates on deferred tax balances in other comprehensive earnings (loss) Balance on December 31, 2009 Changes in 2010: Charged to Statement of Operations Sums charged to other comprehensive earnings Balance on December 31, 2010 (5,363) 806 (4,557) 331 650 -
Intangible assets 32 (1,646) (1,614) (336) -
Total 5,550 (1,027) 38 4,561 (464) (1,238) 23
(3,576) 324 (3,252)
(1,950) (466) (2,416)
593 642 1,235
(128) 819 302 65 1,186
800 592 (11) 1,381
6,068 925 6,993
(128) 2,754 2,319 54 5,127
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2)
Deferred income taxes: Deferred income tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets against current tax liabilities and when the deferred income taxes assets and liabilities relate to income taxes levied by the same taxation authority. The offset sums are as follows: December 31 2010 2009 Thousands of Dollars
Deferred tax assets: Repayment of which is expected within 12 months of the balance sheet date. Repayment of which is expected over 12 months after the balance sheet date.
5,923 4,939 10,862
3,219 6,053 9,272
Deferred tax liabilities: Repayment of which is expected within 12 months of the balance sheet date. Repayment of which is expected over 12 months after the balance sheet date. Tax assets, net (5,735) (5,735) 5,127 (16) (6,501) (6,517) 2,754
December 31 2010 2009 Thousands of Dollars Presented in the balance sheet: Under deferred tax assets Under deferred tax liabilities
5,127 5,127
3,541 (787) 2,754
The deferred taxes are calculated according to tax rates of 18%-38%. f. Income (loss) before taxes on income is comprised as follows: For the Year Ending December 31 2010 2009 Thousands of Dollars 2008
The Company in Israel Non-Israeli subsidiaries
17,423 5,826 23,249
4,849 4,375 9,224
(12,756) (10,504) (23,260)
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g.
Composition of tax expenses (revenues) on income in Report on Comprehensive Earnings (loss): For the Year Ending on December 31 2010 2009 2008 Thousands of Dollars
Current: The Company in Israel Non-Israeli subsidiaries Deferred: The Company in Israel Non-Israeli subsidiaries Current for previous years: The Company in Israel Non-Israeli subsidiaries
1,952 1,830 3,782 (1,603) (716) (2,319) (200) 804 604 2,067
188 (849) (661) 193 1,509 1,702 7 526 533 1,574
611 611 (48) 1,075 1,027 (37) 921 884 2,522
h.
The following is a reconciliation of the theoretical tax amount that would have applied if all revenues had been taxed at the regular tax rate applicable to companies in Israel (see a2 above), to the tax sum charged in the Reports on Comprehensive Earnings (loss) for the reported year: For the Year Ending on December 31 2010 2009 2008 Thousands of Dollars
Income (loss) before taxes on income as presented in the Reports on Comprehensive Earnings (Loss) Theoretical tax expenses (revenues) Decrease in tax due to different tax rates applicable to non-Israeli subsidiaries Increase (decrease) in tax due to fixed differences: Non-deductable expenses Impairment of non-deductable goodwill Impairment of non-deductable fixed assets Tax expenses for prior years, net Increase in taxes deriving from losses for tax purposes created in the reported year and for which no deferred taxes were credited. Decrease in taxes from losses for tax purposes in the reported year for which no deferred taxes were credited in the past. Exchange rate differences and differences in the measurement base. Decrease in deferred taxes as a result of the change in tax rates occurring in coming years Other, net Taxes on income in Statements of Operations
23,249 5,812 (277) 5,535 355 179 604
9,224 2,398 (100) 2,298 177 506 533
(23,260) (6,280) (575) (6,855) 109 1,996 884
104
142
5,978
(3,952) (556) (202) 2,067
(857) 43 (1,366) 98 1,574
278 132 2,522
66
i.
Tax Assessments Tax self-assessments filed by the Company and subsidiaries in Israel through 2006 are deemed to be final. Tax self-assessments filed by a U.S. subsidiary through 2006 are deemed to be final. Influence of the Adoption of IFRS in Israel on Tax Liability As discussed in note 2a, the Company has prepared its Financial Statements in accordance with the IFRS as of January 1, 2007. IFRS standards differ from generally accepted Israeli accounting standards, and accordingly, preparation of financial statements as per IFRS standards may reflect a financial situation, operating results and cash flows materially different from those presented in these Financial Statements. Pursuant to the Income Tax Ordinance Revision (no. 174 Temporary Orders Regarding Tax Years 2007 and 2008), 2010, published on February 4 2010, it was determined that taxable income for tax years 2007, 2008 and 2008 shall not be prepared in accordance with Accounting Standard 29 set by the Israeli Accounting Standards Board (hereinafter: IFRS Rules), note that where the tax laws provide specific instructions regarding the treatment of income, as an expenses etc., the tax laws shall take precedence over accounting rules, be they IFRS or others. Company management calculated its taxable income for tax years 2008 and 2009 based on Israeli accounting standards in effect prior to the Israeli adaptation of the IFRS, subject to certain adjustments, and therefore revision of the ordinance has no impact on the calculation of current and deferred taxes in the Financial Statements. Although the temporary ordinance has not yet been extended to tax year 2010, the Company has calculated its taxable income based on Israeli accounting standards in effect prior to the Israeli adaptation of the IFRS. The amendment to the ordinance had no material impact on the tax expenses reported in these Financial Statements.
j.
Note 16 Severance Pay Liability a. The following sums presented in relation to payments and benefits to employees have been included in determining operating income: For the Year Ending on December 31 2010 2009 Thousands of Dollars Salary and associated Post-retirement benefits: defined deposit plan Post-retirement benefits: defined contribution plan Benefits pursuant to option plan Total employee benefits 106,305 2,563 257 1,262 110,387 102,442 2,261 335 301 105,339 122,734 2,550 456 (188) 125,552 2008
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b.
Post-Employment Benefits Defined Benefit Plan The sums presented in the balance sheet were determined as follows: As of December 31 2009 2010 Thousands of Dollars
Present value of funded liabilities Fair value of plan assets Balance of liabilities in the balance sheet
6,350 5,925 425
6,668 6,438 230
Sums presented in the balance sheet with regard to severance pay liability: As of December 31 2009 2010 Thousands of Dollars Defined benefit plan, net Other liabilities due to employment termination 425 47 472 230 20 250
Presented: As of December 31 2009 2010 Thousands of Dollars Surplus of plan assets over liabilities from the termination of employeremployee relationships, net Liabilities for employment termination, net of deposits to severance pay funds (472) (472) 85 (335) (250)
Transactions in defined benefit plan liabilities over the course of the years were as follows: 2010 Balance at the Beginning of the Year Current service cost Current interest expenses Actuarial losses (gains) Linkage differentials Benefits paid Balance at the end of the year 6,668 218 300 184 204 (1,224) 6,350 2009 Thousands of Dollars 6,626 258 329 366 26 (937) 6,668 2008 8,025 338 457 (282) 137 (2,049) 6,626
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Movements in the fair value of defined benefit plan assets over the years are as follows: 2010 Balance at the Beginning of the Year Expected return on plan assets Actuarial losses (gains) Linkage differentials Employer contributions Benefits paid Balance at the end of the year 6,438 261 45 184 208 (1,211) 5,925 2009 Thousands of Dollars 6,404 252 389 27 242 (876) 6,438 2008 8,044 339 (515) 161 703 (2,328) 6,404
The expenses recognized in the Report on Comprehensive Earnings (Loss) are as follows: For the Year Ending December 31 2010 2009 Thousands of Dollars Current service expenses Current interest expenses Expected rate of return on plan assets Expenses (revenues) from linkage differentials 218 300 (261) 20 277 Presented under: For the Year Ending December 31 2010 2009 Thousands of Dollars Cost of sales Sales and marketing expenses General and administrative expenses Financing expenses (revenues) 95 85 77 20 277 The chief actuary assumptions employed are as follows: 2010 Percent Discount rate CPI increase rate Expected return on plan assets Future salary increase Israel 4.14 2.99 4.14 3.50 U.S.A. 5.15 0.00 5.50 0.00 Israel 4.14 2.82 4.14 3.50 U.S.A. 5.49 0.00 6.00 0.00 2009 153 99 83 (1) 334 286 95 75 (24) 432 2009 258 329 (252) (1) 334 338 457 (339) (24) 432 2008
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The expected return on plan assets is determined based on available expected returns on assets underlying the current investment policy. Expected returns on fixed interest investments are based on the gross yield to maturity as of the balance sheet date. The projected benefits of the post-retirement plan for the year ending December 31 2011, amount to $454,000.
Note 17 Earnings (Loss) per Share a. Basic The basic profit per share calculated by dividing the profit charged to parent company shareholders by the weighted average of the number of ordinary shares issued, with the exception of ordinary shares purchased by the Company and held as treasury shares. 2010 Net income (loss) attributed to Company shareholders (in thousands of dollars) Weighted average of number of ordinary shares issued (in thousands) Less treasury shares (in thousands) Number of shares for calculating basic earnings (loss) per share Basic earnings (loss) per share (dollars per share) b. Diluted The diluted profit per share in calculated by adapting the weighted average of the number of ordinary shares in circulation less treasure shares while including potential ordinary shares with a diluting effect (2008 not included as they were anti-diluting). 2010 Net income (loss) used for calculating diluted earnings per share (in thousands of dollars) Weighted average of the number of ordinary shares issued (in thousands) used for the calculation of profit (loss) per share Less treasury shares (in thousands) Adjustment due to incremental shares from the exercise of options (in thousands) Weighted average of the number of ordinary shares for calculating diluted earnings (loss) per share (in thousands) Net diluted earnings (loss) per share (dollars per share) In calculating profit (loss) per share, adaptations due to nondiluted options (in thousands) were not taken into account. 21,060 24,599 1,207 700 24,092 2009 7,662 20,528 1,207 30 19,348 2008 (26,400) 19,948 1,207 18,741 21,060 24,599 1,207 23,392 0.90 2009 7,662 20,528 1,207 19,321 0.40 2008 (26,400) 19,948 1,207 18,741 (1.41)
0.87 1,493
0.40 2,063
(1.41) 953
Note 18 Commitments a. The Company and its subsidiaries rent 18 structures via operational lease. The lease (including optional extension) for 7 facilities would expire on different dates between 2012 and 2029, with the remaining lease agreements expiring in 2011.
70
b.
The Company intends to renew some of the aforementioned lease agreements and has signed an agreement according to which a compound is supposed to be constructed for it which it undertook to rent out for a period of 10 years with an option to extend. Minimum future annual lease payments (accounting for optional extensions likely to be exercised) for each year from 2011 to 2014 will amount to $9.1million, $5.6 million, $4.4 million and $3.3 million, respectively. In the period between 2015 and the end of the lease term, accumulated lease payments would amount to $15.5 million. Lease expenses for 2010, 2009 and 2008 amounted to $9.3, $9.1 and $9.7 million, respectively. Regarding liability for minimum royalty payments, see Notes 13, 9c.
Note 19 Transactions and Balances with Interested and Related Parties The company is controlled by Isaac Dabah, through GMM Capital LLC, which owns 54% of the Company's shares. Interested parties" - according to the definitions of interested parties in the Securities Refulations (Yearly Financial Statements), 2010. "Related Parties" As defined in IAS 24, Related Party Disclosures. Key Company management personnel included together under the definition of related parties as per AS 24, include the members of the Board of Directors and the Company's CEO. a. Transactions with interested parties and related parties: Benefits were given interested parties and related parties as follows: For the Year Ending December 31 2009 2008 2010 Sales in thousands of dollars, see (1) below Purchases in thousands of dollars, see (2) below Salary and benefit component for options granted interested parties and related parties employed by the Company or on its behalf: Sum in thousands of dollars, see (3), (4) and (6a) below. Number of people to whom benefits refer Pay, consulting expenses, expense refunds paid and the benefit component for options granted directors: Sum in thousands of dollars, see (5) below Number of people to whom benefits refer 413 7 340 7 221 7 1,082 2 644 1 353 1 122 261 -
1) Sales Sales sums presented above refer to transactions between Group members and a company owned by an interested party, conducted in the normal course of business, at market prices and according to prevailing credit terms. On June 2008 this company ceased being owned by the interest party. 71
2) Purchases The sum of purchases presented above refers to the transaction between a U.S. subsidiary and an interest party, carried out over the normal course of businss, at market prices and under prevailing credit terms. 3) Options to the Company's Former CEO In conjunction with the 2006 employee stock option plan (see Note 14), the Company's CEO was granted 502,003 options, of which 425,001 options were at $7.26 per option and 75,002 options at $8.43 per option. Out of the options in question, 50,000 options were contingent on performance in 2007 and 2008. In light of the CEOs departure, all of the options granted him through this plan have expired. In addition, the balance of options granted the then-CEO pursuant to prior plans which have not yet been exercise have also expired. 4) Options to the Company CEO On October 20 2009 the Company's CEO and controlling shareholder was granted 720,000 options in the price of $3.27 per option, contingent on achieving operational objectives in 2010 2012 (see note 14.b.2). The benefit component for these options listed as an expense in 2010 amounted to $498,000.
5) Consultation Agreement The Company has a consultation agreement with a director in the company. In return for the consultation, the director is entitled to payment according to hours invested. in 2010, the directror received a total of $44,000 for the consultation services provided. 6) Approval of Terms of Employment of Interested Party a. Ratification of the terms of the daughter of the Companys controlling shareholder, acting as product manager and merchandising manager in a subsidiary. On October 13 2010 the Companys Audit Committee and on November 17 2010 (following a discussion held on October 13 2010) the Companys Board of Directors approved the terms of the daughter of the Company's CEO and controlling shareholder as product manager and merchandising manager at Delta Galil USA Inc.(hereinafter in this section: the Subsidiary). The terms of her employment shall be presented for ratification at the Company's general meeting, which shall convene these coming weeks. The following are the key points of the terms of her employment, as approved: 1) The terms of her employment shall apply from the start of work at the subsidiary, meaning March 8 2010. The terms of her employment are not limited in time and U.S. law shall apply to their conclusion. A yearly salary of $70,000 (gross) and she shall be entitled to the other generally accepted benefits granted employees of the subsidiary. In addition, she shall be entitled to a yearly bonus in accordance with the senior employee bonus plan employed by the subsidiary, according to targets set, which shall not exceed 20% of her yearly salary. She shall be entitled to take part in the subsidiarys health insurance plan and 401k and to a refund of expenses accrued, as per the rules
2)
3)
72
4)
5)
and directives applying to the employees of the subsidiary in effect at the time. The CEO of the subsidiary may revise, from time to time, the terms of her employment at a rate of no higher than 10% a year, subject to the approval of the Companys Audit Committee that the revision is reasonable based on the scope of her employment, the nature of her duties, her qualifications and other related circumstance, so long as that insomuch as the total accumulated rate of the raises compared to salaries approved by the General Meeting exceeds 25%, the matter shall be brought to the general meeting for approval, in accordance with the law. These terms of employment were established on the basis of accepted terms for other employees at the subsidiary in similar positions and with similar qualifications.
Upon the approval of this agreement by all the Companys institutions (including the shareholders meeting), Ms. Dabach shall be paid the sums owed her for the period since she began work in practice (March 8 2010). b. Approval of the terms of employment of Mr. Yitzhak Weinstock, as Chief Operations Officer of a subsidiary. On October 13 2010 the Companys Audit Committee and on November 17 2010 (following a discussion held on October 13 2010) the Companys Board of Directors approved the terms of the employment at Delta Galil USA (hereinafter in this section: the Delta Galil Industries Ltd. Subsidiary) of a Company director. In this position, starting January 1 2011, he shall serve as the Chief Operations Officer (COO) of the Companys activities in North America, including the activities of the subsidiary, as a full-time job. The terms of his employment shall be presented for ratification at the Company's general meeting. The following are the key points of the terms of his employment, as approved: 1. A yearly salary of $360,000 (gross). In addition, Mr. Weinstock shall be entitled to a yearly bonus in accordance with the senior employee bonus plan employed by the subsidiary, according to objectives set, which shall not exceed 30% of his yearly salary. He shall be entitled to take part in the subsidiarys health insurance plan and 401k and to a refund of expenses accrued, as per the rules and directives applying to the employees of the subsidiary in effect at the time. This agreement is not limited in time and either of the parties may bring it to conclusion by providing three months advance notice to the other party, with the exception of predefined cases in which the Company may terminate the agreement immediately. The Company CEO may revise, from time to time, his salary at a rate of no more than 10% a year, subject to the approval of the Companys Audit Committee that the revision is a result of meeting goals set in his yearly work plan and the performance of the Company as a whole, so long as that insomuch as the total accumulated rate of the raises compared to salary approved by the General Meeting exceeds 25%, the matter shall be brought to the general meeting for approval, in accordance with the law. Note that so long as the director is employed by the subsidiary he shall not receive Company director compensation for serving as director.
2.
3.
4.
5.
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7) On February 16 2011 the Companys Audit Committee and Board of Directors reached a decision in which a Company executive has a personal interest, regrading a $45,000 contribution to a non-profit which designated the contribution to another non-profit, in which a Company director serves as chairman. b. Balances with interested and related parties: December 31 2010 2009 Thousands of Dollars Current credit balances for purchases from related parties (see 2a) Balance as of the balance sheet date Highest balance during the year Current credit balance due to salary expenses, consultation and expense refunds to directors: Balance as of the balance sheet date Current debit balance due to salaries of interested and related parties employed at the Company or on its behalf: Balance as of the balance sheet date c. Director Compensation and Insurance The Company has a remuneration and insurance arrangement for directors and senior executives, including senior executives in subsidiaries in which the Company holds at least 25% of its stock capital. The remuneration is limited to $15 million from which $10 million is covered by an insurance policy with yearly premium in 2010 of $42,000. d. On April 14 2008 the Board of Directors approved the reimbursement of future expenses to the Chairman of the Board and to an additional director, in relation to the fulfillment of their duties in the Board of Directors, with a ceiling not exceeding $200,000 per year for the Chairman of the Board and $80,000 for the additional director. On the same date the Company's Board of Directors approved an update to the participation remuneration and yearly remuneration for Company directors and external directors starting April 1 2008 and recommended that the Companys shareholders meeting approve participation remuneration and yearly remuneration for the Chairman of the Board and an additional director starting April 1 2008. The general meeting of the Companys shareholders ratified these recommendations in May 2008. The Chairman of the Board of Directors (Mr. Gideon Chitayat) is not entitled to reimbursement for the expenses in question.
57 65
42
100
42
31
74
Note 20 Additional Information Pertaining to the Financial Statements: a. Accounts Receivable 1. Trade Receivables December 31 2009 2010 Thousands of Dollars Outstanding debt Checks collectable 88,583 1,734 90,317 The item is presented net of a provision for doubtful debt to the amount of 918 101,324 1,816 103,140 732
a. As of December 31, 2010, a trade receivables balance of $0.7 million ($1.9 million December 31 2009) is a balance exceeding the contractual payment date for which no provision has been made to doubtful debts. Most of the balance has been repaid by the approval of these Financial Statements. This concerns a number of customers independent of each other who have no insolvency events in their past. The age of most of the balances is up to 3 months. The Company periodically reviews the aging of its trade receivables, and provides a provision to doubtful debt for customers whom the Company believes are insolent. Movements in Company provisions to doubtful debts are as follows: December 31 2009 2010 Thousands of Dollars Balance at the beginning of the period Increase in provision to doubtful debts Exchange rate differences Decrease in provision to doubtful debts Balance at the end of the period 732 170 30 (14) 918 2,717 36 4 (2,025) 732
Net expense from bad and doubtful debts for the years ending on December 31 2009 and 2010, accumulated to $479,000 (which includes $300,000 for a debt owed for the sale of fixed assets, see Note 10(b)(1) above) and $159,000 respectively. Net income (expense) from doubtful debts includes net revenues charged directly to expenses in the Statement of Operations, which were not reflected in the provision for doubtful debts to the amount of ($23,000) and $104,000 for the years ending December 31 2010 and 2009, respectively. The creation and release of provisions to doubtful debts due to trade receivables balances were included under administrative and general expenses in the Statement of Operations. Customer balances charged to doubtful debt are written off when their collection is not expected. 75
For the credit rating of a major customer, see note 4(a)(2). b. Change in the Terms of the Commitment with a Material Customer. Over the course of 2010, working relations with Wal-Mart were altered, in such a manner that a significant portion of the products are provided the customer based on orders (ad hoc) and not in the form of replenishment, as was the practice to date. As part of the change in question, the customer approached strategic suppliers and proposed joining a discount arrangement through a financial factor under attractive commercial conditions (LIBOR + 1%). The Company chose to joint this arrangement over the course of Q2 2010. As a result of this change, credit days granted the customer are between 20 and 30 days. The impact of this arrangement on the trade receivables balance as of December 31 2010 is a $12 million reduction compared to the balance in the balance sheet as of December 31 2009. 2. Other Accounts Receivable December 31 2009 2010 Thousands of Dollars Government institutions Receivables from suppliers Prepaid expenses Employees Deposits Income receivables Receivables due to a sales transaction of fixed assets classified in the past as available for sale (1) Receivables from the sale of subsidiary (2) Revenues receivable from the revaluation of forward agreements (3) Others 2,426 1,494 1,215 189 601 1,922 1,158 1,454 1,034 535 12,028 (1) See Note 8(b)(2), this balance includes VAT. (2) See cash flow, extraction from consolidation appendix. (3) The Company entered into forward transactions on the exchange rate of the euro and the dollar for 2011, which amounted to $20 million as of December 31 2010. These transactions are not recognized as accounting hedging transactions. The fair value of the financial items from the balance of other receivables is close to the value presented in the books. The balances included in other receivables for financial items do not include doubtful debts and do not include overdue sums. The maximum exposure to credit risks as of the balance sheet date due to receivable balances is the fair value of the whole group less non1,487 977 1,702 234 225 116 529 563 5,833
76
financial balances (from advanced expenses). The Company does not hold any collateral for these receivables. b. Inventory Composition of inventory: December 31 2009 2010 Thousands of Dollars Finished products Goods in process Raw materials Packaging and other materials 103,029 4,464 11,414 2,368 121,275 61,105 8,298 8,496 2,786 80,685
As of December 31 2010, the inventory balance for the area of activity that has undergone depreciation is presented less the depreciation provision to the amount of $10.5 million (as of December 31 2009 - $11.6 million). For the purpose of presenting it at fair value, inventory is presented net of sales costs. The change in the depreciation provision is included under sales costs in the Report on Comprehensive Earnings. As for the cost of inventory recognized as an expense and included in the cost of sales, see Note 20g. Regarding liens on inventory see Note 11b. c. Short-Term Bank Loans December 31 2010 2009 Thousands of Dollars Loans from banks Less deferred expenses Total 57,518 (79) 57,439 104,148 (21) 104,127
1. The average interest rate on the balance of credit and short-term loans as of December 31, 2010 and December 31, 2009 was 2.1% and 2.4%, respectively. 2. Total unutilized short-term credit lines as of December 31, 2010 and December 31, 2007 amounted to $110 million and $44 million, respectively. In addition to those credit lines, the Company has short term deposits as of December 31 2010 to the amount of $40 million, deriving from the proceeds of the January 2010 debenture issue, so that the sum of the Companys unused credit resources amounts to $150 million. The sum of the above credit sources includes $22 million in non-binding lines. As of December 31, 2010, the effective framework amounted to a sum of $56 million (credit frameworks against inventory and customers according to coefficients agreed with the banks), and the unutilized short-term credit line amounted to $36 million, and is included in the total unutilized credit balance. 3. The fair value of the short-term lawns is equal to its value in the books as the influence of capitalization is not material.
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4. Delta Galil USA Inc., a Company subsidiary, is party to a credit agreement dated December 9, 2004 with Bank Leumi U.S.A. and Bank Hapoalim. Loans by virtue of the credit agreement are guaranteed by most of the assets of the subsidiary. The aforementioned credit agreement was renewed in April 2010. Key points of the loan renewal agreement: a. the total short-term revolving loan is $80 million; b. the short-term interest rate is LIBOR + 2.75% per year and in certain cases the possibility of taking Prime interest loans is given; and c. the loan agreement depends upon the following financial stipulations: 1. Delta USAs net yearly profit shall not be below $1. 2. Capital investments shall not exceed $2 million on the basis of the past twelve months (not including label purchases). 3. Tangible equity defined as equity less intangible assets (mainly goodwill) shall not drop below $28 million. 4. The ratio between financial liabilities and equity shall not exceed 3.5. The lending bank allowed the subsidiary, Delta U.S.A., to redeem the loan given it by the parent company to the amount of $41.5 million (of which a loan of $26.5 was given over the course of December 2010 following the issue of debentures (see Note 12 above) so long as it meets the financial stipulations as well as the assumptions at the basis of the loan. The current agreement shall remain in effect until the end of April 2011. As part of the renewal of the agreement, it was decided to add Bank Discount New York as a party to the credit agreement with Bank Hapoalim and Bank Leumi USA. As of the balance sheet date and as of this report, the Company has complied with the above financial stipulations. On the matter of liens guaranteeing the bank obligations, see Note 11b. d. Other Accounts Payable December 31 2009 2010 Thousands of Dollars 11,468 10,805 3,357 3,422 2,758 1,875 4,150 5,820 10,932 11,032 4,900 1,825 750 1,366 41,506 1,646 402 35,002
Employees and institutions in respect of salary Provision for vacation and convalescence pay Institutions Liability for minimum royalty payments Expenses payable Deferred income due to transaction to sell real estate classified as intended for sale less related costs paid (1) Interest payables due to debentures (2) Restructuring expenses payable Others
(1) See Note 8(b)(1) (2) See Note 12
78
e.
Restructuring Expenses 2010 plan Over the course of the first quarter of 2010, the Company decided to terminate its socks finishing operations in Jordan. The cost of discontinuing the operations in question amounted to $0.5 million, consisting primarily of impairment of fixed assets and severance pay to 90 terminated employees. 2009 plan In Q3 of 2009 the Company decided on the merger of the distribution center and the operational and administration support systems in its socks in its subsidiary in Auburn Hosiery Mills Inc. in the U.S. with existing Delta Galil USA arrays. This merger was made possible after completing the transfer to a new IT system in both subsidiaries. The cost of the aforementioned merger, to the amount of $0.5 million, was included in 2009 results as part of restructuring costs and included compensation payments to 40 dismissed employees. 2008 plan Due to changes in the business environment in which the UK business unit was active, as expressed in the decrease in the scope of its activity, in the erosion of margins and the weakening of the exchange rate of the pound sterling vs. the USD, the Company decided over the course of 2008 to discontinue the unit's business activity in its current format, and to perform changes in its working model with its customers and on further streamlining steps in order to improve its performance and competitiveness. The activity of the UK business unit was in the womens undergarment category in conjunction with Marks & Spencer and additional customers. The sales of the UK business unit in 2008 amounted to a total of 55 million, and the operational loss for that period amounted to $15.5 million. The changes in the working model with the customers in the UK from FSV (Full Service Vendor) to FOB (Free on Board), included the following steps: 1. Products will be supplied directly from factories (on an FOB basis). 2. Responsibility for the transporting products, their storage and distribution will be passed on to the customers. 3. The Company will not hold any inventory for its customers and responsibility for its management and the risk embedded in holding it will be passed on to them. 4. The Company has changed its sales currency to USD. In addition, the Company has taken further steps to reduce fixed expenses as described below: 1. Transferring product development from the UK and Israel to the Company's factory in Egypt. 2. Closing the brassiere development center in Mansfield, UK. 3. Significant reduction of activity in the London office, which will serve as a sales office. 4. Reducing overhead in Israel and in Egypt related to UK activity. The above restructuring expenses amounted to a total of $9.2 million. These expenses include employee compensation, payment of minimal usage fees in a UK storage and distribution agreement and writing off fixed assets used for UK activity.
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Over the course of 2009 the Company signed an amendment to the UK storage and distribution agreement, in which the minimum sums denoted in the original agreements were reduced. Accordingly, the Company wrote off the provision listed in 2008 for minimal usage fees to the sum of $1.8 million. Implementation of the key elements of these steps was completed in Q4 2009. 1. Movement in the restructuring provision over the course of 2010 and 2009: 2010 2009 Thousands of Dollars Opening balance Additional provisions during the year Reversal of unutilized provisions Utilization during the year Exchange rate differences Closing balance Presented: Payables and credit balances 1,646 485 (129) (1,200) (52) 750 7,900 474 (1,583) (5,555) 410 1,646
750
1,646
2. The principal components of expenses for the restructuring plan are as follows: For the Year Ending on December 31 2010 Costs associated with workforce reduction Writing off fixed assets and computer software Other expenses (income)* 158 327 485 2009 Thousands of Dollars 474 (1,805) (1,331) 3,501 1,130 4,531 9,162 2008
* Other income see 2008 restructuring plan above. f. Sales On the matter of sales to main customers see note 5e. g. Cost of Sales For the Year Ending December 31 2009 2008 2010 Thousands of Dollars 313,232 234,123 256,689 77,414 66,557 78,098 60,615 57,737 68,025 22,795 28,835 28,051 44,412 35,145 43,344 7,922 9,696 9,020 10,505 9,299 9,540 (38,090) 498,805 27,439 468,831 24,388 517,155
Purchases from subcontractors Materials consumed Salaries and associated expenses Other manufacturing expenses Shipping and customs Depreciation and amortization Royalties Decrease (increase) in inventory of finished goods and in-process inventory
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h.
Selling & Marketing, General and Administrative Expenses For the Year Ending December 31 2010 2009 2008 In Thousands of Dollars
Selling and marketing: Salaries and associated expenses Packing, shipping and storage Rent and maintenance Advertising Commissions Depreciation and amortization Amortization of intangible assets Other Total sales and marketing expenses Administrative and general: Salaries and associated expenses Professional fees Travel, hospitality and entertainment Office expenses Rent and office maintenance Telephone and postage Depreciation and amortization Doubtful debt and bad debt Other Total general and administrative expenses Total sales, marketing, general and administrative expenses i. Expenses by Type
34,424 4,485 10,493 2,503 4,213 1,531 844 6,714 65,207
33,656 7,874 9,180 2,688 3,685 1,679 817 6,763 66,342
42,275 7,703 10,483 2,960 4,009 2,045 739 8,739 78,953
15,348 3,500 1,743 1,109 457 337 693 479 1,681 25,347 90,554
13,946 2,665 1,404 976 570 388 708 159 1,140 21,956 88,298
15,252 3,434 1,471 1,240 748 260 519 2,168 1,611 26,703 105,656
For the Year Ending December 31 2010 2009 2008 In Thousands of Dollars Purchases from subcontractors Wages and payroll Use of raw materials Shipping, packaging, storage and customs expenses Depreciation and amortization Royalties expenses Advertising expenses Amortization of intangible assets Impairment of goodwill Impairment of fixed assets Other expenses Changes in finished goods inventory and in-process inventory Total cost of sales, selling and marketing, general and administrative expenses and impairment of goodwill and fixed assets 313,232 110,387 77,414 48,897 10,146 10,505 2,503 844 992 53,521 (38,090) 590,351 234,123 105,339 66,557 43,019 12,083 9,299 2,688 817 1,945 55,765 27,439 559,074 256,689 125,552 78,098 51,047 11,584 9,540 2,960 739 7,392 62,214 24,388 630,203
81
j.
Other revenues For the Year Ending December 31 2010 2009 Thousands of Dollars 375 386 761 2008 805 805
Capital gain from the sale of fixed assets Capital gain from the sale of asset classified as held for sale Profit from derivative financial instruments
249 483 1,762 2,494
k.
Finance expenses, net For the Year Ending December 31 2010 2009 In Thousands of Dollars 2008
Interest expenses due to on credit and loans from banking corporations Interest expenses with respect to debentures (1) Other interest expenses, net. Capitalization component of long-term assets and liabilities Interest expenses due to discount arrangement with material customer (2) Total financing expenses Interest income from banking corporations Exchange rate differentials, net Total financial expenses, net
3,981 1,847 367 452 36 6,683 (71) 1,205 7,817
4,967 373 638 5,978 (28) 419 6,369
7,288 544 (1,607) 6,225 (89) 1,343 7,479
(1) $166,000 was charged to financing income from the capital reserve in 2010. (2) See Note 20(a)(1)(b). l. Extra-Balance Sheet Liabilities December 31 2010 2009 In Thousands of Dollars Extra-balance sheet liabilities for: Customs collateral Documentary credit for future royalty payments Documentary credit Others 2,188 3,900 8,533 483 15,104 3,132 2,420 11,923 206 17,681
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Note 21 Additional Details Regarding Investment in Investee Companies as of December 31 2010 Balance Loans and Notational Investment Sheet Capital Value of the Cost Value Notes (*) Shares in NIS/Foreign Currency In Thousands of Dollars $10 39,126 83,175 41,790 1,300,000 2,061 3,302 $21,000 21 32,002 13,914 $14,706 15 (199) $42,373 783 1,020 NIS 0.2 NIS 24,980 NIS 995,472 NIS 782 1,806 (92) Dividend Revenues (*)
Fully-Controlled and Fully Held (100%) Subsidiaries Delta Galil USA Inc. Delta (Textile) London Ltd. Delta Galil Holland B.V. Delta Egypt Sourcing Ltd.** Peace Bridge Co.** DGT (Holdings) Ltd. ** Textard Ltd.*** Delta Galil Properties (1981) Ltd. Delta Elastic Ribbon Industries Ltd. **
Number of Shares of Any Type Held by the Company 100 1,300,000 250 500 30,000 1,020 2,000 24,980,002 995,464
1,548 120 -
* Including directly and indirectly related companies. ** The company is undergoing liquidation. *** The company is inactive.
Note 22 Events Subsequent to the Balance Sheet Date: 1. Dividend distribution On February 16 2011 the Company decided to distribute dividends to the amount of $2 million, at 8.54 cents per share, to be distributed on March 15 2011 according to the dollars representative rate of exchange as published the day prior to the payment date. The determining date for this distribution shall be February 28 2011 and the X date shall be March 1 2011. 2. On February 16 2011, the Company Board of Directors resolved to grant, out of options available for allocation under the 2009 plan for American employees, 15,000 options to a Delta USA employee at an exercise price of $8.91 per option. The exercise price is equal to the average share price on the 30 trading days preceding day of the decision. 3. Regarding a contribution approved by the Companys Audit Committee and Board of Directors on February 16 2011, see Note 19(a)(7)
____________ ___________________ ____________
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Appendix A Details of Subsidiaries and Associates Ownership and control by the holding company directly and through subsidiaries as of December 31, 2010:
Holding Company Delta Galil Industries Ltd. Company Name Delta Galil USA. Inc. Delta Galil Holland B.V. Delta Textiles (London) Ltd. Delta Sourcing Egypt (L.L.C.)** Peace Bridge Co. ** Delta Elastic Tapes Industries Ltd.** Delta Galil Properties (1988) Ltd. Textard Ltd.* D.G.T. Holdings Ltd.* Delta Galil Holland B.V. Delta Textile Egypt - Free Zone S.A.E. Century Wear Corporation (WLL) Thai Progress Garment Co. Ltd. Delta Textile Bulgaria Ltd. Delta Galil Hong Kong Ltd. Dominion Hosiery mills Inc Delta Galil Romania SRL** Delta Galil Hungary Kft* Delta Galil Hong Kong Ltd. Delta Textiles (London) Ltd. Delta Galil Europe Ltd Delta Galil Limited Apparel (Guangzhou) Co. Ltd. Delta Galil Europe Ltd. Sport Socks Company (Belgium) Ltd. Delta Galil Germany GMBH Delta Galil USA Inc. Delta Galil Properties (1988) Ltd. Burlen Corp. Adumit Ltd.** Ownership and Control Rate 100% 100% 100% 100% 100% 90% 100% 100% 100% 100% 50% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 50% Subsidiary Subsidiary Subsidiary Subsidiary Subsidiary Subsidiary Subsidiary Subsidiary Subsidiary Subsidiary Subsidiary Subsidiary Subsidiary Subsidiary Subsidiary Subsidiary Subsidiary Subsidiary Subsidiary Subsidiary Subsidiary Subsidiary Associate
* Inactive companies. ** Undergoing liquidation.
Delta Galil U.S.A

