The following table of our material contractual obligations as of December 31, 2006, summarizes the aggregate effect that these obligations are expected to have on our cash flows in the periods indicated:
See Note 8 to our consolidated financial statements included in this annual report for our royalty commitments to the Office of the Chief Scientist in Israel.
Our executive officers and directors and their ages and positions as of the date of this annual report are as follows:
Nachum (Homi) Shamir has served as our President and Chief Executive Officer and a director since April 9, 2006. Prior to joining us, Mr. Shamir served as Corporate Vice President of Eastman Kodak Company and as the President of Eastman Kodak’s Transaction and Industrial Solutions Group, which includes several business units, including Kodak Versamark, Inc. (whose operations were previously those of Scitex Digital Printing Inc.) of which Mr. Shamir was President and Chief Executive Officer. From June 2003 to January 2004, Mr. Shamir served as the President and Chief Executive Officer of Scitex Corporation. From January 2001 to January 2004, he served as the President and Chief Executive Officer of Scitex Digital Printing, having previously served as its Chief Operating Officer since July 2000. Prior thereto, Mr. Shamir was Managing Director and General Manager of Scitex Digital Printing (Asia Pacific) Pte Ltd., from the incorporation of this Singapore-based company in 1994. From 1993 until 1994 he was with the Hong Kong based Scitex Asia Pacific (H.K.) Ltd. Before joining Scitex, Mr. Shamir held senior management positions at various international companies mainly in the Asia Pacific regions. Mr. Shamir holds a B.Sc from the Hebrew University of Jerusalem and an M.P.A. from Harvard University.
Kevin Rubey has served as our Chief Operations Officer since June 2001. Prior to joining us, from 1998 to May 2001, Mr. Rubey worked at Eastman Kodak Company, a consumer and professional photographic and information imaging company where he led global manufacturing and operations for the Health Imaging Business Unit. From 1996 to 1998, Mr. Rubey was Manufacturing Director of the Medical Imaging Business Unit of Imation Corporation, a U.S. information technology company specializing in data storage and color image management. Prior to that, from 1977 to 1996, Mr. Rubey worked at the 3M Corporation in a variety of positions in the health, consumer and information technology businesses. Mr. Rubey holds a B.Sc. in mechanical engineering and an M.B.A. from the University of Minnesota.
Yuval Yanai has served as our Chief Financial Officer since September 1, 2005. From October 2000 through August 2005, he served as Senior Vice President and Chief Financial Officer of Koor Industries Ltd., one of Israel’s largest holding corporations. Prior to that, from April 1998 to September 2000 he served as Vice President and Chief Financial Officer of NICE Systems Ltd., an Israeli global provider of Insight from Interactions, and from 1991 to April 1998, he was the Vice President, Finance and Chief Financial Officer of Elscint Ltd., a former Israeli company engaged in the manufacturing of medical imaging devices that was acquired by larger companies in this field. He joined Elscint in 1985 and served as Corporate Controller and Corporate Treasurer through 1991. Mr. Yanai has served as a director of Makteshim-Agan Industries Ltd., Equity One, Inc., BVR Systems Ltd., Tadiran Communication Ltd., The Elisra Group and Telrad Networks Ltd. Mr. Yanai holds a B.Sc. in Accounting and Economics from the Tel Aviv University.
Christopher Rowland has served as President of Given Imaging, Inc., our U.S. subsidiary, since May 2006. He joined us in February 2006 as our Senior Vice President of Business Development and Corporate Strategy. Prior to that, Mr. Rowland worked for 17 years at Boston Scientific Corporation, a medical device company, in various sales, marketing and general management positions across all Boston Scientific divisions and in several countries. Most recently he was Vice President of Marketing for the Endovations division of Boston Scientific, where he had responsibility for all marketing, product development and launch activities of products in the gastrointestinal field. Prior to that, from 1985 until 1989 Mr. Rowland worked for Xerox Corporation in various sales positions. Mr. Rowland has a B. Sc. in Marketing from Southern Illinois University.
Mark Gilreath has served as Chief Marketing Officer since January 1, 2006. From February 2003 until December 2005, he served as Corporate Vice President – Marketing Strategy, from April 2001 until February 2003 he served as President of Given Imaging, Inc., from September 2000 until April 2001 as our Vice President – Global Business Development and from October 1999 to September 2000 as a consultant to us. In 1999, Mr. Gilreath founded VortexMed, Inc., a developer of internet sites for healthcare professionals, where he served as Chief Executive Officer until September 2000. From 1992 to 1999, Mr. Gilreath held various management positions with PENTAX Precision Instrument Corporation including Product Manager, Director of Marketing, Area Sales Manager and Director of Business Development. Prior to joining PENTAX, from 1989 to 1992, Mr. Gilreath served as an officer in the U.S. Navy. He holds a B.Sc. in business finance from Winthrop University and an M.B.A. from the Fuqua School of Business at Duke University.
Manfred Gehrtz has served as President, International since January 1, 2006. Prior to that, from January 2004 until December 31, 2005, Mr. Gehrtz served as our Corporate Vice President, General Manager for Europe. Prior to joining us, from 1995 to 2003, Mr. Gehrtz was Managing Director, the head of the Endoscope Division and Vice President of Medical Systems Europe at Olympus Optical Co. (Europa) GmbH, a developer of products in the fields of photography, endoscopy, microscopy, communication and diagnostics. From 1990 to 1995, Mr. Gehrtz was Managing Director and CEO of Aesculap Meditec GmbH, a German company that develops and manufactures medical laser systems. Prior to that, from 1986 to 1990, Mr. Gehrtz was a Specialist, Lab Manager and Production Facility Manager at IBM Deutschland GmbH. Mr.
