TARO PHARMACEUTICAL INDUSTRIES LTD. | ||
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By: | /s/ Kevin Connelly | |
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||
Name:
Kevin Connelly
Title:
Senior Vice President and
Chief Financial Officer
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1.
|
To
elect eight directors to the Board of Directors of the
Company.
|
|
2.
|
To
reappoint the Company’s independent registered public accounting firm and
to authorize the Company’s Audit Committee to fix the remuneration of the
Company’s independent registered public accounting firm in accordance
with
the volume and nature of their services.
|
|
3.
|
To
amend the Company’s Articles of Association to reflect amendments to
provisions of the Israel Companies Law - 1999, as amended (the
"Companies
Law") authorizing the Company to indemnify its officers and
directors and
those of its subsidiaries.
|
|
4.
|
To
approve the indemnification of the officers and directors of
the Company
and those of its subsidiaries to the maximum extent permitted
by law and
the Company's amended Articles of Association, by authorizing
and
empowering the Company to enter into amended Exemption and
Indemnification
Agreements with its officers and directors.
|
|
5.
|
To
receive the report of management and the Board of Directors
on the
business of the Company and to receive, consider and approve
the
Consolidated Financial Statements of the Company for the year
ended
December 31, 2004.
|
By
Order of the Board of Directors,
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|
Barrie
Levitt, M.D.
Chairman
of the Board of Directors
|
BY
ORDER OF THE BOARD OF DIRECTORS,
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Barrie
Levitt, M.D.
Chairman
of the Board of Directors
|
Exhibit 2
TARO PHARMACEUTICAL INDUSTRIES LTD. c/o AMERICAN STOCK TRANSFER 59 MAIDEN LANE NEW YORK, NY 10038 - www.proxyvote.com ----------------- 1 -800-690-6903 VOTE BY INTERNET Use the Internet to transmit your voting instructions and for electronic delivery of information up until 11:59 p.m. Eastern Time on September 5, 2005. Have your proxy card in hand when you access the web site and follow the instructions to obtain your records and to create an electronic voting instruction form VOTE BY PHONE - Use any touch-tone telephone to transmit your voting instructions up until 11:59 p.m. Eastern Time on September 5, 2005. Have your proxy card in hand when you call and then follow the instructions. VOTE BY MAIL Mark, sign and date your proxy card and return it in the postage-paid envelope we have provided or return it to TARO PHARMACEUTICAL INDUSTRIES LTD., c/o ADP, 51 Mercedes Way, Edgewood, NY 11717. Your proxy card must be received on or before 11:59 p.m. Eastern Time on September 5, 2005. ELECTRONIC DELIVERY OF FUTURE SHAREHOLDER COMMUNICATIONS If you would like to reduce the costs incurred by TARO PHARMACEUTICAL INDUSTRIES LTD. in mailing proxy materials, you can consent to receiving all future proxy statements, proxy cards and annual reports electronically via e-mail or the Internet. To sign up for electronic delivery, please follow the instructions above to vote using the Internet and, when prompted, indicate that you agree to receive or access shareholder communications electronically in future years. TO VOTE, MARK BLOCKS BELOW IN BLUE OR BLACK INK AS FOLLOWS: TARPHI KEEP THIS PORTION FOR YOUR RECORDS THIS PROXY CARD IS VALID ONLY WHEN SIGNED AND DATED. -- DETACH AND RETURN ThUS PORTION ONLY TARO PHARMACEUTICAL INDUSTRIES LTD. Vote On Directors Election of Directors 01)Heather Douglas 05) Barne Levitt For Withhold ForAllTOwitflhOKl autnonty to vote, mark lorAII Excep(' All All Exceptand wtite the nominees runber on the the bebw. 02)Micha Friedman 06) Tal Levitt 03) Eric Johnston 07) Daniel Moros 04) Gad Keren 08) Myron Strober For Against Absthin Vote On Proposals 2. Reappoint Kost Forer Gabbay & Kasierer as the Company's independent registered public accounting firm and authorize the Audit Committee to fix the remuneration of said independent registered public accounting firm. 3. Approve an amendment to the Articles of Association to provide for indemnification of officers and directors. 4. Approve indemnification of the Company's officers and directors including entering into amended exemption and o o o indemnification agreements. 5. Approve the Consolidated Financial Statements of the Company for the year ended December 31, 2004. |
TARO PHARMACEUTICAL INDUSTRIES LTD. PROXY FOR ANNUAL GENERAL MEETING OF SHAREHOLDERS ON SEPTEMBER 8, 2005 THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF TARO PHARMACEUTICAL INDUSTRIES LTD. The undersigned hereby appoints Hannah Bayer, Marc Coles and Samuel Rubinstein, and each or any of them, with full power of substitution and revocation to each of them, the attorney, agent and proxy of the undersigned, as to all Ordinary Shares of TARO PHARMACEUTICAL INDUSTRIES LTD. (the "Company") which the undersigned is entitled to vote at the Annual General Meeting of Shareholders of the Company to be held at the offices of the Company, 14 Hakitor Street, Haifa Bay, Israel on Thursday, September 8, 2005 at 8:00 a.m. (Israel time) and at any and all adjourn ments thereof, to vote as fully and with the same force and effect as the undersigned might or could do if personally present and acting, with respect to the matters on the reverse side. IF NO DIRECTIONS ARE INDICATED THE SHARES REPRESENTED BY THE PROXY WILL BE VOTED "FOR" EACH OF THE MATTERS ON THE REVERSE SIDE AND AS DETERMINED BY THE HOLDERS OF THE PROXIES WITH RESPECT TO ALL OTHER MATTERS TO COME BEFORE THE MEETING. (To be Continued and Signed on the Other Side) |
Exhibit 3
Investing for a Healthy Future |
|
Financial Highlights Statement of Income Data Year ended December 31, In thousands of U.S. dollars, except per Ordinary Share data 2004 2003 2002 2001 2000 Net Sales $ 284,130 $ 315,458 Gross Profit 164,726 213,004 Operating Income (Loss) (516) 74,685 Income (Loss) Before Taxes on Income (6,933) 72,956 Minority Share in (Profit) Loss of Subsidiaries1,017 (326) Net Income 11, 075 61,155 ---------------------------------------------------------------- Earnings per Ordinary Share: Basic: $ 0.38 $ 2.12 Diluted: $ 0.37 $ 2.06 ---------------------------------------------------------------- $ 211,581 $ 149,230 $ 103,797 132,113 94,494 62,591 53,259 32,775 16,096 53,175 30,453 12,585 (214) (81) (20) 44,555 25,994 10,027 ------------------------------------------------- $ 1.55 $ 1.11 $ 0.47 $ 1.52 $ 0.99 $ 0.42 ------------------------------------------------- Balance Sheet Data As of December 31, In thousands of U.S. dollars 2004 2003 Working Capital $ 201,586 $ 279,955 Property, Plant and Equipment 241,966 182,306 Total Assets 696,847 616,523 LongTerm Debt 187,346 156,937 Shareholders' Equity 368,120 347,400 2002 2001 2000 $ 198,871 $ 196,711 $ 43,588 93,358 54,024 41,827 379,845 307,762 120,446 47,127 49,285 38,250 269,137 218,364 50,214 |
To Our Shareholders: Taro Pharmaceutical Industries Ltd. ("Taro" or the "Company") according to independent industry sources, prescriptions filled maintains a sense of confidence about the future. We believe with Taro branded and generic pharmaceuticals are continuing that we are responding appropriately to the challenges of 2004 to increase, and, as for our pipeline, we are making progress and to the intensifying competitive environment within the U.S. with our filings at the U.S. Food and Drug Administration ("FDA") generic pharmaceutical market. and at regulatory agencies in other countries, In addition, we continue to maintain the high levels of quality and customer Our sense of confidence is based on several factors. Taro'sservice that have always characterized the Company. These marketing initiatives with prescription pharmaceuticals continue positive factors, combined with the cost reduction measures we to be productive, and our generic and proprietary research implemented in 2004, lead us to believe that we are taking the programs are generating a robust pipeline. To be specific, right steps to return to a path of growth and profitability. Barrie Levitt, M.D. Chairman |
Divestiture of Consumer Brands An additional reason for our optimism is the action we have taken with two of our consumer brands. During 2003 and 2004, Taro developed two lines of prophetary over-the-counter ("OTC") consumer products, Kerasal(R) and EIixSure(R) Both brands attained nationwide distribution and recognition. Kerasal ointment became a leading product in the footcare market. ElixSure(R), which received a prestigious 2004 Good Housekeeping Institute "Good Buy" Award, provides physicians and patients with a unique liquid drug delivery system which pours but does not spill. However, continued support of these two excellent product lines would have required substantial additional expenditures. Thus, after careful evaluation, we concluded that further investment in these OTC lines was no longer consistent with our strategic and financial goals. It appeared prudent to take advantage of an op portunity to monetize the investment in proprietary OTC products, and in March 2005 the Company granted Alterna, LLC exclusive licenses in North America to market and distribute ElixSure(R) and Kerasal(R). Alterna is a company with an experienced management team and a primary commitment to the branded OTC market. We hope that Alterna will develop these products to their full potential. Under our agreements with Alterna, we will receive manufacturing revenues, royalties and a warrant for a 5% equity position in their company, and Taro will not incur further marketing expenses for these products. |
Financial Highlights of 2004 Taro's net sales for the year ended December 31, 2004 were our commitment to research. In the third and fourth quarters of $284.1 million, compared with $315.5 million in 2003. Gross 2004, sales and net income improved sequentially but remained profit in 2004 was $164.7 million, compared with $213.0 million below the levels achieved in the same quarters of 2003. SG&A in 2003. Selling, general and administrative ("SG&A") expenses expenses were higher in 2004 than in 2003, largely as a result for the year were $123.3 million, compared with $97.7 million in of our OTC promotional efforts. Cost reduction and resource 2003. R&D expenses in 2004 were $41.9 million, compared with reallocation initiatives implemented in mid-year helped to mitigate $40.6 million, in 2003. Net income in 2004 was $1 1.1 million, or the decline in our profits. These initiatives included reductions $0.37 per diluted share, compared with $61.2 million, or $2.06 in personnel, inventories, production and purchasing. Our per diluted share, in 2003. workforce was reduced by approximately ten percent. As we have previously discussed, during the first half of 2004, However, even as we addressed the immediate issues we the Company experienced an unexpected shortfall in revenues continued to make strategic investments in a healthy future. as a result of reduced purchases by key customers, competitive Our investments in R&D grew in 2004. In addition, the Company pricing pressures and changes in the mix of products sold. This acquired new proprietary prescription brands and invested shortfall occurred while we were incurring significant costs to in state-of-the-art facilities in Israel, Canada, Ireland and the support the ElixSure(R) and Kerasal initiatives and maintaining United States. |
Financial Position At December 31, 2004, Taro's total assets were $696.8 million, an increase of $80.3 million compared with $616.5 million at December 31, 2003. Included in this increase is the value of the Company's product acquisitions. Total liabilities were $328.0 million, an increase of $60.6 million compared with $267.4 million at the end of 2003. Shareholders' equity was $368.1 million at December 31, 2004, an increase of $20.7 million compared with $347.4 million at the end of 2003. Taro's inventory levels reflect the progress of our programs to reduce purchasing and production costs. Inventories, which increased to a level of approximately $101.7 million at June 30, 2004, decreased to $86.6 million at year-end. The actual reduction would have been greater but for the effect of the weakness of the U.S. dollar. Research Taro has a research-based growth strategy. We invest 12% to 15% of annual sales in R&D. Approximately $109 million was invested in R&D from 2002 through 2004. Taro researchers develop finished pharmaceutical products in a variety of dosage forms. The Company also invests in the synthesis of novel and existing active pharmaceutical ingredients. In 2004, Taro received 15 approvals for Abbreviated New Drug Applications ("ANDAs") and one approval for a New Drug Application (NDA") from the FDA, subsequently transferred to Alterna. At May 31, 2005, the Company had 26 ANDAs pending at the FDA and one NDA related to its NonSpilTM technology. |
|
Proprietary Research Programs In Canada, we are currently preparing for Phase Ill studies animals that had been pre-treated with T2000. We continue of T2000, one of our non-sedating barbiturate compounds. conducting pre-clinical research on protecting the nervous These trials will be directed toward the treatment of essential system from ischemic injury. tremor. These compounds may also be effective in the treatment of seizures (epilepsy). It is important to note that, even with approval to conduct a Phase Ill study in Canada, there can be no assurance of the In a separate development in 2004, the U.S. Patent and successful completion of Phase Ill testing, or of the approval by Trademark Office issued a patent on T2000 and other members any regulatory authority of the drugs for any indication or the of the non-sedating barbiturate group of compounds for the commercial success of these drugs if and when approved. protection of brain tissue from damage during an ischemic stroke. Research indicated that rats pre-treated with T2000 experienced significantly less brain tissue damage after an experimental stroke than rats that did not receive the drug. In addition, the data suggested that neurologic function was better preserved in the |
Manufacturing and Distribution In 2004, we streamlined our manufacturing and distribution in- In late 2004 and early 2005, our Canadian facilities were infrastructure by consolidating facilities. These measures included spected by both the FDA and the Canadian Health Products and the transfer of production from the Company's Long Island, New Food Branch Inspectorate with no Form 483 issued by the FDA York factory to its state-of-the-art facility near Toronto. During the and no finding of material deficiencies by the Canadian authoriyear, we also consolidated our U.S. warehousing and distribution ties. Similarly, the Irish Medicines Board, representing European activities with the acquisition of a 315,000 square foot distribution regulatory authorities, inspected our Israeli plant and found us to center in New Jersey. be in compliance there, as well. |
In Summary We thank our employees for their dedication and loyalty in responding to the challenges of 2004. With their support, and the support of our shareholders and customers, we intend to expand the Company's core business in generic and branded prescription products. We believe that the combined impact of Taro's strategic growth initiatives, focus on prescription products and cost control measures will return the Company to sustainable growth. Sincerely, Barrie Levitt, M.D. Chairman of the Board June 2005 |
Corporate Information Taro Pharmaceutical Industries Ltd. Principal Offices 14 Hakitor Street Haifa Bay 26110, Israel ISRAEL Haifa Taro Pharmaceutical Industries Ltd. Board of Directors: 14 Hakitor Street Barrie Levitt, M.D., Chairman Haifa Bay 26110, Israel Daniel Moros, M.D., Vice Chairman ISRAEL Yakum Heather Douglas, Esq. Taro Pharmaceutical Industries Ltd. Haim Fainaro, C.P.A. Euro Park (Italy Bldg.) Micha Friedman, Ph.D. Yakum Business Park, Yakum 60972, Israel Ben Zion Hod, C.P.A. U.S.A. Eric Johnston, Esq. Taro Pharmaceuticals U.S.A., Inc. Gad Keren, M.D. 3 Skyline Drive Tal Levitt, Esq. Hawthorne, New York 10532, U.S.A. Myron Strober, C.P.A. CANADA Taro Pharmaceuticals Inc. 130 East Drive Brampton, Ontario L6T 1C1, Canada Investor Information UK Taro Pharmaceuticals (UK) Ltd. Auditors: First Floor, Prince of Wales House Kost, Forer, Gabbay & Kasierer 3 Bluecoats Avenue, Hertford SG1 4 1 PB, United Kingdom A Member of Ernst & Young Global IRELAND Tel Aviv, Israel Taro Pharmaceuticals Ireland Ltd. Ernst & Young Lourdes Road Thornhill, Ontario, Canada Roscrea, Co Tipperary Republic of Ireland Ernst & Young INDIA New York, New York, U.S.A. Taro Pharmaceuticals India Private Limited 504, Sigma, Hiranandani Gardens, Counsel: Powai, Mumbai-400076, Weil, Gotshal & Manges Maharashtra, India New York, New York, U.S.A. Yigal Arnon & Co. For Additional Information, Contact: Tel Aviv, Israel Kevin Connelly, C.P.A., Sr. VP and Chief Financial Officer Daniel Saks, VP, Corporate Affairs Transfer Agent: c/o Taro Pharmaceuticals U.S.A., Inc. American Stock Transfer Co. 3 Skyline Drive New York, New York, U.S.A. Hawthorne, New York 10532, U.S.A. Certain statements in this document are forward=looking statements within the meaning of the Private Securities Litigation reform Act of 1995. These statements include, but are not limited to, statements that are not describing historical facts; events or circumstances the Company "anticipates," "expects," "plans," "intends," " designs," "believes," "hopes," or "wants" to happen or exist, or statements about which the Company is "optimistic," or has "confidence," or similar language. These include statements about the Company's goals; the company's continuing research and clinical trials; the robustness of the Company's pipeline; the expansion of the Company's core business in generic and branded pharmaceuticals; the growth of the Company's TaroPharma line of proprietary products; the Company's cost reductions measures; the return of the Company to sustained or profitable growth; consumer, physician or marketplace acceptance of the Company's new or existing products; comments concerning agreements with Alterna, LLC regarding ElixSure(R) and Kerasal(R) products; the Company's research and facilities expansion programs; Taro's filings with the FDA; and the company's overall growth and expansion. Although Taro Pharmaceutical Industries Ltd. Believes the expectations reflected in such forward-looking statements to be based on reasonable assumptions, it can give no assurances that its expectations will be attained. Factors that could cause actual results to differ include general economic conditions, industry and market conditions, slower than anticipated penetration of new markets, changes in the Company's financial position, regulatory actions and legislative actions in the countries in which Taro operates, future demand and market size for products under development, the out come of the agreements with Alterna, marketplace acceptance of new or existing products either generic or proprietary, and other risks detailed from time to time in the Company's SEC reports, including it Annual Reports Form 20-F, in which we explain that the preparation of Taro's financial statements requires us to make estimates on currently available information, our historical experience and various other assumptions that we believe to be reasonable under the circumstance. The results of these assumptions are the basis for determining the carrying values of assets and liabilities that are not available from other sources. Since the factors underlying these assumptions are subject to change overtime, the estimates on which they are based are subject to change accordingly. Forward-looking statements speak only as of the date on which they are made. The Company undertakes no obligations to update, change or revise any forward-looking statement, whether as a result of new information, additional or subsequent developments or otherwise. |
o | REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIESEXCHANGE ACT OF 1934 |
x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934 |
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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Title
of each class
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Name
of each exchange on which registered
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None
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None
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x Yes |
No
o
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o Item 17 |
x Item
18
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Page
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PART
I
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5
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25
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27
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38
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38
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39
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39
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49
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51
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54
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54
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54
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55
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55
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58
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59
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63
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65
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70
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70
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72
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72
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72
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72
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73
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73
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73
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74
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74
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74
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74
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74
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74
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74
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74
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80
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80
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81
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93
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93
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93
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93
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94
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94
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PART
II
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94
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95
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95
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95
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95
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95
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96
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96
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PART
III
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96
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96
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97
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Year
Ended December 31,
|
||||||||||||||||
2004
|
2003
|
2002
|
2001
|
2000
|
||||||||||||
(In
thousands of U.S. dollars except per ordinary share
data)
|
||||||||||||||||
Statement of Income Data: | ||||||||||||||||
Sales
|
$
|
284,130
|
$
|
315,458
|
$
|
211,581
|
$
|
149,230
|
$
|
103,797
|
||||||
Cost
of sales
|
119,404
|
102,454
|
79,468
|
54,736
|
41,206
|
|||||||||||
Gross
profit
|
164,726
|
213,004
|
132,113
|
94,494
|
62,591
|
|||||||||||
Operating
expenses:
|
||||||||||||||||
Research
and development, net
|
41,943
|
40,601
|
26,373
|
19,633
|
14,593
|
|||||||||||
Selling,
General and Administrative
|
123,299
|
97,718
|
52,481
|
42,086
|
31,902
|
|||||||||||
Total
operating expenses
|
165,242
|
138,319
|
78,854
|
61,719
|
46,495
|
|||||||||||
Operating
income
|
(516
|
)
|
74,685
|
53,259
|
32,775
|
16,096
|
||||||||||
Financial
expenses, net
|
6,417
|
1,722
|
162
|
2,594
|
3,855
|
|||||||||||
Other
income (loss), net
|
—
|
(7
|
)
|
78
|
272
|
344
|
||||||||||
Income
before taxes on income
|
(6,933
|
)
|
72,956
|
53,175
|
30,453
|
12,585
|
||||||||||
Taxes
on income
|
(16,991
|
)
|
11,475
|
8,406
|
4,378
|
2,538
|
||||||||||
10,058
|
61,481
|
44,769
|
26,075
|
10,047
|
||||||||||||
Minority
interest in (earnings) loss
|
||||||||||||||||
of
a subsidiary
|
1,017
|
(326
|
)
|
(214
|
)
|
(81
|
)
|
(20
|
)
|
|||||||
Net
income
|
$
|
11,075
|
$
|
61,155
|
$
|
44,555
|
$
|
25,994
|
$
|
10,027
|
||||||
Earnings
per ordinary share:
|
||||||||||||||||
Basic
|
$
|
0.38
|
$
|
2.12
|
$
|
1.55
|
$
|
1.11
|
$
|
0.47
|
||||||
Diluted
|
$
|
0.37
|
$
|
2.06
|
$
|
1.52
|
$
|
0.99
|
$
|
0.42
|
||||||
Number
of ordinary shares used in computing
|
||||||||||||||||
earnings
per ordinary share (in thousands):
|
||||||||||||||||
Basic
|
29,058
|
8,873
|
8,665
|
3,370
|
1,420
|
|||||||||||
Diluted
|
9,657
|
9,674
|
9,408
|
6,302
|
3,864
|
As
of December 31,
|
||||||||||||||||
2004
|
2003
|
2002
|
2001
|
2000
|
||||||||||||
(In
thousands of U.S. dollars)
|
||||||||||||||||
Consolidated Balance Sheet Data: | ||||||||||||||||
Working
capital
|
$
|
201,585
|
$
|
279,955
|
$
|
198,871
|
$
|
196,711
|
$
|
43,588
|
||||||
Property,
plant and equipment, net
|
241,966
|
182,306
|
93,358
|
54,024
|
41,827
|
|||||||||||
Total
assets
|
696,847
|
616,523
|
379,845
|
307,762
|
120,446
|
|||||||||||
Short-term
debt, including current maturities
|
81,905
|
43,544
|
10,272
|
8,231
|
8,491
|
|||||||||||
Long-term
debt
|
187,346
|
156,937
|
47,127
|
49,285
|
38,250
|
|||||||||||
Minority
interest
|
694
|
1,711
|
1,159
|
776
|
168
|
|||||||||||
Shareholders’
equity
|
368,120
|
347,400
|
269,137
|
218,364
|
50,214
|
D.