Valuation for Goodwill Impairment Assessment
****
Prepared at the request of:
February 2011
Table of Contents
Chapter A - General...................................................................................... 3 Chapter B - Executive Summary ............................................................... 13 Chapter C - Description of the Company & Its Activities........................ 16 Chapter D - Business Environment .......................................................... 23 Chapter E - Business Results ................................................................... 34 Chapter F - Valuation ................................................................................. 40
Chapter A - General
1.1 General We were commissioned by you to prepare an economic valuation of Delta Galil USA Inc. (hereinafter: "DGUSA" and/or the "Company") as of December 31, 2010 to ascertain whether there has been an impairment of the Company's goodwill (hereinafter: the "Report") in the books of the parent company Delta Galil Industries Ltd. (hereinafter: "Delta Galil" and/or the "Group"). This opinion includes a description of the methodology and main assumptions and analyses used for assessing the value of the Company. Having said that, the description does not purport to provide a full and detailed breakdown of all the procedures that we applied in formulating the opinion. 1.2 Reliance on Information Received from the Company In formulating this Opinion, Giza Singer Even Ltd. (hereinafter: "Giza Singer Even") assumed and relied on the accuracy, completeness, and up-todatedness of the information received from the Company, including the financial data and any forward-looking information. Giza Singer Even is not responsible for independently verifying the information it has received, and accordingly, did not conduct an independent examination of this information, other than general and superficial reasonability tests. In conducting this valuation, we also addressed, among other things, forecasts that were submitted to us by Company management. These projections are uncertain suppositions and expectations regarding the future, partly based on information existing in the Company as of the date of the valuation, as well as various assumptions and expectations pertaining to the Company and to numerous extraneous factors, including the situation in the market segment in which the Company operates, potential competitors, and the general market situation. It should therefore be emphasized that there is no certainty that these suppositions and expectations will fully or partially materialize. The assessments and forecasts of Company management, apart from being based on these assumptions, relate to the Company's future intentions and goals as of the date of the evaluation. These intentions and goals are materially
influenced by the situation in the Company and in the market and need to be continuously adjusted to the various changes in the working assumptions, the Company's situation and the general economic situation. Any such change stands to influence the chance that these estimations will materialize. If the estimations of Company management do not materialize, the actual results may vary materially from the results projected or inferred from these estimations, insofar as they were used in this opinion, noting that the fair value was appraised in this Report, as set out in the accounting standard chapter. 1.3 Forward-looking Information In this valuation, we also addressed forward-looking information that was submitted to us by Company management. Forward-looking information is uncertain information concerning the future, which is based on information available to the Company on the valuation date and includes management's estimations or intentions as of the valuation date. If management's projections do not materialize, the actual results may vary materially from the results estimated or implied from this information, insofar as they were used in this opinion. 1.4 Limitations in the Application of the Opinion An economic assessment is not an exact science, and is intended to reflect in a reasonable and fair manner the situation at a given time, based on known data, basic assumptions and forecasts. Changes in key variables and/or other information may alter the basis for the basic assumptions and alter the conclusions accordingly. This professional opinion does not constitute a due diligence study and does not purport to contain the information, investigations and tests or any other information contained in a due diligence study, including an examination of the Company's contracts and engagements. We emphasize that this opinion does not constitute legal advice or a legal opinion. The interpretation of various documents that we reviewed was done exclusively for the purpose of forming and providing this Opinion.
The information appearing in the Opinion and valuation does not presume to include all the information required by a potential investor, and is not meant to determine the value of the Company for a specific investor. Different investors may have different objectives and methods of examination based on other assumptions, and accordingly, the price they would be willing to pay will vary. 1.5 Personal and Financial Ties with the Company We hereby confirm that we have no personal interest in DGUSA, other than the fact that we receive a fee for providing advice, and our professional fees are not contingent on the results of this valuation. It should be noted that in recent years, Giza Singer Even prepared several economic opinions on the Company, including an impairment analysis for purposes of previous years' financial statements.
Subject of the Opinion Valuation Key Assumptions Results % Long($ 000's) Capitalization term growth rate December IAS No. 36 Discounting 128,708 12.0% 3% 2009 of cash flows (DCF) Date of the Opinion Relevant Work Standard Method
Impairment analysis for financial statement purposes Impairment analysis for financial statement purposes
December IAS No. 36 Discounting 2008 of cash flows (DCF)
133,276
11.9%
3%
In connection with this opinion, we should note that Giza Singer Even will receive a letter of indemnity from the party commissioning this report in the event that Giza Singer Even is sued in a legal proceeding for the payment of any amount to a third party for a cause of action that could stem, directly or indirectly, from this Opinion. In such case, the buyers shall indemnify Giza Singer Even for any reasonable expenses that Giza Singer Even shall incur or be required to pay for legal representation, legal advice, professional consulting, defense against legal proceedings, negotiations, etc. The parties commissioning the report shall also indemnify Giza Singer Even for the amount that it shall be ordered to pay a third party in a legal proceeding. The duty of
indemnification shall not apply in the event that Giza Singer Even acted with gross negligence or malicious intent in providing the services subject of the opinion. 1.6 Reference to the Opinion We consent that this Opinion may be cited in financial statements of Delta Galil and in periodic reports to the Securities Authority. We hereby give our consent to the party so authorized for this purpose by the company commissioning this study to electronically report on our behalf and in our stead to the Securities Authority of our having signed this valuation. This opinion may not be used for any other purpose without receiving explicit prior and written permission from Giza Singer Even. Anyone using the study, in whole or in part, other than for the purposes for which it was submitted, and without the prior written approval of Giza Singer Even, may be sued therefore. 1.7 Limitation of Liability This Opinion is intended for the use of Company management and for the purpose described above, and it may not be used for any other purpose, including transferring our Opinion to a third party or citing it, without our prior written consent. In no event, whether we have given our consent or not, will we assume any responsibility toward any third party which was forwarded our opinion. In the course of our work, we received information, explanations, data and representations from the Company and/or from someone on its behalf (the Information). The responsibility for such information lies with whomever provided such information. The ambit of our work does not include an examination and/or verification of said information. Consequently, our work shall not be considered and will not constitute a confirmation of the veracity, completeness or accuracy of the information provided to us. In no event will we be liable for any loss, damage, cost or expenditure that might be caused in any manner or form from acts of fraud, misrepresentation, deception, submission of information that is not true or complete or obstruction of information on the part
of Delta and/or anyone on its behalf, or any other reliance on said information, subject to the aforesaid. In general, forecasts tend to relate to future events and are based on reasonable assumptions made on the date of the forecast. Such assumptions may change over the forecasted period, and consequently forecasts made at the time of the valuation may differ from actual financial results and/or from estimates made at a later date. Therefore, these forecasts may not be treated with the same level of confidence attributed to data appearing in audited financial statements. We offer no opinion regarding the correlation of the forecasts made by the companies and/or by anyone on their behalf with the financial results that will actually be obtained. Our opinion does not constitute a due diligence study and should not be relied on as such. Moreover, financial assessments do not presume to be an exact science, and their conclusions are often contingent on the subjective judgment exercised by the valuator. Although we believe that the value that we have set is reasonable based on the information submitted to us, another value appraiser may reach a different value. 1.8 Sources of Information Main sources of information used in preparing the Opinion: Audited financial statements of Delta Galil (the parent company) for 2009 and financial statements (reviewed) as of September 30, 2010. Shelf prospectus of the parent company dated November 30, 2010 Balance sheet and statement of income for 2008 and 2009 (audited in accordance with U.S. accounting standard plus adjustments to international accounting standards conducted by the Company) and balance sheet and internal statement of income (unaudited and unreviewed plus adjustments to international accounting standards carried out by the Company) for 2010. Financial statements of the Company for 2008 to 2010 Company budget for 2011.
Sales forecast for 2012 Background material, market data, analyst reports obtained from disclosed information published on websites, newspaper articles or other publicly available information Clarifications and data forwarded to us by the Company at our request Meetings and/or telephone conversations with the following officers in the Company: Mr. Isaac Dabah, CEO Delta Galil Mr. Yossi Hajaj, CFO, Delta Galil Mr. Miki Laxer, Delta Galil Controller Ms. Ayelet Hajaj, Delta Galil deputy Controller 1.9 The Accounting Standard At the request of the party commissioning this study, the evaluation will be used for implementing International Accounting Standard No. 36 regarding asset impairment (hereinafter: the "Standard") in its financial statements. The purpose of the Standard is to prescribe the procedures that an enterprise must apply to ensure that its assets are carried at no more than their recoverable amount. An asset is carried at more than its recoverable amount when the carrying value of the asset exceeds the amount to be recovered through use or sale of the asset. In this case, the asset value has been impaired, and the Standard requires the corporation to recognize an impairment loss. The Standard also specifies when a corporation should reverse an impairment loss and requires certain disclosures for impaired assets, and for investments in investee companies that are not subsidiaries, which are carried in the financial statements in an amount that significantly exceeds their market value or net sale price. The Standard prescribes the accounting treatment and statement required in the event of asset impairment. If an enterprise prepares consolidated financial statements (including proportionate consolidation), the Standard will be applied to the accounting treatment of the impairment of all the assets appearing in the enterprise's consolidated balance sheet, including investments in investee companies that are not subsidiaries, goodwill
stemming from the acquisition of subsidiaries and fair value adjustments. In effect, this Standard applies to investments in subsidiaries and jointly controlled companies, so that provisions for impairment loss, which are recognized in the consolidated financial statements with respect to assets of the subsidiary or the jointly-controlled company, including goodwill and fair value adjustments, will be stated in the separate financial statements of the parent company as a reduction of the investment account in the subsidiary or jointly-controlled company. The Standard prescribes that the recoverable amount of an asset should be estimated whenever there are indications that an asset may be impaired. This standard requires recognizing the impairment loss of an asset (i.e. the value of the asset has declined) whenever the carrying amount of the asset exceeds its recoverable amount. An impairment loss will be recognized in the statement of profit and loss for those assets stated at cost and should be treated as a revaluation decrease, and only for those assets carried at a revalued amount in accordance with other accounting standards or in accordance with the provisions of any law. The Standard prescribes that a recoverable amount shall be calculated as the net sale price or value in use, whichever is higher: 1. The net sale price is the amount obtainable from the sale of the asset in a good faith transaction between a knowledgeable and willing buyer and seller, less direct incremental disposal costs. 2. The value in use of the asset is the estimate of the present value of future cash flows to be derived from use and disposal of the asset at the end of its useful life.
In determining the asset's value in use, this Standard requires that the enterprise use, among other things: 1. Cash flow forecasts based on reasonable and substantiated assumptions which: Reflect the present situation of the asset; Represent management's best estimate on the economic conditions that will prevail for the rest of the asset's useful life. 2. The pre-tax discount rate, reflecting current market assessments of the time value of money and the risks specific to the asset. The discount rate should not reflect risks for which future cash flows have already been adjusted. 1 An estimate of the recoverable amount will be calculated for each asset separately. If this is not possible, this Standard requires the enterprise to determine the recoverable amount for the cash-generating unit to which the asset belongs. A cash-generating unit is the smallest identifiable group of assets, generating cash inflows from continuing use, which are essentially independent of the cash inflows from other assets or other groups of assets. Having said that, if the output produced by an asset or by a group of assets is traded in an active market, the asset or group of assets will be identified as a separate cash-generating unit even if part or all of the output produced by the asset or group of assets is meant for internal use. In evaluating impairment of a cash-generating unit, this standard requires taking into account goodwill and joint assets (such as head office assets) attributed to that cash-generating unit. The test for possible goodwill impairment is based on rules and guidelines prescribed in International Accounting Standard No. 36.
Under section 85 of the summary of considerations and reasons for conclusions that were taken into account in IAS 36 Asset Impairment: "Theoretically, discounting aftertax cash flows at an after-tax discount rate and discounting pre-tax cash flows at a pretax discount rate should give the same result, as long as the pre-tax discount rate is equal to the after-tax discount rate, when it is adjusted to reflect the specific amount and timing of the cash flows for taxes." For reasons of convenience and according to generally accepted practice, we conducted the valuation based on after-tax cash flows and an after-tax discount rate.
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Since goodwill cannot be measured separate from the activity, the generally accepted method for testing for goodwill impairment is to measure the recoverable account of each cash-generating unit to which the acquired goodwill or part thereof is allocated and compare it to the carrying value of the assets or liabilities (including the acquired goodwill) allocated to that unit. If the recoverable amount is lower than the carrying amount of the cash-generating unit, the difference will be amortized from the goodwill allocated to that unit. If a difference remains after amortizing all the goodwill, the rest of the assets allocated to that unit should be amortized on a pro rata basis, subject to the recoverable value limitation of these assets. As a rule, the test for goodwill impairment includes the following stages: 1. Determining the cash-generating units and the carrying value of their assets and liabilities - This stage includes determining the relevant units for measuring the goodwill value and allocating the assets and liabilities to the various units, including allocation of acquired goodwill. 2. Measuring the recoverable value of each unit - Taking into account the cash flows expected from it and/or its value in use, whichever is higher. 3. Comparing the recoverable value to the carrying value - as stated above.
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1.10 Details on the Valuating Company Giza Singer Even is the leading non-affiliated economic and financial advisory firm in Israel. The firm has been in business for over 25 years. Giza Singer Even's advisory services are divided into four fields: Consulting to corporations and government authorities; mergers and acquisitions; issues; tenders and infrastructure products. Giza Singer Even provides its services through several departments: value economics, financing and capital market, applied economic research, financial accounting and risk management, project and infrastructure finance, and a professional department. The partners heading the firm: Chairman of the firm Yechiel Even and CEO Yariv Philosoph, together with Prof. Eli Kraisberg, Yuval Zilberstein, Eli Goldberg, Avshalom Herscovici and Udi Rosenberg, who also heads the firm's professional department. Other partners of the firm are Eyal Jedwab, Yuval Lapidot, Yuval Barak and Hila Himi from the Corporate Finance Department, Asher Shakler from the Financial Accounting and Risk Management Department, Department. This opinion was prepared by a team headed by Yechiel Even, a founding partner of the firm. Mr. Even has over twenty years of experience in performing valuations. He holds a B.A. and M.B.A. in Economics and Business Administration from Bar-Ilan University. Sincerely yours, Varda Stern from the Project Finance and National Infrastructures Department, and Alex Shechter from the Economic Valuation
_____________________ Giza Singer Even
Date: February 16, 2011
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Chapter B - Executive Summary