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Gehrtz holds a Ph. D. in Physical Chemistry and an M.Sc. in Physics from the University of Munich, Germany. From 1983 to 1985 Mr. Gehrtz was a Post-Doctoral Fellow at the IBM Research Laboratory in San Jose, California.
Ori Braun has served as Senior Vice President – Business Development since October 2006. Prior to joining us, Mr. Braun served as President of Valor Inc., a leader in productivity increasing engineering software solutions to the PCB design, fabrication and assembly industry. From 2004 to 2005, he served as President of LifeWatch Inc., a leading cardiac monitoring services company. From 1985 to 2004 he founded and held various CEO and executive positions at Bventure Inc., a company providing services to medical startup companies, at 3DV Systems Inc., a company developing and selling 3D camera technology, at Helios Software Engineering Ltd., a company in the business of simulation technology that was acquired by Cadence Design Systems Inc., and at Lansoft Computing Ltd. During this period, Mr. Braun also co-founded Atria Inc., a company providing solutions for CHF patients. Between 1994 and 1996, Mr. Braun held the position of Vice President Business Development at Rafael Development Corporation, or RDC, a large shareholder of Given Imaging, which is a holding company controlled by Discount Investment Corporation Ltd., or DIC, another significant shareholder of Given Imaging. Mr. Braun holds a B.Sc. in Mechanical Engineering from the Ben Gurion University in Beer Sheva, Israel.
Doron Birger has served as Chairman of the board of directors since August 2002 and as a director since June 2000. Mr. Birger has served as Chief Executive Officer of Elron Electronic Industries since August 2002, President since 2001, Chief Financial Officer from 1994 to August 2002, and Corporate Secretary from 1994 to 2001. Mr. Birger is a director of RDC Rafael Development Corporation and a director or chairman of the board of directors of many privately held companies in the Elron group in the fields of medical devices, semiconductors, communication and advanced materials. From 1991 to 1994, Mr. Birger was Chief Financial Officer at North Hills Electronics Ltd., an advanced electronics company. From 1990 to 1991, Mr. Birger served as Chief Financial Officer of Middle-East Pipes Ltd., a manufacturer in the metal industry. From 1988 to 1990, Mr. Birger served as Chief Financial Officer of Maquette Ltd., a manufacturer and exporter of fashion items. From 1981 to 1988, Mr. Birger was Chief Financial Officer and director at Bateman Engineering Ltd. and I.D.C. Industrial Development Company Ltd. Mr. Birger holds a B.A. and an M.A. in economics from the Hebrew University, Jerusalem.
James M. Cornelius has served as a director since October 2001 and was elected as an outside director in December 2001. Mr. Cornelius was elected interim Chief Executive Officer of Bristol-Myers Squibb, or BMS, on September 12, 2006 and also serves as a director of BMS. From November 15, 2005 to April 21, 2006, Mr. Cornelius served as the chairman of the board of directors and chief executive officer of Guidant Corporation, a leading cardiac and vascular medical device company listed on the New York Stock Exchange, until the sale of Guidant to Boston Scientific Corporation. From 2000 until 2006, Mr. Cornelius served as the non-executive Chairman of the board of directors of Guidant Corporation. From 1994 until 2000, Mr. Cornelius served as the Senior Executive and Chairman of Guidant Corporation. From 1983 to 1994, Mr. Cornelius was a director, a member of the Executive Committee and Chief Financial Officer of Eli Lilly and Company. From 1980 to 1982, Mr. Cornelius served as President and Chief Executive Officer of IVAC Corporation, formerly part of Eli Lilly’s Medical Device and Diagnostics Division, and from 1978 to 1980, Mr. Cornelius was Director of Acquisitions for Eli Lilly’s Medical Device and Diagnostics Division. Mr. Cornelius also serves as a director of The DIRECTV Group, Inc. Mr. Cornelius holds an M.B.A. and a B.A. in accounting from Michigan State University.
Michael Grobstein has served as a director since October 2001 and was elected as an outside director in December 2001. Mr. Grobstein serves as a director of Bristol-Myers Squibb, as chairman of its audit committee and a member of its compensation and management development committee. Mr. Grobstein served as a director of Guidant Corporation from 1999 to 2006, at which time Guidant was acquired by Boston Scientific Corporation. During that period, he was chairman of Guidant’s audit committee and a member of its corporate governance committee. Mr. Grobstein worked with Ernst & Young LLP from 1964 to 1998, and was admitted as a partner in 1975. At Ernst & Young, Mr. Grobstein served as a Vice Chairman-International Operations from 1993 to 1998, as Vice Chairman-Planning, Marketing and Industry Services from 1987 to 1993, and Vice Chairman-Accounting and Auditing Services from 1984 to 1987. In these positions, Mr. Grobstein, among other things, oversaw the global strategic planning of the firm, was responsible for developing and implementing the firm’s worldwide audit service delivery process and consulted with multinational corporations on a wide variety of financial reporting matters. Mr. Grobstein is a certified public accountant in the United States and holds a B.Sc. in accounting from the University of Illinois.
Chen Barir has served as director since August 2002. Mr. Barir is Chairman of Berman & Co. Trading and Investments Ltd. and subsidiaries and affiliates, a private investment company specializing in venture investments and management focusing primarily on seed or early stage medical device companies, investments and real estate. Mr. Barir is chairman and Chief Executive Officer of Galil Medical Ltd, a significant shareholder of which is Elron Electronic
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Industries Ltd., which is also a major shareholder of the Company. Mr. Barir is also a director of several privately-held companies in the fields of medical device and real estate. Mr. Barir holds an LL.B from the Hebrew University of Jerusalem, an M.B.A. from the European Institute of Business Administration (INSEAD) in Fontainebleau, France, and a Doctorate in Law and Economics from Harvard Law School, Cambridge, Massachusetts.