|
•
|
the
original manufacturers of
the brand-name equivalents of our generic
products;
|
•
|
other
drug manufacturers (including brand-name companies that also manufacture
generic drugs); and
|
•
|
manufacturers
of new drugs that may compete with our generic drugs and proprietary
products.
|
•
|
filing
new patents
or
extensions of existing patents on brand-name products whose original
patent protection is about to expire, which could extend patent protection
for the product and delay launch of generic equivalents;
|
•
|
developing
patented controlled-release products or other product
improvements;
|
•
|
developing
and marketing branded products as over-the-counter
products;
|
•
|
pursuing
pediatric exclusivity for brand-name
products;
|
•
|
submitting
citizen petitions to request that the Commissioner of the United
States
Food and Drug Administration, or the FDA, take administrative action
with
respect to an abbreviated new drug application, or ANDA
approval;
|
•
|
attaching
special patent extension amendments to unrelated federal
legislation;
|
•
|
engaging
in state-by-state initiatives to enact legislation that restricts
the
substitution of some brand-name drugs with generic drugs;
and
|
•
|
introducing
“authorized generics” to the
marketplace.
|
•
|
trends
in managed healthcare in the United
States;
|
•
|
developments
in health maintenance organizations, managed care organizations and
similar enterprises;
|
•
|
legislative
proposals to reform healthcare and government insurance programs;
and
|
•
|
price
controls and reimbursement
policies.
|
•
|
any
products under development, if and when fully developed and tested,
will
not perform in accordance with our
expectations;
|
•
|
any
generic product under development will, when tested, not be bioequivalent
to its brand-name counterpart;
|
•
|
necessary
regulatory approvals will not be obtained in a timely manner, if
at
all;
|
•
|
any
new product cannot be successfully and profitably produced and
marketed;
|
•
|
other
companies may launch their version of generic products, either prior
to or
following the launch of our newly approved generic version of the
same
product; or
|
•
|
brand-name
companies may launch their products, either themselves or through
third
parties, in the form of “authorized generic” products which can reduce
sales, prices and profitability of our newly approved generic
products.
|
•
|
failure
to enroll a sufficient number of patients meeting eligibility
criteria;
|
•
|
failure
of the new product to demonstrate safety and/or
efficacy;
|
•
|
the
development of serious (including life threatening) adverse events
(including, for example, side effects caused by or connected with
exposure
to the new product); or
|
•
|
the
failure of clinical investigators, trial monitors and other consultants
or
trial subjects to comply with the trial plan or
protocol.
|
•
|
we
may not be able to identify suitable acquisition targets or acquire
companies on favorable terms;
|
•
|
we
compete with other companies that may have stronger financial positions
to
acquire product lines and companies. We believe that this competition
will
increase and may result in decreased availability or increased prices
for
suitable acquisition targets;
|
•
|
we
may not be able to obtain the necessary financing, on favorable terms
or
at all, to finance any of our potential
acquisitions;
|
•
|
we
may not be able to obtain the necessary regulatory approvals, including
the approval of antitrust regulatory bodies, in any of the countries
in
which we may seek to consummate potential
acquisitions;
|
•
|
we
may ultimately fail to complete an acquisition after we announce
that we
plan to acquire a product line or a
company;
|
•
|
we
may fail to integrate our acquisitions successfully in accordance
with our
business strategy;
|
•
|
we
may choose to acquire a business that is not profitable, either
at the
time of acquisition or thereafter;
|
•
|
acquisitions
may require significant management resources and
divert
attention away from our daily operations, result in the loss of key
customers and personnel, and expose us
to unanticipated liabilities;
|
•
|
we
may not be able to retain the skilled employees and experienced management
that may be necessary to operate businesses we acquire, and if we
cannot
retain such personnel, we may not be able to locate and hire new
skilled
employees and experienced management to replace them;
or
|
•
|
we
may purchase a company that has contingent liabilities that include,
among
others, known or unknown patent or product liability
claims.
|
•
|
require
us to incur substantial expenses, even if we are insured or successful
in
the litigation;
|
•
|
require
us to divert significant time and
effort
of our technical and management
personnel;
|
•
|
result
in the loss of our rights to develop or make certain products;
and
|
•
|
require
us to pay substantial monetary damages or royalties in order to license
proprietary rights from third
parties.
|
•
|
actual
or anticipated variations in our quarterly operating results or those
of
our competitors;
|
•
|
announcements
by us or our competitors of new and enhanced
products;
|
•
|
market
conditions or trends in the pharmaceutical
industry;
|
•
|
developments
or disputes concerning proprietary
rights;
|
•
|
introduction
of technologies or product enhancements by others that reduce the
need for
our products;
|
•
|
the
inaccuracy of, or changes, in financial estimates by securities
analysts;
|
•
|
general
economic and political conditions;
|
•
|
departures
of key personnel;
|
•
|
changes
in the market valuations of our
competitors;
|
•
|
regulatory
considerations; and
|
•
|
the
other risk factors listed in this
section.
|
Entity
|
Principal
Activities
|
Primary
Product Lines
|
||
Taro Israel |
·
Manufactures more than 65
finished dosage form pharmaceutical products for sale
in Israel and for export
·
Produces, for its
own use and for sale to third parties, APIs used in the manufacture
of
finished dosage form pharmaceutical products
·
Markets both
proprietary and generic products in the local Israeli market
·
Performs research
and development independently and
through Taro Research Institute
Ltd., a wholly-owned subsidiary
|
·
Dermatology: Prescription and
OTC semi-solid products (creams, ointments and gels) and
liquids
·
Cardiology and Neurology:
Prescription oral dosage products
·
Oral
Analgesics: Prescription
and OTC
·
OTC Nasal Sprays and
Nutritional Supplements
·
Oral, Opthalmic and OTC
preparations
|
||
|
||||
Taro Canada |
·
Manufactures more than 45
finished
dosage form pharmaceutical products for sale
in Canada and for export
·
Markets both proprietary and
generic products in the local Canadian market
·
Independently performs research
and development and through Taro Research Institute
Ltd.
|
·
Dermatology: Prescription and
OTC semi-solid
products (creams, ointments and
gels) and liquids
·
Cardiology and Neurology:
Prescription oral dosage products
|
||
Taro U.S.A. |
·
Markets and distributes both
proprietary and generic products in the local U.S.
·
Performs Research and
development
|
·
Dermatology: Prescription and
OTC semi-solid products (creams, ointments and gels) and
liquids
·
Cardiology and Neurology:
Prescription oral dosage products
·
Other prescription and OTC
products
|
•
|
efforts
by governments, employers, third-party payors and consumers to
control
healthcare costs;
|
•
|
increased
acceptance of generic products by physicians, pharmacists and consumers;
and
|
•
|
the
increasing number of pharmaceutical products whose patents have
expired
and are therefore subject to competition from, and substitution
by,
generic equivalents.
|
Product
Groups
|
Dosage
Form
|
U.S.
Brand Name*
|
Therapeutic
Category
|
Major
Markets
|
Rx/OTC
|
|||||
Amiodarone
HCI
|
tablets
|
Cordarone®
|
Cardiovascular
|
U.S.
|
Rx
|
|||||
Ammonium
Lactate
|
cream,
lotion
|
Lac~Hydrin®
|
Moisturizer
|
U.S.
Canada
|
Rx/
OTC
|
|||||
Bethamethasone
Dipropionate
(augmented)
|
cream,
gel
|
Diprolene®
|
Topical
Corticosteroid
|
U.S.
|
Rx
|
|||||
Carbamazepine
|
tablets,
controlled release tablets, chewable tablets, oral suspension
cream,
ointment
|
Tegretol®
|
Anticonvulsant
|
U.S.
Canada
Israel
|
Rx
|
|||||
Clobetasol
Propionate
|
gel,
topical solution, emollient cream
|
Temovate®
|
Topical
Corticosteroid
|
U.S.
|
Rx
|
|||||
Clorazepate
Dipotassium
|
tablets
|
Tranxene®
|
Antianxiety
|
U.S.
|
Rx
|
|||||
Clotrimazole
|
cream,
topical solution, vaginal cream
|
Lotrimin®/
Gyne-Lotrimin®
|
Antifungal
|
U.S.
Canada
|
Rx/
OTC
|
|||||
Clotrimazole
and
Betametasone
Dipropionate
|
cream,
lotion
|
Lotrisone®
|
Antifungal
|
Israel
U.S.
|
Rx
|
|||||
Desonide
|
cream,
ointment
|
Tridesilon®
|
Topical
Corticosteroid
|
U.S.
|
Rx
|
|||||
Desoximetasone
|
cream,
ointment, gel
|
Topicort®
**
|
Topical
Corticosteroid
|
U.S.
Canada
Israel
|
Rx
|
|||||
Diflorasone
Diacetate
|
cream,
ointment
|
Psorcon®
|
Topical
Corticosteroid
|
U.S.
|
Rx
|
|||||
Econazole
Nitrate
|
cream
|
Spectazole®
|
Antifungal
|
U.S.
|
Rx
|
|||||
Enalapril
|
tablets
|
Vasotec®
|
Cardiovascular
|
U.S.
|
Rx
|
|||||
Enalapril
and Hydrochlorothiazide
|
tablets
|
Vaseretic®
|
Cardiovascular
|
U.S.
|
Rx
|
|||||
Etodolac
|
tablets,
capsules
|
Lodine®
|
Analgesic
|
U.S.
Canada
Israel
|
Rx
|
|||||
Etodolac
|
extended
release tablets
|
Lodine®
XL
|
Analgesic
|
U.S.
Israel
|
Rx
|
|||||
Fluconazole
|
tablets
|
Diflucan®
|
Antifungal
|
U.S.
|
Rx
|
|||||
Fluocinonide
|
cream,
ointment, gel, topical solution, emollient cream
|
Lidex®
|
Topical
Corticosteroid
|
U.S.
Canada
|
Rx
|
|||||
Fluorouracil
|
solution
|
Efudex®
|
Topical
|
U.S.
|
Rx
|
|||||
Halobetasol
Propionate
|
ointment
|
Ultravate®
|
Topical
Corticosteroid
|
U.S.
|
Rx
|
Product
Groups
|
Dosage
Form
|
U.S.
Brand Name*
|
Therapeutic
Category
|
Major
Markets
|
Rx/OTC
|
|||||
Hydrocortisone
Valerate
|
|
cream,
ointment
|
|
Westcort®
|
|
Topical
Corticosteroid
|
U.S.
|
Rx
|
||
Hydrocortisone
|
|
cream,
ointment
|
|
Cortizone®
|
|
First
Aid
|
|
U.S.
Canada Israel
|
|
OTC
|
Ketoconazole
|
|
tablets,
cream
|
|
Nizoral®
|
|
Antifungal
|
|
U.S.
|
|
Rx
|
Malathion
|
|
lotion
|
|
Ovide®
**
|
|
Pediculicide
|
|
U.S.
|
|
Rx
|
Miconazole
Nitrate
|
|
vaginal
cream, cream
|
|
Monistat®
3
Monistat®
7
Micatin®
|
|
Antifungal
|
|
U.S.
|
|
OTC
|
Mometasone
Furoate
|
|
cream,
ointment
|
|
Elocon®
|
|
Topical
Corticosteroid
|
|
U.S.
|
|
Rx
|
Nystatin
|
|
oral
suspension, vaginal cream
|
|
Mycostatin®
|
|
Antifungal
|
|
U.S.
Canada Israel
|
|
Rx
|
Salicyclic
Acid and Urea
|
|
ointment
|
|
Kerasal®
***
|
|
Exfoliating
Moisturizer
|
|
U.S.
Canada
|
|
OTC
|
Terconazole
|
|
vaginal
cream
|
|
Terazol®
|
|
Antifungal
|
|
U.S.
|
|
Rx
|
Triamcinolone
|
|
cream,
ointment,
|
|
Kenalog®
|
|
Topical
|
|
U.S.
|
|
Rx
|
Acetonide
|
|
dental
paste
|
|
|
|
Corticosteroid
|
|
Canada
Israel
|
|
|
Warfarin
Sodium
|
|
tablets
|
|
Coumadin®
|
|
Anticoagulant
|
|
U.S.
Canada
Israel
|
|
Rx
|
*
|
Presented
in this column are the brand-names under which the products
are most
commonly prescribed in the United States. Except as noted below,
we do not
own any of the specific names. In some cases, we manufacture
and sell the
generic equivalent of the product sold by the third party owner
of such
name. Thus, for example, we sell our product “Warfarin Sodium” under that
name in the United States. Warfarin is the generic equivalent
of
“Coumadin,” a product sold under that name in the United States by the
third party owner of the U.S. rights to that name and by us
in Israel,
where we own the right to use that name.
|
**
|
Taro
brands
|
***
|
Brand
rights for North America were sold on March 3,
2005.
|
2004
|
2003
|
2002
|
|||||||||||||||||
In
thousands
|
%
of our
total
sales
|
In
thousands
|
%
of our
total
sales
|
In
thousands
|
%
of our
total
sales
|
||||||||||||||
U.S.A
|
$
|
247,765
|
87%
|
|
$
|
283,197
|
90%
|
|
$
|
183,857
|
87%
|
|
|||||||
Canada
|
18,353
|
6%
|
|
15,603
|
5%
|
|
12,819
|
6%
|
|
||||||||||
Israel
|
14,587
|
5%
|
|
13,468
|
4%
|
|
11,809
|
5%
|
|
||||||||||
Other
|
3,425
|
2%
|
|
3,190
|
1%
|
|
3,096
|
2%
|
|
||||||||||
Total
|
$
|
284,130
|
100%
|
|
$
|
315,458
|
100%
|
|
$
|
211,581
|
100%
|
|
Customer
|
2004
|
2003
|
2002
|
|||||||
AmerisourceBergen
Corporation
|
16%
|
|
20%
|
|
22%
|
|
||||
McKesson
Corporation
|
15%
|
|
17%
|
|
12%
|
|
||||
Cardinal
Health, Inc
|
8%
|
|
9%
|
|
9%
|
|
Customer
Type
|
Percentage
of
Consolidated
Sales
|
|
Drug
wholesalers
|
43%
|
|
Drug
store chains
|
17%
|
|
Mass
merchandisers food and retail chains
|
15%
|
|
Generic
drug
distributors
|
7%
|
|
Managed
care organizations
|
5%
|
Customer
Type
|
Percentage
of
Consolidated
Sales
|
|
Institutional
market
|
4%
|
|
Private
market
|
2%
|
|
Other
international markets
|
1%
|
Customer
Type
|
Percentage
of
Consolidated
Sales
|
|
Drug
wholesalers
|
4%
|
|
Drug
chains, independent pharmacies and others
|
2%
|
Name
of Subsidiary
|
Country
of Incorporation
|
|
Taro
Research Institute Ltd.
|
Israel
|
|
Taro
Pharmaceuticals U.S.A., Inc.
|
United
States
|
|
Taro
Pharmaceuticals Inc.
|
Canada
|
|
Taro
Pharmaceuticals North America, Inc.
|
Cayman
Islands
|
|
Taro
Pharmaceuticals Europe B.V.
|
The
Netherlands
|
|
Taro
Pharmaceuticals Ireland Ltd.
|
Ireland
|
Location |
Square
Footage
|
Main
Use
|
Own/Lease | |||
Haifa Bay, Israel |
325,000
|
Pharmaceutical
manufacturing, production laboratories,
offices, warehousing, chemical
production
(including tank farm and chemical finishing
plant), and
research facility
|
Own | |||
Haifa Bay, Israel |
10,000
|
Warehouse, maintenance | Lease | |||
Yakum, Israel |
15,000
|
Administrative offices | Lease | |||
Brampton, Canada |
250,800
|
Pharmaceutical
manufacturing, production laboratories,
laboratories, administration,distribution
and warehousing
|
Own | |||
Brampton, Canada |
75,400
|
Administration and warehousing | Lease | |||
Hawthorne, New York |
124,000
|
Research laboratory and administrative offices | Own | |||
Hawthorne, New York |
102,000
|
Administrative offices and warehousing | Lease | |||
South Brunswick, New Jersey |
315,000
|
Distribution facility | Own | |||
Roscrea, Ireland |
124,000
|
Pharmaceutical manufacturing, research laboratories and warehousing | Own |
2004
|
2003
|
2002
|
|||||||||||||||||
Customer |
In
thousands
|
%
of our
total
sales
|
In
thousands
|
%
of our
total
sales
|
In
thousands
|
%
of our
total
sales
|
|||||||||||||
U.S.A
|
$
|
247,765
|
87%
|
|
$
|
283,197
|
90%
|
|
$
|
183,857
|
87%
|
|
|||||||
Canada
|
18,353
|
6%
|
|
15,603
|
5%
|
|
12,819
|
6%
|
|
||||||||||
Israel
|
14,587
|
5%
|
|
13,468
|
4%
|
|
11,809
|
5%
|
|
||||||||||
Other
|
3,425
|
2%
|
|
3,190
|
1%
|
|
3,096
|
2%
|
|
||||||||||
Total
|
$
|
284,130
|
100%
|
|
$
|
315,458
|
100%
|
|
$
|
211,581
|
100%
|
|
2004
|
2003
|
2002
|
|||||||||||||||||
Amount
|
Percent
|
Amount
|
Percent
|
Amount
|
Percent
|
||||||||||||||
AmerisouceBergen
Corporation
|
$
|
44.5
|
16%
|
|
$
|
62.7
|
20%
|
|
$
|
46.5
|
22%
|
|
|||||||
McKesson
Corporation
|
$
|
43.2
|
15%
|
|
$
|
53.0
|
17%
|
|
$
|
25.4
|
12%
|
|
|||||||
Cardinal
Health, Inc.