1. Brief Description of the Company and its Activities 1.1 Field of the Company's Activity Delta Galil USA Inc. is a wholly-owned (100%) subsidiary of Delta Galil Industries Ltd., which coordinates the operations of the DGUSA Group in the U.S. mass market. The Company focuses on the marketing and sale of intimate apparel and socks for the mass market and mid-market under private label and other prestigious brand names. DGUSA was founded in 2001 as a merger between Inner Secrets Inc. and Wundies Industries, Inc. In 2003 the Company acquired Auburn Hosiery Mills, a manufacturer of hosiery and socks whose primary customer is Wal-Mart. In 2004, the Company acquired Burlen Corp. which also manufactures for WalMart as a private label. The company sells its products to various retailers and its operations are largely aimed at the giant retailers in the U.S. Burlen also has operations in Britain for Marks & Spencer. 1.2 Composition of Company Ownership:
Name of owner Delta Galil Industries Inc. Holding % 100.0%
2. Description of the Valuation Methodology The evaluation of the Company's activity is based on the assumption that the Company is a "going concern" and will continue to function as such over an infinite horizon. The Companys activity was valued based on the unleveraged discounted cash flow ("DCF") approach. The projected cash flow is derived from the Company's profit forecast. The cash flows were discounted by a Weighted Average Cost Of Capital (WACC) commensurate with the risk of the Company's activity. The value obtained is the economic value of the Companys activity. The economic value of
13
the activity is not dependent on the capital composition of the activity, i.e. it is independent of how the Company's activity is financed, whether through shareholders' equity or debt capital. For the purpose of the valuation, the Company's cash flows were discounted at the relevant discount rate. The residual value, at the end of the five forecast years, was calculated in applying the Gordon model formula and is based on the cost of capital and the permanent growth rate. The representative years for calculating the residual value is 2016.
3. Valuation Summary
3.1 Key assumptions forming the basis of the valuation, as received from the Company and assumed by us The valuation is based, among other things, on assumptions from the Company's board-approved budget for 2011 as well as its estimates and forecasts for the subsequent years, which reflect our assessment of the various parameters based on information that was available to us. The valuation relates to all of the operation's six segments, both in terms of revenues and selling expenses. Given the assumption that the majority of selling and marketing, administration and general expenses are allocated among the various segments, we lumped them together and did not split them up by segments. Main assumptions forming the basis of our valuation:
DGUSA main assumptions Revenues YOY (% Growth) Gross Profit (% Revenues) EBIT (% Revenues) Working capital (% Revenues) CAPEX (000' USA) 2011 12.4% 16.6% 3.7% 18.1% 700
2
2012 4.5% 17.1% 4.5% 18.1% 700
2013 3.4% 17.2% 4.8% 18.1% 700
2014 3.0% 17.2% 4.9% 18.1% 700
2015 3.0% 17.2% 5.0% 18.1% 700
Terminal 3.0% 17.3% 5.5% 18.1% 700
The representative year is Year 6 of the forecast (2016 and onwards), while the real permanent growth reflecting annual population growth and GDP growth rate in the U.S. is 3%. We also assumed about 5.5% EBIT out of revenues in the representative year.
2
Based on company's budget
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3.2 Discount Rate Based on various calculations, the Weighted Average Cost Of Capital (WACC) obtained in this study is between 11% - 12%3. Based on our experience and professional judgment, we based our opinion on a discount rate of 12%, similar to the discount rate applied in assessing previous years' impairment. 3.3 Enterprise Value We calculated the Company's enterprise value that indicates value in use approach, at about $144.1 million. 3.4 Sensitivity Analysis The following table presents an analysis of the sensitivity of the Company's enterprise value to the cost of capital and long-term growth Table of Sensitivity to Enterprise Value (EV)
10.5% 140,045 147,824 157,434 169,607 185,524 207,231 11.0% 134,133 141,046 149,495 160,056 173,634 191,739 Discount rate 11.5% 12.0% 12.5% 128,736 123,789 119,237 134,907 129,321 124,217 142,378 135,961 130,145 151,606 144,075 137,321 163,295 154,219 146,186 178,580 167,260 157,414 13.0% 115,035 119,533 124,849 131,228 139,024 148,770 13.5% 111,145 115,221 120,007 125,703 132,599 141,118
0.0% 1.0% 2.0% 3.0% 4.0% 5.0%
Permanent Growth Rate

3
See chapter F 4.
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Chapter C - Description of the Company & Its Activities

1. Background on the Group
Delta Galil Industries Ltd. is a public company engaged in the design, development, manufacture, marketing and sale of intimate apparel and socks for men, women and children. Europe and Israel. Among the Group's overseas customers are leading retail chains in the U.S. and Europe, such as Wal-Mart, Kohl's, Marks & Spencer, Target, Victoria's Secret, JC Penney as well as prominent brands, such as Tommy Hilfiger, Nike, Hugo Boss, Calvin Klein and others. Apart from this activity, the Company operates under a number of leading international brand names (through licensing agreements), namely Maidenform, Converse, Wilson, Nicole Miller, Lucky, etc. Within its activity in the local Israeli market, the Group operates under the Delta brand name. The products are primarily designed and developed in Israel and the U.S., whereas production is carried out at the Group's manufacturing facilities in the Middle East and the Far East and/or through subcontractors. The following chart shows Delta Galil's holdings in major subsidiaries as of December 2010: The Group is predominantly active in the U.S.,
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Delta Galil Industries LTD
(*) 50% stake
It should be noted that due to recent events in Egypt, we have conversed with the company's management about the potential impact of such events on DGUSA's operations. According to management, the manufacturing activity in Egypt services mainly the upper market segment; therefore, no potential impact is expected.
2. Description of the Company's Operations

Delta Galil USA Inc. is a wholly-owned (100%) subsidiary of Delta Galil, which coordinates the Group's operations in the U.S. mass market. Following an organizational change in the Group, the Company launched operations in Britain as well. DGUSA was founded in 2001 as a merger between Inner Secrets Inc. and Wundies Industries, Inc. Auburn Hosiery Mills (hereinafter: "Auburn") which was acquired in 2003, is active in the socks and hosiery segment, and operates mainly with Wal-Mart. Burlen Corp. (hereinafter: "Burlen") was acquired in 2004. It also operates vis-a-vis Wal-Mart as a PL4 player. Auburn, which was part of Delta Galil's operations in the socks segment, was incorporated in the Company's overall operations as of the end of 2009. This change became feasible after merging the distribution centers and operating support systems of both companies to create synergy and cut costs.
4
Private label
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DGUSA focuses on the marketing and sale of intimate apparel and socks for the mass market and mid-market under private label and other prestigious brand names. Activity in the high-end brand segment is conducted through agreements with large international companies which own leading brand(s) in return for royalties. It should be noted that these agreements vary from time to time, and it is quite likely that Delta will end its engagement with a certain brand and/or start working with new brands. The Company has six operating segments. Each segment specializes in particular products (socks, men's underwear, women's underwear) and particular Customer's activity (Brands or Private Labels). Most of the segments activity revolves around the marketing and sale of intimate apparel for women, men and children, with the women's market segment being the most dominant. The Company also operates in the socks market. DGUSA sells its products to various retailers, primarily to the retail giants and leading department stores in the U.S. Relatively recently the Company added a new activity in Britain that specializes in bras (working primarily with Marks & Spencer M&S), stemming from an organizational change in the group and bras activity's business development. Following is a breakdown of the Company's various segments: 1. DGUS5 is active in the market segment of bras, women's intimate apparel and children's apparel for both the mass and mid-market. It works primarily with Wal-Mart (accounting for about 24% of total sales in 2010), Target (about 23%) and Kohl's (18%). 2. Burlen is active in the market segment of intimate apparel for women and children aimed at both the mass and mid-market. It works primarily with Wal-Mart (accounting for about 65% of total sales in 2010) and JC Penney (10%). 3. Auburn is active in the panty hose and socks segment both as a private label and under leading brands in the mid-market. It works primarily with
DGUSA solo (unconsolidated). For the sake of simplicity, the solo activity is referred to in this opinion as "DGUS".
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Modell's (accounting for about 23% of total sales in 2010) and Marshalls (about 11%). 4. D2 Women operates in the segment of branded intimate apparel for women through several leading brands (Tommy Hilfiger, Nicole Miller, Lucky, etc.) aimed at both the mass market and the mid-market. It works primarily with Sam's Club (about 38% of total sales in 2010) and Macy's (about 25% of the turnover). 5. D2 Men's operates in the branded intimate apparel for men segment under several brands (mostly Lucky) in the mid-market. This division started operating during 2010. 6. UK - This segment operates in the bra and children's undergarment segment in the UK, and is aimed at the mid-market. It works primarily with M&S (68% of total sales in 2010). This is a relatively new activity for the Company (Past two years), although it is founded on the group's long-term working relations with M&S.
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3. Customers
As already mentioned, the Company works with the large retail chains in the U.S. and with leading retailers in the U.K. The following chart shows the distribution of major customers in 20106. Distribution of the C Company's Customers in 2010
Others, 20% Walmart, 37% Macy's, 3% Marks and Spencer, 6%
Kohls, 8%
JC Penney, 10 10% Target, 16%
The Company has several major customers. The Company's main customer is the retail giant Wal-Mart (including its subsidiary Sam's Club) which accounts for Mart about 37% of the Company's total sales. It is worth mentioning that the Company has had business ties with Wal Wal-Mart for over forty years. Other major customers include Target, accounting for about 16% of the Company's sales, JC Penney (about 10%), Kohl's (about 8%), M&S (about 6%) and Macy's (about 3%). In addition to these customers, the Company works with over forty various customers, which together account for 20% of the company's customers, total sales. It should be noted that activity with two of the Company's major customers, Wal WalMart and Target, was downsized somewhat in 2010 (declining by about 7% and 4% in sales volume, respectively, compared to 2009) following a change in these customers' policies, a drop in the level of consumer demand for products and/or
6
Wal-Mart sales data also includes its subsidiary chain, Sam's Club. Mart
20
brands, stiffer competitive pressure and owing to the recession and rise in cotton prices.
4. Raw Materials and Suppliers

The Company tends to buy its products from outside suppliers, mainly from the Far East and from the parent company. The raw material and auxiliary materials needed for the parent company's production activity are bought from subcontractors and suppliers. The main raw materials used by the Group for the range of apparel items it manufactures in-house are cotton yarn, blends of cotton-synthetic yarn and other materials. Due to fluctuating supply and demand conditions and other market factors over which the Group has no control, raw material prices are exposed to volatility. Except for the cotton yard, the parent company only buys the raw materials its needs for its manufacturing activity after receiving purchase orders from its customers. The parent company is not materially dependent on the various suppliers of raw materials and finished products due to the wide range of suppliers and plants. That said, whenever a supplier is replaced, there is a process of looking for a suitable supplier who meets the standards of the Company and of the end customers, which could take several months.
5. Agreements for the Grant of User Rights to Brands

From time to time, the Group enters into agreements to receive user rights to international brands (including Lucky, Maidenform, Nicole Miller, Tommy Hilfiger, Wilson). The license agreements are usually for three to four years, and include payment of royalties of 3% to 15% of revenues to the licensor (5% to 8% for the main agreements). These agreements usually contain a minimum royalty payment clause which is set according to a minimum volume of sales during the term of the agreement.
21
The agreements regulate the Group's obligations as the licensee to manufacture branded products, including regarding the use of brand names, design and development of the products and the submission of annual and semi-annual business sales plan.
6. Competitors
The Company estimates the size of the market to which it caters at about $6 billion a year and its estimated market share at about 5%. Dozens of competitors operate in the Company's sector of activity, most of which are private companies from the U.S. and the Far East. Among the competing companies are Ariella Intimates, Biflex Intimates Group, Felina, Fruit of the Loom, Hanes, Jockey, Saramax Apparel Group, to name a few. Since the vast majorities are private companies, we used data of other similar public companies, for the purpose of analyzing the company's activity.
7. Risk Factors
Following are some of the risk factors that could impact the Company: Rise in prices of raw materials and/or production costs and/or costs of the change, assuming that the Company is limited in rolling over the added costs onto its customers. Regulatory changes (free trade agreements, import quotas, etc.). The economic situation in the U.S. and Britain, which affects the volume of private consumption in general and consumption of intimate apparel in particular. Stiffer competitive pressure Dependence on a key customer (Wal-Mart) High exposure arising from the amount of inventory held by the company amount which arises from the company's operations as an importer of clothes from the East to largest retailers within the US. In addition, the value of held inventory could decline, due to seasonality effects and changes in current fashion trends.
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Chapter D - Business Environment

1. Macro Data - the U.S. Market
Since the Company works primarily with the U.S. market, we surveyed selected macroeconomic data on this market from highly regarded sources. Macroeconomic data on the U.S. market according to the IMF (International Monetary Fund)
USA Economics' Indicator Real GDP Unemployment Population 2009 -2.6% 9.3% 0.9% 2010E 2.6% 9.7% 0.9% 2011F 2.3% 9.6% 1.0% 2012F 3.0% 8.8% 1.0% 2013 2.9% 8.0% 1.0% 2014 2.8% 7.4% 1.0% 2015 2.6% 6.8% 1.0%
Macroeconomic date on the U.S. market according to Barclays Capital

Economic Projections U.S Real GDP Private Consumption CPI Inflation Unemployment Rate 2009 -2.6% -1.2% -0.4% 9.3% 2010E 2.8% 1.7% 1.6% 9.7% 2011F 3.1% 2.9% 1.3% 9.1% 2012F 3.6% 3.5% 1.9% 7.9%
From an analysis of the data, it appears that 2010 is considered a turning point year in the emergence of the U.S. from the severe economic crisis in 2008 and 2009. Recovery is expected to pick up in the coming years. With the improvement in the economic situation, the volume of private consumption is expected to grow and both directly and indirectly affect apparel purchases in general and intimate apparel purchases in particular.
2. Markets of Operation in the U.S. Relevant to the Company

As noted, the Company supplies intimate apparel and socks to the leading retail chains, mostly in the U.S. The Company operates in a complex competitive environment largely impacted by macroeconomic conditions prevailing in the markets as well as varying consumer trends. The rise in cotton prices, stiff competition among the retail chains and cheap supply from the Far East are putting pressure on the value chain in general, and on the suppliers in the apparel industry in particular. As shown in the following table, sales of intimate apparel for women, girls and boys (including panties, underpants, bras and undershirts) in the U.S. retail chain
23
market are estimated at about $6.2 billion7. According to the figures for the twelve months ending on August 2010, the market declined in monetary terms by about 3% compared to the same period the year before, as prices were lowered by about 7%. In quantitative terms, the market grew by roughly 4%. Market of Women's, Men's & Girls' Intimate Apparel in Retail Chains in the U.S.
Aug 2010 (12 M) Vs. Aug 2009 (12 M) Women Girls Boys Total Segment M. USD 5.3 0.2 0.6 6.2 Dollar Volume Share 86% 4% 10% 100% YOY -5% -11% -3% -3% Average Retail Price USD per Unit YOY 3.61 -8% 1.18 -6% 1.47 -6% 2.95 -7%
As shown in the following table, it is estimated that socks sales in the market of U.S. retail chains totaled about $5.2 billion8. According to year-over-year data for the twelve months ending February 2010, the market was down by about 3% compared to the same period the year before due to the lowering of prices at a similar rate. It is noteworthy that the data relates mostly to 2009 when the recession was at its lowest point. Socks Market in U.S. Retail Chains
Aug 2010 (12 M) vs. Feb 2009 (12 M) Men Women Children Total Segment M. USD 2.0 1.9 1.3 5.2 Dollar Volume Share 40% 36% 24% 100% YOY 0% -3% -6% -3% Average Retail Price USD per Unit YOY 1.77 0% 1.82 -5% 1.03 -5% 1.52 -3%
3. The U.S. Apparel Market

The U.S. apparel market has been characterized in recent years by volatility in growth due to the economic crisis on the one hand and stiff competition on the other. The economic crisis was reflected in a decline in the consumption of apparel, an erosion in prices and a drop in the revenues of most of the retail chains. The following chart illustrates the rates of change in apparel consumption in the U.S. in recent years. Due to a shortage of data, the rate of change relates to a select sample of apparel items.
7 8
Source: The NPD Group and the Company. Source: The NPD Group and the Company.
24
Annual Rate of Change in Apparel Consumption in the U.S. (In monetary terms, selected apparel items) 9
25% More than 20% 20% 15% 10% 5% 0% -5% -10% -15% -20% 2007 2008 -16% 2009 2010E -6% 3%
As can be seen from the sample data, 2010 marks a change in the trend and shows certain recovery. However, 3% sales growth in 2010 is considered quite les slim compared to 2007, a year in which particularly high growth was posted. It should be noted that competition between the suppliers in the industry was influenced in recent years by low production costs in Eastern Asia on the one hand and the recession on the other. The influx of many suppliers from Eastern Asia into the U.S. market and the retail chains' desire to lower the cost of goods sold (COGS) exerted competitive pressure on all the suppliers in the industry industry. Owing to the drastic hike in the prices of cotton (see below), an increase in work wages in Eastern Asia and the desire of the chains to work with a relatively small number of high quality and serious suppliers, the number of competitors started to decline. The higher prices of cotton are forcing suppliers to raise their prices as well. From data compiled, it appears that apparel prices in the U.S. stand to go up by
Source: US Department of Commerce, Census Bureau.
25
5%-10%, thereby stemming the deflationary trend characterizing the industry in the last few years10.
4. Leading Retail Chains Among the Company's Customers

According to data compiled on the leading retail chains that are among the Company's customers, it is noteworthy that its two major customers Wal-Mart and Target - stand to end 2010 with revenue growth of about 3.7% and 3.3%, respectively. Analysts project that the growth trend characterizing 2010 stands to pick up in 2011 and 201211. Growth data on leading retails that are among the Company's customers12
Revenues (YOY) Wal-Mart Target JC Penney Kohl's M&S 2006 11.6% 13.1% 6.0% 16.0% 10.1% 2007 8.2% 6.5% -0.2% 5.6% 5.1% 2008 7.3% 2.5% -6.9% -0.5% 0.4% 2009 0.9% 0.6% -5.0% 4.8% 5.2% 2010E 3.7% 3.3% 1.4% 7.4% 2.2% 2011E 4.9% 4.4% 2.2% 5.5% 4.1% 2012E 3.6% 4.3% 2.4% 5.3% 5.3%
5. Analysis of Peer Companies

The following table shows an analysis of companies operating in the apparel field in the U.S., which can serve as a source of comparison to the operations of DGUSA, with the reservation that the structure of the activity may be different. From an analysis of the data, it appears that generally-speaking the performances of the companies improved in 2010 compared to 2008 and 2009. According to projections, the trend of improvement among some of the companies is expected to continue at least in the next two years.
10
11 12
Source: The Wall Street Journal 'Unable to Stretch Further, Apparel Makers Raise Prices' - November 4, 2010. Source: Capital IQ ,Barclays Capital Source: Capital IQ
26
Annual Rate of Growth in Sales13