Eyal Lifschitz has served as a director since December 2003. Since 2001, Mr. Lifschitz has served as Chief Executive Officer of Peregrine Ventures, a venture capital fund focused on the medical device industry. Prior to that, Mr. Lifschitz was co-founder of a number of medical technology companies, including PharmaSys, where he served as Director of Business Development from 1990 to 1994, VisionCare Ophthalmic Technologies, Inc., where he served as Director of Business Development from 1997 to 2001, BioControl, Ltd., where he served as Director of Business Development from 1999 to 2001 and ECR Ltd., where he served as General Manager from 1994 to 2001. Mr. Lifschitz serves on the board of directors of Neovasc Ltd. and of NeuroSonix Ltd., two companies in the medical device field, and holds an LL.B degree from Shearei Mishpat College in Israel.
Prof. Anat Loewenstein has served as a director since August 2005. Prof. Loewenstein completed her training in Johns Hopkins University Hospital in Baltimore in 1996. She has been the Director of the Department of Ophthalmology, Tel Aviv Medical Center since January 2000, Vice Dean of the Sackler School of Medicine, Tel Aviv University since September 2006, and a Professor at the Sackler School of Medicine since April 1999. In addition, since 2000 Prof. Loewenstein has been a member of the Advisory Board of Notal Vision Ltd., a medical device company in the area of diagnostic ophthalmology, and from 1996 until 1997 she served as an advisor to Talia Technologies Ltd., which developed an instrument in diagnostic ophthalmology. She is the principal investigator in multiple multicenter drug and device studies for Pfizer, Novartis, Roche and Zeiss. She is a member of the IRB committee of the Israeli Ministry of Health. Prof. Loewenstein holds an M.D. from the Hebrew University of Jerusalem and Masters Degree in Health Administration from Tel Aviv University.
The aggregate compensation paid by us and our subsidiaries to our directors and executive officers for the year ended December 31, 2006 was $8.0 million (excluding director fees detailed below). This amount includes $3.7 million of stock based-compensation as described below. This amount also includes approximately $0.3 million set aside or accrued to provide pension, severance, retirement or similar benefits or expenses, but does not include business travel, relocation, professional and business association dues and expenses reimbursed to office holders, and other benefits commonly reimbursed or paid by companies in Israel.
In 2006, we granted our directors and executive officer a total of 735,000 options to purchase our ordinary shares and 100,000 restricted shares. The exercise price of these options ranges between $16.22 to $23.55 with a weighted average exercise price of $19.38. Equity awards granted to executive officers typically vest ratably over a four-year period. Equity awards granted to directors typically vest after one year of continued service on the board of directors or a committee thereof. The exercise price of these options was equal to the fair market value of our ordinary shares on the date of grant. These options will expire five years from the date of grant.
The regular fees for each non-employee director include a quarterly fee of $3,750 for their service on our board of directors, and a $1,500 fee for attending and participating in each meeting of the board of directors or any committee of the board of directors. The total amount of these payments in 2006 was $275,300 The directors fees for service by our director, Doron Birger, are paid to Elron Electronic Industries, where he serves as President and Chief Executive Officer. In addition, all of our directors were reimbursed for their expenses for each board of directors meeting attended.
Please see Item 7 “Major Shareholders and Related Party Transactions—Agreements with Directors and Officers — Employment Agreements” for information regarding the employment agreements and compensation of Nachum Shamir, our President and Chief Executive Officer.
Board of Directors and Officers
Our articles of association provide that we may have up to 12 directors, each of whom is elected at an annual general meeting of our shareholders by a vote of the holders of a majority of the voting power present and voting at that meeting. Our
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board of directors currently consists of seven directors. Each director listed above will hold office until the next annual general meeting of our shareholders, except for our outside directors who were elected in December 2001 for an initial three-year term and were reelected for one additional three year term in May 2004, which will expire December 31, 2007. Other than Nachum Shamir, our President and Chief Executive Officer, none of our directors are our employees or are party to a service contract with us. Mr. Jonathan Silverstein left our board of directors in May 2006 and Mr. Gavriel Meron left the board and the employ of the company in September 2006.
A simple majority of our shareholders at a general meeting may remove any of our directors from office and elect directors in their stead or fill any vacancy, however created. In addition, vacancies on the board of directors, other than vacancies created by an outside director, may be filled by a vote of a majority of the directors then in office. Our board of directors may also appoint additional directors up to the maximum number permitted under our articles of association. A director so chosen or appointed will hold office until the next annual meeting of our shareholders.
Each of our executive officers serves at the discretion of the board of directors and holds office until his or her successor is elected or until his or her earlier resignation or removal. In April 2006, Mr. Nachum Shamir began serving as our President and Chief Executive Officer and a director, replacing Mr. Gavriel Meron. Mr. Meron continued to serve as an Executive Vice Chairman of our board of directors until September 8, 2006, when he left the company.
Christopher Rowland, who at the beginning of 2006 served as our Senior Vice President of Business Development and Corporate Strategy, was appointed President of Given Imaging, Inc., our U.S. subsidiary, in May 2006. In October 2006, Mr. Ori Braun joined us as Senior Vice President of Business Development.
There are no family relationships among any of our directors or executive officers. All of our executive officers have signed employment agreements.