|
$
|
23.8
|
8%
|
|
$
|
28.4
|
9%
|
|
$
|
19.0
|
9%
|
|
|||||||
Total
|
$
|
111.5
|
39%
|
|
$
|
144.1
|
46%
|
|
$
|
90.9
|
43%
|
|
Returns
and
Price
Adjustments
|
|
Doubtful
Accounts
|
|
Total
Allowances
|
||||||
Balance
at December 31, 2002
|
$
|
51,910
|
$
|
112
|
$
|
52,022
|
||||
Sales
provisions made in the current period
|
271,226
|
52
|
271,278
|
|||||||
Deductions
allowed to customers
|
(278,084
|
)
|
—
|
(278,084
|
)
|
|||||
Decrease
due to write-offs of uncollectible accounts
|
—
|
(23
|
)
|
(23
|
)
|
|||||
Balance
at December 31, 2003
|
45,052
|
141
|
45,193
|
|||||||
Sales
provisions made in the current period*
|
364,239
|
83
|
364,322
|
|||||||
Deductions
allowed to customers
|
(342,661
|
)
|
—
|
(342,661
|
)
|
|||||
Decrease
due to write-offs of uncollectible accounts
|
—
|
(34
|
)
|
(34
|
)
|
|||||
Balance
at December 31, 2004
|
$
|
66,630
|
$
|
190
|
$
|
66,820
|
*
|
See
Note 1.f to our financial statements included elsewhere in
this
report.
|
Year
ended December 31,
|
||||||||||
2004
|
2003
|
2002
|
||||||||
Statement of Income Data: | ||||||||||
Sales
|
100
|
%
|
100
|
%
|
100
|
%
|
||||
Cost
of sales
|
42
|
32 |
38
|
|||||||
Gross
Profit
|
58
|
68
|
62
|
|||||||
Operation
expenses:
|
||||||||||
Research
and development, net
|
15
|
13
|
12
|
|||||||
Selling,
marketing, general and administrative
|
43
|
31
|
25
|
|||||||
Total
operating expenses
|
58
|
44
|
37
|
|||||||
Operating
income
|
(0.2
|
)
|
24
|
25
|
||||||
Financial
expenses, net
|
2.3
|
1
|
— | |||||||
Other
income, net
|
0
|
— | — | |||||||
Income
before taxes on income
|
(2
|
)
|
23
|
25
|
||||||
Taxes
on income
|
(6 |
)
|
4
|
4
|
||||||
Minority
interest in earnings of a subsidiary
|
—
|
— | — | |||||||
Net
income
|
4
|
%
|
19
|
%
|
21
|
%
|
• |
Our
sales of newly introduced products, which we sell at higher margins
than
our existing products, were responsible for most of the increase
in our
gross profit percentage, which grew from 62.4% to
67.5%.
|
• |
During
2003, we experienced a more “favorable competitive environment for generic
products” than in 2002. Such an environment includes, for example, an
environment in which our products are the initial generic entrants
into
the market (and, occasionally, remain the sole generic versions
of the
product); an environment in which we are able to compete particularly
well
(for example, because of operational efficiencies or less expensive
access
to raw materials); and/or an environment in which there is, for
any number
of reasons (including, for example, a market perception more
favorable to
our products than to those of our competitors) a particularly
great demand
for our products.
|
• |
Over
the past several years, we have invested in a number of capital
projects
designed to increase our production efficiency. As demand for
our products
increased in 2003, we benefited from economies of scale which
decreased
our per unit cost of production.
|
Rate
of Inflation
|
Rate
of Devaluation
(Appreciation)
Against
U.S. Dollar
|
Rate
of Exchange of
U.S.
Dollar
|
|||||||||||||||||
Year
|
Israel(1)
|
Canada(2)
|
Israel(1)
|
Canada(3)
|
Israel(1)
|
Canada(3)
|
|||||||||||||
2000
|
0.0%
|
|
3.2%
|
|
(2.7%
|
)
|
3.9%
|
|
4.04
|
1.50
|
|||||||||
2001
|
1.4%
|
|
0.7%
|
|
9.3%
|
|
6.2%
|
|
4.42
|
1.59
|
|||||||||
2002
|
6.5%
|
|
3.9%
|
|
7.2%
|
|
(1.2%
|
)
|
4.74
|
1.58
|
|||||||||
2003
|
(1.9%
|
)
|
2.0%
|
|
(7.6%
|
)
|
(17.8%
|
)
|
4.38
|
1.29
|
|||||||||
2004
|
1.2%
|
|
2.1%
|
|
(1.6%
|
)
|
(6.9%
|
)
|
4.31
|
1.20
|
Amount
|
|
Linkage
|
|
Rate
|
|
Maturity
|
$13,753
|
|
Israel
CPI(a)
|
|
8.25%
|
|
2005–2010
|
$49,275
|
|
Israel
CPI(a)
|
|
5.80%
|
|
2005–2014
|
$
2,950
|
|
Dollar
|
|
Libor
+ 2.25%
|
|
2005–2014
|
$
1,773
|
|
Dollar
|
|
Libor
+ 2–3%
|
|
2005–2010
|
$44,500
|
|
Dollar
|
|
6%
|
|
2005–2010
|
$15,500
|
|
Dollar
|
|
Libor
+ 2.25%
|
|
2005–20
10
|
• |
generic
pharmaceuticals, where our programs have resulted in our developing
and
introducing a wide range of pharmaceutical products (including
tablets,
capsules, injectables, suspensions, solutions, creams and ointments)
that
are equivalent to numerous brand-name products whose patents and
FDA
exclusivity periods have expired;
|
Brand Name* | |
FINAL
NDA APPROVALS
|
|
Ibuprofen Oral Suspension | ElixSure® |
FINAL
ANDA APPROVALS
|
|
Aiclometasone
dipropionate ointment, 0.05%
|
Aclovate®
|
Ammonium
lactate lotion, 12%
|
Lac-Hydrin®
|
Betamethasone
dipropionate ointment (augmented) 0.05%
|
Diprolene®
|
Ciclopirox
olamine cream, 0.77%
|
Loprox®
|
Ciprofloxacin
tablets 100, 250, 500, 750 mg
|
Cipro®
|
Clindamycin
phosphate topical solution
|
Cleocin®
|
Clotrimazole
and betamethasone dipropionate lotion
|
Lotrisone®
|
Fluconazole
tablets 50, 100, 150 and 200 mg
|
Diflucan®
|
Halobetasol
ointment, 0.05%
|
Ultravate®
|
Hydrocortisone
butyrate ointment, 0.1%
|
Locoid®
|
Hydrocortisone
butyrate solution, 0.1%
|
Locoid®
|
Loratadine
syrup, 5 mg / 5 mL
|
Claritin®
|
Miconazole
nitrate vaginal cream, 4%
|
Monistat®
|
Mometasone
furoate cream, 0.1 %
|
Elocon®
|
Mometasone
furoate ointment, 0.1%
|
Elocon®
|
Phenytoin
oral suspension, 125 mg / S mL
|
Dilantin®
|
Terconazole
vaginal cream, 0.4%
|
Terazol®
|
Terconazole
vaginal cream, 0.8%
|
Terazol®
|
Fluticasone
propionate ointment, 0.005%
|
Cutivate®
|
TENTATIVE
ANDA APPROVALS
|
|
Gabapentin
oral solution, 250 mg / 5 mL
|
Neurontin®
|
Mometasone
furoate topical solution, 0.1% (lotion)
|
Elocon®
|
Payments
due by period (in millions)
|
||||||||||||||||
Type
of Contractual
Obligation
|
Total
|
1
year
|
1-3
years
|
3-5
years
|
Over
5
years
|
|||||||||||
Operating
lease obligations
|
$
|
5.9
|
$
|
1.6
|
$
|
2.9
|
$
|
1.2
|
$
|
0.2
|
||||||
Purchase
obligations
|
11.5
|
11.5
|
— | — | — | |||||||||||
Long-term
debt obligations
|
204.3
|
16.9
|
65.9
|
53.9
|
67.6
|
|||||||||||
Total
|
$
|
221.7
|
$
|
30.0
|
$
|
68.8
|
$
|
55.1
|
$
|
67.8
|
Name |
Age
|
Position | ||
Barrie
Levitt, M.D
|
69
|
Director and Chairman of the Board of Directors | ||
Daniel
Moros, M.D
|
57
|
Director and Vice Chairman of the Board of Directors | ||
Myron
Strober, C.P.A
|
75
|
Director and Chairman of the Audit Committee | ||
Heather
Douglas, Esq
|
50
|
Director
|
||
Micha
Friedman, Ph.D
|
64
|
Director
|
||
Eric
Johnston, Esq
|
60
|
Director
|
||
Gad
Keren, M.D
|
53
|
Director
|
||
Tal
Levitt, Esq
|
35
|
Director
|
||
Ben
Zion Hod, C.P.A
|
51
|
Director
(1)
|
||
Haim
Fainaro, C.P.A
|
62
|
Director
(1)
|
||
Samuel
Rubinstein
|
65
|
Senior
Vice President and General Manager
|
||
Kevin
Connelly, C.P.A
|
44
|
Senior
Vice President, Chief Financial Officer
|
||
Avraham
Yacobi, Ph.D
|
59
|
Senior
Vice President, Research and Development
|
||
Zahava
Rafalowicz
|
58
|
Group
Vice President, Sales and Marketing and Deputy General Manager,
Israel
|
||
Mariana Bacalu |
55
|
Vice President, Pharmaceutical Production | ||
Hannah Bayer, C.P.A. |
55
|
Vice President, Chief Accounting Officer | ||
Marc Coles, Esq. |
48
|
Vice President, General Counsel | ||
Puah Dekel |
45
|
Vice President, Administration, Israel | ||
Yohanan Dichter |
58
|
Vice President, Quality Assurance | ||
Roman Kaplan, Ph.D. |
59
|
Vice President, Technical Operations, Pharmaceuticals | ||
Iftach Katz |
41
|
Vice President, Technical Services, Israel | ||
Alon Korb |
46
|
Vice President, Engineering and Projects, Israel | ||
Sigalit Portnoy, Ph.D. |
41
|
Vice President, Haifa Operations | ||
Tzvi
Tal
|
55
|
Vice President, Information Technology, Israel |
· |
the
majority includes at least one third of the shares of non-controlling
shareholders (as defined in the Companies Law) or their representatives
voted at the meeting in favor of the election;
or
|
Israel
|
Canada
|
USA.
|
Ireland
|
Other
|
Total
|
||||||||||||||
Sales
and Marketing
|
35
|
39
|
165
|
1
|
2
|
218
|
|||||||||||||
Administration
|
48
|
33
|
127
|
8
|
3
|
243
|
|||||||||||||
Research
and Development
|
139
|
76
|
36
|
12
|
1
|
264
|
|||||||||||||
Production
and Quality Control
|
376
|
214
|
0
|
32
|
—
|
622
|
|||||||||||||
Total
|
598
|
362
|
328
|
53
|
6
|
1,347
|
Name
|
Number
of
Ordinary
Shares
|
Percentage
of
Outstanding
Ordinary
Shares
|
|||||||
Barrie
Levitt, M.D. (1)
|
1,206,232
|
4.1
|
%
|
||||||
Daniel
Moros, M.D. (2)
|
820,851
|
2.8
|
%
|
||||||
Tal
Levitt, Esq
|
569,514
|
1.9
|
%
|
||||||
Myron
Strober, C.P.A
|
*
|
*
|
|||||||
Heather
Douglas, Esq
|
*
|
*
|
|||||||
Micha
Friedman, Ph.D
|
*
|
*
|
|||||||
Eric
Johnston, Esq
|
*
|
*
|
|||||||
Gad
Keren, M.D
|
*
|
*
|
|||||||
Ben
Zion Hod, C.P.A
|
*
|
*
|
|||||||
Haim
Fainaro, C.P.A
|
*
|
*
|
|||||||
Samuel
Rubinstein
|
*
|
*
|
|||||||
Kevin
Connelly, C.P.A
|
*
|
*
|
|||||||
Avraham
Yacobi, Ph.D
|
*
|
*
|
|||||||
Zahava
Rafalowicz
|
*
|
*
|
|||||||
Mariana
Bacalu
|
*
|
*
|
|||||||
Hannah
Bayer, C.P.A
|
*
|
*
|
|||||||
Marc
Coles, Esq
|
*
|
*
|
|||||||
Yohanan
Dichter
|
*
|
*
|
|||||||
Roman
Kaplan, Ph.D
|
*
|
*
|
|||||||
Iftach
Katz
|
*
|
*
|
|||||||
Sigalit
Portnoy, Ph.D
|
*
|
*
|
|||||||
Alon
Korb
|
*
|
*
|
|||||||
TzviTal
|
*
|
*
|
|||||||
Puah
Dekel
|
*
|
*
|
|||||||
Total
for all directors and officers (24 persons) listed above, as a
group
|
2,893,521
|
9.8
|
%
|
(1) |
Of
the ordinary shares beneficially owned by Dr. Levitt, (1) 319,066
ordinary
shares are owned individually by Dr. Levitt, (2) 585,780 ordinary
shares
are held by Dr. Levitt as trustee for trusts established by Dr. Levitt,
(3) 12,934 ordinary shares are owned by Dr. Levitt and his wife as
joint
tenants, (4) 780 ordinary shares are owned by Morley and Company,
Inc., or
Morley, which is controlled by Dr. Levitt, (5) 198,032
ordinary shares are owned by Orenova Corporation, which is wholly-owned
by
Dr. Levitt and members of his immediate family, (6) 24,200 ordinary
shares, which are not currently outstanding, are subject to incentive
options granted to Dr. Levitt that are presently exercisable, (7)
65,440
ordinary shares are owned by Taro Research Foundation, Inc., or the
Research Foundation, a charitable foundation established by Dr. Levitt.
In
addition, Dr. Levitt has the right to appoint a majority of the Board
of
Directors of Morley and Company, Inc. which owns all 2,600 of our
outstanding founders’ shares, whose holders are entitled to exercise
one-third of the total voting power in our company regardless of
the
number of ordinary shares then
outstanding.
|
In
2001, the Research Foundation was created by means of a gift
of 65,440
shares from the Levitt Family. The
members of the Foundation are: Dr. Barrie Levitt, Dr. Daniel
Moros, Tal
Levitt, Dr. Jacob Levitt, and Taro
U.S.A.,and its trustees are: Dr. Barrie Levitt and Dr. Daniel
Moros. The
purpose of the Foundation is to
make charitable contributions to health related educational and
research
institutions.
|
|
(2)
|
Of
the ordinary shares owned by Dr. Moros, (1) 353,217 ordinary shares
are
owned individually by Dr. Moros, (2) 190,960 ordinary shares are
held by
Dr. Moros as co-trustee of the Nathan Moros Trust, (3) 253,574
ordinary
shares are held by Dr. Moros as trustee for trusts established
by Isabel
Moros, and (4) 23,100 ordinary shares, which are not currently
outstanding, are subject to incentive options granted to Dr. Moros
that
are presently exercisable.
|
* |
Less
than 1%
|
Ordinary
Shares
Beneficially
Owned
|
Percent
of Ordinary
Shares
Outstanding
|
||||
Neuberger
Berman, Inc./Neuberger Berman, LLC (1)
|
3,073,632
|
10.4%
|
|||
Taro
Development Corporation (2)
|
2,332,937
|
7.9%
|
|
||
T.
Rowe Price Associates, Inc. (3)
|
1,983,100
|
6.7%
|
|
||
Franklin
Resources, Inc. (4)
|
1,817,305
|
6.2%
|
|||
Brookside
Capital Partners Fund, L.P. (5)
|
1,610,810
|
5.5%
|
(1)
|
Based
on information contained in a Schedule 13F filed on February 8,
2005 by
Neuberger Berman, LLC.
|
(2)
|
Dr.
Levitt, Dr. Moros, and their families may be deemed to control
all of the
ordinary shares owned
by
TDC by virtue of their ownership of more than 50% of the shares
of
TDC.
|
(3)
|
Based
on information contained in a Schedule 13G, filed on February 14,
2005 by
T. Rowe Price Associates, Inc.
|
(4)
|
Based
on information contained in a Schedule 13G, filed on February 14,
2005 by
Franklin Resources, Inc.
|
(5)
|
Based
on information contained in a Schedule 13G, filed on April 12,
2005 by
Brookside Capital Partners Fund,
L.P.
|
High
|
Low
|
||||||
2000
|
$
|
17.47
|
$
|
3.66
|
|||
2001
|
$
|
48.50
|
$
|
13.44
|
|||
2002
|
$
|
39.26
|
$
|
21.60
|
|||
2003
|
$
|
72.11
|
$
|
30.14
|
|||
2004
|
$
|
66.53
|
$
|
18.99
|
High
|
Low
|
||||||
First
Quarter 2003
|
$
|
38.92
|
$
|
30.14
|
|||
Second
Quarter 2003
|
$
|
57.77
|
$
|
39.43
|
|||
Third
Quarter 2003
|
$
|
58.71
|
$
|
48.85
|
|||
Fourth
Quarter 2003
|
$
|
72.11
|
$
|
57.34
|
|||
First
Quarter 2004
|
$
|
66.53
|
$
|
57.40
|
High
|
Low
|
||||||
Second
Quarter 2004
|
$
|
63.61
|
$
|
39.91
|
|||
Third
Quarter 2004
|
$
|
43.48
|
$
|
18.99
|
|||
Fourth
Quarter 2004
|
$
|
35.42
|
$
|
21.12
|
|||
First
Quarter 2005
|
$
|
34.11
|
$
|
26.54
|
High
|
Low
|
||||||
December
2004
|
$
|
35.42
|
$
|
30.90
|
|||
January
2005
|
$
|
34.11
|
$
|
30.04
|
|||
February
2005
|
$
|
30.23
|
$
|
26.54
|
|||
March
2005
|
$
|
32.01
|
$
|
28.60
|
|||
April
2005
|
$
|
31.85
|
$
|
27.89
|
|||
May
2005
|
$
|
34.59
|
$
|
29.98
|
Level
of Foreign Investment
|
Company
Tax
Rate
|
Benefit
period
(years)
|
|
Over
0% but less than 25%
|
25%
|
7
|
|
Over
25% but less than 49%
|
25%
|
10
|
|
49%
or more but less than 74%
|
20%
|
10
|
|
74%
or more but less than 90%
|
15%
|
10
|
|
90%
or more
|
10%
|
10
|
Extent
of manufacturing
volume
outside of Israel
|
Royalties
to the Chief
Scientist
as
a percentage of grant
|
|
less
than 50%
|
120%
|
|
between
50% and
90%
|
150%
|
|
90%
and more
|
300%
|
a.
|
An
evaluation was performed under the supervision and with the participation
of our management, including our general manager and chief financial
officer, of the effectiveness of our disclosure controls and procedures
(as defined in Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange
Act of 1934, as amended (the “Exchange Act”)) as of the end of the period
covered by this annual report. Based on that evaluation, our general
manager and chief financial officer have concluded that our disclosure
controls and procedures are effective as of December 31,
2004.
|
|
b.
|
There
was no change in our internal control over financial reporting
(as defined
in rules 13(a)-15(f) and 15(d)-15(f) under the Exchange Act) that
occurred
during the period covered by this annual report that has materially
affected, or is reasonably likely to materially affect, our internal
control over financial reporting.
|
2004
|
2003
|
||
In
million
dollars
|
|||
Audit
Fees
|
$0.83
|
$0.56
|
|
Audit-Related
Fees
|
—
|
—
|
|
Tax
Fees
|
0.45
|
0.50
|
|
All
Other Fees
|
—
|
—
|
|
Total
|
$1.28
|
$1.06
|
Exhibit
No.
|
Description
|
||
1.1
|
Memorandum
of Association of Taro Pharmaceutical Industries Ltd.