YOY Revenues Bernard Chaus Delta Apparel Fredrick's Of Holywood Hampshire Group Hanesbrands Inc Jiangsu Sanyou Oxford Industries Phillip Van Housen Unifirst Corp Van De Velde Warnaco 2007 7.3% 2008 -19.6% 3.1% 17.4% -6.3% -5.0% -27.1% -9.2% 2.8% 13.4% 2.1% 13.4% 2009 -5.0% 10.3% -22.2% -31.4% -8.4% 23.5% -15.5% -3.7% -1.0% 5.4% -2.1% 2010 -7.1% 19.5% -5.6% -7.6% 10.1% 3.3% -12.7% 90.3% 1.2% 18.7% 12.4% 2011 8.3% 4.6% 8.9% 3.2% 17.1% 4.5% 11.1% 10.2% 2012 4.8% 7.0% 4.4% 11.0% 7.1% 4.4% 5.9% 8.8%
-8.2% -0.6% -4.6% 16.0% 9.9% 6.0% 12.9%
In analyzing the data on gross profit as a percentage of income, it can be seen that the average gross profit in the sample is expected to rise in 2010 by about 0.9% compared to 2009 (38.5% compared to 37.6%). A similar trend also characterizes the operating profit (EBIT) which is improving on the time axis (up by about 0.7% in 2010 compared to 2009). Gross profit as a percentage of revenue
Gross Profit Bernard Chaus Delta Apparel Fredrick's Of Holywood Hampshire Group Hanesbrands Inc Jiangsu Sanyou Oxford Industries Phillip Van Housen Unifirst Corp Van De Velde Warnaco Average 2006 27.1% 2007 29.1% 25.1% 49.1% 24.9% 33.0% 11.3% 39.9% 49.1% 36.6% 75.0% 42.4% 37.8% 2008 27.2% 21.6% 43.9% 21.7% 33.4% 11.6% 41.4% 48.4% 37.1% 76.1% 44.7% 37.0% 2009 25.6% 21.5% 46.7% 23.9% 32.8% 13.8% 41.7% 49.3% 39.8% 75.2% 43.1% 37.6% 2010 23.6% 23.7% 46.8% 23.4% 33.5% 14.9% 45.0% 51.7% 39.5% 76.2% 44.8% 38.5%
25.5% 33.0% 11.5% 49.3% 36.1% 75.4% 39.2% 37.1%
13
Source: Capital IQ
27
EBIT as a percentage of revenue

EBIT % Bernard Chaus Delta Apparel Fredrick's Of Holywood Hampshire Group Hanesbrands Inc Jiangsu Sanyou Oxford Industries Phillip Van Housen Unifirst Corp Van De Velde Warnaco Average 2006 -2.7% 2007 1.1% 6.1% 1.6% 2.4% 9.8% 5.1% 5.7% 12.8% 9.3% 32.0% 9.7% 8.7% 2008 -5.6% 3.0% -6.3% -2.3% 9.7% 3.8% 5.6% 11.0% 10.6% 30.2% 8.6% 6.2% 2009 -6.4% 3.4% -4.1% -0.2% 8.8% 5.0% 5.3% 11.5% 13.2% 26.8% 10.4% 6.7% 2010E -4.9% 4.7% -4.0% 0.1% 10.0% 6.5% 7.5% 9.1% 12.7% 28.6% 10.9% 7.4%
4.4% 8.6% 5.6% 12.3% 8.9% 31.6% 7.6% 9.5%
In 2011, the expected improvement in the EBITDA as a percentage of the turnover in the companies surveyed (see companies marked with an asterisk) is about 0.4%, while in 2012 a slighter 0.1% improvement is projected. The improvement in the companies' performance is a direct result of the markets' emergence from the economic crisis, which affects the volume of private consumption.
28
EBITDA as a percentage of revenue ITDA

EBITDA % Bernard Chaus Delta Apparel Fredrick's of Hollywood Hampshire Group Hanesbrands Inc* Jiangsu Sanyou Oxford Industries* Phillip Van Housen* Unifirst Corp* Van De Velde* Warnaco* Average Average* 2006 -1.8% 2007 2.0% 7.8% 3.8% 2.7% 12.8% 7.7% 7.8% 14.7% 14.8% 34.0% 13.3% 11.0% 16.2% 2008 -4.6% 5.0% -3.6% -1.5% 12.4% 7.1% 8.1% 13.2% 15.9% 32.6% 10.8% 8.7% 15.5% 2009 -5.3% 5.4% -0.9% 1.0% 11.2% 7.4% 7.6% 13.6% 19.0% 29.5% 12.7% 9.2% 15.6% 2010E -4.4% 6.3% -0.9% 1.4% 11.8% 8.7% 10.1% 14.7% 18.7% 30.0% 13.8% 10.0% 16.5% 2011F 2012F
4.6% 11.9% 7.8% 14.1% 14.5% 33.6% 10.5% 11.9% 16.9%
12.4% 12.5% 15.5% 17.5% 29.7% 13.7% 16.9%
13.0% 11.6% 16.2% 17.7% 29.6% 13.6% 17.0%
Another indication that the economy is on its way to recovery is the improvement recorded in the average EBITDA of the leading apparel and footwear companies in the U.S., as illustrated in the following chart: Average EBITDA of the 15 Leading Apparel & Footwear Companies in the U.S.14
16.0% 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% 2004 2005 2006 2007 2008 2009 2010E 2010 2011E 11.3% 12.0% % 12.9% 13.0 0% 11.6% 11.8% 13.7%
12.3%
14
Source: Barclays Capital U.S. Department Stores/Broadlines Apparel, Footwear & CapitalTextiles Dec 2010
29
6. Local Apparel Manufacturing and Imports

The volume of local apparel manufacturing in the U.S. has been on a continuing downtrend as it faces stiffer competition from manufacturers in East Asia, which still enjoy a preferred cost structure. However, this gap is expected to narrow on the time axis owing to rising work wages and energy costs. Despite the continued downward spiral in apparel manufacturing in the U.S., deeper government support in the form of subsidies to industries and switching to production using a technology that reduces fabric costs stand to curb the downtrend in local manufacturing for some of the products and perhaps even change its direction on the time axis. The following graph shows the volume of apparel manufacture in the U.S. from 2001 to Q3/201015 in quantitative and fiscal terms16: Volume of Apparel Manufacture in the U.S.
35,000 30,000 8,000 25,000 Quantity Value 4,000 2,000 5,000 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010E Value (M$) Quantity (M Units) 0 20,000 15,000 10,000 6,000 10,000
As may be observed from the following graph, which presents the percentage of imports out of total apparel consumption in the U.S.17, the share of imports has been rising constantly in the last decade.
15 16 17
Apparel includes items for women, men and children. Source: US Department of Commerce. Source: US Census Bureau .The data relates to a representative sample of items of apparel on the U.S. market.
30
Import of Apparel to the U.S. as a Percentage of Domestic Consumption

100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 2002 2003 2004 2005 2006 2007 2008 2009 2010E
It may be observed from the above graph that while about 80% of total apparel consumption originated from imports in 2002, the vast majority of apparel vast consumption in the U.S. today originates from imports.
7. The Rising Price of Cotton

The Company's products are mostly made from cotton. As explained by the Company, the cost of cotton account for 30 50% of the COGS of the relevant 30-50% final products. The price of cotton has risen sharply in the last two years and has today reached a record high, as illustrated in the following graph:
31
Price of Cotton on a Monthly Basis ($ NYF/Lbs)18
The reason for the drastic hike in cotton prices is a combination of climatic hardships (floods in Pakistan) and the growing demand for cotton in China, the world's largest cotton producer and consumer. In an attempt to curb the rise in cotton prices, the governments of the large cotton producers are trying to tighten price control (China) and/or to significantly increase the quantity of cotton produced (USA). Owing to the fact that the Group's COGS is exposed to increases in cotton prices, Delta Galil tries to estimate the trends affecting cotton prices in the aim of adjusting itself to the new competitive conditions and the new business environment that is emerging in order to gauge the gross profitability in the budgets of the various divisions. Trends impacting cotton prices: Rise in the standard of living in China and India, the world's largest cotton consumers; Price hike in alternative products (polyester, nylon, etc.) stemming from an increase in petroleum prices, as its derivatives are used as a raw material for these products;
18
Source: Factset, Barclays Capital, New York Futures
32
U.S. subsidies to the domestic cotton industry aimed at restraining price hikes and supporting the local industry;
Floods and natural disasters, such as the floods that destroyed large cotton fields in Pakistan;
Total world's cotton crops;
The sharp increase in cotton prices contributes to the higher prices of apparel products to the final customer. Today, the retail chains are being asked to comply with their suppliers' demands to pass on the price hike of raw material to their customers, to the displeasure of consumers. The measure may reduce the volume of apparel sold on the one hand and raise the demand for non-branded products on the other.
33
Chapter E - Business Results

1. Balance Sheet
Following are the Company's balance sheets for 2008, 2009 and 2010 in US$ thousands19:
Balance sheet DGUSA (000' USD) Current assets Cash & cash equivalents Accounts receivable Inventories Total current assets Fixed assets Cost (Excluding Software) Less - accumulated depreciation Software Less - accumulated depreciation Total net fixed assets Other assets & differed charges Total assets Current liabilities Short term bank credit Accounts payable Total current liabilities Long term liabilities Deferred income tax Long term union pension obligation Long term royalties Loans from parent Total long term liabilities Shareholders' equity Total liabilities & shareholders' equity
31.12.2008
31.12.2009
31.12.2010E
1,280 47,307 57,492 106,079
1,506 54,146 41,599 97,251
1,965 42,174 79,127 123,266
24,492 (13,876) 1,541 (629) 11,527 64,655 182,261
24,223 (14,570) 1,640 (960) 10,333 63,429 171,013
24,000 (15,317) 1,733 (1,255) 9,162 63,770 196,198
51,500 38,883 90,383
37,700 37,776 75,476
20,750 50,453 71,203
2,999 40 4,922 15,000 22,961 68,918 182,261
3,500 3,344 15,000 21,844 73,693 171,013
3,599 102 5,508 41,500 50,709 74,286 196,198
19
The Company's financial statements apply US GAAP. Since the impairment was assessed in accordance with IAS 36 for asset impairment, the financial data was presented in this chapter after adjusting the Company's financial statements to present them according to international standards. It should be noted that the financial statements for 2007 and 2008 are audited according to US GAAP, to which the Company added adjustments to international accounting standards. The statements for 2010 are not audited or reviewed.
34
2. Statement of Income
Following are the Company's statements of income for the years 2007 to 2010 (US$ thousands):
P&L DGUSA (000` USD) Revenues

%YOY
2007 301,595 249,450 52,144

17.3%
2008 293,334
-2.7%
2009 268,567
-8.4%
2010E 299,230
11.4%
COGS Gross Profit

% Gross Profit
242,789 50,546
17.2%
225,438 43,129
16.1%
253,881 45,348
15.2%
Selling & Marketing expenses General expenses & Administrative 20 EBIT

% EBIT
27,111 11,750 13,284

4.4%
27,909 15,411 7,226

2.5%
24,409 13,150 5,569

2.1%
25,469 14,445 5,434

1.8%
Net Financing Expenses Income) loss) before taxes Taxes on Operations Net Income
% Net Income
6,777 6,507 2,111 4,396

1.5%
2,700 4,526 2,649 1,877

0.6%
3,349 2,220 442 1,778

0.7%
3,168 2,266 1,553 713

0.2%
20
Excluding capital gain and extraordinary items
35
3. Revenues by Segments
The follow table shows a segmentation of the Company's revenues for 2007 to 2010 by segments (in US$ thousands):
Revenues by unit - Net (000' USD) DGUS

YOY
2007 137,306 9,985 115,513 38,791 301,595
2008 140,361
2.2%
2009 133,147
-5.1%
2010E 138,906
4.3%
D2 Men's
YOY
11,756
17.7%
7,737 14,896
26.7%
5,928 22,986
197.1%
UK
YOY
D2 Women
YOY
20,640
38.6%
Burlen
YOY
102,282
-11.5%
79,586
-22.2%
85,772
7.8%
Auburn
YOY
38,935
0.4%
33,201
-14.7%
24,998
-24.7%
Total
YOY
293,334
-2.7%
268,567
-8.4%
299,230
11.4%
The Company's revenues totaled about $299.2 million in 2010, up by about 11.4% on a year-over-year basis. Revenue growth in 2010 is attributed to an increase in the activity of DUSA, D2 Women and Burlen segments, bras selling growth to M&S in the UK Segment, and the launching of the D2 Men's Segment which contributed about $5.9 million to revenue. Auburn has not shown recovery during this period, but a further erosion in its revenue is resulted by the downsizing of Wal-Mart's relevant activity. The decline in DGUS's activity from 2008-2009 stems, among other things, from an erosion in prices and the downsizing of operations with Wal-Mart. Burlen's operations declined during this period due to a change in policy of the segment's major customer (Wal-Mart), which wanted to focus on large brands. 2010 marked a turning point in this trend, when Wal-Mart re-adopted its original policy (which guided it for many years) of focusing on more basic products, a field in which Burlen operates.
36
4. Gross Profit
Following is a segmentation of the Company's gross profit for 2007 to 2010 by segments (in US$ thousands):
Gross Profit by Unit (000' USD) D USA

% Gross margin
2007 16,485
12.0%
2008 22,825
16.3%
2009 17,957
13.5%
2010E 17,387
12.5%
D2 Men's
% Gross margin
1,885
18.9%
1,298
11.0%
1,246
16.1%
891
15.0%
UK
% Gross margin
3,380
14.7%
D2 Women
% Gross margin
1,154
7.7%
1,609
7.8%
Burlen
% Gross margin
26,419
22.9%
19,931
19.5%
16,641
20.9%
16,339
19.0%
Auburn
% Gross margin
7,355
19.0%
6,493
16.7%
6,132
18.5%
5,742
23.0%
Total
% Gross margin
52,144
17.3%
50,546
17.2%
43,129
16.1%
45,348
15.2%
In 2010 there was a further erosion in the Company's gross profit margin (as a percentage of the turnover) compared to the same period the year before, due to the continues recessionary consumption environment in the US, the global rise in cotton prices and in- house managerial malfunctions. The Company maintained certain stability in its gross profit margin in 2007 and 2008, which was 17.3% and 17.2% respectively. With the deepening of the recession, erosion of prices and downsizing of operations, gross profit fell back in 2009 to 16.1%. The gross profit margin in 2010 fell to about 15.2% as a result, among other factors, of the high stock level of the D2 Women Segment owing to administrative mistakes and not meeting delivery schedules. To get rid of the surplus stock, the Company started selling its products to outlet stores at lower prices, another factor that cut into the profit margin. Due to the change in the mix of products and change in Wal-Mart's policy, the Burlen Segment showed erosion in its gross profit margin over the last year.
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5. Operating Expenses
The following table shows the development of the Company's operating expenses for 2007 to 2010 (US$ thousands):
SG&A (000` USD) Selling & marketing

% Revenues
2007 27,111
9.0%
2008 27,909
9.5%
2009 24,409
9.1%
2010E 25,469
8.5%
General & Administrative

% Revenues
11,750
3.9%
15,411
5.3%
13,150
4.9%
14,445
4.8%
Total SG&A
% Revenues
38,861
12.9%
43,320
14.8%
37,560
14.0%
39,914
13.3%
Although projected operating expenses went up in 2010 to a level of about $39.9 million, their percentage out of total revenues went down to about 13.3% due to streamlining measures adopted in 2009 and 2010 that began to bear fruit. The Company downsized headquarters, laid off workers, finished assimilating the integrated ERP system and reduced the distribution centers from five to two, and additionally added activities that require low operational costs (D2 Men's and UK). In 2008 the Company posted higher than usual operating expenses attributed to a high and one-time provision for doubtful debts after several customers declared bankruptcy.
6. Operating Profit (EBIT)

As can be seen from the following table, the EBIT in 2010 (about $5.4 million accounting for about 1.8% of the turnover) continued the downtrend characteristic of the last few years, attributed to the economic recession, deflation in prices, rise in cotton prices, launching of new operations that called for relatively high startup costs (D2 Men's, D2 Women) and false managerial decisions.
21
DGUSA EBIT (000' USD) EBIT

% Revenues
2007 13,284
4.4%
2008 7,226
2.5%
2009 5,569
2.1%
2010E 5,434
1.8%
EBIT Adjusted
% Revenues
9,726
3.3%
7,569
2.8%
8,434
2.8%
21
Excluding capital Gain and extra ordinary items
38
The adjusted EBIT excluding one-time specific investment in new activities were established in recent years. For comparison reasons, according DGUSA, the company estimated the value of the initial expenses involved in setting up new Branded Items' activities as follows: 2008 - 2.5mm USD, 2009 - 2mm USD, 2010 - 3mm USD. Based on information submitted to us by the Company, the EBIT posted in the last few years is considered low compared to peer companies with a similar structure of operations, whose EBIT out of total revenue ranges between 4% 8%.
7. Selected Operational Ratios

Following are selected Operational ratios and data for 2008 to 2010:
Financial Ratios (000' USD) Revenues % Profit Gross % EBIT % EBITDA EBITDA / Interest expenses % Working Capital / Revenues Current assets (Net) Shareholders' equity % Shareholders' equity / Total Liabilities and Shareholders' equity
2008 293,334 17.2% 2.5% 3.5% 2.4 22.5% 11,527 68,918 37.8%
2009 268,567 16.1% 2.1% 3.0% 2.4 21.6% 10,333 73,693 43.1%
2010E 299,230 15.2% 1.8% 2.6% 2.3 23.7% 9,162 74,286 37.9%
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Chapter F - Valuation
1. Valuation Methodology
The Valuation was made according to the value in use approach, according IAS 36. The valuation of the Company's enterprise value is based on the assumption that the Company is a "going concern" that will carry on its business activity in the present format over an infinite horizon. The Companys activity was valued based on the unleveraged discounted cash flow ("DCF") approach. The projected cash flow is derived from the Company's profit forecast. The cash flows will be discounted by a cost of capital commensurate with the risk of the Company's activity22. The value obtained is the economic value of the Companys activity. The economic value of the activity does not depend on the capital composition of the activity, i.e. it is independent of how the Company's activity is financed, whether through shareholders' equity or debt capital.
2. Comments on Specific Methodologies

The valuation is based, among other things, on assumptions and trends reflecting from the Company's board-approved detailed budget for 2011 as well as its estimates and forecasts for the subsequent years, which reflect our opinion on the various parameters based on information that was available to us. Note that the Company has not stayed within its budget in recent years. According to the Companys explanations, its failure to meet its budget is due, among other things, to exogenous variables that affected the entire sector (higher cotton prices, the economic crisis) and endogenous variables at the company level, including managerial mistakes and a weak management backbone in some of the Companys segments. Given the gaps in recent years between actual and projected results, we examined the company's budget for 2011 by analyzing the feasibility of its base assumptions, in light of future market conditions and the company's development and efficiency measures, which are planned to be executed in the years to come.
22
The cash flows are continuous and received during the entire year, and on average, the flow for the year of activity is received in mid-year. Accordingly, the discount period is adjusted to the date of receipt of the cash flow, on average. See below for more details in the section relating to the discount rate.
40
For the purpose of the valuation, we discounted the Company's cash flow at the relevant discount rate, as explained below. The residual value after the five forecast years was estimated using the Gordon model formula, based on the cost of capital and the permanent growth rate. The representative year for calculating the residual value is 2016.
3. Cash Flow Forecast