Outside and Independent Directors
Under Israel’s Companies Law, companies incorporated under the laws of the State of Israel whose shares are listed on an exchange including the Nasdaq Global Market are required to appoint at least two outside directors. Outside directors are required to meet standards of independence set forth in the Israeli Companies Law. Outside directors are elected by a majority vote at a shareholders’ meeting, provided that either (1) the majority of shares voted at the meeting, including at least one-third of the shares of non-controlling shareholders voted at the meeting, vote in favor of the election of the outside director, or (2) the total number of shares voted against the election of the outside director does not exceed one percent of the aggregate voting rights in the company. The initial term of an outside director is three years. Under a recent amendment to the Israeli Companies Law, an outside director of a company whose shares are dually listed on an Israeli exchange and on a foreign exchange, including the Nasdaq Global Market, may be re-elected to one or more additional three-year terms, subject to the conditions described above for election of outside directors, if the audit committee and the board of directors have determined that these additional terms benefit the company in light of the outside director’s expertise and contribution to the company and the reasons for this determination have been presented to the shareholders prior to their approval of the re-election. Previously, an outside director could serve a maximum of two terms as an outside director. Outside directors may only be removed by the same percentage of shareholders as is required for their election, or by a court, and then only if the outside directors cease to meet the statutory requirements for their appointment or if they violate their duty of loyalty to the company. If an outside directorship becomes vacant and there are no other two serving outside directors, a company’s board of directors is required under the Companies Law to call a shareholders’ meeting immediately to appoint a new outside director. Our two outside directors are James Cornelius and Michael Grobstein. We intend to propose their election to a third term as outside directors at our next annual shareholders’ meeting.
Each committee of a company’s board of directors is required to include at least one outside director and our audit committee is required to include both outside directors. An outside director is entitled to compensation as provided in regulations adopted under the Companies Law and is otherwise prohibited from receiving any other compensation, directly or indirectly, in connection with services provided as an outside director.
An amendment to the Companies Law that became effective on January 19, 2006 provides that every outside director appointed to the board of directors of an Israeli company must qualify as a “financial and accounting expert” or as “professionally competent,” as such terms are defined in the applicable regulations under the Companies Law, and that at least one outside director must qualify as a “financial and accounting expert.” We will be required to comply with these requirements upon the next appointment of our outside directors in 2007. In addition, this amendment requires Israeli
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companies to determine how many directors, in addition to the outside directors, qualify as “financial and accounting experts” taking into account the nature of the company’s business, the complexity of the activities carried out by the company and the size of its board of directors. In February 2006, our board of directors determined that at least one of our directors will be a “financial and accounting expert,” in addition to the outside directors. Currently, Doron Birger qualifies as a “financial and accounting expert,” as defined in the applicable regulations.
In addition to the requirements of the Companies Law, we comply with the Nasdaq Global Market listing requirements, under which a majority of the members of our board of directors (including all members of our audit committee) are required to be independent, as that term is defined in the rules of the Nasdaq Global Market. Our board of directors has determined that all of our directors, except Mr. Nachum Shamir, qualify as independent directors in accordance with the applicable rules.
Audit Committee
Under the Companies Law, the board of directors of any company whose shares are listed on any exchange must also appoint an audit committee comprised of at least three directors including all of the outside directors. The audit committee may not include the chairman of the board of directors, the general manager, the chief executive officer, a director employed by the company or who provides services to the company on a regular basis, or a controlling shareholder or a relative of a controlling shareholder. Under the Nasdaq Global Market listing requirements, we are required to have an audit committee consisting of at least three members, each of whom must be “independent”, as defined under the rules of the Nasdaq Global Market and the Securities Exchange Act of 1934 (the “Exchange Act”), and each of whom must be able to read and understand fundamental financial statements. In addition, one member of the audit committee must have past employment experience in finance or accounting or other comparable experience which results in the individual’s financial sophistication. We believe that the current members of our audit committee, Michael Grobstein, James Cornelius and Eyal Lifschitz, each meets these independence and financial literacy requirements. In addition, the board of directors has determined that Mr. Grobstein has the requisite experience and is the financial expert serving on our audit committee.
Under the Companies Law, the role of the audit committee is to identify irregularities in the business management of the company, in consultation with the internal auditor and the company’s independent accountants, and suggest an appropriate course of action. In addition, it is the role of the audit committee to approve transactions with related parties and other corporate actions specified in the Companies Law. Under the Nasdaq Global Market listing requirements, our audit committee has adopted an audit committee charter setting forth its responsibilities. The audit committee charter governing the actions of our audit committee states that in fulfilling this role the committee is entitled to rely on interviews and consultations with our management, our internal auditor and our independent public accountants, and is not obligated to conduct any independent investigation or verification. The charter also states that the audit committee is required to nominate the company’s independent accountants, which the shareholders subsequently are required to approve.
Internal Auditor
Under the Companies Law, the board of directors must appoint an internal auditor nominated by the audit committee. The role of the internal auditor is to examine whether a company’s actions comply with the law and orderly business procedure. Under the Companies Law, the internal auditor may be an employee of the company but not an interested party or an office holder, or affiliate, or a relative of an interested party or an office holder, nor may the internal auditor be the company’s independent accountant or its representative. An interested party is defined in the Companies Law as any person or entity holding 5% or more of the outstanding shares or the voting rights in the company, any person or entity who has the right to designate one director or more or the chief executive officer of the company or any person who serves as a director or as a chief executive officer. Our internal auditor is the Israeli member firm of Deloitte Touche Tohmatsu.