(1)
|
||
1.2
|
Articles
of Association of Taro Pharmaceutical Industries Ltd., as
amended
|
||
2.1
|
Form
of ordinary share certificate (1)
|
||
4.1
|
Taro
Vit Industries Limited 1991 Stock Incentive Plan (2)
|
||
4.2
|
Taro
Pharmaceutical Industries Ltd. 2000 Employee Stock Purchase Plan
(3)
|
||
4.3
|
Taro
Pharmaceutical Industries 1999 Stock Incentive Plan (4)
|
||
8
|
List
of Subsidiaries (See “Organizational Structure” in Item 4.C of this Form
20-F)
|
||
12.1
|
Certification
of the Senior Vice President & General Manager pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
|
||
12.2
|
Certification
of the Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
|
||
13
|
Certification
of the Senior Vice President & General Manager and Chief Financial
Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section
906 of the Sarbanes-Oxley Act of 2002
|
||
15(a).1
|
Consent
of Kost, Forer, Gabbay & Kasierer
|
||
l5(a).2
|
Debenture
and Loan Agreement dated December 19, 2000 (5)
|
||
1
5(a).3
|
Loan
agreements dated May 20, 2003 and November 27, 2003
(6)
|
(1)
|
Previously
filed as an exhibit to our Registration Statement on Form F-1 (No.
333-63464), as amended, and incorporated herein by
reference.
|
(2)
|
Previously
filed as an exhibit to our Registration Statement on Form S-8 (No.
33-80802) and incorporated herein by reference.
|
(3)
|
Previously
filed as an exhibit to our Registration Statement on Form S-8 (No.
333-12388) and incorporated herein by reference.
|
(4)
|
Previously
filed as an exhibit to our Registration Statement on Form S-8 (No.
333-13840) and incorporated herein by reference.
|
(5)
|
Previously
filed as an exhibit to our Annual Report on Form 20-F for the fiscal
year
ended December 31, 2000 and incorporated herein by
reference.
|
(6)
|
Previously
filed as an exhibit to our Annual Report on Form 20-F for the fiscal
year
ended December 31, 2003 and incorporated herein by
reference.
|
TARO
PHARMACEUTICAL INDUSTRIES LTD.
|
||
|
|
|
By: | /s/ Kevin Connelly | |
|
||
Kevin
Connelly,
Senior
Vice President and Chief
Financial
Officer
|
F-2
|
|
F-3 –
F-4
|
|
F-5
|
|
F-6
|
|
F-7 –
F-8
|
|
F-9 –
F-48
|
Tel-Aviv,
Israel
|
KOST
FORER GABBAY & KASIERER
|
February
23, 2005
|
A
Member of Ernst & Young Global
|
December
31,
|
|||||||
2004
|
2003
|
||||||
ASSETS | |||||||
CURRENT ASSETS: | |||||||
Cash
and cash equivalents
|
$
|
98,630
|
$
|
159,12l
|
|||
Restricted
short-term bank deposits
|
6,598
|
2,518
|
|||||
Accounts
receivable:
|
|||||||
Trade
(Note 3a)
|
124,674
|
120,522
|
|||||
Other
receivables and prepaid expenses (Note 3b)
|
16,621
|
17,046
|
|||||
Inventories
(Note 4)
|
86,591
|
84,486
|
|||||
TOTAL
CURRENT ASSETS
|
333,114
|
383,693
|
|||||
LONG-TERM
INVESTMENTS (Note 7)
|
19,984
|
2,888
|
|||||
PROPERTY,
PLAN AND EQUIPMENT, NET (Note 5)
|
241,966
|
182,306
|
|||||
GOODWILL
|
7,222
|
7,199
|
|||||
OTHER
INTANGIBLE ASSETS AND DEFERRED CHARGES, NET (Note 6)
|
63,174
|
30,187
|
|||||
DEFERRED
INCOME TAXES (Note 14)
|
31,387
|
10,250
|
|||||
TOTAL
ASSETS
|
$
|
696,847
|
$
|
616,523
|
December
31,
|
|||||||
2004
|
2003
|
||||||
LIABILITIES
AND SHAREHOLDERS’ EQUITY
|
|||||||
CURRENT
LIABILITIES:
|
|||||||
Short-term
bank credit
and short-term loans (Note
8)
|
$
|
64,961
|
$
|
19,124
|
|||
Current
maturities of long-term debt (Note 10)
|
16,944
|
24,420
|
|||||
Accounts
payable:
|
|||||||
Trade
|
17,845
|
26,148
|
|||||
Other
and accrued expenses (Note 9)
|
27,220
|
31,083
|
|||||
Income
taxes payable
|
4,559
|
2,963
|
|||||
TOTAL
CURRENT LIABILITIES
|
131,529
|
103,738
|
|||||
LONG-TERM
LIABILITIES:
|
|||||||
Long-term
debt, net of current maturities (Note 10)
|
187,346
|
156,937
|
|||||
Deferred
income taxes (Note 14)
|
6,716
|
4,880
|
|||||
Accrued
severance pay
|
2,442
|
1,857
|
|||||
TOTAL
LONG-TERM LIABILITIES
|
196,504
|
163,674
|
|||||
COMMITMENTS
AND CONTINGENCIES (Note 12)
|
|||||||
MINORITY
INTEREST
|
694
|
1,711
|
|||||
SHAREHOLDERS’
EQUITY (Note 13):
|
|||||||
Share
capital:
|
|||||||
Ordinary
Shares of NIS 0.0001 par value:
|
|||||||
Authorized
at December 31, 2004 and 2003: 200,000,000 shares; Issued
at
|
|||||||
December
31, 2004 and 2003: 29,435,805 and 29,234,618 shares,
|
|||||||
respectively;
Outstanding at December 31, 2004 and 2003: 29,170,405
|
|||||||
and
28,969,218, respectively
|
679
|
679
|
|||||
Founders’
shares of NIS 0.00001 par value:
|
|||||||
Authorized,
issued and outstanding at December 31, 2004 and 2003:
|
|||||||
2,600
shares
|
1
|
1
|
|||||
Additional
paid-in capital
|
184,562
|
182,699
|
|||||
Accumulated
other comprehensive income
|
13,477
|
5,695
|
|||||
Treasury
stock
|
(1,348
|
)
|
(1,348
|
)
|
|||
Retained
earnings
|
170,749
|
159,674
|
|||||
TOTAL
SHAREHOLDERS’ EQUITY
|
368,120
|
347,400
|
|||||
TOTAL
LIABILITIES AND SHAREHOLDERS’ EQUITY
|
$
|
696,847
|
$
|
616,523
|
Year
ended December 31,
|
||||||||||
2004
|
2003
|
2002
|
||||||||
Sales
(Notes 15a and 16)
|
$
|
284,130
|
$
|
315,458
|
$
|
211,581
|
||||
Cost
of sales
|
119,404
|
102,454
|
79,468
|
|||||||
Gross
profit
|
164,726
|
213,004
|
132,113
|
|||||||
Operating
expenses:
|
||||||||||
Research
and development, net (Note 15b)
|
41,943
|
40,601
|
26,373
|
|||||||
Selling,
marketing, general and administrative (Note 15c)
|
123,299
|
97,718
|
52,481
|
|||||||
165,242
|
138,319
|
78,854
|
||||||||
Operating
income (loss)
|
(516
|
)
|
74,685
|
53,259
|
||||||
Financial
expenses, net (Note 15d)
|
(6,417
|
)
|
(1,722
|
)
|
(162
|
)
|
||||
(6,933
|
)
|
72,963
|
53,097
|
|||||||
Other
income (loss), net
|
—
|
|
(7
|
)
|
78
|
|||||
Income
(loss) before income taxes
|
(6,933
|
)
|
72,956
|
53,175
|
||||||
Income
taxes (tax benefit) (Note 14)
|
(16,991
|
)
|
11,475
|
8,406
|
||||||
10,058
|
61,481
|
44,769
|
||||||||
Minority
interest in losses (earnings) of a subsidiary
|
1,017
|
(326
|
)
|
(214
|
)
|
|||||
Net
income
|
$
|
11,075
|
$
|
61,155
|
$
|
44,555
|
||||
Basic
net earnings per Ordinary share (Note 13f)
|
$
|
0.38
|
$
|
2.12
|
$
|
1.55
|
||||
Diluted
net earnings per Ordinary share (Note 13f)
|
$
|
0.37
|
$
|
2.06
|
$
|
1.52
|
Share
capital
|
Additional
paid-in
capital
|
Accumulated
other
comprehensive
income
(loss)
|
Treasury
stock
|
|
Retained
earnings
|
Total
comprehensive
income
|
Total
shareholders’
equity
|
|||||||||||||||
Balance
at January 1, 2002
|
$
|
680
|
$ | 167,599 | $ | (2,591 | ) | $ | (l,288 | ) | $ | 53,964 | $ | — | $ | 218,364 | ||||||
Tax
benefit related to exercise of
|
||||||||||||||||||||||
stock
options
|
—
|
5,195 | — | — | — | — | 5,195 | |||||||||||||||
Exercise
of options and issuance of
|
||||||||||||||||||||||
shares
of ESPP
|
|
*)
|
651 | — | — | — | — |
651
|
||||||||||||||
Compensation
in respect of options
|
||||||||||||||||||||||
granted
to non-employees
|
—
|
139 | — | — | — | — | 139 | |||||||||||||||
Net
income
|
— | — | — | — | 44,555 | 44,555 | 44,555 | |||||||||||||||
Comprehensive
income
|
||||||||||||||||||||||
Foreign
currency translation
|
||||||||||||||||||||||
adjustments
|
—
|
— | 236 | — | — | 236 | 236 | |||||||||||||||
Unrealized
loss on available-for-
|
||||||||||||||||||||||
sale
marketable securities
|
—
|
—
|
(3
|
)
|
—
|
— |
(3
|
)
|
(3
|
)
|
||||||||||||
Total
comprehensive income
|
|
44,788
|
||||||||||||||||||||
Balance
at December 31, 2002
|
680
|
173,584
|
(2,358
|
)
|
(1,288
|
)
|
98,519
|
—
|
269,137
|
|||||||||||||
Tax
benefit related to exercise of
|
||||||||||||||||||||||
stock
options
|
—
|
6,995
|
—
|
—
|
—
|
—
|
6,995
|
|||||||||||||||
Exercise
of options and issuance of
|
||||||||||||||||||||||
shares
of ESPP
|
|
*)
|
2,110
|
—
|
—
|
—
|
—
|
2,110
|
||||||||||||||
Compensation
in respect of options
|
||||||||||||||||||||||
granted
to non-employees
|
—
|
10
|
—
|
—
|
—
|
—
|
10
|
|||||||||||||||
Purchase
of treasury stock
|
|
*)
|
—
|
—
|
(60
|
)
|
—
|
—
|
(60
|
)
|
||||||||||||
Net
income
|
—
|
—
|
—
|
—
|
61,155
|
61,155
|
61,155
|
|||||||||||||||
Comprehensive
income
|
||||||||||||||||||||||
Foreign
currency translation
|
||||||||||||||||||||||
adjustments
|
—
|
—
|
9,501
|
—
|
—
|
9,501
|
9,501
|
|||||||||||||||
Unrealized
loss from hedging
|
||||||||||||||||||||||
derivatives
|
— |
—
|
(1,448
|
)
|
—
|
—
|
(1,448
|
)
|
(1,448
|
)
|
||||||||||||
Total
comprehensive income
|
69,208
|
|||||||||||||||||||||
Balance
at December 31, 2003
|
680
|
182,699
|
5,695
|
(1,348
|
)
|
159,674
|
—
|
347,400
|
||||||||||||||
Exercise
of options and issuance of
|
||||||||||||||||||||||
shares
of ESPP
|
|
*)
|
1,863
|
—
|
—
|
—
|
—
|
1,863
|
||||||||||||||
Net
income
|
—
|
—
|
—
|
—
|
11,075
|
11,075
|
11,075
|
|||||||||||||||
Comprehensive
income
|
||||||||||||||||||||||
Foreign
currency translation
|
||||||||||||||||||||||
adjustments
|
—
|
—
|
6,076
|
—
|
—
|
6,076
|
6,076
|
|||||||||||||||
Unrealized
gain from hedging
|
||||||||||||||||||||||
derivatives
|
—
|
—
|
1,681
|
—
|
—
|
1,681
|
1,681
|
|||||||||||||||
Unrealized
gain from available for
|
||||||||||||||||||||||
sale
marketable securities
|
25
|
25
|
25
|
|||||||||||||||||||
Total
comprehensive income
|
18,857
|
|||||||||||||||||||||
Balance
at December 31, 2004
|
$
|
680
|
$
|
184,562
|
$
|
13,477
|
$
|
(1,348
|
)
|
$
|
170,749
|
$
|
368,120
|
|||||||||
Accumulated
unrealized gains on
|
||||||||||||||||||||||
available-for-sale
marketable
|
||||||||||||||||||||||
securities
|
$
|
71
|
||||||||||||||||||||
Accumulated
foreign currency
|
||||||||||||||||||||||
translation
adjustments
|
13,173
|
|||||||||||||||||||||
Accumulated
unrealized gain from
|
||||||||||||||||||||||
hedging
derivatives
|
233
|
|||||||||||||||||||||
|
$
|
13,477
|
Year
ended December 31,
|
||||||||||
2004
|
|
2003
|
|
2002
|
||||||
Cash flows from operating activities: | ||||||||||
Net
income
|
$
|
11,075
|
$
|
61,155
|
$
|
44,555
|
||||
Adjustments
required to reconcile net income to net cash provided
|
||||||||||
by
(used in) operating activities:
|
||||||||||
Minority
interest in earnings (losses) of a subsidiary
|
(1,017
|
)
|
326
|
214
|
||||||
Depreciation
and amortization
|
19,622
|
14,405
|
8,263
|
|||||||
Compensation
in respect of options granted to non-employees
|
—
|
10
|
139
|
|||||||
Accrued
severance pay, net
|
177
|
27
|
55
|
|||||||
Capital
gain (loss) on sale of property, plant and equipment
|
(5
|
)
|
9
|
—
|
||||||
Currency
fluctuation of long-term debt
|
(190
|
) |
212
|
|
(327
|
)
|
||||
Deferred
income taxes, net
|
(18,822
|
)
|
2,004
|
(1,110
|
)
|
|||||
Tax
benefit from exercise of options
|
—
|
7,219
|
5,364
|
|||||||
Increase
in trade receivables (Note 1.f)
|
(3,804
|
)
|
(50,992
|
)
|
(26,853
|
)
|
||||
Increase
in other accounts receivable and prepaid expenses
|
(27
|
)
|
(1,209
|
)
|
(4,250
|
)
|
||||
Decrease
(increase) in inventories
|
776
|
(37,638
|
)
|
(11,717
|
)
|
|||||
Increase
(decrease) in trade payables
|
(8,783
|
)
|
(340
|
)
|
11,090
|
|||||
Increase
(decrease) in other accounts payable and accrued expenses
|
(2,408
|
)
|
10,132
|
3,142
|
||||||
Increase
(decrease) in income taxes payable
|
1,596
|
(63
|
)
|
1,077
|
||||||
Net
cash provided (used in) by operating activities
|
(1,810
|
)
|
5,257
|
29,642
|
||||||
Cash
flows from investing activities:
|
||||||||||
Purchase
of property, plant and equipment
|
(72,270
|
)
|
(94,421
|
)
|
(43,246
|
)
|
||||
Acquisition
of Thames Pharmacal Company, Inc. (a)
|
—
|
—
|
(6,436
|
)
|
||||||
Purchase
of product rights
|
(37,326
|
)
|
(10,375
|
)
|
(377
|
)
|
||||
Long-term
and other deposits
|
(14,196
|
)
|
(64
|
)
|
(130
|
)
|
||||
Investment
in restricted short-term bank deposits
|
(4,080
|
)
|
(50
|
)
|
(52
|
)
|
||||
Proceeds
from sale of property, plant and equipment
|
—
|
24
|
371
|
|||||||
Net
cash used in investing activities
|
(127,872
|
)
|
(104,886
|
)
|
(49,870
|
)
|
Year
ended December 31,
|
||||||||||
2004
|
2003
|
2002
|
||||||||
Cash
flows from financing activities:
|
||||||||||
Proceeds
from exercise of options and issuance of shares of ESPP
|
1,863
|
2,110
|
651
|
|||||||
Proceeds
from long-term debt
|
41,496
|
116,346
|
7,183
|
|||||||
Purchase
of treasury stock
|
—
|
(60
|
)
|
—
|
||||||
Repayment
of long-term debt
|
(19,696
|
)
|
(8,616
|
)
|
(6,006
|
)
|
||||
Short-term
bank credit and short-term loans, net
|
45,504
|
17,873
|
(1,636
|
)
|
||||||
Net
cash provided by financing activities
|
69,167
|
127,653
|
192
|
|||||||
Effect
of exchange rate changes on cash and cash equivalents
|
24
|
380
|
21
|
|||||||
Increase
(decrease) in cash and cash equivalents
|
(60,491
|
)
|
28,404
|
(20,015
|
)
|
|||||
Cash
and cash equivalents at the beginning of the year
|
159,121
|
130,717
|
150,732
|
|||||||
Cash
and cash equivalents at the end of the year
|
$
|
98,630
|
$
|
159,121
|
$
|
130,717
|
||||
Supplemental
disclosure of cash flow transaction:
|
||||||||||
Cash
paid during the year for:
|
||||||||||
Interest
|
$
|
9,417
|
$
|
3,102
|
$
|
2,696
|
||||
Income
taxes
|
$
|
894
|
$
|
5,593
|
$
|
3,270
|
||||
(a)
Acquisition of Thames Pharmacal Company, Inc.:
|
||||||||||
Estimated
fair value of assets acquired and liabilities assumed at
|
||||||||||
the
date of acquisition:
|
||||||||||
Working
capital deficiency, net (excluding cash)
|
$
|
1,788
|
||||||||
Property,
plant and equipment
|
(220
|
)
|
||||||||
Intangible
assets
|
(4,697
|
)
|
||||||||
Goodwill
|
(3,307
|
)
|
||||||||
$
|
(6,436
|
)
|
||||||||
(b)
Non-cash investing and financing transactions:
|
||||||||||
Purchase
of property, plant and equipment on credit
|
$
|
2,948
|
$
|
5,415
|
$
|
5,870
|
||||
Investment
in intangible assets on credit
|
$
|
12,750
|
$
|
14,100
|
$
|
—
|
a.
|
Taro
Pharmaceutical Industries Ltd. (“the Company”) is an Israeli corporation,
which operates in Israel and through Israeli, North American,
and European
subsidiaries (“the Group”). The principal business activities of the Group
are the production, research, development and marketing of pharmaceutical
products. The Company’s Ordinary shares are listed for trade on the NASDAQ
National Market in the United States.
|
|
All
of the industrial pharmaceutical activities of the Group in Israel
are
performed by the Company. The activities of the Group in North
America are
performed by Taro Pharmaceuticals Inc., Taro Pharmaceuticals
North
America, Inc. and Taro Pharmaceuticals U.S.A., Inc. Taro Research
Institute Ltd. provides research and development services to
the Group.
Taro International Ltd., Taro Pharmaceuticals Ireland Ltd. and
Taro
Pharmaceuticals (U.K.) Ltd. are engaged in the pharmaceutical
activities
of the Group outside North America.
|
||
The
Group manufactures generic and proprietary drug products in its
facilities
located in Israel, Canada and the U.S.A., and manufactures bulk
active
pharmaceutical ingredients in its facilities located in Israel.
The
majority of the Group’s sales are in North America.
|
||
In
North America, the Company sells and distributes its products
principally
to drug industry wholesalers, drug store chains and mass merchandisers.