Following is a list of all the assumptions used in constructing a model for forecasting the Companys cash flow: 3.1 Revenue The Companys 2011 budget predicts revenue growth of about 14.7%. This budget, drawn up by Company management and approved by the Board of Directors, includes a separate analysis of each segment, at the customer level, and at the product category level. The Company makes the following assumptions in its real growth forecast: Rise in prices - The Company plans to raise the price of its products by 6 10%, as a result of higher cotton prices, in order to maintain its gross profit margin, in line with the trend in the US apparel industry. The alleged price increase was already agreed upon by the company and several of its major clients. Quantitative rise in sales volume - resulting from the recovery of the economy from recession and an increase in the volume of private consumption Recovery in the US retail sector - based on information from analysts Change in the mix of products - the Company is bolstering its activity in branded goods, which feature higher prices than prices for private label goods Strengthening the management backbone - put emphasis on recruiting executives with relevant capabilities and experience and replacing a mass number of the current executives
41
As a result of examining current market conditions (which are relevant to the company's activity) and after several conversations held with the company's directors, we estimated the growth in sales in 2011 to be about 12.4%. It should be noted that the Companys fairly high growth rate in 2011 is affected by the intensified activity in relatively new segments (UK, D2 Men's). Discounting this factor, the growth forecast matches analysts forecasts for peer companies and large retail chains in the US, as reviewed in Chapter D (for example Warnaco: 10.2% ,Hanesbrands : 8.9% ,Wal-Mart: 4.9% ,Kohl's: 4.1%). The following is a summary of the Companys multiannual revenue forecast at the level of its segments. In our opinion, the growth rate in sales from 2012 onward is likely to be more moderate than the 2011 sales forecast. It was assumed that the real permanent growth rate in the representative year would total 3%, an assumption reflecting the population growth rate and the average growth in US GDP. DGUSA's Revenues by Segments During the Forecast Years
DGUSA Revenues (000' USD) D USA
YOY
2011 148,629
7.0%
2012 156,061
5.0%
2013 160,743
3.0%
2014 165,565
3.0%
2015 170,532
3.0%
Terminal 175,648
3.0%
D2 Men's
YOY
15,708
165.0%
18,064
15.0%
19,870
10.0%
20,467
3.0%
21,081
3.0%
21,713
3.0%
UK
YOY
33,414
45.4%
36,755
10.0%
37,858
3.0%
38,994
3.0%
40,163
3.0%
41,368
3.0%
D2 Women
YOY
25,181
22.0%
21,555
-14.4%
22,201
3.0%
22,868
3.0%
23,554
3.0%
24,260
3.0%
Burlen
YOY
92,205
7.5%
96,816
5.0%
99,720
3.0%
102,712
3.0%
105,793
3.0%
108,967
3.0%
Auburn
YOY
21,123
-15.5%
22,179
5.0%
22,845
3.0%
23,530
3.0%
24,236
3.0%
24,963
3.0%
Total Revenues
YOY
336,260
12.4%
351,430
4.5%
363,237
3.4%
374,134
3.0%
385,358
3.0%
396,919
3.0%
Following are the assumptions base for the growth rates estimated in the various segments: DGUS - Growth in the bras and children's apparel sectors and a process of price increases. According to data received from the company, the volume of solid orders for the first quarter of 2011 matches the Company budget, with minor deviations, and price increases of 6% - 10% towards mid 2011 were
42
agreed with a number of large customers. Moderate growth in 2012 is attributed to the company exceeding the price increase process. D2 Mens - This activity, which began in mid 2010, is based on branded intimate apparel. Due to the parallel with the D2 Womens segment, and relying on the Companys assessments, it is believed that this segment will also in time reach sales of $25 million. It should be added that the Company notes that the forecast for the segments business assumes expected sales of over $20 million, based on knowledge of the market and characteristics of the business environment and actual agreements made with clients; if the sales amount is lower, the Company sees no justification in this separate activity. UK - Relatively high growth in 2011, based, according to the Companys explanations, on concrete orders for longstanding customers (e.g. M&S) and diversifying the mix of products besides bras. Note that Delta has extensive experience in adapting high-quality products to the British market, and that a volume of business in the neighborhood of $40 million is realistic, given the fact that activity in this market generated revenues of more than $50 million in the past. D2 Women - Growth attributed to a change in management and making operational and marketing changes. In 2012, a sharp drop in revenue is expected owing to the foreseen termination of the license agreement for the Nicole Miller brand and reliance on the existing products (Tommy Hilfiger and Lucky). Assuming that the Company buys a license for another high-quality brand, actual sales are expected to be higher. Burlen - Growth stems from stepped-up activity in working with the Wal-Mart chain, combined with the Companys original strategy of featuring basic items and raising prices. Total revenue in the representative year is still less than the revenue posted in 2007. Auburn - A drop in sales volume in 2011, owing to the continued downtrend in demand for the Wilson brand and a decision made by Wal-Mart to drop this brand. Growth in 2012 is a result of renewed penetration of leading retail chains and completion of the price raising process.
43
3.2 Cost of Goods Sold (COGS) The COGS-to-revenue ratio, derived from the Company's budget for 2011, is 82.5%. After examining the current relevant market conditions, and after several conversations held with the company, we used an 83.4% COGS rate for 2011, an improvement of less than 1.5% compared with 2010 (84.8%). In making the assumptions for this study, the COGS declined throughout the forecast years, reaching 82.7% in the representative year, about the same as the COGS posted in 2008 and 2007. Improvement in the COGS is due to the following factors: Price increases Rolling over the increased cost of raw materials onto the Companys customers. Due to the rising cotton prices, the Company plans to raise the price of its products in order to halt the erosion in its gross profit margin. According to the information submitted to us by Company management, the Company has reached understandings, and even signed agreements with some of its customers, for a 6% - 7% price hike in mid 2011. Change in the Companys product mix Moving the mix of activities in the direction of branded goods (D2 Mens and D2 Women), which feature higher gross profit margins than goods sold in the mass market. Improvement in the quality of the management team Better control of orders and inventory, tighter connections with the customers, and better adaptation of collections and products.
44
The following table shows the COGS for the forecast years according to the various segments:
DGUSA COGS (000' USD) D USA Total
% Revenues
2011 127,974
86.1%
2012 134,216
86.0%
2013 138,243
86.0%
2014 142,390
86.0%
2015 146,662
86.0%
Terminal 151,059
86.0%
D2 Men's
% Revenues
12,566
80.0%
13,729
76.0%
15,102
76.0%
15,555
76.0%
16,021
76.0%
16,502
76.0%
UK
% Revenues
28,235
84.5%
30,764
83.7%
31,528
83.3%
32,474
83.3%
33,448
83.3%
34,452
83.3%
D2 Women
% Revenues
19,465
77.3%
16,166
75.0%
16,429
74.0%
16,922
74.0%
17,430
74.0%
17,953
74.0%
Burlen
% Revenues
75,530
81.9%
79,112
81.7%
81,487
81.7%
83,933
81.7%
86,452
81.7%
88,964
81.6%
Auburn
% Revenues
16,556
78.4%
17,340
78.2%
17,860
78.2%
18,397
78.2%
18,950
78.2%
19,472
78.0%
DGUSA
% Revenues
280,326
83.4%
291,327
82.9%
300,650
82.8%
309,671
82.8%
318,963
82.8%
328,402
82.7%
The following are the reasons for COGS assumptions according to the various segments: DGUS - Improvement in COGS in 2011 and 2012 due to price increases owing to rolling over higher cotton prices onto the end customers. Starting in 2012, the COGS stabilizes at 86.0%. D2 Mens - Improvement in COGS in 2011 and 2012, due to stabilizing of activity by the new segment. From 2012 on, the COGS stabilizes at 76.0%, reflecting in our view a reasonable COGS for mens branded underwear. UK - Improvement in COGS to 83.3%, as a result of higher prices and stabilizing activity in the British market, which the group has been familiar with for decades. D2 Women - A fairly steep drop in COGS, compared with 2010, following the reduction in inventory. A decline in the COGS to 74.0% starting in 2013, reflecting in our view a reasonable COGS for womens branded intimate apparel. Burlen - COGS stabilizes at around 81.7% of turnover starting in 2012, based on price increases and proper adjustment of the product mix. Note that the segment reported better performance in recent years, and this assumption reflects the new competitive environment vis--vis leading chains, including Wal-Mart.
45
Auburn - COGS stabilizes at around 78.2% of turnover starting in 2012, based on price increases on the one hand and cancellation of one of the best selling brands on the other. 3.3 Sales, Marketing, Management and General Expenses axes A degree of improvement in the ratio of sales, marketing, management and general expenses to total sales was assumed, due to the fixed cost factor (approximately 60% of expenses). According to Company management, further cost-cutting measures are expected in the coming years, which might directly affect the company's performance. The following table shows the expected SG&A expenses during the forecast years:
DGUSA SG&A (000` USD) Selling & marketing

% Revenues
2011 28,171
8.4%
2012 28,871
8.2%
2013 29,515
8.1%
2014 30,066
8.0%
2015 30,627
7.9%
Terminal 30,555
7.7%

% Revenues
15,183
4.5%
15,447
4.4%
15,751
4.3%
16,035
4.3%
16,325
4.2%
16,168
4.1%
Total SG&A
% Revenues
43,354
12.9%
44,318
12.6%
45,265
12.5%
46,102
12.3%
46,952
12.2%
46,723
11.8%
The 2011 Company budget includes $3.7 million in expenses paid by the Company to the parent company (Delta Galil) for services provided to the Company. $2.4 million a year of these expenses were offset by the deduction of tax benefits. Delta Galil management explained that DGUSA would not have incurred these overhead expenses as an independent private company. This reimbursement of expenses, amounting to $1.5 million per year (which include deducted tax benefits), was included in the Companys operating cash flow, and does not increase over time. Owing to the use of the Gordon formula for calculating the scrap value of the general cash flow, based on permanent growth, $2.5 million was deducted from the value of the Companys general business, assuming that the reimbursement of the surplus expenses to the cash flow does not increase over time.
46
3.4 Taxes The effective tax rate used to calculate tax expenses in the model according to the Company's effective tax rate in the U.S., according to its explanations, was 38%.
As explained by the Company, DGUSA has been enjoying from an annual tax
benefit of $245 thousand for the next 9 years, due to additional amortization of Burlen's goodwill, which doesn't appears in the company's P&L. Originally, The total additional amortization amount was $9.65 million, and the reduction period was set to 15 years. The total discounted tax benefit amounts is approximately $1.38 million. 3.5 Working Capital The Companys working capital includes customers, accounts receivable, and inventory, net of obligations to suppliers and service providers and accounts payable. An exceptionally high volume of inventory was reported for 2010 compared to the Companys past performance. This exceptionally high volume is attributed to the postponement of orders for underwear sold in packages of 10 products by the Wal-Mart chain (a product developed specially for the chain, and was replaced to packages of 3 products, because of disappointing sales figures), and to a particularly large inventory accumulated by the D2 Women segment as a result of managerial mistakes. The Company explained that the surplus inventory is sellable, and that the Company is currently making efforts to sell it. Taking these one-time events into account, we chose not to use the 23.7% ratio of working capital to total sales in 2010 as a representative figure. In order to calculate the changes in working capital for the forecast period, we first calculated the average accounts receivable and the average suppliers and service providers as a percentage of sales for the past three years (14.1% and 16.9%, respectively, in 2008-2010), and the average inventory for 2008-2009 (excluding the exceptional year of 2010) as a percentage of sales (17.8%).
47
Since UK activity is carried out using the FOB method23, and therefore the UK segment operates without inventory, the UK segments proportion of revenue was deducted from the calculated inventory rate. Using this methodology, the rate of inventory for the forecast period was 16.0% of total revenue. The working capital-to-total revenue ratio used by us for the forecast years was therefore 18.1%. For comparison reasons the company's working capital rate, after deducting the UK activity, is approximately 20% from generated sales. The following table shows the calculation of the representative working capital for the model:
Working Capital / Revenues Accounts Receivables Inventories Accounts Payable Working Capital
31.12.2008 16.1% 19.6% -13.3% 22.5%
31.12.2009 20.2% 15.5% -14.1% 21.6%
31.12.2010E 14.1% 26.4% -16.9% 23.7%
2011 - Terminal 16.8% 16.0% -14.7% 18.1%
The following table shows the working capital in 2008-2010 and during the forecast years by components:
Working Capital (000` USD) Accounts Receivable Inventories Accounts Payable Working Capital
Working Capital / Revenues
2008 47,307 57,492 (38,883) 65,916

22.5%
2009 54,146 41,599 (37,776) 57,969

21.6%
2010E 42,174 79,127 (50,453) 70,848

23.7%
Working Capital (000` USD) Accounts Receivable Inventories Accounts Payable Working Capital % Revenues
2011 56,472 53,828 (49,522) 60,778

18.1%
2012 59,020 56,256 (51,756) 63,520

18.1%
2013 61,003 58,147 (53,495) 65,654

18.1%
2014 62,833 59,891 (55,100) 67,624

18.1%
2015 64,718 61,688 (56,753) 69,652

18.1%
Terminal 66,659 63,538 (58,456) 71,742

18.1%
23
Free On Board.
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3.6 Investments and Amortization As explained by the Company, it was assumed that total annual capital investments in each of the forecast years would total $700,000. This amount represents a sales and marketing company that does not require large investments in expensive manufacturing equipment and/or logistical setups. It is noteworthy that the total investments in the representative year assumed in this study were $250,000, less than the total investments assumed in our study of one year ago. The reason for the decline in costs is that the Company finished installing computer systems in 2010, and it does not anticipate further investments in these systems in the coming years, as assumed in the previous study. Depreciation in 2010 totaled $1.5 million in 2010. The investment depreciation rate from 2011 on was set at 10%. For the representative year, it was assumed that the depreciation rate would equal the level of the average annual investment. Since the amount of depreciation in 2015 does not equal the investment, a tax shield was computed for the years after 2015, when the depreciation exceeds the amount of the investment. The total tax shield for depreciation amounts to about $132,000. Note that added to the annual depreciation is a fixed amortization of about $739,000 for the goodwill value of Burlen's customer relations. 3.7 Operating Profit Based on our assumptions, the EBIT in 2011 totals $12.6 million, about 3.7% of turnover, compared with 1.8% in 2010. The improvement in the EBIT is due to the improvement made in the Gross profit rate (as stated above), the expected increase in sales and due to the expected improvement in operational efficiency. Due to economies of scale for SG&As fixed expenses and the assumption that the company's profitability improves over the forecast years, the estimated EBIT reaches 5.5% in the representative year. According to our examinations, based on peer companies and explanations provided by the Company, the EBIT rate that we assumed is rather low for the industry.
49
The following table displays the EBIT in 2008-2010 and for the forecast years:
DGUSA (000' USD) EBIT
% Revenues
2007 13,284
4.4%
2008 7,226
2.5%
2009 5,569
2.1%
2010E 5,434
1.8%
DGUSA (000' USD) EBIT

% Revenues
2011 12,580
3.7%
2012 15,784
4.5%
2013 17,322
4.8%
2014 18,361
4.9%
2015 19,443
5.0%
Terminal 21,794
5.5%
3.8 Summary of Assumptions for the Cash Flow Forecast Model The cash flow forecast model is based on the assumptions for the 2011 Company budget, among other things. This budget assumes better profitability than the Company reported in its 2010 financial statements, at a rate of 4.6% Following talks with Company management about Delta Galils current operations in general and long-term plans, particularly for Delta USA, and after thoroughly checking the Companys results in recent years, the character of its activity market, and the results of similar companies in Israel and overseas, we were persuaded that the Companys results for 2010 do not reflect its potential profit, for several key reasons: 2010 was a turning point in the US economic recovery, reflected in improved performance by the leading retail chains. Analysts predict that the upward trend will continue, and will directly affect the apparel industry. 2010 featured a substantial rise in the price of the main raw material for the Companys goods - cotton. The company suffered a decrease in its profitability following this price increase, due to its inability to implement a similar short term price increase on its products. The Company plans to raise the sale prices of most of its products in order to roll over the price rise onto the end customers, as is accepted practice in the retail sector. Based on the information provided to us, the Company has signed agreements for price increases of 6% - 10% with a number of leading retail chains. This measure is expected to take place in mid 2011. Because of eroding profit margins in the industry, the Company is focusing on selling products with higher gross profit margins (branded products). This measure is expected to boost its revenue and profitability.
50
Owing to economies of scale, growth in the Companys revenue will reinforce its stature among its customers and competitors on the one hand, and reduce the weight of its fixed costs on the other. Better quality management (Inc. new COO) will be a useful tool in the achievement of the Company's plans. The following charts show the performances of the business units in the past and in the future based on the assumptions made in this opinion: DGUSA
($M, % of Total Sales)
450 17.3% 400 350 300 301.6 250 200 8% 150 4.4% 100 52.1 50 0 2007 2008 Revenues Revenues YOY 08-07 -2.7% 09-08 -8.4% 2009 2010E 2011F 2012F EBIT 11-10 12.4% 12-11 4.5% 2013F 2014F 2015F Terminal % EBIT 14-13 3.0% 15-14 3.0% Terminal 3.0% 13.3 2.5% 50.5 7.2 2.1% 43.1 5.6 1.8% 45.3 5.4 3.7% 55.9 12.6 4.5% 60.1 15.8 4.8% 62.6 17.3 4.9% 64.5 18.4 5.0% 66.4 19.4 5.5% 6% 68.5 21.8 4% 2% 0% 293.3 268.6 10% 299.2 336.3 351.4 17.2% 16.1% 15.2% 363.2 374.1 16.6% 17.1% 17.2% 17.2% 17.2% 385.4 17.3% 396.9 20% 18% 16% 14% 12%
Gross Profit 10-09 11.4%
% Gross Profit 13-12 3.4%
51
DGUS Segment
200 180 160 140 120 100 80 60 40 20 0 2007 2008 2009 2010E 2011F 2012F 2013F 2014F 2015F Terminal 16.5 22.8 20.7 21.8 22.5 23.2 23.9 24.6 10% 137.3 140.4 16.3% 133.1 13.5% 12.0% 138.9 13.9% 12.5% 14.0% 14.0% 14.0% 14.0% 14.0% 148.6 156.1 160.7 165.6 170.5 175.6 25% 30%
20%
15%
18.0
17.4
5%
0%
Revenues Revenues YOY 08-07 2.2% 09-08 -5.1% 10-09 4.3%
Gross Profit 11-10 7.0% 12-11 5.0%
% Gross Profit 13-12 3.0% 14-13 3.0% 15-14 3.0% Terminal 3.0%
D2 Men's Segment
50 45 40 35 30 25 20 15 15.7 10 5 0 2007 2008 2009 2010E Revenues Revenues YOY 08-07 09-08 10-09 2011F 2012F 2013F 2014F 2015F Terminal 3.1 0.9 5.9 0% 4.3 4.8 4.9 5.1 5.2 5% 18.1 19.9 20.5 21.1 21.7 10% 15.0% 15% 20.0% 20% 24.0% 24.0% 24.0% 24.0% 24.0% 30%
25%
Gross Profit 11-10 165.0% 12-11 15.0%
52
UK Segment
50 45 40 35 30 25 20 15 10 5 0 2007 2008 2009 2010E Revenues Revenues YOY 08-07 09-08 10-09 197.1% 2011F 2012F 2013F 2014F 2015F Terminal 7.7 1.2 3.4 5.2 6.0 6.3 6.5 6.7 6.9 23.0 10% 16.1% 14.7% 33.4 15.5% 36.8 16.3% 37.9 16.7% 39.0 16.7% 40.2 16.7% 25% 41.4 20% 16.7% 15% 30%
5%
0%
Gross Profit 11-10 45.4% 12-11 10.0%
D2 Women Segment
50 45 40 35 30 25 25.2 20 15 10 10.0 5 0.0 0 2007 2008 2009 2010E Revenues Revenues YOY 08-07 17.7% 09-08 26.7% 10-09 38.6% 2011F 2012F 2013F 2014F 2015F Terminal 11.0% 11.8 1.3 1.2 7.7% 14.9 7.8% 1.6 0% 5.7 5.4 5.8 5.9 6.1 6.3 5% 20.6 21.6 22.2 22.9 23.6 24.3 10% 15% 18.9% 22.7% 25.0% 26.0% 26.0% 26.0% 26.0% 25% 30%
20%
Gross Profit 11-10 22.0% 12-11 -14.4%
53
Burlen Segment
200 180 160 140 120 100 80 79.6 60 40 20 0 2007 2008 2009 2010E 2011F 2012F 2013F 2014F 2015F Terminal 26.4 19.9 20.0 115.5 102.3 85.8 92.2 96.8 99.7 102.7 105.8 109.0 15% 22.9% 20.9% 19.5% 19.0% 18.1% 18.3% 18.3% 18.3% 18.3% 18.4% 20% 25% 30%
10%
16.6
16.3
16.7
17.7
18.2
18.8
19.3
5%
0%
Revenues Revenues YOY 08-07 -11.5% 09-08 -22.2% 10-09 7.8%
Gross Profit 11-10 7.5% 12-11 5.0%
Auburn Segment
50 45 40 35 30 19.0% 25 20 15 10 5 0 2007 2008 2009 2010E Revenues Revenues YOY 08-07 0.4% 09-08 -14.7% 10-09 -24.7% 2011F 2012F 2013F 2014F 2015F Terminal 0% 7.4 6.5 6.1 5.7 5.0 5.1 5.3 5.5 16.7% 38.8 38.9 20% 33.2 18.5% 15% 25.0 21.1 22.2 22.8 23.5 24.2 25.0 10% 23.0% 21.6% 21.8% 21.8% 21.8% 21.8% 22.0% 25% 30%
4.6
4.8
5%
Gross Profit 11-10 -15.5% 12-11 5.0%
54
3.9 Company's Cash Flow Forecast Following is the Company's cash flow forecast for the years 2011 to 2015 and in the representative year:
DGUSA (000' USD) Revenues
YOY
2011 336,260 12.4% 280,326 83.4% 55,934 16.6% 28,171 8.4% 15,183 4.5% 43,354 12.9% 12,580 3.7% 2,314 14,894 4.4% 1,488 700 (10,070) 4,780 20,971 19,816
2012 351,430 4.5% 291,327 82.9% 60,103 17.1% 28,871 8.2% 15,447 4.4% 44,318 12.6% 15,784 4.5% 2,384 18,168 5.2% 1,488 700 2,742 5,998 10,216 8,619
2013 363,237 3.4% 300,650 82.8% 62,588 17.2% 29,515 8.1% 15,751 4.3% 45,265 12.5% 17,322 4.8% 2,454 19,776 5.4% 1,488 700 2,134 6,582 11,848 8,924
2014 374,134 3.0% 309,671 82.8% 64,463 17.2% 30,066 8.0% 16,035 4.3% 46,102 12.3% 18,361 4.9% 2,524 20,885 5.6% 1,488 700 1,970 6,977 12,726 8,559
2015 385,358 3.0% 318,963 82.8% 66,395 17.2% 30,627 7.9% 16,325 4.2% 46,952 12.2% 19,443 5.0% 2,594 22,037 5.7% 1,488 700 2,029 7,388 13,408 8,052
Terminal 396,919 3.0% 328,402 82.7% 68,517 17.3% 30,555 7.7% 16,168 4.1% 46,723 11.8% 21,794 5.5% 1,439 23,233 5.9% 1,488 700 2,090 8,282 13,650 24 91,075
COGS
% Revenues
Gross Profit
% Revenues
Selling & Marketing expenses

% Revenues

% Revenues
Total SG&A
% Revenues
EBIT
% Revenues
Depreciations & amortization EBITDA

% Revenues
Overhead (Delta Galil) CAPEX Change in working capital TAX Net cash flow Discounted Net cash flow
24
Not including depreciations & amortization tax shield, overhead's (Delta Galil) growth correction, Burlen's amortization tax benefit
55
Following is the Company's cash flow forecast for the years 2011 to 2015 and in the representative year pre tax:
DGUSA (000' USD) Revenues YOY COGS % Revenues Gross Profit % Revenues Selling & Marketing expenses % Revenues General & Administrative % Revenues Total SG&A % Revenues EBIT % Revenues Depreciations & amortization EBITDA % Revenues Overhead (Delta Galil) CAPEX Change in working capital Net cash flow (Pre Tax) Discounted Net cash flow (Pre Tax)
2011 336,260 12.4% 280,326 83.4% 55,934 16.6% 28,171 8.4% 15,183 4.5% 43,354 12.9% 12,580 3.7% 2,314 14,894 4.4% 2,400 700 (10,070) 26,664 24,552
2012 351,430 4.5% 291,327 82.9% 60,103 17.1% 28,871 8.2% 15,447 4.4% 44,318 12.6% 15,784 4.5% 2,384 18,168 5.2% 2,400 700 2,742 17,126 13,370
2013 363,237 3.4% 300,650 82.8% 62,588 17.2% 29,515 8.1% 15,751 4.3% 45,265 12.5% 17,322 4.8% 2,454 19,776 5.4% 2,400 700 2,134 19,342 12,803
2014 374,134 3.0% 309,671 82.8% 64,463 17.2% 30,066 8.0% 16,035 4.3% 46,102 12.3% 18,361 4.9% 2,524 20,885 5.6% 2,400 700 1,970 20,616 11,570
2015 385,358 3.0% 318,963 82.8% 66,395 17.2% 30,627 7.9% 16,325 4.2% 46,952 12.2% 19,443 5.0% 2,594 22,037 5.7% 2,400 700 2,029 21,708 10,329
Terminal 396,919 3.0% 328,402 82.7% 68,517 17.3% 30,555 7.7% 16,168 4.1% 46,723 11.8% 21,794 5.5% 1,439 23,233 5.9% 2,400 700 2,090 22,843 72,729
25
4. Weighted Average Cost of Capital 4.1 Cost of Equity The following table presents the sum of the key parameters that we used in valuing the Company's cost of equity (Ke): Estimation of the Company's cost of equity
Parameter Risk-free interest Market premium Beta Specific risk premium The Company's cost of equity
25
Value 1.86% 5.07% 1.33 6.28% 14.90%
Note 1 2 3 4
Not including overhead's (Delta Galil) growth correction
56
Notes to the table: (1) The rate of return of a US government bond26 over a 30-year period. (2) Average difference between the annual real return on stock indexes and the risk free interest in the U.S.27. (3) To determine the Company's beta, we examined a group of companies in the same field of business. According to our examination, there are no traded companies identical in their operations to the Company, and we therefore chose companies with similar features as the Company. Following is a list of peer companies used for calculating the beta28
Calculation of Levered Beta by Peer Companies