Compensation and Nominating Committee
Our compensation and nominating committee consists of our directors, James Cornelius, Doron Birger and Michael Grobstein. In accordance with the rules of the Nasdaq Global Market, our compensation and nominating committee adopted a charter, which sets forth its responsibilities. Pursuant to the charter, the compensation and nominating committee is authorized to make decisions regarding executive compensation and terms and conditions of employment, as well as to recommend that the board of directors issue options under our stock option plans. The compensation and nominating committee is also responsible for recommending to the board of directors nominees for board membership. The composition of the committee satisfies the Nasdaq Global Market’s independent director requirements.
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Executive Committee
In April 2006, we formed an executive committee which is governed by a written charter adopted by our board of directors. The charter specifies, among other things, that:
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| • | the executive committee must be comprised of at least three directors and the majority of the committee’s members must qualify as “independent directors” under applicable law and the Nasdaq Global Market independent director requirements (and one member must qualify as an “outside director” under the Israeli Companies Law); |
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| • | the Chairman of our board of directors must serve as a member of the executive committee; |
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| • | the executive committee shall meet as needed to conduct and oversee our affairs and fulfill its responsibilities and not less than once each quarter; |
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| • | the executive committee may exercise the full powers of our board of directors between board meetings where, at the discretion of the chairman of the board, timely action is required or warranted, provided that the committee may not act in lieu of our board in any matter in respect of which the delegation of powers is prohibited under applicable law or that requires the approval of our shareholders; and |
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| • | the committee is otherwise granted, among other things, the mandate to review the details of our business strategy and make recommendations to the board, to oversee and assist our chief executive officer as necessary, to monitor organization and management changes in our company and take any other action delegated or assigned from time to time by our board of directors. |
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The executive committee currently consists of our directors, Michael Grobstein (Chairman), Doron Birger and James Cornelius. |
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D. | EMPLOYEES |
As of December 31, 2006, we and our subsidiaries had 400 employees of whom 194 were based in Israel, 142 in the United States, 46 in Europe, 11 in Japan and 7 in Australia. This reflects a 18% increase in the number of employees since December 31, 2005. This increase was mainly in research and development employees in Israel and sales personnel in our U.S. subsidiary. The primary reason for this increase was an internal reorganization of our sales, marketing and product management teams that we implemented in December 2005. We implemented this change in order to enable us to focus more effectively on particular markets, clinical indications and technology for each type of PillCam capsule and each part of the gastrointestinal tract. The reorganization realigned our activities along product lines and allows us to address more efficiently the development, marketing and sale of multiple products and the accumulation and circulation of clinical information related to multiple gastrointestinal tract organs. We expect our headcount to increase further in 2007, primarily in research and development, manufacturing and sales and marketing.
Under Israeli law, we and our employees are subject to protective labor provisions, including restrictions on working hours, minimum wages, minimum vacation, minimum termination notice, sick pay, severance pay and social security as well as equal opportunity and anti-discrimination laws. Orders issued by the Israeli Ministry of Labor and Welfare make certain industry-wide collective bargaining agreements and collective bargaining agreements in the electricity, steel and electronics industries applicable to us. These agreements affect matters such as cost of living adjustments to salaries, length of working hours and week, recuperation, travel expenses, and pension rights. Our employees are not represented by a labor union. We provide our employees with benefits and working conditions above the required minimum and which we believe are competitive with benefits and working conditions provided by similar companies in Israel. We have written employment agreements with all of our Israeli employees and with our senior non-Israeli employees. Competition for qualified personnel in our industry is intense and we dedicate significant resources to employee retention. We have never experienced labor-related work stoppages and believe that our relations with our employees are good.
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Share Ownership by Directors and Executive Officers
For information regarding ownership of our ordinary shares by our directors and executive officers, and regarding options to purchase our ordinary shares granted to Nachum Shamir, our President and Chief Executive Officer, see Item 7 “Major Shareholders and Related Party Transactions.”
Stock Option Plans
2006 Equity Incentive Plan
Our 2006 Equity Incentive Plan provides for the grant of options to purchase our ordinary shares or the grant of restricted stock to eligible employees, directors and consultants of us or our subsidiaries. The 2006 equity plan is administered by our Board of Directors and Compensation and Nominating Committee. The plan contains provisions concerning the vesting, price, exercise and other terms of awards; however, in many cases our Compensation and Nominating Committee has authority to grant awards under different terms at its discretion. We have reserved for issuance a total of 2,500,000 authorized but unissued ordinary shares under the 2006 equity plan. As of December 31, 2006, we had outstanding under this plan options to purchase 539,500 shares and 100,000 shares of restricted stock.
The 2006 equity plan permits us to grant a number of equity instruments, such as options, restricted stock, restricted stock units and stock appreciation rights. Our previous plans only permitted the grant of options. Option awards under this plan must be granted at no less than the fair market value of our ordinary shares on the date of the grant and the term of the awards may not exceed ten years. Our current policy is that options granted under the 2006 equity plan expire five years following the date of the grant.
Generally, where a grant of an award under the plan is the first grant of equity to a particular person, 50% of the award is exercisable on the second anniversary of the date of grant, and 25% becomes exercisable on each of the third and fourth anniversaries of the date of the grant. In cases of subsequent grants, awards vest in four equal installments beginning with the first anniversary of the grant. To the extent the awards have vested, they may be exercised in whole or in part from time to time until their expiration.