In
Israel, the Group sells and distributes its products principally
to
healthcare institutions and private pharmacies.
|
||
In
the generic pharmaceutical industry, selling prices and related
profit
margins tend to decrease as products mature due to increased
competition
from other generic pharmaceutical manufacturers as they gain
approval from
the U.S. Food & Drug Administration, the Canadian Therapeutic Products
Directorate and the Israeli and other Ministries of Health (“Government
Agencies”) to manufacture equivalent products. The Group’s future
operating results are dependent on, among other things, its ability
to
introduce new products and maintain its approvals to market existing
drugs.
|
||
While
non-compliance with Government Agencies’ regulations can result in refusal
to allow entry, seizure, fines or injunctive actions to prevent
the sale
of products, no such actions against the Group or its products
have ever
occurred. The Group believes that it is in material compliance
with all
Government Agencies’ regulations.
|
||
One
customer accounted for 16%, 20%, and 22% of the Group’s revenues for the
years ended December 31, 2004, 2003 and 2002, respectively (see
also Note
15a).
|
Some
raw materials and
certain
products are
currently
obtained from single domestic or foreign suppliers. Although the
Group has
not experienced material difficulties to date, future supply interruptions
could require additional regulatory approvals and may result in
the
Group’s inability to market affected products pending approvals. Any
significant and prolonged interruption of supply could have a material
adverse effect on the Group’s results of operations and financial
position.
|
|||||
b.
|
On
May 7, 2002, the Company through its subsidiaries purchased substantially
all of the assets and assumed all liabilities of Thames Pharmacal,
Inc..
Thames was a privately-held New York manufacturer of prescription
and
over-the-counter pharmaceutical products. The acquisition was made
in
order to broaden the Company’s portfolio of products. The aggregate
purchase price of $6,436 was paid in cash. The Company accounted
for this
acquisition by the purchase method. The results of Thames operations
have
been included in the consolidated financial statements since the
acquisition date.
|
||||
The
following table summarizes the estimated fair value of assets acquired
and
liabilities assumed at the acquisition date:
|
|||||
Current
assets
|
$ |
3,024
|
|||
Current
liabilities
|
(4,812
|
) | |||
Property,
plant and equipment
|
220
|
||||
Intangible
assets
|
4,697
|
||||
Goodwill
|
3,307
|
||||
|
$ |
6,436
|
|||
The
intangible assets acquired include product rights with a weighted
average
useful life of 11 years. No in-process research and
development
was identified.
|
|||||
Pro
forma information in accordance with Statement of Financial Accounting
Standard No. 141, “Business Combinations,” has not been provided since the
sales and net income for 2002 were not material in relation to
total
consolidated sales and net income.
|
|||||
c.
|
On
January
14,
2003, Taro Pharmaceuticals North America, Inc. entered into a license
and
option agreement with Medicis Pharmaceutical Corporation. According
to the
agreement, during 2004, TNA exercised its option and purchased
from
Medicis four branded prescription product lines for sale in the
United
States and Puerto Rico for an aggregate purchase price of $23,800.
The
main products purchased were Topicort and Ovide. These product
lines are
used primarily in dermatology and
pediatrics.
The purchase price was allocated to the product lines. Such product
lines
have a weighted average useful life of 15
years.
|
d.
|
On
March 21, 2003, the Company’s Irish subsidiary, Taro Pharmaceuticals
Ireland Ltd., acquired, for an amount equal to $5,900, a multi-purpose
pharmaceutical manufacturing and
research
facility in Ireland. The facility was purchased in connection
with
liquidation proceedings from the Official Liquidator appointed
by the High
Court of Ireland. Based on a valuation analysis, $2,350 was allocated
to
land, $1,950 was allocated to buildings with an average useful
life of 30
years and $1,600 was allocated to infrastructure, machinery and
equipment
with an average useful life of eight years.
|
|
e.
|
On
January 8, 2004, the Company’s U.S. subsidiary expanded its distribution
capacity with the purchase of a modern, 315,000 square foot distribution
center on 25 acres of land in South Brunswick, New Jersey. Taro
acquired
the facility for approximately $18,433. This facility is subject
to
depreciation on a straight line basis over a period of 40
years.
|
|
f.
|
In
July 2004, Taro U.S.A. entered into a license agreement with
Medicis for
four product lines including the Lustra® product line and two development
stage products in the United States, Canada and Puerto Rico.
The aggregate
purchase price will be $35,565. These products are used for the
treatment
of skin disorders. The products have a weighted average useful
life of 14
years. As part of the agreement, the Company received $20,000
from Medicis
with which the Company established a reserve, reducing accounts
receivable
and including it in cash flows from operating activities. This
reserve is
to be utilized for returns and other deductions related to the
products.
|
|
NOTE
2: —SIGNIFICANT ACCOUNTING
POLICIES
|
||
The
consolidated financial statements are prepared according to accounting
principles generally accepted in the United States (“U.S.
GAAP”).
|
||
a.
|
Use
of estimates:
|
|
The
preparation of financial statements in conformity with generally
accepted
accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial
statements
and accompanying notes. Actual results could differ from those
estimates.
|
||
b.
|
Financial
statements in U.S. dollars:
|
|
A
majority of the revenues of the Company and certain of its subsidiaries
is
generated in U.S. dollars (“dollars”). In addition, a substantial portion
of the costs of the Company and
certain
of its subsidiaries is incurred in dollars. The Company’s management
believes that the dollar is the primary currency of the economic
environment in which the Company
and
|
certain
of its subsidiaries operate. Thus, the functional and reporting
currency
of the Company and certain of its subsidiaries is the
dollar.
|
||
Accordingly,
amounts in currencies other than U.S dollars have been translated
as
follows:
|
||
Monetary
balances — at the exchange rate in effect on the balance sheet
date.
|
||
Revenues
and costs —at
the exchange rates in effect as of the date of recognition
of the
transactions.
|
||
All
transaction gains and losses resulting from the remeasurement
mentioned
above are reflected in the statement of income as financial
income or
expenses, as appropriate.
|
||
The
dollar has been determined to be the functional currency for
the Company
and all subsidiaries except the Canadian, Irish and the U.K.
subsidiaries,
for which their respective local currencies are their functional
currencies. The financial statements of the Canadian, Irish
and
the
U.K. subsidiaries have been translated into dollars. All balance
sheet
accounts have been translated using the exchange rates in effect
at the
balance sheet date. Amounts recorded in the statements of income
have been
translated using the average exchange rate for the year. The
resulting
translation adjustments are
reported
as a component of shareholders’ equity, under “Accumulated other
comprehensive income (loss).”
|
||
c.
|
Principles
of consolidation:
|
|
The
consolidated financial statements include the accounts of the
Company and
its subsidiaries. Inter-company transactions and balances have
been
eliminated in consolidation. Profits from inter-company sales
not yet
realized outside the Group have been eliminated in consolidation.
The
Company holds 50% of the shares conferring voting rights, and
96.9% of the
shares conferring rights to profits, of Taro Pharmaceuticals
U.S.A. Inc.
(“the U.S. subsidiary”); the remaining shares (conferring 50% of the
voting rights and 3.1% of the rights to profits) are held by
Taro
Development Corporation (a shareholder of the Company). According
to an
agreement between TDC and the Company, the shareholder will
appoint
directors in the U.S. subsidiary as instructed by the Company.
TDC may
terminate the agreement upon one year written notice.
|
||
d.
|
Cash
equivalents:
|
|
Cash
equivalents are short-term highly liquid investments that are
readily
convertible to cash with maturities of three months or less
at the date
acquired.
|
e.
|
Restricted
short-term bank deposits:
|
||
Restricted
cash is primarily invested in certificates of deposit, which
mature within
one year and which are used as collateral for the Company’s short-term
bank loans. Such restricted short-term bank deposits are recorded
at cost,
including accrued interest.
|
|||
f.
|
Allowance
for doubtful accounts:
|
||
The
allowance for doubtful accounts is calculated primarily with
respect to
specific debts which, in the opinion of the Company’s management, are
doubtful of collection, and with respect to a fixed general
allowance
which, in the opinion of the Company’s management, is sufficient to cover
anticipated uncollectible balances.
|
|||
g.
|
Inventories:
|
||
Inventories
are stated at the lower of cost or market value. Inventory
reserves are
provided to cover risks arising from slow-moving items or obsolescence.
Cost is determined as follows:
|
|||
Raw
and packaging materials — average cost basis.
|
|||
Finished
goods and work in progress — average production costs including materials,
labor and direct and indirect manufacturing expenses.
|
|||
Purchased
products for commercial purposes — average cost basis.
|
|||
The
amounts of inventory obsolescence were $7,156, $5,209, and
$2,930 for the
years ended December 31, 2004, 2003 and 2002,
respectively.
|
|||
h.
|
Property,
plant and equipment:
|
||
1.
|
Property,
plant and equipment are stated at cost net of accumulated
depreciation.
|
||
2.
|
Interest
and payroll expenses incurred during the construction period
of property,
plant and equipment are capitalized to the cost of such
assets.
|
3.
|
Depreciation
is calculated by the straight-line method over the estimated
useful lives
of the assets, from the date the asset is ready for its intended
use, at
the following annual rates:
|
%
|
|
Buildings
|
2.5–4
|
Installations,
machinery and equipment
|
5–10
(mainly 10)
|
Motor
vehicles
|
15–20
|
Furniture,
fixtures, office equipment and EDP equipment
|
6–33
(mainly
20)
|
Leasehold
improvements are depreciated by the straight-line method over
the term of
the lease (5–10 years).
|
|||
4.
|
The
Group accounts for costs of computer software developed or obtained
for
internal use in accordance with Statement of Position No. 98-1,
“Accounting for the Costs of Computer Software Developed or Obtained
for
Internal Use”. SOP No. 98-1 requires the capitalization of certain costs
incurred in connection with developing or obtaining internal
use software
during the application development stage. During the years 2004
and 2003,
the Group capitalized $924 and $958 of software costs, respectively.
Capitalized software costs are amortized by the straight-line
method over
their estimated useful life of three years.
|
||
i.
|
Goodwill:
|
||
Effective
January 1, 2002, the Company adopted the full provisions of Statement
of
Financial Accounting
Standards No. 142 “Goodwill and Other Intangible Assets” (“SFAS 142”).
Under SFAS
142 goodwill is no longer amortized but instead is tested for
impairment
at least annually (or
more frequently if impairment indicators
arise).
|
|||
SFAS
142 prescribes a two phase process for impairment testing of
goodwill. The
first phase screens for impairment; while the second phase (if
necessary)
measures impairment.
|
|||
In
the first phase of impairment testing, goodwill attributable
to a
reporting unit is tested for impairment by comparing the fair
value of the
reporting unit with its carrying value. The second phase of the
goodwill
impairment test compares the implied fair value of the reporting
unit’s
goodwill with the carrying amount of that goodwill. If the carrying
amount
of the reporting unit’s goodwill exceeds the implied fair value of that
goodwill, an impairment loss is recognized in an amount equal
to that
excess.
|
Fair
value of the reporting unit is determined using market capitalization.
The
Company performs its annual impairment tests during the fourth
fiscal
quarter of each year. As of December 31, 2004, no impairment
loss has been
identified.
|
||
Changes
in goodwill during the year resulted from translation adjustment
related
to goodwill recorded in the Canadian subsidiary.
|
||
j.
|
Other
intangible assets and deferred charges:
|
|
Product
rights are amortized on a straight-line basis over their
estimated useful
lives. Such product rights are amortized over eight and 20
years.
|
||
Acquired
intangible assets are amortized over their useful life using
a method of
amortization that reflects the pattern in which the economic
benefits of
the intangible assets are consumed or otherwise used up,
in accordance
with SFAS 142. These assets are amortized over a weighted
average
amortization period of 15 years.
|
||
Debt
issuance costs in respect of long-term loans from institutional
investors
and bonds are deferred and amortized under the effective
interest method
over the term of the loans from institutional investors and
bonds.
|
||
k.
|
Impairment
of long-lived assets:
|
|
The
Group’s long-lived assets are reviewed for impairment in accordance
with
Statement of Financial Accounting Standards No. 144 “Accounting for the
Impairment or Disposal of Long-lived Assets,” whenever events or changes
in circumstances indicate that the carrying amount of an
asset may not be
recoverable. An impairment exists when the carrying amount
of the asset
exceeds the aggregate future undiscounted cash flows expected
to be
generated by the asset. The impairment to be recognized is
measured by the
amount by which the carrying amount of the assets exceeds
the fair value
of the assets. As of December 31, 2004, no impairment losses
have been
identified.
|
||
l.
|
Revenue
recognition:
|
|
Revenues
from product sales are recognized when delivery has occurred,
persuasive
evidence of an arrangement exists, the vendor’s fee is fixed or
determinable and collection is probable. The Group maintains
a provision
for product returns and sales allowances in accordance with
Statement of
Financial Accounting Standard No. 48, “Revenue Recognition When Right of
Return Exists”. Provision for returns and other sale allowances are
determined on the basis of past experience and are deducted
from
revenues.
|
Allowance
for sales deductions and product returns: When the Company
recognizes and
records revenue from the sale of its pharmaceutical products,
the Company
simultaneously records an estimate of various future costs
related to the
sale. This has the effect of reducing the amount of reported
product
sales. These costs include the Company’s estimates of product returns,
rebates, chargebacks and other sales deductions. Chargebacks
result from
price arrangements the Company has with end-user customers
establishing
contract prices which are typically lower than the wholesalers’
acquisition costs or invoice prices. When these customers buy
the
Company’s products from their wholesaler of choice, the wholesaler
issues
a credit memo (chargeback) to the Company for the difference
between the
invoice price and the end-user contract price.
|
||
m.
|
Research
and development:
|
|
Research
and development expenses, net of related grants received, are
charged to
expenses as incurred.
|
||
n.
|
Royalty-bearing
grants:
|
|
Royalty-bearing
grants from the government of Israel through the Office of
the Chief
Scientist for funding approved research and development projects
are
recognized at the time the Company is entitled to such grants,
on the
basis of the related costs incurred. Such grants are included
as
deductions from research and development costs.
|
||
o.
|
Advertising
expenses:
|
|
The
Group expenses advertising costs as incurred. Advertising expenses
were
approximately $30,955, $22,309, and $4,075 for the years ended
December
31, 2004, 2003 and 2002, respectively.
|
||
p.
|
Income
taxes:
|
|
Income
taxes are accounted for in accordance with Statement of Financial
Accounting Standard No. 109 “Accounting for Income Taxes” (“SFAS 109”).
SFAS 109 prescribes the use of the liability method, whereby
deferred tax
asset and liability account balances are determined for temporary
differences between the financial reporting and tax bases of
assets and
liabilities, and for carryforward losses. Deferred taxes are
measured
using the enacted tax rates and laws that will be in effect
when the
differences are expected to reverse. The Group provides a valuation
allowance, if necessary, to reduce deferred tax assets to their
estimated
realizable value.
|
q.
|
Basic
and diluted net earnings per share:
|
|
Basic
earnings per share are calculated based on the weighted average
number of
Ordinary shares outstanding during each year. Diluted net earnings
per
share are calculated based on the weighted average number of
Ordinary
shares outstanding during each year, plus dilutive potential
Ordinary
Shares considered outstanding during the year, in accordance
with
Statement of Financial Accounting Standard No. 128, “Earnings per
Share”.
|
||
The
total weighted average number of options excluded from the
calculations of
diluted net earnings per share, as a result of their anti-dilutive
effect,
was 396,145, 49,000, and 164,050 for the years ended December
31, 2004,
2003 and 2002, respectively.
|
||
r.
|
Accounting
for stock-based compensation:
|
|
The
Company has elected to follow Accounting Principles Board Statement
No.
25, “Accounting for Stock Options Issued to Employees” (“APB 25”) and
Financial Accounting Standards Board (the “FASB”) Interpretation No. 44
“Accounting for Certain Transactions Involving Stock Compensation” (“FIN
44”) in accounting for its employees stock options plans. According
to APB
25, compensation expense is measured under the intrinsic value
method,
whereby compensation expense is equal to the excess, if any,
of the quoted
market price of the stock over the exercise price at the grant
date of the
award.
|
||
The
Company adopted the disclosure provisions of Financial Accounting
Standards Board Statement No. 148, “Accounting for Stock-Based
Compensation — Transition and Disclosure”, which amended certain
provisions of Statement of Financial Accounting Standard No.
123,
“Accounting for Stock-Based Compensation” (“SFAS 123”). The Company
continues to apply the provisions of APB 25 in accounting for
stock-based
compensation.
|
||
Pro-forma
information regarding the Company’s net income and net earnings per share
is required by SFAS 123 and has been determined as if the Company
had
accounted for its employee stock options under the fair value
method
prescribed by SFAS 123.
|
||
The
fair value for options granted in 2004, 2003 and 2002 is amortized
over
their vesting period on a straight line basis and estimated
at the date of
grant using a Black-Scholes options pricing model with the
following
weighted average
assumptions:
|
2004
|
2003
|
2002
|
||||||||
Dividend
yield
|
0%
|
|
0%
|
|
0%
|
|
||||
Expected
volatility
|
55.8%
|
|
52.0%
|
|
52.3%
|
|
||||
Risk-free
interest
|
3.50%
|
|
3.00%
|
|
1.75%
|
|
||||
Expected
life of up to
|
5
years
|
5
years
|
5
years
|
In
2004, the fair value for the options granted under the Company’s ESPP plan
is amortized over their vesting period on a straight line basis
and
estimated at the date of the grant using a Black-Scholes options
pricing
model with the following weighted assumptions: 0% dividend
yield, 31.6%
volatility, 3.5% risk free interest rate and expected life
of up to eight
months.
|
||
The
following table illustrates the effect on net income (loss)
and net
earnings (loss) per share, assuming that the Company had applied
the fair
value recognition provision of SFAS 123 on its stock-based
employee
compensation:
|
Year
ended December 31,
|
||||||||||
2004
|
2003
|
2002
|
||||||||
Net
income — as reported
|
$
|
11,075
|
$
|
61,155
|
$
|
44,555
|
||||
Less
— total stock-based compensation expenses determined under
|
||||||||||
fair
value method for all awards
|
3,811
|
1,474
|
1,026
|
|||||||
Net
income — pro-forma
|
$
|
7,263
|
$
|
59,681
|
$
|
43,529
|
||||
Earnings
per share:
|
||||||||||
Basic
— as reported
|
$
|
0.38
|
$
|
2.12
|
$
|
1.55
|
||||
Basic
— pro forma
|
$
|
0.25
|
$
|
2.07
|
$
|
1.52
|
||||
Diluted
— as reported
|
$
|
0.37
|
$
|
2.06
|
$
|
1.52
|
||||
Diluted
— pro forma
|
$
|
0.24
|
$
|
2.01
|
$
|
1.48
|
The
Company applies SFAS No. 123 and Emerging Issue Task Force
No. 96-18
“Accounting for Equity Instruments That are Issued to Other
Than Employees
for Acquiring, or in Conjunction with Selling Goods or Services” with
respect to options issued to non-employees. SFAS No. 123 requires
the use
of option valuation models to measure the fair value of the
options
granted.
|
||
s.
|
Concentrations
of credit risk:
|
|
Financial
instruments that potentially subject the Group to concentrations
of credit
risk consist principally of cash and cash equivalents, restricted
short-term bank deposits and trade receivables. Cash and cash
equivalents
and restricted short-term bank deposits are invested in major
banks in
Israel, the United States, Canada and the Cayman Islands. Such
deposits in
the United States may be in excess of insured limits and are
not insured
in other jurisdictions. Management believes that the financial
institutions that hold the Group’s cash and cash equivalent and restricted
short-term bank deposits are financially sound and that minimal
credit
risk therefore exists with respect to these financial
instruments.
|
||
The
Group’s trade receivables are mainly derived from sales to customers
in
the United States, Canada, Europe and Israel. The Group has
adopted credit
policies and standards intended to accommodate industry growth
and
inherent risk. Management believes that credit risks are moderated
by
obtaining credit insurance providing certain protection in
the event of
customers’ default and by the diversity of the Group’s customer base and
geographic sales areas. The Group performs ongoing credit evaluations
of
its customers’ financial condition and requires collateral when deemed
necessary.
|
||
t.
|
Fair
value of financial instruments:
|
|
The
carrying amounts of cash and cash equivalents, restricted short-term
bank
deposits, trade and other receivables and trade and other payables
approximate their fair value, due to the short-term maturities
of these
instruments.
|
||
The
carrying amount of long term bank deposits approximate their
fair value
since such deposits bear market interest rates.
|
||
The
carrying amounts of the Group’s borrowing arrangements under its
short-term and long-term debt agreements approximate their
fair value
since the loans bear interest at rates that approximate the
Group’s
incremental borrowing rates for similar types of borrowing
arrangements.
|
||
The
fair value of currency swap contracts is determined by discounting
to the
present all future cash flows of the currencies to be exchanged
at
|
interest
rates prevailing in the market for the period the currency exchanges
are
due and expressing the results in U.S. dollars at the current
spot foreign
currency exchange rate.
|
||
u.
|
Accounting
for derivatives:
|
|
FASB
Statement No. 133, “Accounting for Derivative Instruments and Hedging
Activities” (“SFAS No. 133”), requires companies to recognize all of their
derivative instruments as either assets or liabilities in the
statement of
financial position at fair value. The accounting for changes
(i.e., gains
or losses) in the fair value of a derivative instrument depends
on whether
the instrument has been designated and qualifies as part of a
hedging
relationship and on the type of hedging relationship. For derivative
instruments that are designated and qualify as hedging instruments,
a
company must designate the hedging instrument, as a fair value
hedge, cash
flow hedge or a hedge of a net investment in a foreign operation.