Company Levered Beta Unlevered Beta D/V Bernard Chaus 0.53 0.27 61% Delta Apparel 0.68 0.48 41% Fredrick's of Hollywood 2.11 1.81 22% Hampshire Group 0.40 0.42 -7% Hanesbrands * 1.89 1.24 46% Jiangsu Sanyou 0.41 0.43 -7% Oxford Industries 2.38 1.94 28% Phillips Van Housen 1.99 1.50 35% Unifirst Corp. 1.17 1.14 4% Van De Velde * 0.51 0.52 -4% Warnaco Grp 1.61 1.67 -7% Median 1.17 1.14 22% * Peer companies not included in the valuation conducted in 2009. Due to a shortage of data and/or bankruptcy, two peer companies previously included were omitted from the list - Hartmarx and Montaigne Fashion Group and two other companies were included - Van de Velde, a Belgian company specializing in bras, and Hanesbrands, a large U.S. company active, among other fields, in branded apparel.
(4) The specific risk premium reflects the excess risk added for the company due to its size in relation to the size of its markets of operation29 4.2 Weighted Average Cost of Capital (WACC) In accordance with the standard guidelines, the discount rate should be a pre-tax discount rate that reflects current market estimates of: a. The time value of money; b. Specific risks with respect to which the cash flows were adjusted.
26 27
Source: www.ustreas.gov Source: Study published by Damodaran (as of December 2010) 28 Source: Capital IQ 29 According to the 2010 Ibbotson
57
However, although the standard guidelines prescribe applying a pre-tax discount rate, in practice and in accordance with the notes accompanying the standard, the result of the calculation of pre-tax cash flows discounted by a pre-tax discount rate should be the same as the result of the calculation of after-tax cash flows discounted using an appropriate after-tax discount rate. For these reasons, we chose to base our calculation on after-tax cash flows in applying an after-tax discount rate. The discount price reflects, among other things, the business-operating risk inherent in the Companys activities. Some of the risk is attributed to the nature of the market sector in which the Company operates, and some of it stems from specific characteristics of the Company. The Companys cost of capital was determined based on our experience and professional discretion as well as the accepted discount rates used by our firm for the systematic business-operating risk to the operating cash flows in similar sectors and the business-operating risk specific to the Company's operations and the sector in which it operates, compounded by the fact that the Company operates in a particularly competitive market with many competitors. For assessing the Company's cost of capital, the weighted average cost of capital was estimated (using the CAPM model to calculate the cost of equity) by comparing it to similar public companies. The resulting weighted cost of capital from this estimation was about 11.84% (after tax) computed as follows: Parameters for Calculating the Company's WACC
Parameter Risk-free interest Beta Market premium The Company's cost of equity Cost of debt Tax rate D/E WACC Value 1.86% 1.33 5.1% 14.90% 6.08% 38% 28% 11.84% Comments
1 2
58
Notes to the table: 1. 2. Depending on the the long-terminterest rate paid by similar companies and on the parent company's bonds U.S. interest rate. The long-term corporate tax rate in the U.S.
4.3 WACC - Summary Based on the above calculations and in using the debt to equity ratio of 28% (taking into account the debt capital of peer companies), the WACC obtained is between 11% - 12%. Based on our professional judgment, the Weighted Average Cost of Capital that we applied in the valuation is 12% (corresponding with an after-tax cost of capital of 17.9%), similar to the cost of capital we applied in evaluating previous years' impairments. 5. Long-term Growth The Company's real permanent growth rate was estimated at 3%. This rate was set taking into account population growth in the U.S., GDP annual growth rate in the last two years, and average historic growth of the large retailers. Addressing these factors reflects, in our opinion the projected permanent growth. 6. Enterprise Value Summary 6.1 The Company's Enterprise Value The Company's enterprise value is equal to the net present value of the sum of the cash flows specified above plus a residual value from 2016 and on. The enterprise value according to the valuation that indicates value in use approach is $144,076 thousand.
59
6.2 Sensitivity Analysis Following is an analysis of the sensitivity of the Company's enterprise value to changes in assumptions regarding the cost of capital and long-term growth (US$ '000s). Sensitivity Analysis of the Company's Enterprise Value
10.5% 140,045 147,824 157,434 169,607 185,524 207,231 11.0% 134,133 141,046 149,495 160,056 173,634 191,739 Discount rate 11.5% 12.0% 12.5% 128,736 123,789 119,237 134,907 129,321 124,217 142,378 135,961 130,145 151,606 144,075 137,321 163,295 154,219 146,186 178,580 167,260 157,414 13.0% 115,035 119,533 124,849 131,228 139,024 148,770 13.5% 111,145 115,221 120,007 125,703 132,599 141,118
0.0% 1.0% 2.0% 3.0% 4.0% 5.0%
Permanent Growth Rate
6.3 Comparison with Previous Valuations Following is a summary of previous valuations:

DGUSA Cost of Capital Permanent growth rate Enterprise value ($ 000's) Present Valuation 12.0% 3% 144,075 Valuation in December 2009 12.0% 3% 128,708 Valuation in December 2008 11.9% 3% 133,276
It should be noted that the comparison of this valuation to prior valuations is inconsistent, due to the following reasons: This valuation includes additional two segments, that have been developed during last 2 years and are expected to grow significantly in 2011 (As part of business development into new activities that include branded men's activity - D2 Men's) An estimated $25 millions of surplus inventory that influences 2011 cash flow This year's valuation includes Auburn's enterprise value (valued at 5-8 millions USD), as it was merged into DGUSA as of January 1st, 2010. In last year's valuation, Auburn's was valued by decreasing net financial liabilities (roughly $10 millions). Therefore, by comparing Auburn's EV to its net financial liabilities, including Auburn in this year's valuation adds no excessive positive value
60
6.4 Peer Companies' Multiples To assess the reasonableness of the valuation result, we compared the EBITDA multiples obtained in the valuation to the EBITDA multiples' of peer companies. The EBITDA multiples of peer companies, based on statements of September 30, 201030 (the last statements published), range between 4.8 and 10.1, as shown in the following table. Peer Companies' Multiples
Company Delta Apparel Hampshire Group* Hanesbrands Oxford Industries Phillips Van Housen Triumph* Unifirst Corp. Van De Velde Warnaco Grp Average Median
*EBITDA data relates to end of 2010
TEV / EBITDA 7.7 9.6 8.8 6.8 10.1 9.3 4.8 9.6 6.7 8.1 8.8
The EBITDA multiples obtained in the valuation (enterprise value divided by the projected EBITDA in the coming year, including reimbursement of surplus expenses to the parent company) is 8.8. The EBITDA multiple for 2010 based on this valuation is about 15.6. 6.5 Delta's Market Value In assessing the reasonableness of the valuation result, we compared the Company's enterprise value, as follows from the valuation, and the enterprise value of the parent company, Delta Galil Industries Ltd. From an analysis of the following table, it emerges that the operations of DGUSA account for about 52% of Delta's total market value compared to a contribution of about 49% to revenue and about 28% to EBIT.
30
In principle, the projected EBITDA is to be used to obtain the EBITDA multiple. Due to the availability of the data, the last known EBITDA was used to obtain the peer companies' multiples. Companies which presented a negative EBITDA and/or companies whose multiples were relatively irregular were excluded from the sample of companies.
61
Enterprise Value of Delta Galil and DGUSA

(000') USD Equity Value (average Dec 2010) Net financial liabilities (30.09.2010) Enterprise values Sales revenues 1-9 2010 EBIT 1-9 2010 Delta Galil 199,319 75,680 274,999 466,902 22,936 DGUSA % DGUSA
144,075 229,960 6,450
52% 49% 28%
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Part D
Additional Information Regarding the Corporation As of December 31, 2010

1
Part D Additional Information Regarding the Corporation
Company Name: Delta Galil Industries Ltd. The Companys number with the Registrar of Companies: 520025602. Company Address: 2 Kaufman, Tel Aviv Telephone no.: 03-5193744 Fax: 03-5193730 Balance Sheet Date: December 31, 2010 Report Date: February 16, 2011 Report Period: 2010 Email: rebeca.gahzan@deltagalil.com
Regulation 10a Concise Quarterly Statements of Comprehensive Earnings See Section 2.2 of the Board of Directors Report. Regulation 10c Use of Proceeds of Securities while Taking Into Account the Goals of the Proceeds in Accordance with the Prospectus 1. Designation of the Proceeds of Debenture Issue January 2010 According to the shelf offering report the published by the Company on January 18 2010 the Company raised a total of 113 million NIS (gross). The proceeds of the issue were designated for financing the Companys business activities as decided by the Companys Board of Directors from time to time or according to strategies set by the Board of Directors. At the same time, the Company regularly examines, as part of its strategy, the option of purchasing activity or companies outside of Israel, in order to expand its activities. As the Company reported on December 11 2009, the Company had negotiated for the purchase of assets and brandied international activity in the field of apparel and designated the proceeds of the issue or a portion thereof for financing this transaction, insomuch as it comes to fruition. On June 29 2010 the Company announced that it would be discontinuing negotiations in light of the sellers decision to stop sales proceedings.
The proceeds of the issue were deposited in an interest-bearing short-term deposit in a banking institution. December 2010 According to the shelf offering report the Company published on January December 23 2010 the Company raised a total of 98 million NIS (gross). The Company did not assign a specific purpose for the proceeds of the issue, and they were designated for financing the Companys business activities as decided by the Companys Board of Directors from time to time or according to strategies set by the Board of Directors. The proceeds of the issue were used to redeem short-term credit. Regulation 11 List of Investments in Subsidiaries and Directly and Indirectly Related Companies as of December 31 2010
Fully-Controlled and Fully-Held Subsidiaries (100%)
Number of Shares Held by the Company, of All Types
Notation Value of the Shares NIS/Foreign Currency
Cost of Investment in Thousands of Dollars
Balance Sheet Value in Thousands of Dollars
Delta Galil USA Inc. Delta (Textile) London Ltd. Delta Galil Holland B.V. Delta Egypt Sourcing Ltd.(1) Peace Bridge Co. (2) / (1). D.G.T. (Holdings) Ltd.(3) Textured Ltd. (1) Delta Galil Properties (1981) Ltd. Delta Elastic Tapes Industries Ltd. (905) (1)
100 1,300,000 250 500 30,000 1,020 2,000 24,980,002 995,646 Ordinary 8 Deferred
$10 1,300,000 $21,000 $14,706 $42,373 1,020 NIS 0.2 NIS 24,980 NIS 995,472 NIS
39,126 2,061 21 15 783 782 1,806
83,175 3,302 32,002 (199) (92) -
(1) The company is currently undergoing liquidation.

(2) A company in Jordan purchased as part of the purchase of Gibor in April 2009. (3) Inactive company.
Regulation 12 Changes in Investments in Subsidiaries and in Directly and Indirectly Related Companies in the Reported Period Date of Change January 1 2010 Nature of Change Merged into Delta Galil USA Inc. Name of Subsidiary Auburn Hosiery Mills
Regulation 13 Revenues of Subsidiaries and Related Companies and the Corporations Revenues from Them as of the Report
Income (Loss) Name of Subsidiary (Before Tax) in 2010, in Thousands of Dollars Net Profit (Loss) (After Tax) in 2010 in Thousands of Dollars Other Comprehensive Income (Loss) Interest Income Received from Subsidiary in Thousands of Dollars (1) Revenues from Dividends Received from Subsidiary, in Thousands of Dollars (2)
Delta Galil USA Inc. (3) Delta (Textile) London Ltd. (3) Delta Galil Holland B.V. (3) Delta Egypt Sourcing Ltd. (4) Peace Bridge Co. (4) Delta Galil Properties (1981) Ltd (4)
2,813
1,260
1,143
755
448
467
467
1,548
2,545
2,161
2,161
208
120
424
424
424
(800)
(800)
(800)
(1) Total interest received in cash was $255,000, $73,000 on March 4 2010, $121,000 on June 11 2010 and $61,000 on December 17 2010. (2) Total dividends received in cash were $1,578,000, $1,548,000 on December 31 2010 and $30,000 on May 28 2010. (3) The information received in the above table includes the profits (loss) of subsidiaries of subsidiaries as included in the profits (losses) of the subsidiaries. (4) The company is undergoing liquidation.
Regulation 20 Stock Market Trade Securities Listed for Trade Dates and Reasons for Trade Discontinuation 1. According to the shelf offer report published by the Company on January 18 2010 and revised January 19 2010 the Company offered the public, by way of a uniform offer, 113,000,000 NIS par value Company debentures (Series K), worth 1 NIS NV each. Trade of the debentures (Series K) on the stock exchange began January 24 2010. For more details see immediate report on the results of the debenture issue from January 21 2010 (reference no. 2010-01-362040). 2. According to the shelf offer report published by the Company on December 23 2010 and revised December 23 2010, the Company offered the public, by way of a uniform offer, 92,189,920 NIS par value registered Company debentures (Series K), worth 1 NIS NV each. Trade of the debentures (Series K) on the stock exchange began December 28 2010. For more details see immediate report on the results of the debenture issue from December 23 2010 (reference no. 2010-01-731286). 3. During the reported period, trade of the Companys securities listed for trade on the stock exchange did not stop, except for the following cases: Date May 24, 2010 August 11, 2010 November 29, 2010 Cause Publication of First Quarter Financial Statements Publication of Second Quarter Financial Statements Publication of Third Quarter Financial Statements
Regulation 21 Remuneration of Interested Parties and Senior Executives a. The following are details of cost of the Company for remuneration (remuneration given in the reported year, including the Company's remuneration obligations for the reported year) for the five most highly compensated of the Companys senior executives, in USD and NIS:
Remuneration Recipient Information Name Job Title Scope of Position Holdings in the Corporations Equity 0.08% Salary, Benefits and Associated 486,834 Grant Remuneration for Services 1 OptionBased Payments
2
Other Remuneration Commission Other Interest Rent Other Total in Dollars* Total in NIS
Management Fees
Consulting Fees
Shlomo Doron 3
VP of Operations and Deputy CEO CEO
100%
621,935
335,047
1,443,816
5,102,658
Isaac Dabah
100%
56.08%
520,000
497,795
1,017,795
3,800,692
Yossi Hajaj
CFO
100%
465,042
206,163
101,250
772,455
2,846,345
Steve Klein
CEO of Burlen
100%
602,794
104,000
51,944
758,738
2,833,311
Esti Maoz
VP of Marketing and Strategic Development
100%
421,016
170,271
6,431
597,718
2,200,482
(1) In terms of cost to the Company. (2) Option-based payment includes the benefit component for options granted executives as part of the 2006 and 2009 plans, calculated according to the B&S Model, and as included as an expense in the Companys reported in the reported year. Note that this component was not paid in cash. The exercise prices of the options granted move between $3.02 and $8.98 per option and the value of the options moves between $1.23 and $4.01 per option, in accordance with the various issues. For further information regarding the exercise price and the value of the options see Note 14 to the Financial Statements in Part C of this periodic report. (3) The sum of the grant includes the relative portion included as an expense this year to the amount of $250,000 for the signing bonus paid in 2009. (4) On October 20 2009, the shareholders general and special meeting approved the grant of options to Mr. Isaac Dabah, Company CEO and Director and its controlling shareholder.
Mr. Dabah was granted 720,000 options at the price of $3.27 per option, which can be exercised as 720,000 Company shares. The maturing of the options in question is contingent on achieving goals pertaining to operational profits from ordinary activities, excluding the impact of one-time items (EBIT) during 2010 2013 as follows: 1. Subject to achieving operational profits from regular activities excluding the impact of one-time items (EBIT) to the amount of $35 million in 2010, 200,000 options will mature on March 31 2011. As of this report and in accordance with the financial results achieved in 2010, these options have not matured according to this condition see Section 2 below. An expense was listed in the Financial Statements based on the assumption that 2010 goals will be achieved in a cumulative fashion manner across two years. 2. Subjected to achieving an accumulated EBIT of $70 million in 2010 and 2011, 200,000 options will mature on March 31 212; in this case the recipient will also be entitled, on the same date, to the maturation of the options mentioned in Section (1) above (if they do not mature earlier). 6 3. Subjected to achieving an accumulated EBIT of $105 million in 20102012, 200,000 additional options will mature on March 31 2013. In this case the recipient will also be entitled, on the same date, to the maturation of the options mentioned in Sections (1) and (2) above (if they do not mature earlier). 4. An additional 50,000 options will mature on March 31 2012 if the accumulated EBIT for 2010 and 2011 will reach $75 million and 70,000 additional options will mature on March 31 2013 if the accumulated EBIT for 2010, 2011 and 2012 will reach of $121 million. If the accumulated EBIT for 2010, 2011 and 2012 will reach $121 million while the EBIT in question does not reach $75 million in 2010 2011, the recipient shall be entitled, on March 31 2013, to the maturation of the 50,000 options denoted at the beginning of this section (4).
b.
Remuneration Recipient Information Name Job Title Scope of Position Holdings in the Corporations Equity 0.20% Salary Grant Remuneration for Services 1 OptionBased Payment Management Fees Consulting Fees Commission Other Other Remuneration Interest Rent Other Total in Dollars* Total in NIS
Gideon Chitayat
2
Chairman of the Board of Directors 6 in number
73,500
11,448
84,948
342,750
Directors
3
211,000
28,620
43,616
44,999
328,235
1,225,710
Gloria Dabah
Product Manager and Development Coordinator at Delta U.S.
62,466
62,466
233,260
(1)
In terms of cost to the Company. Remuneration sums for directors Shaul Ben Zeev and Yechezkel Dovrat are each paid to companies under their full control: Meishar Omer Ltd. and Yechezkel Dovrat Consulting and Initiatives, respectively. In addition to the yearly remuneration, Mr. Shetiat shall be entitled, above and beyond the options granted to all Company directors, to an additional 10,000 nontradable Company options exercisable as 10,000 regular Company shares, in return for an exercise price of $5 US for each option warrant (hereinafter: the Additional Options for the Chairman of the Board) At the conclusion of each full year in office as Chairman of the Board, 1/3 of the options granted shall mature. If he serves as Chairman for a period of less than 12 months, he shall not be entitled to any options from that batch. The option allocation was carried out in accordance with terms offered to all Company employees as part of the 2009 option allocation plan adopted by the Board of Directors on August 20 2009. The remuneration to the Chairman of the Board is paid to a company under his full control by the name of G.M.B.S. Ltd. see October 20 2009 immediate report (ref: 2009-01-260757).
(2)
(3) The aforementioned remuneration includes the benefit component for options granted directors over the course of Q4 2009, the option allocation was carried out in accordance with terms offered all Company employees as part of the 2009 option allocation plan adopted by the Board of Directors on August 20 2009; in accordance with the grant in question, directors received 10,000 options each (non-tradable), exercisable as 10,000 regular Company shares, in return for an exercise price of $5 US for each option warrant. The Ddirectors payment Shaul Ben Zeev and Yehezakel Dovrat are paid threw a Company held by them: "Meishar Omer Ltd, and Yehezakel Dovrat consulting, respectively.
Mr. Shlomo Doron, Deputy CEO and VP of Operations for further details on the terms of his employment, see immediate report dated July 23 2009, reference no. 2010-01-177156, included by way of reference. Mr. Doron is entitled to a yearly bonus based on the Company's policy and goals set. The yearly bonus shall not exceed 12 of Mr. Doron's monthly salaries1. Accordingly, in 2010 Mr. Doron received a bonus of $371,935. Mr. Steve Klein, CEO of Burlen the following are the key terms of Mr. Kleins employment by the Company: Mr. Kleins gross monthly salary is $48,000. Mr. Klein is entitled to 20 paid vacation days a year and group health insurance according to regular practice for Burlen executives and is entitled to take part ion all compensation and welfare plans existing at Burlen regarding its employees and executives. Mr. Klein is entitled to various expenses reimbursements including mobile telephone expenses, land-based telephone expenses and travel expenses. Mr. Kleins employment agreement renews annually unless one of the parties informs the other 90 days in advance that they seek to discontinue their agreement. Furthermore, the agreement establishes various grounds for the Company and Mr. Klein to terminate the agreement at shorter notice, such as dismissal under exceptional circumstances by the Company, dismissal due to death or the loss of work ability and so on. In the event that the Company terminates its commitment with Mr. Klein without cause (as defined in the contract), and in the event that Mr. Klein terminates his commitment with the Company under justified circumstances as defined in the agreement, Mr. Klein shall be entitled to a recovery bonus to the amount of six monthly salaries, including social benefits. According to the agreement Mr. Klein is entitled to an annual bonus based on Company policy, goals set and the Board of Directors evaluation. The annual bonus shall not exceed 50% of Mr. Kleins salary.2 Accordingly, in 2010 Mr. Klein received a bonus of $104,000.
Note that in the event that results in practice exceed the goals set, the executive shall be entitled to
additional benefits as set by management from time to time.
10
The employment agreement included a confidentiality commitment for Mr. Kleins entire employment period and for a period of 5 years from the conclusion of his employment. Furthermore, the agreement includes an occupational restriction and a non-compete clause for a period of 24 months from the end of his employment at the Company. In May 2006 the Company granted Mr. Klein 25,002 options with an exercise price of $8.43 per option, as part of the 2006 plan. In April 2010 Mr. Klein was granted 50,000 options with an exercise price of $8.98 per option as part of the 2009 plan, with one half of these options contingent on achieving goals for 2010. The contingent options (25,000) expired as a result of failing to meet the goals set. Mr. Isaac Dabah, Company CEO and Director On August 20 2009 Mr. Dabah decided to end his tenure as Chairman of the Board of Directors and the members of the Board of Directors decided to extend Mr. Dabahs term in office, so that he may continue to serve as the Company's CEO. The terms of Mr. Dabah's employment and service as Company CEO were approved by the Company's Audit Committee, Board of Directors and the Companys general meeting in accordance with the law. Regarding the terms of his employment as Company CEO see immediate reports published by the Company on September 6 2009 (ref: 200901-224304 and 2009-01-224325), September 22 2009 (ref: 2009-01-237762 and 2009-01-237768) and October 18 2009 (ref: 2009-01-257628 and 2009-01-257625) and the immediate report on the results of the October 20 2009 general meeting (ref: 2009-01-260757), presented by way of referral. Mr. Tim Regan, CEO of Delta USA the following are the terms of Mr. Regans employment by the Company: Mr. Regans gross monthly salary is $37,500 (yearly salary of $450,000). Mr. Regan is entitled to take part in all existing Company compensation and welfare plans applicable to its executives and 4 weeks of vacation per year. Mr. Regan is also entitled to various expense reimbursements, such as participation in rental payments, vehicle expenses and travel expense reimbursements.
Note that in the event that results in practice exceed the goals set, the executive shall be entitled to additional
benefits as set by management from time to time.
11
Mr. Regan is entitled to an annual bonus based on Company policy and progressive goals set in its contract with him. In accordance with these goals, the yearly bonus may reach up to 130% of Mr. Regans total yearly salary.3 Accordingly, in 2010 Mr. Regan received a bonus of $50,000. The Company allocated to Mr. Regan 50,000 non-tradable Company options exercisable as 50,000 ordinary Company shares, in accordance with the terms of the Companys 2006 option plan. Mr. Yossi Hajaj, Chief Financial Officer the following are key terms of Mr. Hajajs employment by the Company: Mr. Hajajs gross monthly salary is 100,000 NIS. Mr. Hajaj is entitled to social benefits set in his contract, such as 23 days of vacation, various expense reimbursements such as telephone expenses, an education fund, executive insurance, vehicle and mobile phone. Mr. Hajaj is entitled to an annual bonus based on Company policy and goals set. The annual bonus shall not exceed 6 of Mr. Hajajs monthly salaries.4 Accordingly, in 2010 Mr. Hajaj received a bonus of $206,163. The Company has allocated to Mr. Hajaj 277,502 options pursuant to the 2006 plan. In addition, Mr. Hajaj has at his disposal 5,000 options issued as part of the 2002 plan. Mr. Hajajs employment agreement is not limited in time and either of the parties may bring it to conclusion by providing advance written notice to the other party. The Company may discontinue Mr. Hajajs employment with 180 days written notice, while according to the parties written agreement made after the contract was signed, Mr. Hajaj may end work at the Company with 90 days written notice. Mr. Hajaj has signed an unlimited confidentiality agreement with the Company. Ms. Esti Maoz, VP of Development and Strategic Development the following are the key terms of Ms. Maozs employment by the Company: Ms. Maozs gross monthly salary is 85,000 NIS.