In case of participating employees and consultants, upon the termination of their employment or service, all unvested awards are cancelled. All vested awards may be exercised within 180 days following termination. All vested awards not exercised within this period are automatically forfeited and cancelled. Unvested awards to non-employee directors whose service is terminated or discontinued for any reason other than for cause after more than five years of service on our board of directors, will automatically vest and become exercisable immediately prior to termination or discontinuation of service. These vested awards may be exercised within 180 days following termination of service, except in cases of where termination or discontinuation of service is a result of statutory requirements, death, disability or other circumstances of forced cessation of service, in which case awards may be exercised at any time until their expiration date. In a case of termination for cause of a plan participant, all awards, whether vested or unvested, are automatically forfeited and cancelled.
Under this plan, in the event of an acquisition or merger in which we are not the surviving entity and the acquiring entity does not agree to assume the awards, all outstanding, but unvested, awards will be accelerated and exercisable, ten days prior to the acquisition or merger. In addition, if the employment of a holder of outstanding awards is terminated in anticipation of or during the 12 month period following an acquisition or merger, all awards that are scheduled to vest within two years of such acquisition or merger, will be automatically accelerated and exercisable, subject to certain adjustments and exceptions.
Awards granted under the 2006 equity plan to Israeli residents may be granted under Section 102 of the Israeli Income Tax Ordinance pursuant to which the awards or the ordinary shares issued upon their exercise must be deposited with a trustee for at least two years following the date of the grant. Under Section 102, any tax payable by an employee from the grant or exercise of the awards is deferred until the transfer of the awards or ordinary shares by the trustee to the employee or upon the sale of the awards or ordinary shares. Gains on awards granted under the 2006 equity plan are subject to a mixed tax rate as follows: First, any profit derived from the excess of the average price of the ordinary shares of the company during the 30 trading days prior to the date of grant over the exercise price of the options and other tax
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deductible expenses concerning the sale, referred to as the average profit at grant date, is subject to regular income tax based on the individual tax rate of the exercising person. Second, any profit resulting from the excess of the selling price of the shares underlying the options over the average profit at grant date is subject to capital gains tax at a rate of 25%, if all the conditions and requirements under Section 102 are fulfilled. Options granted under the plan to U.S. residents may also qualify as incentive stock options within the meaning of Section 422 of the U.S. Internal Revenue Code of 1986. The exercise price for incentive stock options must not be not less than the fair market value on the date the option is granted, or 110% of the fair market value if the option holder holds more than 10% of our share capital.
2003 Stock Option Plan
Our 2003 stock option plan provides for a grant of options to our directors, employees and consultants, including members of our medical advisory committee, and to the directors, employees or consultants of our subsidiaries. We initially reserved a total of 1,500,000 ordinary shares for issuance under the plan. In addition, we have reserved for issuance under the plan any ordinary shares underlying unvested options granted under our 1998 and 2000 stock option plans that expire without exercise. As of December 31, 2006, we had outstanding options to purchase 2,754,102 shares under the 2003 stock option plan
The plan is substantially similar to our 2000 stock option plan. Generally, where a grant of options under the plan is our first grant of options to that person, the options are not exercisable before the second anniversary of the date of grant, at which time 50% of the options become exercisable with 25% becoming exercisable on each of the third and fourth anniversaries of the date of the grant. However, in cases of subsequent grants, options vest in four equal installments beginning with the first anniversary of the grant. Our Compensation and Nominating Committee has the authority to accelerate the time periods for the vesting of options. Unexercised options expire ten years after the date of grant. To the extent the options have been vested, they may be exercised in whole or in part from time to time until their expiration. Upon the termination of the employment of an employee other than for cause, the employee may exercise all vested options. Our Compensation and Nominating Committee determined that in respect of grants made beginning in 2006, optionees will have 180 days to exercise vested options following termination. If the employment of an employee is terminated for cause, all of his or her vested and unvested options will be automatically forfeited and cancelled.
In the event of an acquisition or merger, we will endeavor to ensure that the rights of the holders of outstanding options are maintained. If we are unable to do so or if our board of directors resolves otherwise, all outstanding, but unvested, stock options will be accelerated and exercisable, ten days prior to the acquisition or merger. In addition, if the employment of a holder of outstanding options is terminated in anticipation of or during the 12 month period following an acquisition or merger, all outstanding but unvested stock options will be accelerated and exercisable, subject to certain adjustments and exceptions.
Options granted under the 2003 plan to Israeli residents may be granted under Section 102 of the Israeli Income Tax Ordinance pursuant to which the options or the ordinary shares issued upon their exercise must be deposited with a trustee for a minimum period equal to the shorter of 30 months commencing on the date of grant or 24 months commencing on the end of the year in which the grant was made. Under Section 102, any tax payable by an employee from the grant or exercise of the options is deferred until the transfer of the options or ordinary shares by the trustee to the employee or upon the sale of the options or ordinary shares. Gains on options granted in 2003 and later are subject to a mixed tax rate as follows: First, any profit derived from the excess of the average price of the ordinary shares of the company during the 30 trading days prior to the date of grant over the exercise price of the options and other tax deductible expenses concerning the sale, referred to as the average profit at grant date, is subject to regular income tax based on the individual tax rate of the exercising person. Second, any profit resulting from the excess of the selling price of the shares underlying the options over the average profit at grant date is subject to capital gains tax at a rate of 25%, if all the conditions and requirements under Section 102 are fulfilled. Options granted under the plan to U.S. residents may also qualify as incentive stock options within the meaning of Section 422 of the U.S. Internal Revenue Code of 1986. The exercise price for incentive stock options must not be not less than the fair market value on the date the option is granted, or 110% of the fair market value if the option holder holds more than 10% of our share capital.