The
designation is based upon the nature of the exposure being
hedged.
|
||
For
a derivative instrument that is designated and qualifies as a
fair value
hedge (i.e., an instrument that hedges the exposure to changes
in the fair
value of an asset or a liability or an identified portion thereof
that is
attributable to a particular risk), the gain or loss on the derivative
instrument as well as the offsetting loss or gain on the hedged
item are
recognized in the same line item associated with the hedged item
in
current earnings. For a derivative instrument that is designated
and
qualifies as a cash flow hedge (i.e., an instrument that hedges
the
exposure to variability in expected future cash flows that is
attributable
to a particular risk), the effective portion of the gain or loss
on the
derivative instrument is reported as a component of other comprehensive
income and reclassified into earnings in the same line item associated
with the forecasted transaction in the same period or periods
during which
the hedged transaction affects earnings.
|
||
For
derivative instruments not designated as hedging instruments,
the gain or
loss is recognized in financial income/expense in current earnings
during
the period of change.
|
||
v.
|
Impact
of recently issued accounting standards:
|
|
On
November 2004, the FASB issued Statement of Financial Accounting
Standard
No. 151, “Inventory Costs, an Amendment of ARB 43, Chapter 4.” SFAS 151
amends Accounting Research Bulletin No. 43, Chapter 4, to clarify
that
abnormal amounts of idle facility expense, freight handling costs
and
wasted materials (spoilage) should be recognized as current-period
charges. In addition, SFAS 151 requires that allocation of fixed
production overheads to the costs of conversion be based on
normal
|
capacity
of the production facilities. SFAS 151 is effective for inventory
costs
incurred during fiscal years beginning after June 15, 2005. The
Company
does not expect that the adoption of SFAS 151 will have a material
effect
on its financial position or results of operations.
|
||
In
December 2004, the FASB issued Financial Accounting Standards
No. 153,
“Exchanges of Nonmonetary Assets —An
Amendment of Accounting Principles Board Opinion No. 29” (“SFAS 153”).
SFAS 153 amends Accounting Principles Board Opinion No. 29, “Accounting
for Nonmonetary Transactions” (“APB 29”). The amendments made by SFAS 153
eliminate the APB 29 exception for nonmonetary exchanges of similar
productive assets and replace it with a general exception for
exchanges of
nonmonetary assets that do not have commercial substance. As
applicable to
the Company, the provisions in SFAS 153 are effective for nonmonetary
asset exchanges occurring as from the third quarter of 2005 and
the
provisions of this statement will also be applied prospectively.
The
Company does not expect the adoption of SFAS 153 to have a material
effect
on the Company’s financial statements or its results of
operations.
|
||
On
December 16, 2004, the FASB issued FASB Statement No. 123 (revised
2004),
“Share-Based Payment” (“Statement 123(R)”), which is a revision of FASB
Statement No. 123, “Accounting for Stock-Based Compensation”. Statement
123(R) supersedes Accounting Principles Board Opinion No. 25,
“Accounting
for Stock Issued to Employees”, and amends FASB Statement No. 95,
“Statement
of Cash Flows”. Generally, the approach in Statement 123(R) is similar to
the approach described in Statement 123. However, Statement 123(R)
requires all share-based payments to employees, including grants
of
employee stock options, to be recognized in the income statement
based on
their fair values. Pro forma disclosure is no longer an
alternative.
|
||
Statement
123(R) must be adopted no later than January 1, 2006. Early adoption
will
be permitted in periods in which financial statements have not
yet been
issued. The Company expects to adopt Statement 123(R) on the
first interim
period beginning after January 1, 2006.
|
||
Statement
123(R) permits public companies to adopt its requirements using
one of two
methods:
|
||
a)
A “modified prospective” method in which compensation cost is recognized
beginning with the effective date (a) based on the requirements
of
Statement 123(R) for all share-based payments granted after the
effective
date and (b) based on the requirements of Statement 123 for all
awards
granted to employees prior to the effective date of Statement
123(R) that
remain unvested on the effective
date.
|
b)
A “modified retrospective” method which includes the requirements of the
modified prospective method described above, but also permits
entities to
restate based on the amounts previously recognized under Statement
123 for
purposes of pro forma disclosures either (a) all prior periods
presented
or (b) prior interim periods of the year of adoption.
|
||
The
Company is still in the process of evaluating which of the two
methods
described above it will use prospectively.
|
||
As
permitted by Statement 123, the Company currently accounts for
share-based
payments to employees using Opinion 25’s intrinsic value method and, as
such, generally recognizes no compensation cost for employee
stock
options. Accordingly, the adoption of Statement 123(R)’s fair value method
will have a significant impact on the Company’s results of operations,
although it will have no impact on the Company’s overall financial
position. The impact of adoption of Statement 123(R) cannot be
predicted
at this time because it will depend on levels of share-based
payments
granted in the future. However, had the Company adopted Statement
123(R)
in prior periods, the impact of that standard would have approximated
the
impact of Statement 123 as described in the disclosure of pro
forma income
and earnings per share in Note 2r above.
|
||
Statement
123(R) also requires that the benefits of tax deductions in excess
of
recognized compensation cost to be reported as a financing cash
flow,
rather than as an operating cash flow as required under current
literature. This requirement will reduce net operating cash flows
and
increase net financing cash flows in periods after the effective
date.
While the Company cannot estimate what those amounts will be
in the future
(because they depend on, among other things, when employees exercise
stock
options), the amount of operating cash flows recognized in prior
periods
for such excess tax deductions were $0, $7,219, and $5,364 in
2004, 2003
and 2002, respectively.
|
||
NOTE
3: —ACCOUNTS
RECEIVABLE
|
||
a.
|
Trade:
|
December
31,
|
|||||||
2004
|
2003
|
||||||
Open
accounts
|
$
|
123,296
|
*)
|
$
|
119,547
|
||
Notes
and checks receivable
|
1,568
|
1,116
|
|||||
124,864
|
120,663
|
||||||
Less
—allowance
for doubtful accounts
|
190
|
141
|
|||||
$
|
124,674
|
$
|
120,522
|
*)
|
Includes
a balance of $11,000 from an original amount of $20,000 withheld
by
customers in connection with customary deduction procedures.
The Company
believes these amounts were withheld in error and is conducting
active
discussions to collect them. Approximately $9,000 of the
$20,000 was
collected as of December 31, 2004.
|
See
Note 1.f.
|
||
As
for pledges, see Note 11.
|
||
b.
|
Other
receivables and prepaid expenses:
|
December
31,
|
|||||||
2004
|
2003
|
||||||
Employees
|
$
|
98
|
$
|
262
|
|||
Office
of the Chief Scientist
|
807
|
670
|
|||||
Government
authorities
|
3,911
|
4,344
|
|||||
Derivative
instruments (Note 19)
|
1,050
|
1,313
|
|||||
Deferred
income taxes (Note 14)
|
4,647
|
5,487
|
|||||
Prepaid
expenses
|
5,413
|
3,917
|
|||||
Other
|
695
|
1,053
|
|||||
$
|
16,621
|
$
|
17,046
|
December
31,
|
|||||||
2004
|
2003
|
||||||
Raw
and packaging materials
|
$
|
31,467
|
$
|
32,665
|
|||
Finished
goods
|
48,321
|
42,650
|
|||||
Work
in progress
|
5,483
|
7,587
|
|||||
Purchased
products for commercial activities
|
1,320
|
1,584
|
|||||
$
|
86,591
|
$
|
84,486
|
As
for pledges, see Note 11.
|
a.
|
Composition
of assets grouped by major classifications are as
follows:
|
|
December
31,
|
|||||||
2004
|
2003
|
||||||
Cost:
|
|||||||
Land
|
$
|
15,580
|
$
|
12,491
|
|||
Leasehold
land (1)
|
13,421
|
12,539
|
|||||
Buildings
(1)
|
119,460
|
73,712
|
|||||
Leasehold
improvements
|
3,009
|
3,401
|
|||||
Installation,
machinery and equipment
|
120,722
|
100,948
|
|||||
EDP
equipment
|
29,124
|
23,248
|
|||||
Motor
vehicles
|
341
|
342
|
|||||
Furniture,
fixtures and office equipment
|
7,906
|
6,212
|
|||||
Advances
for property and equipment
|
2,788
|
2,023
|
|||||
312,351
|
234,916
|
||||||
Accumulated
depreciation:
|
|||||||
Buildings
(1)
|
7,219
|
5,375
|
|||||
Leasehold
improvements
|
2,191
|
1,566
|
|||||
Installation,
machinery and equipment
|
39,667
|
29,663
|
|||||
EDP
equipment
|
17,953
|
13,392
|
|||||
Motor
vehicles
|
212
|
163
|
|||||
Furniture,
fixtures and office equipment
|
3,143
|
2,451
|
|||||
70,385
|
52,610
|
||||||
Depreciated
cost
|
$
|
241,966
|
$
|
182,306
|
Depreciation
expenses were $16,515, $12,206 and $7,875, for the years
ended December
31, 2004, 2003 and 2002, respectively.
|
|||
(1)
Certain
buildings (the depreciated balance of which as of December
31, 2004 was
$48,273) were constructed on land leased from the Israel
Land
Administration pursuant to four leases. These leases expire
between 2009
and 2049. The Company has the option to renew each lease
for an additional
term of 49 years.
|
|||
b.
|
Cost
of property, plant and equipment includes capitalized interest
expenses,
payroll and related expenses and other expenses incurred
in order to bring
the assets to their intended use, in the amount of $17,967
and $8,211 as
of December 31, 2004 and 2003, respectively. Capitalized
expenses were
$9,756, $4,989 and $1,258 for the years ended December
31, 2004, 2003 and
2002, respectively.
|
c.
|
Cost
of EDP equipment includes capitalized development costs
of computer
sortware developed for internal use in the amount of
$3,384 and $2,460 as
of December 31, 2004 and 2003, respectively.
|
|
d.
|
As
of December 31, 2004, the Company has outstanding contractual
commitments
to expand its buildings and to purchase equipment in
the amount of
$11,506.
|
|
e.
|
As
of December 31, 2004, $53,771 of the Company’s plant and equipment was
under various stages of construction and validation,
and therefore was not
subject to depreciation.
|
|
f.
|
As
for pledges — see Note 11.
|
|
NOTE
6: —OTHER INTANGIBLE ASSETS AND DEFERRED
CHARGES
|
||
a.
|
Composition:
|
December
31,
|
|||||||
Cost:
|
2004
|
2003
|
|||||
Product
rights
|
$
|
68,167
|
$
|
32,049
|
|||
Deferred
charges in respect of loans from institutional investors
|
|||||||
and
bonds
|
1,327
|
1,327
|
|||||
69,494
|
33,376
|
||||||
Accumulated
amortization:
|
|||||||
Product
rights
|
5,609
|
2,667
|
|||||
Deferred
charges in respect of loans from institutional investors
|
|||||||
and
bonds
|
711
|
522
|
|||||
6,320
|
3,189
|
||||||
Amortized
cost
|
$
|
63,174
|
$
|
30,187
|
See
Note 1.f.
|
||
b.
|
Amortization
expenses were $3,107, $2,199, and $388, for the years
ended December 31,
2004, 2003 and 2002, respectively.
|
|
c.
|
As
of December 31, 2004, the estimated amortization expenses
of intangible
assets for 2005 to 2009 is as follows: 2005 — $4,014; 2006 — $4,953; 2007
— $4,953; 2008 —$5,232; and 2009 — $4,833. The weighted average
amortization period for these assets is 15
years.
|
December
31,
|
|||||||
2004
|
2003
|
||||||
Severance
pay fund (1)
|
$
|
1,897
|
$
|
1,489
|
|||
Derivative
instruments (2)
|
3,536
|
1,044
|
|||||
Long-term
deposit (3)
|
14,398
|
185
|
|||||
Other
|
153
|
170
|
|||||
$
|
19,984
|
$
|
2,888
|
(1)
|
Under
Israeli law, the Company and its Israeli subsidiaries
are required to make
severance or pension payments to dismissed employees
and to employees
terminating employment under certain other circumstances.
Deposits are
made with a pension fund to secure pension and
severance rights for the
majority of the employees in Israel who have joined
the pension fund. The
deposits, together with a one-time payment made
to that fund, relieve the
Company and its Israeli subsidiaries of their severance
pay liability to
those employees whose employment started after
June 1, 1979. Accordingly,
neither the deposit nor the related severance pay
liability for such
employees have been recorded.
|
The
severance pay liability for the period through
May 31, 1979 is covered by
the balance sheet accrual. The balance sheet accrual
also covers the
severance pay liability to employees of the Company
who have not joined
the pension fund. The Company has made deposits
with recognized severance
pay funds with respect to this accrual.
|
|
The
Company may only withdraw the amounts funded for
the purpose of
disbursement of severance pay.
|
|
The
Company’s non-Israeli subsidiaries maintain a retirement
savings plan
covering substantially all of their employees.
The subsidiaries’ matching
contribution to the plan was approximately $1,283,
$882, and $477 for the
years 2004, 2003 and 2002, respectively.
|
|
December
31,
|
||||||||||
2004
|
|
2003
|
|
2002
|
||||||
Pension,
retirement savings and severance expenses
|
$
|
4,239
|
$
|
3,060
|
$
|
2,138
|
(2)
|
As
for derivative instruments, see Note 19.
|
(3)
|
Long-term
deposits consist of an interest bearing two year
bank deposit at a
weighted average rate of 2.19%, in the amount of
$14,000 as collateral for
loans to purchase fixed assets.
|
Weighted
average
interest
rate
|
Amount
|
||||||||||||
December
31,
|
December
31,
|
||||||||||||
2004
|
2003
|
2004
|
2003
|
||||||||||
% | |||||||||||||
Short-term
bank credit and loans:
|
|||||||||||||
In,
or linked to, U.S. dollars
|
3.93
|
2.94
|
$
|
53,262
|
$
|
14,605
|
|||||||
In
NIS
|
5.23
|
6.70
|
6,410
|
5
|
|||||||||
In
Canadian dollars
|
5.00
|
5.25
|
4,564
|
4,372
|
|||||||||
Other
|
6.00
|
2.18
|
725
|
142
|
|||||||||
$
|
64,961
|
$
|
19,124
|
||||||||||
Total
authorized credit lines approximate
|
65,000
|
$
|
28,500
|
||||||||||
Unutilized
credit lines approximate
|
$
|
39
|
$
|
9,006
|
|||||||||
Weighted
average interest rates at the end of
|
|||||||||||||
the
year for all loans
|
4.16
|
3.46
|
December
31,
|
|||||||
2004
|
2003
|
||||||
Employees
and payroll accruals (including accrual for
vacation pay)
|
$
|
9,477
|
$
|
14,599
|
|||
Interest
payable
|
2,313
|
2,148*
|
)
|
||||
Suppliers
of property, plant and equipment
|
2,948
|
4,683
|
|||||
Accrued
expenses and other
|
12,482
|
9,653*
|
)
|
||||
$
|
27,220
|
$
|
31,083
|
a.
|
Composed
as follows:
|
December
31,
|
|||||||
2004
|
2003
|
||||||
Loans
from institutional investors and bonds
|
$
|
129,068
|
$
|
130,432
|
|||
Banks
|
36,599
|
29,672
|
|||||
Mortgage
|
23,711
|
4,571
|
|||||
Obligations
to other vendors
|
12,750
|
14,100
|
|||||
Other
|
2,162
|
2,582
|
|||||
204,290
|
181,357
|
||||||
Less
— current maturities
|
16,944
|
24,420
|
|||||
$
|
187,346
|
$
|
156,937
|
1.
|
The
Company has undertaken to comply with financial
covenants in respect of
its bank debt. The covenants stipulate that
our debt to equity ratio may
not exceed 2:1, and that our current ratio
may not be lower than 1:1.
During December 2004,
the Company requested and received from its
Israeli banks, a one year
waiver for certain financial covenants. Accordingly,
these financial
covenants will be measured based on the Company’s December 31, 2005
financial statements. Another financial covenant
was amended by the bank
and the Company expects to meet the amended
financial covenant in the
coming year. As of December 31, 2004, the Company
was in compliance with
all other bank debt covenants.
|
|||
2.
|
The
loan agreements that the Company signed during
2003 require that, prior to
incurring additional debt in Israel, the Company’s interest coverage ratio
be greater than 2:1, to be measured on April
1 of each year of the loan,
commencing on April 1, 2005. In the first quarter
of 2005, the loan
agreements were amended to defer measurement
of the interest coverage
ratio until April 1, 2006. In addition, the
Company undertook, with two of
the institutional investors who had made loans
to the Company of
approximately $6,500, to perform a review of
the Company’s compliance with
the interest coverage ratio on August 15, 2005,
with respect to the
12-month period ending June 30, 2005. These
covenants, as amended, may
restrict the Company’s ability to incur additional debt in Israel.