4
12
Ms. Maozs employment agreement is not limited in time and either of the parties may bring it to conclusion by providing six months written notice to the other party. In the event of termination by the Company, Ms. Maoz shall be entitled to full salary for the period in question, including social benefits. Ms. Maoz is entitled to social benefits as set in the agreement and various expense reimbursements. Ms. Maoz is entitled to an annual bonus based on Company policy and goals set. The annual bonus shall not exceed 50% of Ms. Maozs total salary.5 Accordingly, in 2010 Ms. Maoz received a bonus of $170,271. The Company allocated 47,502 options to Ms. Maoz as part of the 2006 plan. In addition, Ms. Maoz has at her disposal 7,500 options issued as part of the 2002 plan. Mr. Gideon Chitayat, Chairman of the Board of Directors on August 20 2009 Mr. Chitayat was appointed as Chairman of the Company's Board of Directors. The appointment shall remain in effect until March 31 2011. The terms of his service as Chairman of the Board were ratified by the General meeting on October 20 2009 (after receiving the approval of the Audit Committee and the Company's Board of Directors. For details regarding the terms of his service see Section 1.16.10.5 to the Description of the Corporation's Business, Part A of the periodic report. The Company's Board of Directors the Companys directors6 are entitled to directors' compensation not exceeding generally accepted levels and set according to the directives of the Companies Regulations (Rules Regarding Compensation and Expenses for Outside Directors), 2000, in accordance with the Company's rank. The Company pays its directors yearly compensation to the amount of 60,000 NIS per year and participation compensation of 2,250 NIS per meeting. In addition, on October 20 2009 the Company's general meeting ratified the allocation of 10,000 non-tradable options exercisable as 10,000 ordinary Company shares worth 1 NIS NV in return for an exercise price of $5, to directors Israel Baum, Noam Lautman, Tzipporah Carmon and Gideon Chitayat, in accordance with the 2009 option allocation plan adopted by the Board of Directors on August 20 2009. All of the above is detailed in the immediate reports published by the Company on

6
With the exception of Chairman of the Board Mr. Chitayat, Company CEO Isaac Dabah so long as he serves
as Company CEO and Mr. Weinstock starting January 2011 so long as he serves as a COO of a subsidiary, for whom different terms of service were set.
13
September 6 2009 (ref: 2009-01-224304 and 2009-01-224325), September 22 2009 (ref: 2009-01237762 and 2009-01-237768) and October 18 2009 (ref: 2009-01-257628 and 2009-01-257625) and in the immediate report on the results of the meeting from October 20 2009 (ref: 2009-01260757), presented by way of referral. Accordingly, at the December 7 2009 general meeting in which Mr. Dovrat was ratified as outside director at the Company, it was decided to allocate him 10,000 non-tradable options, exercisable as 10,000 ordinary Company shares worth 1 N IS NV each, in return for an exercise price of $5, in accordance with the terms of the Company's 2009 option plan. For further details see the October 28 2009 immediate report on the material private offer and general meeting summons (ref: 2009-01-267591, and in the immediate report on the results of the December 7 2009 general meeting (ref: 2009-01-312165), presented by way of referral. Expense refund for Mr. Itzhak Weinstock Mr. Itzhak Weinstock, a Company director, is entitled7 to active expense reimbursements pertaining to the fulfillment of his duties as Company director including flight reimbursements and hospitality of a sum not exceeding $80,000 per year and in accordance with Company procedure. In 2010 these expense reimbursements amounted to $45,000. Consultation agreement with Mr. Baum on November 15, 2007 the Company entered into an agreement with Mr. Israel Baum, Company director (hereinafter: "the Consultation Agreement"). The Consultation Agreement was approved by the Audit Committee and by the Board of Directors in August 2007 and was ratified by the General Assembly on Mat 22 2008 In accordance with the Consultation Agreement, Mr. Baum undertook to provide the Company and companies under its control, from time to time, at the request of the Company's CEO, consultation services pertaining to the Company's options regarding works it requires by way of outsourcing in Asia, in accordance with and as detailed in the immediate report published by the Company on May 13 2008, reference no. 2008-01-132033, presented by way of referral (hereinafter: "the Consultation Services"). In return for the Consultation Services, Mr. Baum shall be entitled to hourly pay. The Company estimated that the total expense involved in the Consultation Agreement is not expected to be material to the Company. At the general meeting held October 20, 2009, after receiving the approval of the Audit Committee and Company Board of Directors, the Consultation Agreement was revised retroactively starting August 1 2008 so that the consultation services covered by the agreement in the field of outsourcing
Ratified at the general meeting held Mat 22 2008
14
would not be geographically restricted to Asia alone and so that they would include consultation on all of the Companys areas of manufacturing and purchasing. With the exception of the above, the Consultation Agreement remained unchanged. As of December 31, 2010 Mr. Baum has received 44,000 NIS for consultation services provided from since he began providing consultation services to the Company. Gloria Dabah, daughter of the Companys controlling shareholder, marketing manager and product manager at a subsidiary for details on the terms of her employment see Regulation 22, Section (3) below. Regulation 22 Transactions with the Controlling Shareholder Transactions Listed in Section 270(4) of the Companies Law, 1999 (1) Update of directors compensation for Mr. Isaac Dabah (controlling shareholder) and Mr. Itzhak Weinstock (a director in whom the controlling shareholder has a personal interest in approving his pay). On April 14, 2008 the Audit Committee and the Board of Directors confirmed that starting April 1, 2008 Mr. Dabah and Mr. Weinstock would be paid yearly remuneration and participation remuneration identical to the yearly remuneration and the participation remuneration the Company shall pay outside directors serving at the Company, all as detailed in the Companys April 2008 immediate report (reference no. 2008-01-109833), presented by way of referral. Note that starting from Mr. Dabah's appointment as Company CEO in August 2008, Mr. Dabah has not received directors compensation. In addition, starting from the Mr. Weinstocks appointment as chief operations manager at a subsidiary, as detailed in Section (5) below, Mr. Weinstock has not received directors compensation. (2) Ratification of the terms of employment of Mr. Dabah, Companys director and controlling shareholder, as Company CEO: The general meeting held on August 26 2008 ratified the appointment of Mr. Isaac Dabah, the Company's controlling shareholder and Chairman of the Board of Directors, as Company CEO for a period of up to twelve months from the general meetings ratification, and ratified the terms of his employment. Details regarding the appointment and terms of employment of the Company CEO are included in the immediate report on the transaction between the Company and its controlling shareholder from July 20 2008 (ref: 2008-01-208110) and in the immediate report on the results on the meeting for the ratification of the controlling shareholder from August 2008 (ref: 2008-01-246723) which are presented by way of referral. Seeing as Mr. Dabah informed the Company on August 20 2009 that he had decided to end his tenure as Chairman of the Board of Directors, the members of the Board of Directors decided to extend Mr.
15
Dabah's term in office, so that he may continue to serve as the Company's CEO and lead the Companys activities. The terms of Mr. Dabah's employment and service as Company CEO were approved by the Company's Audit Committee, Board of Directors and the Companys general meeting with accordance to the law. In this regard, see the immediate reports published by the Company on September 9 2009 (ref: 2009-01-224304 and 2009-01-224325), September 22 2009 (ref: 2009-01237762 and 2009-01-237768) and October 18 2009 (ref: 2009-01-257628 and 2009-01-257625) and the immediate report on the results of the October 20 2009 general meeting (ref: 2009-01-260757), presented by way of referral. (3) Ratification of the terms of employment of Ms. Gloria Dabah, the daughter of the Company controlling shareholder, acting as product manager and merchandising manager in a subsidiary. On October 13 2010 the Companys Audit Committee and on November 17 2010 (following a discussion held on October 13 2010) the Companys Board of Directors approved the terms of the employment of Ms. Gloria Dabah, the daughter of Mr. Isaac Dabah, the Company's CEO and controlling shareholder as product manager and merchandising manager at Delta Galil USA Inc. The terms of her employment were ratified at the general meeting held December 27 2010. For further details, including on the matter of Ms. Dabahs employment, see immediate report on the general meeting summons report published November 18 2010, ref. 2010-01-685278, presented by way of referral. (4) Ratification of the terms of employment of Mr. Itzhak Weinstock, Company director, as Chief Operations Manager of a subsidiary. On October 13 2010 the Companys Audit Committee and on November 17 2010 (following a discussion held on October 13 2010) the Companys Board of Directors approved the terms of the employment at Delta Galil USA of Mr. Itzhak Weinstock, Company director. Starting January 1 2011, Mr. Weinstock has served as Chief Operations officer (COO) of the Companys activities in North America, including the activities of the subsidiary, as a full-time job. The terms of his employment were ratified at the general meeting held December 27 2010. For further details, including on the matter of Mr. Weinstocks employment, see immediate report on the general meeting summons report published November 18 2010, ref. 2010-01-685278, presented by way of referral. (5) Entering into a liability insurance policy for directors and executives considered Company controlling shareholders: In February 2011 the Companys Audit Committee and Board of Directors, in accordance with Section 1b(5) of the Companies Regulations (Relief in Transactions with Controlling Shareholders), 2000, approved the inclusion of Mr. Isaac Dabah, Company Director and CEO and controlling shareholder, and Mr. Itzhak Weinstock, a director in which the controlling shareholder has a personal interest in
16
including in the liability insurance policy for directors and executives of the Company and its subsidiaries, in the insurance policy in question. The members of the Audit Committee confirmed that the insurance terms regarding the directors Isaac Dabah and Itzhak Weinstock were identical to the terms of the insurance of the other Company directors and executives; that the terms of the policy are under market conditions; and that their inclusion in the policy will have no material impact on the Companys profitability, property or liabilities. For further information see the immediate report published by the Company on August 30, 2009 and February 17, 2011. Regulation 24 Shares and Securities Held by the Corporations Interested Shareholders and Senior Executives or Those of Corporate Investee the Activity of Which is Material to the Corporations Activities as Close as Possible to the Reported Date
Name of Holder
Name and Number of Security
Number of Shares
NonTradable Options
Holding Rates in Capital and Voting Rights 54.41%
Fully Diluted Rate 49.47%
Isaac Dabah (through GMM Capital LLC)
Delta Galil 627034 (shares) Delta Galil 6270086 (nontradable options)
12,730,873
720,000
Sterling Macro Fund (fund managed by Isaac Dabah) Dov Lautman. through companies under his control Clal Holdings Insurance Ltd. Gideon Chitayat Chairman of the Board of Directors
Delta Galil 620734
390,204
1.67%
1.52%
Delta Galil 627034
2,443,117
10.44%
9.49%
Delta Galil 627034 Delta Galil 627034 (shares) Delta Galil 6270086 (nontradable options)
2,841,271
12.14%
11.04%
50,000
20,000
0.21%
0.20%
Shlomo Doron
Delta Galil
18,775
250,000
0.08%
0.07%
17
Deputy CEO and VP or Operations
627034 (shares) Delta Galil 6270078 (nontradable options)
Yossi Hajaj CFO
Delta Galil 6270078 (nontradable options)
282,502
0%
1.10%
Esti Maoz VP of Marketing and Strategic Development Miki Laxer Company Accountant and Secretary
47,502
0%
0.23%
Delta Galil 6270078/ 6270052 (non-tradable options)
27,084
0%
0.13%
Motti Fireman VP of Human Resources
10,417
0%
0.05%
Avi Avital IT Manager
11,000
0%
0.05%
Steve Klein Manager of Burlen
Delta Galil 627034 (shares) Delta Galil 6270052 (nontradable options)
24
75,002
0%
0.29%
Tim Regan Manager of Delta Galil USA
70,000
0%
0.27%
Gil Admoni Head of Delta Galil Delta Israel segment 6270078 (nontradable options)
30,000
0%
0.15%
18
Regulation 24a Listed Capital, Issued Capital and Convertible Securities As of this report, and as of December 31 2010, the Companys listed capital was 36,000,000 shares worth 1 NIS NV each. As of this report, and as of December 31 2010, the Companys issued and paid-up share capital was 24,586,336 shares worth 1 NIS NV each. This capital is after neutralizing 1,206,971 dormant shares held by the Company and 147,106 shares held in trust in relation to the Companys option plans. The following are details of the balance of the options issued pursuant to the Companys option plans (regarding a description of the Company's option plans see Note 14 to the Financial Statements, Chapter C of this periodic report): 17,500 non-tradable option warrants (security number 6270052) exercisable as 17,500 ordinary Company shares worth 1 NIS NV each. 1,384,806 non-tradable option warrants (security number 6270078) exercisable as 1,384,806 ordinary Company shares worth 1 NIS NV each. 1,100,000 non-tradable option warrants (security number 6270086) exercisable as 1,100,000 ordinary Company shares worth 1 NIS NV each.
Regulation 24b Outline of the Corporations Shareholders Name of Holder The Bank Leumi LIsrael Listing Company Ltd. GMM Capital LLC Adinoam Properties N.D.R.L Investments 1988 Ltd. Delta Galil Industries Ltd. Jack Thekkekara Vinokor Holdings Ltd. Diana Baradarian Delta Galil 627034 Delta Galil 627034 Delta Galil 627034 Delta Galil 627034 Delta Galil 627034 Delta Galil 627034 Delta Galil 627034 625,000 1,429,993 715,000 165,862 74,006 63,501 30,646 Name and Number of Security Delta Galil 627034 Number of Shares 21,599,028
19
Name of Holder Francis Tam Steve Lockcuff Kristina Nettesheim Textured Ltd. in trust for the holders of Muller shares Various employees The Mastan Company INC. Sigler & Co. C/O Manufacturers Hanno Tamara Bliss PHASE I. Louis I. Waldman Paula Alice Moss Sylvia Morris Bernfel Idan Irit Derishevitz Mordechai Margalit Eilat Abd Alalatif Kwider Massalmani Weissman David Villager Moshe Estreicher Kennedy Levirrer Franz Bar Menucha
Name and Number of Security Delta Galil 627034 Delta Galil 627034 Delta Galil 627034 Delta Galil 627034
Number of Shares 14,195 10,292 5,392 4,861
Delta Galil 627034 Delta Galil 627034 Delta Galil 627034
2,703 2,263 1,222
Delta Galil 627034 Delta Galil 627034 Delta Galil 627034 Delta Galil 627034 Delta Galil 627034 Delta Galil 627034 Delta Galil 627034 Delta Galil 627034
904 891 788 563 452 357 328 315
Delta Galil 627034 Delta Galil 627034 Delta Galil 627034 Delta Galil 627034 Delta Galil 627034
296 192 185 192 231
20
Name of Holder Goral Zvi Aharon Simchon Miriam Eilon Israel Hajiabi Malka by Shoshana Hakimi Berber Oscar Golan Moshe and/or Lillith Harlaf Amiram Harlaf Shifra Broida Alon Halperen Tova Michael Bady Rest Home for Lonely Adults Bialystoker Center and Home for the Aged Nathan Schooler Levi Pike Alter Ludvika through the Gan Shalva Sanitarium Kozalik Zvi Levinson Miriam Henrietta Cummings and Paul M. Cummings
Name and Number of Security Delta Galil 627034 Delta Galil 627034 Delta Galil 627034 Delta Galil 627034
Number of Shares 181 181 177 127
Delta Galil 627034 Delta Galil 627034 Delta Galil 627034 Delta Galil 627034 Delta Galil 627034 Delta Galil 627034 Delta Galil 627034 Delta Galil 627034 Delta Galil 627034
94 94 94 94 85 85 85 79 77
75 70 64
63 75 55
21
Name of Holder Greenberg Avraham Armon Batya Elimelech Avraham Rosman Eliezer Gannie A. Abbell Sternberg Adiel Friedman Sima Ganger Shlomo Rothenberg Yehuda Fozzie Yossef Peleg Adi Borishensky Yossef Helia Shibley Avneri Shai Nir Roth Yaakovi Dalia Kalina Shmuel Hanut Aida Daibas Maadi Duabi Ayesha Harbawi Kamil
Name and Number of Security Delta Galil 627034 Delta Galil 627034 Delta Galil 627034 Delta Galil 627034 Delta Galil 627034 Delta Galil 627034 Delta Galil 627034 Delta Galil 627034 Delta Galil 627034 Delta Galil 627034 Delta Galil 627034 Delta Galil 627034 Delta Galil 627034 Delta Galil 627034 Delta Galil 627034 Delta Galil 627034 Delta Galil 627034 Delta Galil 627034 Delta Galil 627034 Delta Galil 627034 Delta Galil 627034
Number of Shares 53 49 40 40 38 33 40 31 30 27 27 25 24 17 17 12 12 12 12 12 12
22
Name of Holder Nathsaru Samira Mona Abud Dao Hen Lulu Warman Zohar Hadassah Zohar Avraham Palkovsky Eliyahu Schwartz Penny Diav Kamela Zuabi Fatma Sibley Basma Halaila Spa Elran Uziel Zuabi Nagach Cohen Yardena Cohen Hanna Kase Ibrahim Grete Goldhill Jan Solomon C/O Jenal Industries Jehuda Wattenburg Grumberg Shamai Neumann David
Name and Number of Security Delta Galil 627034 Delta Galil 627034 Delta Galil 627034 Delta Galil 627034 Delta Galil 627034 Delta Galil 627034 Delta Galil 627034 Delta Galil 627034 Delta Galil 627034 Delta Galil 627034 Delta Galil 627034 Delta Galil 627034 Delta Galil 627034 Delta Galil 627034 Delta Galil 627034 Delta Galil 627034 Delta Galil 627034 Delta Galil 627034
Number of Shares 12 12 9 8 8 8 6 6 6 6 6 3 3 3 3 3 3 3
3 2 2
23
Name of Holder Shamai Chaim Bar-Lev Yehuda Gevla Greta Goldsmith Yonatan Margalit Eilat Percy Azkiel at Bengara Zion
Name and Number of Security Delta Galil 627034 Delta Galil 627034 Delta Galil 627034 Delta Galil 627034 Delta Galil 627034 Delta Galil 627034
Number of Shares 2 1 1 1 1 1
Regulation 26 Corporate Directors on the Report Date a. Members of the Board of Directors Director Name
Last Name First Name
ID No.
Town
Address
Street House No.
Appointment Date
Year Month Day
Chitayat Dabah
72644339 Tel-Aviv, Israel 054907852 NYC, NY, USA Ben Zeev Shaul 006347702 Omer, Israel Dovrat Yechezkel 007627649 Ramat Hasharon, Israel Baum Israel 005172796 Tel-Aviv, Israel Lautman Noam 24407280 Tel-Aviv, Israel Weinstock Itzhak 6139265 NJ, USA Carmon Tzipporah 51528933 Savyon, Israel
Gideon Isaac
Ben Yossef Broadway Erez Nachshon
32 1450 50 1
05 05 09 09
11 11 10 12
15 15 20 16
Feinstein Harav Amiel Meadowland Parkway Hatichon
10 34 150 9
05 01 07 09
12 11 10 10
26 30 21 20
24
c. Additional Information Regarding Board Members