2000 Stock Option Plan
Our 2000 stock option plan provides for the grant of options to our directors, employees or consultants, including members of our medical advisory committee, and to the directors, employees or consultants of our subsidiaries. As of December 31, 2006, we had outstanding options to purchase 746,502 shares under the 2000 stock option plan. Ordinary
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shares underlying options which expire without exercise under the 2000 stock option plan become available for issuance under the 2003 stock option plan.
The plan is administered by our Compensation and Nominating Committee which makes recommendations to our board of directors regarding grantees of options and the terms of the grant, including exercise prices, vesting schedules, acceleration of vesting and other matters necessary in the administration of the plan. Upon the recommendation of our Compensation and Nominating Committee, options granted under the plan to Israeli residents may be granted under Section 102 of the Israeli Income Tax Ordinance pursuant to which the options or the ordinary shares issued upon their exercise must be deposited with a trustee for at least two years. Any tax payable by an employee from the grant or exercise of the options is deferred until the transfer of the options or ordinary shares by the trustee to the employee or upon the sale of the options or ordinary shares. Options granted under the plan to U.S. residents may also qualify as incentive stock options within the meaning of Section 422 of the U.S. Internal Revenue Code of 1986. The exercise price for incentive stock options must not be not less than the fair market value on the date the option is granted, or 110% of the fair market value if the option holder holds more than 10% of our share capital.
Under the 2000 stock option plan, options issued under the plan are not exercisable before the second anniversary of the date of grant at which time 50% of the options become exercisable with 25% becoming exercisable on each of the third and fourth anniversaries of the date of grant. Unexercised options expire ten years after the date of grant. If the employment of an employee is terminated for cause, all of his or her vested and unvested options will automatically be forfeited and cancelled.
In the event of an acquisition or merger, we will endeavor to ensure that the rights of the holders of outstanding options are maintained. If we are unable to do so or if our board of directors resolves otherwise, all outstanding, but unvested, stock options will be accelerated and exercisable, ten days prior to the acquisition or merger.
1998 Stock Option Plan
Our 1998 stock option provides for the grant of options to our directors, employees, or consultants, including members of our medical advisory committee. Our 1998 stock option plan has been superseded by our 2000 stock option plan and we have ceased issuing options under our 1998 stock option plan. As of December 31, 2006, we had outstanding options to purchase 74,500 shares under the 1998 stock option plan. Ordinary shares underlying options which expire without exercise under the 1998 stock option plan become available for issuance under the 2003 stock option plan.
Under the 1998 stock option plan, options issued under the plan are not exercisable before the second anniversary of the date of grant at which time 50% of the options become exercisable with 25% becoming exercisable on each of the third and fourth anniversaries of the date of grant. Unexercised options expire ten years after the date of grant. If the employment of an employee is terminated for cause, all of his or her vested and unvested options will automatically be forfeited and cancelled.
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
The following table sets forth certain information regarding the beneficial ownership of our outstanding ordinary shares as of March 31, 2007 for: (1) each person who we believe beneficially owns 5% or more of the outstanding ordinary shares, (2) each of our directors individually, (3) each of our executive officers individually, and (4) all of our directors and executive officers as a group. Beneficial ownership of shares is determined under rules of the Securities and Exchange Commission and generally includes any shares over which a person exercises sole or shared voting or investment power. The table also includes the number of shares underlying options that are exercisable within 60 days of March 31, 2007. Ordinary shares subject to these options are deemed to be outstanding for the purpose of computing the ownership percentage of the person holding these options, but are not deemed to be outstanding for the purpose of computing the ownership percentage of any other person.
The shareholders listed below do not have any different voting rights from our other shareholders. Unless otherwise noted below, each shareholder’s address is c/o Given Imaging Ltd., P.O. Box 258, Yoqneam 20692, Israel.
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| | | | | | |
Name and Address | | Number of Shares
Beneficially
Owned | | Percentage of
Shares
Beneficially Owned |
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Principal shareholders: | | | | |
IDB Holding Corporation Ltd. (1) | | 11,286,975 | | | 39.4 | % |
AXA Assurances I.A.R.D. Mutuelle, AXA Assurances Vie Mutuelle,
AXA Courtage Assurance Mutuelle, AXA, AXA Financial, Inc.(2) | | 3,760,771 | | | 13.1 | |
OrbiMed Advisors LLC, OrbiMed Capital LLC and Samuel D. Isaly (3) | | 1,841,004 | | | 6.4 | |
Directors and executive officers: | | | | | | |
Nachum Shamir (4) | | 180,000 | | | * | |
Yuval Yanai (5) | | 12,500 | | | * | |
Kevin Rubey (6) | | 240,000 | | | * | |
Christopher Rowland (7) | | 8,000 | | | * | |
Mark Gilreath (8) | | 193,900 | | | * | |
Manfred Gehrtz (9) | | 76,000 | | | * | |
Ori Braun | | — | | | — | |
Doron Birger (10) | | 7,307,691 | | | 25.4 | |
James M. Cornelius (11) | | 285,000 | | | * | |
Michael Grobstein (12) | | 187,000 | | | * | |
Chen Barir (13) | | 53,500 | | | * | |
Eyal Lifschitz (14) | | 45,500 | | | * | |
Anat Loewenstein (15) | | 12,500 | | | * | |