Under
certain restrictive debt covenants, any dividend
distribution requires the
prior approval of certain banks.
|
|||
b.
|
Classified
by currency, linkage terms and interest rates,
the total amount of the
liabilities (before deduction of current maturities)
is as
follows:
|
Interest
rate
|
Amount
|
||||||||||||
December
31,
|
December
31,
|
||||||||||||
2004
|
2003
|
2004
|
2003
|
||||||||||
%
|
|||||||||||||
In,
or linked to, U.S. dollar
|
4.16
|
4.58
|
$
|
117,071
|
$
|
107,604
|
|||||||
In
Euro
|
—
|
—
|
1,609
|
—
|
|||||||||
In
Canadian dollars
|
4.56
|
5.29
|
23,710
|
9,891
|
|||||||||
In
Israeli currency — linked to CPI*
|
6.37
|
6.41
|
61,900
|
63,862
|
|||||||||
|
|
$
|
204,290
|
$
|
181,357
|
(*)
|
After
giving effect to the hedging instrument,
this debt is linked to the U.S.
dollar and bears interest at a weighted average
rate of 6.37%, as of
December 31, 2004.
|
As
for hedging foreign currency and interest
rate risk of the portion linked
to the Israeli CPI, see Note 19.
|
||
Loans
in the amount of $46,300 are subject to variable
interest rates primarily
linked to the LIBOR and the Canadian Bankers’ Rate. As of December 31,
2004, the balance of the Company’s outstanding debt is subject to fixed
interest rate.
|
||
c.
|
The
liabilities mature as follows:
|
December
31,
2004
|
||||
2005
|
$
|
16,944
|
||
2006
|
34,930
|
|||
2007
|
30,952
|
|||
2008
|
28,741
|
|||
2009
|
25,156
|
|||
Thereafter
|
67,567
|
|||
$
|
204,290
|
For
collateral, see Notes 7(3) and 11.
|
a.
|
Balance
of liabilities collateralized by pledges
is as follows:
|
|
December
31,
2004
|
||||
Short-term
bank credit and short-term loans *)
|
$
|
64,691
|
||
Long-term
debt (including current maturities) **)
|
$
|
189,931
|
*)
|
Including
a short-term loan of $2,300 received by the
U.S. subsidiary,
collateralized by a short-term bank deposit
of the North American
subsidiary in an equal amount.
|
**)
|
Including
long-term loans of $14,000 received by the U.S.
subsidiary, collateralized
by long-term bank deposits of the Company in
an equal
amount.
|
b.
|
The
above mentioned liabilities are collateralized
by:
|
||
1.
|
A
mortgage which includes a first priority charge
on all property, plant and
equipment of the Canadian subsidiary, specifically
including land,
buildings, production machinery, furniture
and fixtures, and a floating
charge covering all assets of the Canadian
subsidiary.
|
||
2.
|
Pledges
on assets of the Company and its Israeli subsidiaries,
including a first
priority floating charge on all
assets.
|
a.
|
Companies
of the Group have leased offices, warehouse space,
production facilities
and equipment, under operating leases for periods
through 2010. The
minimum annual rental payments, under non-cancelable
lease agreements, are
as follows:
|
December
31,
2004
|
||||
2005
|
$
|
1,575
|
||
2006
|
1,184
|
|||
2007
|
931
|
|||
2008
|
816
|
|||
2009
and Thereafter
|
1,396
|
|||
$
|
5,902
|
Total
rent expenses were $3,977, $3,366, and $1,967 for
the years ended December
31, 2004, 2003 and 2002, respectively.
|
||
b.
|
Royalty
commitments:
|
|
One
of the subsidiaries is committed to pay royalties
at the rate of 3%–5% to
the government of Israel through the Office of the
Chief Scientist (“OCS”)
on proceeds from sales of products in which the government
participates in
the research and development by way of grants. The
obligation to pay these
royalties is contingent on actual sales of the products
and, in the
absence of such sales, no payment is required. The
commitment is on a
product by product basis, is in an amount not exceeding
the total of the
grants received by the subsidiary,
including
|
interest
accrued thereon, and is linked to the dollar. Commencing 1999,
grants are
subject to interest at a rate of Dollar LIBOR. As of December
31, 2004,
the aggregate contingent liability to the OCS amounted to
$9,251.
|
|||
Royalty
payments to the OCS were $431, $506 and $1,376 for the years
ended
December 31, 2004, 2003 and 2002, respectively.
|
|||
c.
|
A
claim in the amount of approximately $550 was filed by a customer
against
the Company. Based on a legal opinion and insurance coverage,
management
believes that the final outcome of the lawsuit will not have
a material
adverse effect on the accompanying financial statements and,
accordingly,
no provision was made for this claim.
|
||
d.
|
During
2004, purported securities class action complaints were filed
against the
Company and certain of its current and former officers and
directors in
the United States District Court for the Southern District
of New York.
The Company intends to rigorously defend against the claims
in these
actions and believes that it will not incur any material charge
as a
result of these actions.
|
||
NOTE
13: — SHAREHOLDERS’ EQUITY
|
|||
a.
|
Pertinent
rights and privileges of Ordinary shares:
|
||
1.
|
100%
of the rights to profits are allocated to the Ordinary
shares.
|
||
2.
|
Two-thirds
of the voting power of the Company’s shares are allocated to the Ordinary
shares.
|
||
3.
|
100%
of the dissolution rights are allocated to the Ordinary
shares.
|
||
b.
|
Founders’
Shares:
|
||
One-third
of the voting power of all of the Company’s shares is allocated to the
Founders’ shares.
|
|||
c.
|
Stock
option plans:
|
||
1.
|
The
Company’s 1991 Stock Incentive Plan (“1991 plan”) and 1999 Stock Incentive
Plan (“1999 plan”) provide for the issuance of incentive stock options,
non-qualified stock options, and stock appreciation rights
to key
employees and associates of the Group.
|
||
The
options are granted for at least 100% of the fair market value
on the date
of grant and the aggregate amount of the options granted may
not exceed
2,100,000. As of December 31, 2004, none of the options granted
include
stock appreciation rights.
The
|
options
are granted to employees and associates, have a four to five-year
graded
vesting term and generally expire ten years after the date
of the grant.
Each option entitles its holder the right to purchase one Ordinary
share
of NIS 0.0001 par value (subject to adjustments). As of December
31, 2004,
an aggregate of 635,775 options in respect of the 1999 plan
are still
available for future grants. Any options that are canceled
or forfeited
before expiration become available for future grants.
|
||
2.
|
A
summary of the Company’s stock option activity (except options to
associates) and related information for the three years ended
December 31,
2004 is as follows:
|
Number
of
options
|
|
Exercise
price
|
Weighted
average
exercise
price
|
|||||||
$
|
$
|
|||||||||
Outstanding
at January 1, 2002
|
1,076,597
|
|
9.67
|
|||||||
Exercised
|
(91,834
|
)
|
2.17–11.91
|
3.77
|
||||||
Canceled
and forfeited
|
(21,674
|
) |
2.44–38.58
|
19.87
|
||||||
Granted
|
266,500
|
24.10–38.98
|
32.02
|
|||||||
Outstanding
at December 31, 2002
|
1,229,589
|
14.72
|
||||||||
Exercised
|
(192,167
|
)
|
2.38–39.03
|
7.28
|
||||||
Canceled
and forfeited
|
(46,300
|
)
|
2.49–46.28
|
22.29
|
||||||
Granted
|
295,750
|
30.30–71.15
|
45.59
|
|||||||
Outstanding
at December 31, 2003
|
1,286,872
|
23.10
|
||||||||
Exercised
|
(155,045
|
)
|
2.08–46.95
|
7.34
|
||||||
Canceled
and forfeited
|
(180,250
|
)
|
2.49–71.15
|
39.30
|
||||||
Granted
|
527,500
|
20.24–66.42
|
34.68
|
|||||||
Outstanding
at December 31, 2004
|
1,479,077
|
2.38–69.26
|
26.83
|
The
number of options exercisable as of December 31, 2004, 2003
and 2002 are
468,293 466,561, and 436,160, respectively. The weighted average
exercise
prices for the options exercisable as of December 31, 2004,
2003 and 2002
are $12.79, $7.94, and $4.82, respectively.
|
||
The
stock options outstanding and exercisable as of December 31,
2004 have
been classified into ranges of exercise prices as
follows:
|
Range
of
exercise
price
|
Outstanding
as
of
December
31,
2004
|
Weighted
average
remaining
contractual
life
|
Weighted
average
exercise
price
|
Exercisable
as
of
December
31,
2004
|
Weighted
average
exercise
price
|
|||||||||||
$
|
years | $ | $ | |||||||||||||
2.38–6.82
|
237,572
|
4.19
|
3.60
|
237,572
|
3.60
|
|||||||||||
6.83–13.18
|
217,900
|
5.95
|
12.37
|
117,710
|
12.28
|
|||||||||||
13.19–20.75
|
86,400
|
8.31
|
18.26
|
15,010
|
14.91
|
|||||||||||
20.76–33.98
|
546,400
|
8.64
|
28.04
|
47,510
|
30.17
|
|||||||||||
33.99–42.46
|
128,555
|
7.25
|
37.12
|
38,991
|
37.23
|
|||||||||||
42.47–69.26
|
262,250
|
8.92
|
55.12
|
11,500
|
50.16
|
|||||||||||
1,479,077
|
7.44
|
26.83
|
468,293
|
12.79
|
3.
|
The
weighted average fair values for options granted
were:
|
Year
ended December 31,
|
||||||||||
2004
|
2003
|
2002
|
||||||||
Weighted
average fair value on the date of grant
|
$
|
17.68
|
$
|
22.33
|
$
|
14.85
|
Options
to employees were issued with an exercise price equal to
fair market
value. No compensation expenses were recognized in 2004,
2003 or
2002.
|
||
4
|
a)
|
A
summary of the Company’s stock option activity in respect of associates
and related information for the three years ended December
31, 2004 is as
follows:
|
Number
of
options
|
|
Exercise
price
|
Weighted
average
exercise
price
|
|||||||
$
|
$
|
|||||||||
Outstanding
at January 1, 2002
|
32,500
|
|
9.58
|
|||||||
Exercised
|
(12,500
|
)
|
2.63–6.19
|
3.82
|
||||||
Outstanding
at December 31, 2002
|
20,000
|
2.75–36.38
|
10.82
|
|||||||
Exercised
|
(4,500
|
)
|
2.63–6.19
|
5.16
|
||||||
Canceled
and forfeited
|
(2,000
|
)
|
32.61–32.61
|
32.61
|
||||||
Outstanding
at December 31, 2003
|
13,500
|
2.75–36.38
|
10.82
|
|||||||
Exercised
|
(2,500
|
)
|
6.19
|
6.19
|
||||||
Outstanding
at December 31, 2004
|
11,000
|
2.75–6.13
|
4.27
|
The
number of options exercisable as of December 31, 2004,
2003, and 2002 were
11,000, 11,375, and 14,750,
respectively.
|
The stock options outstanding and exercisable as of December 31, 2004 have been classified into ranges of exercise prices as follows: |
Options
outstanding
|
Options
exercisable
|
|||||||||||||||
Range
of
exercise
price
|
Outstanding
as
of
December
31,
2004
|
Weighted
average
remaining
contractual
life
|
Weighted
average
exercise
price
|
Exercisable
as
of
December
31,
2004
|
Weighted
average
exercise
price
|
|||||||||||
$
|
years
|
$
|
$
|
|||||||||||||
2.75–6.13
|
11,000
|
4.81
|
4.27
|
11,000
|
4.27
|
b)
|
The
Company accounts for its options granted to associates
under the fair
value method as prescribed in SFAS No. 123 and EITF 96-18.
These options
vest primarily over 4–5 years.
|
|||
The
fair value of these options was estimated using the Black-Scholes
Option
Pricing Model.
|
||||
Compensation
expenses of approximately $0, $10 and $139 amortized over
the vesting
period were recognized in the years ended December 31,
2004, 2003 and
2002, respectively.
|
||||
5.
|
In
2004, 2003 and 2002, 157,545,
196,667,
and 104,334 options were exercised to purchase 157,545,
196,667, and
104,334 Ordinary shares, respectively. The amount of consideration
received therefrom in 2004, 2003 and 2002, was $1,013,
$1,422, and $393,
respectively.
|
|||
e.
|
Dividends:
|
|||
The
Company may declare and pay dividends out of its retained
earnings (as for
restrictions on dividend distribution see Notes 10 and
14c).
|
||||
f.
|
Net
earnings per share:
|
|
|
Year
ended December 31, 2004
|
Year
ended December 31, 2003
|
Year
ended December 31, 2002
|
||||||||||||||||||||||||
|
Net
Income
(numerator)
|
Shares
(denominator)
|
Per
Share
Amount
|
Net
income
(numerator)
|
Shares
(denominator)
|
Per
Share
Amount
|
Net
income
(numerator)
|
Shares
(denominator)
|
Per
Share
Amount
|
|||||||||||||||||||
Basic
EPS:
|
||||||||||||||||||||||||||||
Net
income available to holders
|
||||||||||||||||||||||||||||
of
Ordinary shares
|
$
|
11,075
|
29,057,564
|
$
|
0.38
|
$
|
61,155
|
28,872,839
|
$
|
2.12
|
$
|
44,555
|
28,664,887
|
$
|
1.55
|
|||||||||||||
Effect
of dilutive securities:
|
||||||||||||||||||||||||||||
Stock
options
|
—
|
599,922
|
(0.01
|
)
|
—
|
801,309
|
(0.06
|
)
|
—
|
743,307
|
(0.03
|
)
|
||||||||||||||||
Diluted
EPS:
|
||||||||||||||||||||||||||||
Income
available to holders of
|
||||||||||||||||||||||||||||
Ordinary
Shares plus
|
||||||||||||||||||||||||||||
assumed
exercises
|
$
|
11,075
|
29,657,486
|
$
|
0.37
|
$
|
61,155
|
29,674,148
|
$
|
2.06
|
$
|
44,555
|
29,408,194
|
$
|
1.52
|
g.
|
Stock
repurchase:
|
|
In
prior years, the Group acquired 265,400 Ordinary shares
of the Company in
the aggregate amount of $1,348, which represent less
than 1% of the total
outstanding Ordinary shares.
|
||
h.
|
2000
Employee Stock Purchase Plan:
|
|
In
May 2000, the Company’s Board of Directors approved and implemented the
2000 Employee Stock Purchase Plan (“the Plan”). The Plan was approved at
an Extraordinary General Meeting of Shareholders held
on May 2, 2001. The
purpose of the Plan is to provide employees of the Company
and those of
its subsidiaries designated by the Board with an opportunity
to purchase
Ordinary shares. The maximum number of shares issuable
under the Plan is
500,000 Ordinary shares, subject to adjustment.
|
||
Under
the terms of the Plan, participating employees accrue
funds in an account
through payroll deductions during six month offering
periods. The funds in
this account are applied at the end of such offering
periods to purchase
Ordinary shares at a 15%
discount
from the closing price of the Ordinary Shares on (i)
the first business
day of the offering period or (ii) the last business
day of the offering
period, whichever closing price is lower. As of December
31, 2004,
participating employees purchased an aggregate of 129,379
Ordinary Shares
at a weighted average exercise price of $26.54.
|
||
The
amounts of consideration received therefrom in 2004,
2003 and 2002 were
$850, $688 and $258,
respectively.
|
||
NOTE
14: — INCOME TAXES
|
||
a.
|
Measurement
of taxable income under the Income Tax (Inflationary
Adjustments) Law,
1985:
|
|
Results
for tax purposes in Israel are measured in terms of earnings
in New
Israeli Shekels (“NIS”) after certain adjustments for increases in
Israel’s CPI. As explained in Note 2b, the financial statements
are
measured in dollars. The difference between the annual
change in the
Israeli CPI and in the NIS/dollar exchange rate causes
a further
difference between taxable income and the income before
taxes shown in the
financial statements. In accordance with paragraph 9(f)
of SFAS 109, the
Company has not provided deferred income taxes on the
differences
resulting from changes in exchange rates and indexing
for tax purposes
through December 31, 2002. The Company and its Israeli
subsidiaries are
taxed under this law.
|
||
As
of January 1, 2003, for tax purposes the Company’s earnings are measured
in terms of dollars.
|
b.
|
Tax
rates applicable to the income of the Israeli companies
in the
group:
|
|
Until
December 31, 2003, the regular tax rate applicable to
income of companies
(which are not entitled to benefits due to “approved enterprise” status,
as described below) was 36%. In June 2004, an amendment
to the Income Tax
Ordinance (No. 140 and Temporary Provision), 2004 was
approved by the
Israeli parliament, which determines, among other things,
that the
corporate tax rate is to be gradually reduced to the
following tax rates:
2004 — 35%, 2005 — 34%, 2006 — 32% and 2007 and thereafter — 30%. Since
the Company benefits from lower tax rates of the “Approved Enterprise”
status, such changes do not have, or are not expected
to have, a material
effect on its financial results.
|
||
c.
|
Tax
benefits under the Law for the Encouragement of Industry
(Taxes),
1969:
|
|
The
Company is an “industrial company” as defined by this law and, as such, is
entitled to certain income tax benefits, mainly accelerated
depreciation
in respect of machinery and equipment (as prescribed
by regulations
published under the Inflationary Adjustments Law) and
the right to claim
public issuance expenses, amortization of patents and
other intangible
property rights as deductions for tax purposes.
|
||
d.
|
Tax
benefits under the Law for the Encouragement of Capital
Investments, 1959
(“the Law”):
|
|
The
Company’s production facilities in Israel have been granted an
“Approved
Enterprise” status under the Law. The main benefits arising from
such
status are tax exempt income for a period of 2–4 years and reduction in
tax rates on income derived from Approved Enterprises
for the remaining
benefit period. The Company is also a “foreign investors’ company”, as
defined by the Law and, as such, is entitled to a 10
or 15 year period of
benefits, based on the level of investment, and to a
reduction in tax
rates to l0%–25% (based on the percentage of foreign ownership in
each tax
year) and to accelerated depreciation in respect of machinery
and
equipment.
|
||
The
period of tax benefits, described above, is subject to
a limit of 12 years
from commencement of production or 14 years from the
date of receiving the
Approved Enterprise status, whichever occurs earlier.
|
||
The
Company has four “Approved Enterprise” plans. Under the first approval,
the undistributed income derived from one Approved Enterprise
will be
exempt from corporate tax for a period of four years
from 2001, and the
Company will be eligible for a reduced tax rate of between
10% to
25%
for
an additional two years. Under the second approval,
the
|
undistributed
income derived from another Approved Enterprise was exempt
from corporate
tax for a period of two years from 2001 and the Company
will be eligible
for a reduced tax rate of 10% to 25%
(based
on the percentage of foreign ownership in each tax year)
for an additional
eight years. Under the third approval (benefit period starting
2003), the
undistributed income will be exempt from corporate tax
for a period of two
years following implementation of the plan. The Company
will be eligible
for a reduced tax rate of between 10% to 25% (based on
the percentage of
foreign ownership in each tax year) for an additional 13
years thereafter.