Director Name Citizenship Date of Birth Membership in Board of Directors Committees Accounting and Financial Competency or Professional Qualifications Employee of the Company, a Subsidiary, a Related Company or of an Interested Party Education and Occupation in Past Five Years Gideon Chitayat Chairman of the Board of Directors Israeli August 29 1939 Chair of Remuneration Committee Yes expertise in accounting and finance No Education: M.A., PhD Business Administration Wharton School M.B.A. Hebrew University, Jerusalem B.A. Economics Hebrew University, Jerusalem Employment: Chairman and President of BMBS Consultants Ltd. Consultant to Chairs and CEOs of leading companies in the Israeli industry bin the field of business strategy. Senior outside lecturer at the Rekanati School of Business Administration at Tel Aviv University Director at a number of companies Other Corporations in Which He Serves as Director Machteshim Agan Paz Petroleum Industries Ltd. The Tel Aviv Museum BATM traded in London. Melisseron Family Member of Other Interested Party in the Corporation Director with Accounting and Financial Expertise For the Purpose of Meeting the Minimum Number Set by the Board of Directors as per Section 92(a)(12) of the Companies Law No No
Director Name Citizenship Date of Birth Membership in Board of Directors Committees Accounting and Financial Competency or Professional Qualifications Employee of the Company, a Subsidiary, a Related Company or of an Interested Party
Isaac Dabah Israeli, U.S.A. August 11 1957 None No Yes Company CEO
25
Education and Occupation in Past Five Years
Education: Attended Baruch College of the City University of NY Employment: January 1 2005-now CEO of GMM Capital LLC. 2003-2004 CEO of Denim Division, Jones Apparel Group
Other Corporations in Which He Serves as Director Family Member of Other Interested Party in the Corporation Director with Accounting and Financial Expertise For the Purpose of Meeting the Minimum Number Set by the Board of Directors as per Section 92(a)(12) of the Companies Law
Yes Delta Galil USA, Delta UK, Delta Egypt. No No
Director Name Citizenship Date of Birth Membership in Board of Directors Committees Accounting and Financial Competency or Professional Qualifications Employee of the Company, a Subsidiary, a Related Company or of an Interested Party Education and Occupation in Past Five Years
Shaul Ben Zeev External Director Israeli September 3 1946 Chairman of the Audit Committee, Financial Statement Examination Committee, Remuneration Committee Yes has expertise in accounting and finance No Education: B.A. Economics and Statistics Hebrew University, Jerusalem M.B.A New York University Employment: 2001-now Chief Business Manager, Avraham Livnat Ltd.
Other Corporations in Which He Serves as Director
IDB Holdings, Discount Investments, IDB Tourism, Hamashbir Holdings, Ahava Holdings, Ahava Dead Sea Laboratories, H&O Hamashbir Fashion, Peanut Marketing, Tnuvot Sadeh Vemata, Tnuvot Sadeh Marketing, Tnuvot Tene, Migdalei Haarava Exports, Tikshuvim Business Communications Center, Sempal Investments, Meishar Omer, S. Angel, Grand Automotive Limited Partnership, Aquitel. Y.O.E.L. Jerusalem Oil Exploration, Nafta Israeli Oil Company, Grand Auto D.O.O. Field Produce Int. B.V.
Family Member of Other Interested Party in the Corporation Director with Accounting and Financial Expertise For the Purpose of Meeting the Minimum Number Set by the Board of Directors as per Section 92(a)(12) of the Companies Law
No Yes
26
Yechezkel Dovrat External Director Israeli February 13 1946 Chair of the Financial Statement Examination Committee, Audit Committee Yes has expertise in accounting and finance No Education: B.A. Economics and Accounting Tel-Aviv University Certified Public Accountant Employment: 2002-now economic consultant and director at private and public companies. Chairman of Taavura Holdings Ltd. Acting Chairman of Tamig Tire Marketing Ltd. (of the Taavura Group). Acting Chairman of the Bonei Arim Group Ltd. - until May 2005 Chairman of Kabiran (1991) Ltd. until September 2006 Maalot the Israeli Securities Rating Company Ltd. (outside director) until January 2008. Shlomo A. Angel Ltd. (outside director) until September 2008. Pangaea Real Estate Ltd. (outside director) until July 2010.
Clal Industries and Investments Ltd., Mivtach Shamir Holdings Ltd. Chairman, H&O Fashion Ltd., Y.O.E.L. Jerusalem Oil Exploration Ltd., Efcon Industries Ltd., Hamashbir Holdings (1999) Ltd., Yechezkel Dovrat Consulting and Initiatives Ltd., Peanut and Cotton Marketing Ltd., Tnuvot Sadeh Vemata Ltd., H&O Fashion Chains (2003) Ltd., Migdalei Haarava Exports Ltd., Yozma Galil Shipping Company (1983) Ltd., Yozma Galil Holdings Ltd., Haroshet Explosive Industries (1997) Ltd., Haroshet Explosives Ltd. No Yes
Director Name Citizenship Date of Birth Membership in Board of Directors Committees
Itzhak Weinstock Israeli; U.S.A. November 25 1946 Remuneration Committee
27
Accounting and Financial Competency or Professional Qualifications Employee of the Company, a Subsidiary, a Related Company or of an Interested Party Education and Occupation in Past Five Years
No Head of Operations at subsidiary Delta Galil USA starting January 1 2011. Education: 1971 M.B.A. Columbia University 1979 Certified Public Accountant Employment: 2005-2010 GMM Capital LLC 2003-2004 ANG
No No No
Tzipporah Carmon Israeli December 7 1952 Remuneration Committee No No Education: B.A. Sociology and Education Hebrew University, Jerusalem M.B.A. International Marketing and Trade UCLA, California Employment: 1993-now Manager and owner of T.C. Export
Other Corporations in Which She Serves as Director Family Member of Other Interested Party in the Corporation Director with Accounting and Financial Expertise For the Purpose of Meeting the Minimum Number Set by the Board of Directors as per Section 92(a)(12) of the Companies Law
None No No
28
Israel Baum Israeli January 24 1938 No No No Education: B.S.C Manufacturing Engineer - Temple University, Philadelphia Employment: Provides consulting services to the Company
None No No
Noam Lautman Israeli April 16 1969 Audit Committee, Financial Statement Examination Committee No No Education: 1995 B.Sc. Mathematics and Computer Sciences Tel-Aviv University 2000 M.B.A. New York University Employment: 2006-now 2gether Capital Ltd CEO 2002-2006 Teva Pharmaceutical Industries Ltd. Director of New Initiatives and Strategic Planning
Browzwear Cedar Design Group
29
Yes son of Dov Lautman No
Regulation 26a Company Senior Executives
Name of Senior Executive ID Number Date of Birth Start of Term in Office Position in the Corporation, a Subsidiary, a Related Company or with an Interested Party Education and Occupation in Past Five Years
Yossi Hajaj 023543572 June 15 1968 March 2004 Chief Financial Officer
Education: Certified Public Accountant B.A. in Accounting and Economics Tel-Aviv University Employment: 2004-now CFO 1999-2004 Accountant and Secretary
Company Interested Party or Family Member of Other Interested Party or Senior Executive in the Corporation
No
Esti Maoz 61019840 June 26 1947 January 2003 VP of Marketing and Strategic Development
Education: Marketing Certificate Studies Haifa University Employment: 1991-2002 Manager, Delta New York
No
30
Miki Laxer 24557480 October 24 1969 March 2004 Accountant and Secretary
Education: Certified Public Accountant B.A. Accounting and Business Education Tel-Aviv College of Management M.B.A. Tel-Aviv College of Management Employment: Deputy Accountant June 1999-March 2004
No
Gil Admoni 059183434 May 12 1965 August 9 2009 Head of Operating Segment, Delta Israel
Education: B.A. Economics and Business Administration Hebrew University, Jerusalem M.A. Marketing and Finance Hebrew University, Jerusalem Employment: 2007-2009 CEO Hed Artzi Group and Tower Records Retail Chain. 2003-2007 VP of Marketing and Sales DBS Satellite Services (1998) Ltd. (YES).
No
31
Shlomo Doron 047091046 July 28 1948 November 2 2009 Deputy CEO and VP of Operations and Manager of Global Division Upper Market Segment Area of Activity Education: Textile Graduate Shenkar College Employment: 2006-2009 VP and Head of Business Development DIM Brands Apparel Paris. 2006-2002 General Manager, Undergarments Area of Activity Sara Lee Courtaulds London
No
Motti Feuerman 055602106 January 11 1959 January 2 2008 VP of Human Resources
Education: Graduate of Managerial Program in Human Resources, Technion B.A. in Philosophy and Geography Tel-Aviv University Employment: 2006-2008 VP of Human Resources, Nilit. 1999-2006 VP of Human Resources, Strauss Ice Cream
No
32
Steve Klein 126-54-3581 April 20 1959 December 8 2004 Manager, Burlen
Education: B.A. in Economics - Clark University Employment: Managing Burlen (in the period in question)
No
Timothy Regan 210629910 November 15 1951 July 3 2008 Manager, Delta Galil USA
Education: Anthropology at Auckland University, USA Employment: 2007-2008 President Pleasure State 2004-2007 Global Vice President, Vanity Fair Corporation
No
33
Avi Avital 55090567 January 26 1958 July 3 2008 IT Manager
Education: Graduate, School of Computer Engineering Technion Employment: IT Manager (period in question) 1998-2008 Company Deputy IT Manager
No
Oren Groupi 24120735 April 7 1969 March 2007 Auditor
Education: M.A. in Law LLM Bar Ilan University B.A. in Business Administration (Accounting and Finance) College of Management Employment: 2004-2011 Head of Internal Auditing and Risk Management Division and KPMG Somekh Chaykin Accountants
No
34
Regulation 26b Independent Authorized Signatory N/A. Regulation 27 the Companys CPAs Name of Accountant: Kesselman and Kesselman Office Address: 25 Hamered, Tel Aviv Regulation 28 Changes to Bylaws or Articles of Association N/A. Regulation 29 Director Recommendations Before the General Meeting and their Resolutions Not Requiring General Meeting Ratification; Special General Meeting Decisions A special and annual general meeting from December 27 2010 in which it was decided (a) to ratify the appointment of all directors serving at the Company who are not outside directors, Israel Baum, Isaac Dabah, Itzhak Weinstock, Noam Lautman, Dr. Gideon Chitayat, and Ms. Tzipporah Carmon for an additional term in office until the next general meeting; (b) to ratify the appointment of accounting firm Kesselman and Kesselman as the Companys auditing accountant for 2011 and authorize the Companys Board of Directors to set its pay according to the nature and scope of services granted the Company in 2011; (c) to ratify the terms of the employment of Ms. Gloria Dabah, daughter of Mr. Isaac Dabah, the Company's CEO and controlling shareholder, as product manager and merchandising manager at Delta Galil USA Inc. starting March 8 2010, as detailed in the General November 18 2011 General Meeting Summoning Report; (d) to ratify the terms of employment of Mr. Itzhak Weinstock, Company director, as Chief Operations Officer for all of the Company's activity in North America, as a full-time position, starting January 1 2011, as detailed in the General November 18 2011 General Meeting Summoning Report. For further details regarding the issues on the general meetings agenda and its results see the immediate reports published by the Company on November 18 2010 (reference no. 2010-01-685278) and December 27 2010 (reference no. 2010-01-732738), presented by way of referral. Regulation 29a Company Resolutions The following are the Company's resolutions regarding exemptions, insurance or commitments to compensate executives, in effect from the report date: Director and Executive Liability Insurance Policy On May 25 2008 the Companys general meeting ratified a framework agreement according to which the Company may, from time to time, enter into policies insuring the liability of Company directors and executives (with the exception of directors and executives considered controlling shareholders). Insurance coverage shall be of a sum no greater than twenty (20) million dollars US
35
for all Company executives and the yearly premium shall not exceed one hundred thousand (100,000) dollars US and shall be in effect for a period of five years from ratification. For further information see the immediate report published by the Company on May 13 2008 (reference no.: 2008-01-132033) and the immediate report on the results of the May 25 2008 meeting (reference no.: 2008-01-143748), presented by way of referral. On February 23 the Company's Audit Committee and Board of Directors ratified the extension of the insurance policy in accordance with the terms ratified by the general meeting. It also approved the inclusion of Mr. Isaac Dabah, Company Director and CEO and controlling shareholder, and Mr. Itzhak Weinstock, a director in which the controlling shareholder has a personal interest in including in the liability insurance policy for directors and executives of the Company and its subsidiaries, in the insurance policy in question. The members of the Audit Committee confirmed that the insurance terms regarding the directors Isaac Dabah and Itzhak Weinstock were identical to the terms of the insurance of the other Company directors and executives; that the terms of the policy are under market conditions; and that their inclusion in the policy will have no material impact on the Companys profitability, property or liabilities. For further details see the immediate report published by the Company on February 17 2011. In accordance with the above, the Company has a policy covering the liability of directors and executives serving in it and in its subsidiaries. The policy has a liability limit of $10 million US, for all insurance incidents and for the accumulated insurance period. The insurance period is between January 1 and December 31. The total premium the Company will pay for the policy in question in 2011 is $38,900 (some $42,000 in 2010). Advance Indemnity for Directors and Executives The Companys Audit Committee and Board of Directors on January 16 2003 and the Company general meeting on March 25 approved an indemnity arrangement for executives serving today or who have served in the Company in the past or will serve in the future including executives at companies in which the Company holds at least 25% of their stock capital and letter of indemnity expenses in accordance with the following principles. In accordance with the above indemnity agreement, the Company shall compensate executives for actions carried out/to be carried out by them by virtue of serving as director or executive, directly or indirectly related to events which the Company's Board of Directors believes are expected in light of the Company's activity in practice upon granting the indemnity commitment. The Company shall compensate the executive for any financial liability applicable to the executive in Israel and/or abroad in favor of any person or legal entity in accordance with the ruling (including a ruling issued as part of a settlement or an arbitrators ruling ratified by a court). The
36
indemnity obligation shall apply to reasonable litigation expenses, including legal fees borne by the executives or which the executive has been compelled to pay by the court as a result of proceedings against the executive by the Company or for the Company or by any other individual or entity, or legal charges for which the executive was acquitted, or criminal charges for which the executive was found guilty of a crime that does not involve criminal intent. The sum paid by the Company to the executive pursuant to the indemnity arrangement was limited to a total of $15 million U.S. (less any sum paid the executive in accordance with the directors and executives; insurance policy) and under the condition that the sum of the compensation does not exceed 25% of the Company's equity on the date of payment. The indemnity obligation as per Section 7.6.1 shall apply to the following events: a. An act or failure to act pertaining to transactions conducted by the Company or a subsidiary with other companies before or after a transaction including the act of signing the transaction, its implementation and actions carried out by the executives for the Company. b. The issue of securities, including, but without detracting from the generality of the above, offering securities to the public in accordance with a prospectus, private offer, an offer for sale, issue of bonus shares or offering securities in some other manner, carrying out purchase offers and all related matters. c. An event deriving from the fact that the Company is a public company or deriving from the fact that its shares have been offered the public or deriving from the fact that the Companys shares are traded on the stock exchange. d. An action or transaction as defined in Section 1 of the Companies Law including negotiations for entry into a transaction or action, transfer, sale, purchase or lien on assets or liabilities (including securities), or granting or receiving rights to any of them, receiving credit and granting securities, as well as any action directly or indirectly related to the transaction or action in question. e. A report or announcement filed in accordance with the Companies Law or the Securities Law, 1968, including resulting regulations, or according to rules or guidelines practiced in stock exchanges in Israel or abroad, or the law of some other country arranging similar matters and/or avoidance of submittal of such a report or announcement. f. Acts or decisions (including failures to act or decide) on the matter of hedging Company assets or liabilities. g. Sale, purchase or holding of negotiable securities.
37
h. Reports to, announcements to and requests for approval from (including actions pertaining to said reports or requests) legal and administrative authorities in Israel and abroad including the Securities Authority in Israel or abroad, securities exchanges in Israel or abroad, antitrust authorities, the Registrar of Information, the Registrar of Companies and Trademarks, the Registrar of Pledges, the Real Estate Registry etc. i. Acts pertaining to trade and marketing relations, including actions and agreements with contractors, customers, insurers, insurance agents and other agents, suppliers, service providers, orders and purchases for the Company. j. Any action that caused an error or failure to take appropriate security or safety measures. k. Any announcement including presenting a position or opinion in good faith by the executive over the course of their work and by virtue of their position as executive including in Board of Directors or Board Committee meetings. l. Alterations to the Company's structure or its restructuring or any related decision, including, but without detracting from the generality of the above, mergers, spin-offs, arrangements between the Company and its shareholders and/or creditors in accordance with the Companies Law, changes in the Companys capital, establishing subsidiaries, liquidating them or selling them, their allocation or their distribution. m. An action or decision pertaining to employer-employee relations including negotiations, commitments and implementation of personal or group work agreements, employee benefits, including allocating securities to employees. n. Events pertaining to the Companys information system. o. An act leading to personal harm, illness, death or damage to property including loss of use of property. p. Any of the events detailed above, regarding the executives' service at Company subsidiaries.
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Part E Yearly Report on the Effectiveness of Internal Control on Financial Reporting and Disclosure as per Regulation 9.b.(a) of the Securities Regulations (Periodic and Immediate Reports), 1970:
Attached herein is a yearly report on the effectiveness of internal controls on financial reporting and disclosure as per Regulation 9.b.(a) of the Securities Regulations (Periodic and Immediate Reports), 1970 as well as according to the guiding principles for implementing an evaluation of the effectiveness of internal controls on financial reporting and disclosure on the Board of Directors and management, as published by the Securities Authority in Legal Position 199-9 from November 23, 2010: Management, under the supervision of the Board of Directors of Delta Galil Industries Ltd. (hereinafter the Corporation), is responsible for establishing and maintaining adequate internal controls for financial reporting and disclosure in the corporation. In this regard, senior executives and members of management consist of: 1. Mr. Isaac Dabah, CEO and director; 2. Shlomo Doron, Deputy CEO, Chief Operations Officer and Head of Global Upper Market Segment; 3. Yossi Hajaj, Chief Financial Officer; 4. Esti Maoz, VP of Marketing and Strategic Development; 5. Tim Regan, Manager, Delta Galil USA; 6. Steve Klein, Manager, Burlen; 7. Gil Admoni, Head of Delta Israel Segment; 8. Motti Fireman, VP of Human Resources; 9. Avi Avital, VP of Information Systems; 10. Gil Shimon, Head of Sock and Seamless Activity 11. Miki Laxer, Controller and Secretary; Internal control of financial reporting and disclosure includes existing Corporation controls and procedures, designed by the CEO and the senior finance executive or under their supervision, or by the parties serving in the positions in question, under the supervision of the Corporations Board of Directors, which were designed to provide a reasonable level of certitude regarding the reliability of financial reporting and the preparation of the reports in accordance with the law, and to guarantee that information the corporation is required to disclose that it is publishing according to the law has been collected, processes, summarized and reported on the date and in the format set in law. Internal control includes, among other things, controls and procedures designed to ensure that this information the corporation is required to disclose has been accumulated and passed on to the Corporation's management, including the CEO, the COO and the senior executive from the field of finance or whoever carries out these duties in practice, in order to allow decisions to be made in a timely manner, taking the disclosure requirements into account.
Due to its structural limitations, internal control of financial reporting and disclosure is not intended to provide absolute certainty that misrepresentation or omission of information in the reports will be avoided or discovered. Management, under the supervision of the Board of Directors, conducted an examination of the control and an evaluation of the internal control of financial reporting and disclosure in the corporation and its effectiveness. Based on the aforementioned evaluation, the Corporations Board of Directors and management have reached the conclusion that the Corporation's internal controls on financial reporting and disclosure as of December 31, 2010 are effective.
Executive statements: (a1) CEO Statement According to Regulation 9.b.(d).(1)
Managers Statement Chief Business Managers Statement
I, Isaac Dabah, to hereby state that:
1. I have studied the periodic reports of Delta Galil Industries Ltd. (hereinafter the Corporation) for 2010 (hereinafter the Reports). 2. In my opinion, the Reports do not contain any untrue statement of a material fact nor omit to state a material fact necessary so that the statements included therein, in light of the circumstances under which such statements were made, will not be misleading with respect to the reported period. 3. In my opinion, the financial statements and any other financial information included therein, adequately reflect, in all material aspects, the financial standing, operating results and cash flows of the Corporation for the dates and periods referred to in the Reports. 4. I have disclosed, to the Banks independent auditor, the Board of Directors and the Audit Committee of the Corporation's Board of Directors, based on my most up-to-date evaluation on internal controls for financial reporting and disclosure: a. All significant deficiencies and material weaknesses in the determination or operation of internal controls over financial reporting and disclosure that are reasonably likely to negatively impact the Corporations ability to record, process, summarize and report financial information in such a manner so as to cast doubt on the reliability of financial reporting and the preparation of the Financial Statements in accordance with the law, and
b. Any fraud, material or not, involving the CEO or his direct subordinate or other employees who have a significant role in internal controls over the financial reporting and disclosure; 5. I, by myself or along with others in the Corporation: a. Have established controls and procedures, or confirmed that the establishment and existence of controls and procedures under my supervision, intended to ensure that material information referring to the Corporation, including its subsidiaries as defined in the Securities Regulations (Yearly Financial Statements), 2010, has been brought to my attention by others in the Corporation and in its subsidiaries, particularly over the course of the preparation of the reports; and
b. Have established controls and procedures, or confirmed that the establishment and existence of controls and procedures under my supervision, designed to provide reasonable assurance of the reliability of financial reporting and preparation of the Financial Statements in accordance with the law, including in accordance with generally accepted accounting practices; c. Have assessed the effectiveness of internal controls on financial reporting and disclosure, and presented in this report the conclusions of the Board of Directors and Management regarding the effectiveness of internal controls as of the reports.
The above does not detract from my responsibility or the responsibility of any other person according to the law.
February 16 2011
Isaac Dabah CEO
(b) Statement of the Most Senior Executive from the Field of Finance as per Regulation 9.(b)(d).(2).
Managers Statement Statement of the Most Senior Executive from the Field of Finance
I, Yossi Hajaj, do hereby state that:
1. I have studied the periodic reports of Delta Galil Industries Ltd. (hereinafter the Corporation) for 2010 (hereinafter the Reports). 2. In my opinion, the Reports do not contain any untrue statement of a material fact nor omit to state a material fact necessary so that the statements included therein, in light of the circumstances under which such statements were made, will not be misleading with respect to the reported period. 3. In my opinion, the financial statements and any other financial information included therein, adequately reflect, in all material aspects, the financial standing, operating results and cash flows of the Corporation for the dates and periods referred to in the Reports. 4. I have disclosed, to the Banks independent auditor, the Board of Directors and the Audit Committee of the Corporation's Board of Directors, based on my most up-to-date evaluation on internal controls for financial reporting and disclosure: a. All significant deficiencies and material weaknesses in the determination or operation of internal controls over financial reporting and disclosure that are reasonably likely to negatively impact the Corporations ability to record, process, summarize and report financial information in such a manner so as to cast doubt on the reliability of financial reporting and the preparation of the Financial Statements in accordance with the law, and
b. Any fraud, material or not, involving the CEO or his direct subordinate or other employees who have a significant role in internal controls over the financial reporting and disclosure; 5. I, by myself or along with others in the Corporation: a. Have established controls and procedures, or confirmed that the establishment and existence of controls and procedures under my supervision, intended to ensure that material information referring to the Corporation, including its subsidiaries as defined in the Securities Regulations (Yearly Financial Statements), 2010, has been brought to my attention by others in the Corporation and in its subsidiaries, particularly over the course of the preparation of the reports; and
b. Have established controls and procedures, or confirmed that the establishment and existence of controls and procedures under my supervision, designed to provide reasonable assurance of the reliability of financial reporting and preparation of the Financial Statements in accordance with the law, including in accordance with generally accepted accounting practices; c. Have assessed the effectiveness of internal controls on financial reporting and disclosure, and presented in this report the conclusions of the Board of Directors and Management regarding the effectiveness of internal controls as of the reports.
The above does not detract from my responsibility or the responsibility of any other person according to the law.
February 16 2011
Yossi Hajaj Chief Financial Officer

Annual Report 2010 1

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Annual Report 2010 1

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Delta Galil Industries Ltd.

2010 Annual Report

February 16, 2011

Delta Galil Industries Ltd.

2010 Annual Report

Delta Galil Industries Ltd.

Description of the Corporations Business As of December 31, 2010

Page Part A Description of the Corporations Business

1.2. 1.3. 1.4.

Part B Other Information

Part C Description of the Corporations Business by Segment

Part D Additional Information at the Corporate Level

Description of the Corporations Business

Delta Galil Industries Ltd,

Delta Galil Holland B.V.

Delta Galil USA Inc.

Delta Galil Europe Ltd.

Auburn Hosiery Mills Inc.

Thai Progress Garment

Century Wear Corporation (*) (WLL)

Delta Textile Bulgaria Ltd.

Delta Textile Egypt S.A.E

Name of Interested Party

Share Price (In Dollars) 1.80 1.45 4.53

Sum of Transaction (In Dollars) 2,034,926 70,071 11,900,000 14,004,997

157,715 7,986 165,701

4.53 7.34 7.70 8.45

329,313 106,536 28,524 72,028 207,088

Sterling Macro Fund (fund managed by Isaac Dabah)

June 2010 December 2010 January 2011 Total purchased in 2010

trust in relation to the Company's option plan.

Name of Interested Party Chairman of the Board of Directors

Number of Ordinary Shares Purchased 20,000 10,000 50,000

Share Price (In Dollars) 3.03 4.53

Sum of Transaction (In Dollars) 60,690 45,300 161,990

Part B Other Information

(8,888) 586,865 (15,225) 586,865

3. Operating profit (loss)

4. Restructuring expenses 5. Loss from the sale of

485 666 120,138

485 666 992

7. Total assets attributed as

(7,577) 556,388 (14,701) 556,368

7. Total assets attributed

7. Total assets attributed

Part C Description of the Corporations Business by Segment

Operating segment: DELTA USA Mass Market

Cancellation of Textile Product Import Quotas

a. DELTA USA Mass Market

b. Global Upper Market Segment

a. In Egypt the production capability is 1.4 million products a

b. In Thailand the Company manufactures 375,000 products a

c. In Jordan the maximum production capability for 2010 was 0.5

d. In Bulgaria the factorys potential production capability is 1.4

a. Purchase of Raw Materials

d. Coloring and Finishing

h. Manufacture of Seamless Clothing

2010 Average inventory (in 11.1

millions of dollars) Inventory days 142 132

Part D Additional Information at the Corporate Level

150,691 572,534 26.3% 100%

143,502 622,834 23.0% 100%

Fixed Assets and Facilities