Under the fourth approval (benefit period most likely be
implemented
during 2005), the undistributed income will be exempt from
corporate tax
for a period of two years following implementation of the
plan and the
Company will be eligible for a reduced tax rate of between
10% to 25%
(based on the percentage of foreign ownership in each tax
year) for an
additional eight years thereafter.
|
||
The
entitlement to these benefits is conditional upon the Company
fulfilling
the requirements of the Law, regulations published thereunder
and the
instruments of approval for the specific investments in
Approved
Enterprises. In the event of failure to comply with these
requirements,
the benefits may be canceled and the Company may be required
to refund the
amount of the benefits, in whole or in part, including
interest. As of
December 31, 2004, management believes that the Company
is meeting all of
the aforementioned requirements.
|
||
The
tax-exempt income attributable to the Approved Enterprises
can not be
distributed to shareholders without subjecting the Company
to taxes. As of
December 31, 2004, retained earnings included approximately
$92,331 of
tax-exempt profits earned by the Company’s Approved Enterprises. The
Company has decided not to declare dividends out of such
tax-exempt
income. Accordingly, no deferred income taxes have been
provided on income
attributable to the Company’s Approved Enterprises.
|
||
If
the retained tax-exempt income is distributed, it will
be taxed at the
corporate tax rate applicable to such profits as if the
Company had not
chosen the alternative tax benefits (currently 10%), and
an income tax
liability would be incurred of approximately $9,233 as
of December 31,
2004.
|
||
Income
not eligible for Approved Enterprise benefits mentioned
above is taxed at
the regular rate of 35%.
|
||
e.
|
On
July 24, 2002, Amendment 132 to the Israeli Income Tax
Ordinance (“the
Amendment”) was approved by the Israeli Parliament and came into
effect on
January 1, 2003. The principal objectives of the
Amendment
|
were
to broaden the categories of taxable income and to reduce
the tax rates
imposed on employees’ income.
|
||
The
material consequences of the Amendment applicable to the
Company include,
among other things, imposing a tax on all income of Israeli
residents,
individuals and corporations, regardless of the territorial
source of
income, certain modifications in the qualified taxation tracks
of employee
stock options and the introduction of the “controlled foreign corporation”
concept according to which an Israeli company may become
subject to
Israeli taxes on certain income of a non-Israeli subsidiary,
if the
subsidiary’s primary source of income is passive income (such as interest,
dividends, royalties, rental income or capital gains). An
Israeli company
that is subject to Israeli taxes on the income of its non-Israeli
subsidiaries will receive a credit for income taxes paid
by the subsidiary
in its country of residence. Since the Company benefits from
lower tax
rates of an “Approved Enterprise,” such credits are immaterial to its
results of operations.
|
f.
|
Income
before income taxes comprises the
following:
|
Year
ended December 31,
|
||||||||||
2004
|
2003
|
2002
|
||||||||
Domestic
(Israel)
|
$
|
32,802
|
$
|
40,666
|
$
|
28,095
|
||||
Foreign
(North America, the Cayman Islands, Ireland and the U.K.)
|
(39,735
|
)
|
32,290
|
25,080
|
||||||
$
|
(6,933
|
)
|
$
|
72,956
|
$
|
53,175
|
g.
|
The
provision for income taxes comprises the following:
|
|
Year
ended December 31,
|
||||||||||
2004
|
2003
|
2002
|
||||||||
Current
taxes
|
$
|
1,831
|
$
|
2,252
|
$
|
4,152
|
||||
Deferred
income taxes
|
(18,822
|
)
|
9,223
|
4,254
|
||||||
$
|
(16,991
|
)
|
$
|
11,475
|
$
|
8,406
|
||||
Domestic
|
$
|
1,743
|
$
|
2,556
|
$
|
373
|
||||
Foreign
|
(18,734
|
)
|
8,919
|
8,033
|
||||||
$
|
(16,991
|
)
|
$
|
11,475
|
$
|
8,406
|
h.
|
Reconciliation
of the theoretical tax expenses to the actual tax
expenses:
|
|
A
reconciliation of the theoretical tax expense, assuming
all income is
taxed at the statutory rate applicable to income of the
Group and the
actual tax expense is as follows:
|
Year
ended December 31,
|
||||||||||
2004
|
2003
|
2002
|
||||||||
Income
before income taxes
|
$
|
(6,933
|
)
|
$
|
72,956
|
$
|
53,175
|
|||
Statutory
tax rate
|
35
|
%
|
36
|
%
|
36
|
%
|
||||
Theoretical
tax expenses
|
$
|
(2,427
|
)
|
$
|
26,264
|
$
|
19,143
|
|||
Deferred
tax in respect of losses for which valuation
|
||||||||||
allowance
was provided
|
586
|
465
|
193
|
|||||||
“Approved
Enterprise” benefit (1)
|
(8,768
|
)
|
(11,704
|
)
|
(8,864
|
)
|
||||
Effect
of different tax rates in other countries
|
(3,242
|
)
|
(1,024
|
)
|
(993
|
)
|
||||
Non-deductible
expenses
|
110
|
150
|
150
|
|||||||
Canadian
tax benefits in respect of research and
|
||||||||||
development
expenses
|
(2,900
|
)
|
(2,556
|
)
|
(1,078
|
)
|
||||
Other
|
(350
|
)
|
(120
|
)
|
(145
|
)
|
||||
Income
taxes in the statements of income
|
$
|
(16,991
|
)
|
$
|
11,475
|
$
|
8,406
|
Basic
|
$
|
0.30
|
$
|
0.41
|
$
|
0.31
|
||||
Diluted
|
$
|
0.30
|
$
|
0.39
|
$
|
0.30
|
i.
|
Current
taxes are calculated at the following rates:
|
|
2004
|
2003
|
2002
|
||||||||
On
Israeli operations (not including “Approved Enterprise”)
|
35
|
%
|
36
|
%
|
36
|
%
|
||||
On
U.S. operations *)
|
38.7
|
%
|
38.7
|
%
|
40.6
|
%
|
||||
On
Canadian operations *)
|
33.8
|
%
|
33.8
|
%
|
33.8
|
%
|
||||
On
U.K. operations *)
|
35
|
%
|
35
|
%
|
35
|
%
|
||||
On
Ireland operations *)
|
10
|
%
|
10
|
%
|
10
|
%
|
*)
|
The
U.S., U.K. and Canadian subsidiaries are taxed on the
basis of the tax
laws prevailing in their countries of residence. The
Canadian subsidiary
qualifies for research and development tax credits,
thereby reducing its
effective tax rate.
|
j.
|
Deferred
income taxes:
|
|
Deferred
income taxes reflect the net tax effects of temporary
differences between
the carrying amounts of assets and liabilities for
financial reporting
purposes and the amounts used for income tax purposes
and of carryforward
losses.
|
|
December
31,
|
||||||
2004
|
2003
|
||||||
Deferred
tax assets:
|
|||||||
Net
operating losses carryforward
|
$
|
35,653
|
$
|
14,714
|
|||
Inventory
|
1,742
|
1,836
|
|||||
Research
and development expenses
|
1,203
|
72
|
|||||
Pre-paid
tax on inter-company interest expenses
|
2,843
|
644
|
|||||
Allowance
for sale returns
|
1,333
|
811
|
|||||
Other,
net
|
2,068
|
2,784
|
|||||
Total
deferred tax assets
|
44,842
|
20,861
|
|||||
Valuation
allowance for deferred tax assets
|
(7,010
|
)
|
(5,124
|
)
|
|||
Net
deferred tax assets
|
37,832
|
15,737
|
|||||
Deferred
tax liabilities:
|
|||||||
Property,
plant, and equipment
|
(5,882
|
)
|
(3,196
|
)
|
|||
Other,
net
|
(2,632
|
)
|
(1,684
|
)
|
|||
Total
deferred tax liabilities
|
(8,514
|
)
|
(4,880
|
)
|
|||
Net
deferred tax assets
|
$
|
29,318
|
$
|
10,857
|
|||
Domestic
|
$
|
2,894
|
$
|
1,794
|
|||
Foreign
|
26,424
|
9,063
|
|||||
$
|
29,318
|
$
|
10,857
|
The
deferred income taxes are presented in the balance
sheet as
follows:
|
December
31,
|
|||||||
2004
|
2003
|
||||||
Among
current assets (“other accounts receivable and prepaid expenses”)
|
$
|
4,647
|
$
|
5,487
|
|||
Long-term
deferred income tax assets
|
31,387
|
10,250
|
|||||
Among
long-term liabilities
|
(6,716
|
)
|
(4,880
|
)
|
|||
$
|
29,318
|
$
|
10,857
|
k.
|
Carryforward
tax losses:
|
||
1.
|
The
Company:
|
||
As
of December 31, 2004, the Company had no carryforward
tax
losses.
|
|||
2.
|
Israeli
subsidiaries:
|
||
As
of December 31, 2004, the Israeli subsidiaries have
carryforward tax
losses in the amount of $978, linked to the Israeli
CPI and which may be
carried forward and offset against taxable income
for an indefinite period
in the future.
|
|||
3.
|
Canadian
subsidiary:
|
||
As
of December 31, 2004, this subsidiary has no carryforward
tax
losses.
|
|||
4.
|
U.K.
subsidiary:
|
||
As
of December 31, 2004, this subsidiary has carryforward
tax losses in the
amount ot $6,835, which may be carried forward and
offset against taxable
income for an indefinite period in the future.
|
|||
5.
|
Irish
subsidiary:
|
As
of December 31, 2004, this subsidiary has carryforward
tax losses of
$6,755. In order for this subsidiary to obtain
a full benefit from these
losses, it must commence commercial operations
within three years after
incurring these losses.
|
|||
6.
|
U.S.
subsidiary:
|
||
As
of December 31, 2004, this subsidiary has carryforward
tax losses in the
amount of $86,339, resulting from 2004 U.S. operating
losses and the
exercise of stock options in 2001 by selling shareholders
in a public
offering of the Company’s shares. These losses can be carried forward
against taxable income for 20 years from the year
in which the losses were
incurred, resulting in expiration dates of 2021
and
2024.
|
|||
i.
|
During
2002, 84.4% of the shares conferring rights to
profits of the U.S.
subsidiary were transferred, in the form of dividend,
to the Company from
Taro Pharmaceuticals North America Inc. pursuant
to section 104 (c) of the
Israeli Income Tax Ordinance. According to a tax
ruling received from the
Israeli Income Tax Commission, in the event that
the U.S. subsidiary pays
a dividend to its shareholders, a portion equal
to the ratio of $5,200 out
of total retained earnings, at the distribution
date, will not be entitled
to tax benefits under the tax treaty between Israel
and the United
States.
|
||
The
Company’s Board of Directors has determined that its U.S.
subsidiary will
not pay any dividend as long as such payment will
result in any tax
expenses for the Company.
|
Year
ended December 31,
|
|||||||||||
2004
|
2003
|
2002
|
|||||||||
a. |
Sales
by location of customers (1) (2) (3):
|
||||||||||
Israel
|
$
|
14,587
|
$
|
13,468
|
$
|
11,809
|
|||||
Canada
|
18,353
|
15,603
|
12,819
|
||||||||
U.S.A
|
247,765
|
283,197
|
183,857
|
||||||||
Other
|
3,425
|
3,190
|
3,096
|
||||||||
$
|
284,130
|
$
|
315,458
|
$
|
211,581
|
||||||
(1)
Including commercial activities
|
$
|
4,654
|
$
|
3,983
|
$
|
1,529
|
|||||
(2)
Including sales to customer A
|
$
|
45,460
|
$
|
62,693
|
$
|
46,548
|
|||||
Including
sales to customer B
|
$
|
43,188
|
$
|
52,997
|
$
|
25,389
|
|||||
(3)
Sales to customer A as a percentage of total sales
|
16
|
%
|
20
|
%
|
22
|
%
|
|||||
Sales
to customer B as a percentage of total sales
|
15
|
%
|
17
|
%
|
12
|
%
|
|||||
b. |
Research
and development expenses, net:
|
||||||||||
Total
expenses
|
$
|
43,343
|
$
|
42,479
|
$
|
27,500
|
|||||
Less
— grants and participations
|
1,400
|
1,878
|
1,127
|
||||||||
$
|
41,943
|
$
|
40,601
|
$
|
26,373
|
||||||
c. |
Selling,
marketing, general and administrative expenses:
|
||||||||||
Selling
and marketing
|
$
|
37,918
|
$
|
30,149
|
$
|
15,947
|
|||||
Advertising
|
30,955
|
22,309
|
4,075
|
||||||||
General
and administrative *)
|
54,426
|
45,260
|
32,459
|
||||||||
$
|
123,299
|
$
|
97,718
|
$
|
52,481
|
||||||
d. |
*)
Including allowance for doubtful accounts
|
$
|
83
|
$
|
52
|
$
|
—
|
||||
Financial
expenses, net *):
|
|||||||||||
Interest
and exchange differences on long-term liabilities
|
$
|
6,622
|
$
|
2,720
|
$
|
2,944
|
|||||
Income
in respect of deposits
|
(1,770
|
)
|
(1,469
|
)
|
(2,351
|
)
|
|||||
Expenses
in respect of short-term credit
|
1,883
|
1,245
|
506
|
||||||||
Foreign
currency translation losses (gains)
|
(318
|
)
|
(774
|
)
|
(937
|
)
|
|||||
$
|
6,417
|
$
|
1,722
|
$
|
162
|
||||||
*)
Net of interest capitalized in cost of property, plant
|
|||||||||||
and
equipment
|
$
|
2,569
|
$
|
1,180
|
$
|
479
|
Foreign
currency
transaction
adjustments
|
Unrealized
loss
on
available-for-
sale
marketable
securities
|
Unrealized
gain
from
hedging
derivatives
|
Total
|
||||||||||
Balance
at January 1, 2003
|
(2,404
|
)
|
46
|
—
|
(2,358
|
)
|
|||||||
Foreign
currency translation adjustments
|
9,501
|
—
|
9,501
|
||||||||||
Unrealized
loss from hedging derivatives
|
—
|
—
|
(1,448
|
)
|
(1,448
|
)
|
|||||||
Balance
at December 31, 2003
|
7,097
|
46
|
(1,448
|
)
|
5,695
|
||||||||
Foreign
currency translation adjustments
|
6,076
|
—
|
—
|
6,076
|
|||||||||
Unrealized
gain from hedging derivatives
|
1,681
|
1,681
|
|||||||||||
Unrealized
gain from available for sale
|
|||||||||||||
marketable
securities
|
—
|
25
|
—
|
25
|
|||||||||
Balance
at December 31, 2004
|
13,173
|
71
|
233
|
13,477
|
Israel
|
Canada*)
|
U.S.A.
|
Other
|
Consolidated
|
||||||||||||
Year ended December 31, 2004 and as of | ||||||||||||||||
December
31, 2004:
|
||||||||||||||||
Sales
to unaffiliated customers **)
|
$
|
14,587
|
$
|
18,353
|
$
|
247,765
|
$
|
3,425
|
$
|
284,130
|
||||||
Long-lived
assets
|
$
|
131,993
|
$
|
51,642
|
$
|
39,070
|
$
|
26,483
|
$
|
249,188
|
||||||
Year
ended December 31, 2003 and as of
|
||||||||||||||||
December
31, 2003:
|
||||||||||||||||
Sales
to unaffiliated customers**)
|
$
|
13,468
|
$
|
15,603
|
$
|
283,197
|
$
|
3,190
|
$
|
315,458
|
||||||
Long-lived
assets
|
$
|
108,684
|
$
|
46,148
|
$
|
20,009
|
$
|
14,664
|
$
|
189,505
|
||||||
Year
ended December 31, 2002 and as of
|
||||||||||||||||
December
31, 2002:
|
||||||||||||||||
Sales
to unaffiliated customers**)
|
$
|
11,809
|
$
|
12,819
|
$
|
183,857
|
$
|
3,096
|
$
|
211,581
|
||||||
Long-lived
assets
|
$
|
67,344
|
$
|
22,515
|
$
|
10,040
|
$
|
609
|
$
|
100,508
|
*)
|
Includes
operations in both Canada and Cayman Islands.
|
**)
|
Based
on customer’s location.
|
Year
ended December 31,
|
||||||||||
2004
|
2003
|
2002
|
||||||||
Compensation
to related parties *):
|
||||||||||
Wages
and salaries
|
$
|
1,050
|
$
|
2,131
|
$
|
1,669
|
||||
Management
fees
|
1,063
|
1,382
|
1,060
|
|||||||
Directors’
fees
|
97
|
103
|
74
|
|||||||
$
|
2,210
|
$
|
3,616
|
$
|
2,803
|
|||||
*)
Compensation was paid to related parties, as follows:
|
||||||||||
Related
parties employed by the Group
|
$
|
1,062
|
$
|
2,150
|
$
|
1,689
|
||||
Related
parties not employed as above — directors (including
|
||||||||||
companies
held by these directors)
|
$
|
1,148
|
$
|
1,466
|
$
|
1,114
|
||||
Number
of individuals to whom the compensation relates
|
||||||||||
(includes
all directors)
|
10
|
11
|
11
|
As
recorded
|
Fair
value
|
||||||
Other
receivable and prepaid expenses
|
$
|
1,050
|
$
|
1,050
|
|||
Long-term
investment
|
$
|
3,536
|
$
|
3,536
|
a.
|
Fair
value hedge:
|
|
During
1999—2000 the Company entered into debenture agreements to borrow
in
Israel, NIS 89.4 million, for a ten-year term and at an
annual interest
rate of 8.25%, payable semi-annually.
|
||
During
the same period, the Company entered into a ten-year cross-currency
interest rate swap in which it receives a semi-annual fixed
payment in NIS
at an annual rate of 8.25% on the notional amount of NIS
89.4 million
linked to Israeli Consumer Price Index (“CPI”), and makes a payment of
LIBOR plus 2.8% on $21,600. There will be a final exchange
of principal at
the maturity dates specified in the contract based on the
comparison of
NIS 89.4 million, linked to the CPI, to the $21,600. The
Company
designated the cross-currency interest rate swap as a fair
value hedge of
the changes in the fair value of the loan due to both interest
rate and
foreign exchange risk.
|
||
At
inception, the hedge relationship is expected to be highly
effective
because the notional amount of the cross-currency interest
rate swap
coincides with that of the debenture agreement, and all
cash flows and
reset dates coincide between the debt and the swap. Accordingly,
no
portion of the change in fair value of the cross-currency
interest rate
swap is considered to be ineffective. Hedge ineffectiveness,
if any, is
included in current period earnings, and was insignificant
in all reported
periods.
|
||
In
accordance with fair value hedge accounting under SFAS
133, the change in
the fair value of the debentures attributable to changes
in the NIS
interest rates is calculated and then this adjusted value
is remeasured at
spot rates through earnings (in accordance with SFAS 52).
The
change in the fair value of the cross-currency interest
rate swap is also
recorded in earnings.
|
||
The
fair value of the afformentioned hedge amounted to $1,800
as of December
31, 2004.
|
||
b.
|
Cash
flow hedge:
|
|
In
2003, the Company entered into loan agreements to borrow,
in Israel, NIS
210 million for an eleven-year term at an annual interest
rate of 5.8%,
payable semi-annually.
|
||
At
the same time the Company entered into a five-year currency
swap in which
it will receive an NIS amount equal to 5.8% of the outstanding
NIS
balance, linked to the CPI,
|
and
pay USD at a fixed rate of 5.9% on USD $47,000. There will
be a final
exchange of principal on maturity of the contract based
on a comparison of
NIS 210 million, linked to the CPI, to $47,000. Interest
payments on the
debt and the swap are payable semi-annually. The Company
designated the
cross-currency swap as a cash flow hedge of the exposure
to changes in
functional-currency-equivalent cash flows on the debt.
|
||||
The
cash flow hedge is expected to be highly effective because
the notional
amount of the cross-currency swap coincides with that of
the debenture
agreement, and the five-year interest rates and cash flow
dates coincide
between the debt and the swap. The Company assessed whether
the derivative
continued to be highly effective in offsetting changes
in cash flows from
the hedged item. No portion of the change in cash flows
of the
cross-currency swap is considered to be ineffective. Hedge
ineffectiveness, if any, is included in current period
earnings, and was
insignificant in all reported periods. Changes in the fair
value of a
derivative that is designated as a cash flow hedge and
is highly effective
are recorded in accumulated other comprehensive income
until the
underlying transaction affects earnings and are then reclassified
to
earnings in the same account as the hedged transaction.
In 2004, the
Company recorded in accumulated other comprehensive income
an unrealized
gain in the amount of $1,600.
|
||||
The
fair value of the cash flow hedge amounted to $2,800 as
of December 31,
2004.
|
||||
NOTE
20: — SUBSEQUENT EVENTS (UNAUDITED)
|
||||
1.
|
In
February 2005, the Company completed the acquisition of
3 Skyline Drive,
the 124,000 square foot building in which the Company had
initially
acquired a 32% interest in 2002.
|
|||
2.
|
In
March 2005, the Company divested the ElixSure® and Kerasal® brands in
North America. However, the Company will continue to manufacture
and
supply these products from its Canadian plant.
|
|||
3.
|
In
March 2005, the Company divested the Kerasal® and Primsol®
trademarks.
|
|||
End
of consolidated financial
statements
|
Year |
Balance
at
beginning
of
period
|
|
Additions
—
Charged
to
costs
and
expenses
|
Deductions
—
Write-offs
of
Inventory
|
Balance
at end of
period
|
||||||||
2004
|
$
|
3,591
|
$
|
8,132
|
$
|
6,221
|
$
|
5,502
|
|||||
2003
|
1,461
|
5,574
|
3,444
|
3,591
|
|||||||||
2002
|
966
|
2,930
|
2,435
|
1,461
|
Year |
Balance
at
beginning
of
period
|
Additions
—
Charged
to
costs
and
expenses
|
Deductions
—
Write-offs
of
Inventory
|
Balance
at end of
period
|
|||||||||
2004
|
$
|
141
|
$
|
83
|
$
|
34
|
$
|
190
|
|||||
2003
|
112
|
52
|
23
|
141
|
|||||||||
2002
|
108
|
8
|
4
|
112
|
|