All directors and executive officers as a group (16) | | 12,580,875 | | | 43.9 | % |
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* Less than 1% |
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(1) | Based on a Schedule 13D/A filed on August 14, 2006 and on information provided to us supplementally, this number consists of 4,622,703 ordinary shares owned by Elron Electronic Industries Ltd., or Elron, 4,002,162 ordinary shares owned by Discount Investment Corporation Ltd., or DIC, and 2,662,110 ordinary shares owned by RDC Rafael Development Corporation Ltd., or RDC. This does not include 268,580 Ordinary Shares held for members of the public through mutual funds, provident funds, pension funds, exchange traded funds and insurance policies which are managed by companies controlled by Clal Insurance Enterprises Holdings Ltd., a majority owned subsidiary of IDB Holding Corporation, or IDBH, which disclaims beneficial ownership of these shares. Based on information contained in that Schedule 13D/A and on information provided to us supplementally, Elron owns all of the outstanding shares of DEP Technology Holdings Ltd. which, in turn, holds 50.1% of the voting power of RDC. As a result, Elron may be deemed to be the beneficial owner of the ordinary shares owned by RDC. As of January 30, 2007, DIC owned approximately 49% of the outstanding shares of Elron and, as a result, DIC may be deemed to be the beneficial owner of the ordinary shares owned by RDC and by Elron. The address of DIC is The Triangular Tower, 44th Floor, 3 Azrieli Center, Tel Aviv 67023, Israel. The address of RDC is Building 7, New Industrial Park, Yoqneam 20692, Israel. The address of Elron is The Triangular Tower, 42nd Floor, 3 Azrieli Center, Tel Aviv 67023, Israel. As of January 30, 2007, IDBH owned the majority of the outstanding shares of IDB Development Corporation Ltd., or IDBD, which, in turn, owned the majority of the outstanding shares of DIC. As a result, IDBH may be deemed to be the beneficial owner of the ordinary shares owned by DIC, RDC and Elron. The address of each of IDBH and IDBD is The Triangular Tower, 44th Floor, 3 Azrieli Center, Tel Aviv 67023, Israel. IDBH and IDBD are public companies traded on the Tel Aviv Stock Exchange. |
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| As of January 31, 2007, (i) Ganden Holdings Ltd., or Ganden, a private Israeli company controlled by Nochi Dankner and his sister Shelly Bergman, held, directly and through a wholly-owned subsidiary, approximately 44.88% of the outstanding shares of IDBH; (ii) Shelly Bergman, through a wholly-owned company, held approximately 7.23% of the outstanding shares of IDBH; (iii) Avraham Livnat Ltd., or Livnat, a private Israeli company controlled by Avraham Livnat, held, directly and through a wholly-owned subsidiary, approximately 10.38% of the outstanding shares of IDBH; and (iv) Manor Holdings BA Ltd., or Manor, a private company |
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| |
| controlled by Ruth Manor, held, directly and through a majority-owned subsidiary, approximately 10.37% of the outstanding shares of IDBH. |
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| Subsidiaries of Ganden, Livnat and Manor have entered into a shareholders agreement with respect to their shares of IDBH constituting, respectively, 31.02%, 10.34% and 10.34% of the outstanding shares of IDBH, for the purpose of maintaining and exercising control of IDBH as a group. Their additional holdings in IDBH are not subject to the shareholders agreement. The term of the shareholders agreement expires in May 2023. Based on the foregoing, IDBH (by reason of its control of IDBD, and by reason of IDBD’s control of DIC), Ganden, Manor and Livnat (by reason of their control of IDBH) and Nochi Dankner, Shelly Bergman, Ruth Manor, and Avraham Livnat (by reason of their control of Ganden, Manor and Livnat, respectively) may be deemed to share with DIC, Elron and RDC the power to vote and dispose of our ordinary shares held by these entities. |
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| Nochi Dankner is Chairman of IDBH, IDBD and DIC. Isaac Manor (the husband of Ruth Manor) and Zvi Livnat (a son of Avraham Livnat) are directors of IDBH, IDBD and DIC. Shai Livnat (another son of Avraham Livnat) is a director of IDBD. Dori Manor (the son of Isaac and Ruth Manor) is a director of IDBH, IDBD, DIC and Elron. The address of Nochi Dankner is The Triangular Tower, 44th Floor, 3 Azrieli Center, Tel Aviv 67023, Israel. The address of Shelly Bergman is 9 Mishmar Ezrehi, Afeka, Tel Aviv, Israel. The address of Ruth Manor is 26 Hagderot Street, Savyon, Israel. The address of Avraham Livnat is Taavura Junction, Ramle, Israel. These individuals disclaim beneficial ownership of the shares owned by the foregoing entities except to the extent of their pecuniary interest therein. On September 29, 2003, Elron and DIC entered into a voting agreement pursuant to which, among other things, DIC agreed to vote all of its ordinary shares in favor of nominees to our board of directors proposed by Elron. The voting agreement is for a term of one year and renews automatically each year thereafter unless terminated by notice of either party to the other party no later than August 30 in each year, or unless earlier terminated by agreement of both parties thereto. |
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(2) | Based on a Schedule 13G/A filed on February 14, 2007, consists of 3,584,045 ordinary shares owned by Alliance Bernstein L.P., or Alliance, and 176,726 ordinary shares owned by AXA Equitable Life Insurance Company, or AXA Equitable. Based on information contained in the Schedule 13G/A, Alliance and AXA Equitable are subsidiaries of AXA Financial, Inc. AXA Financial, Inc. is a parent holding company with respect to the holdings of Alliance, AXA Equitable and Frontier Trust Company, FSB (Advest Trust). Each of Alliance and AXA Equitable operates under independent management and makes independent decisions. AXA Financial, Inc. is controlled by AXA Assurances I.A.R.D Mutuelle, AXA Assurances Vie Mutuelle and AXA Courtage Assurance Mutuelle (collectively, the “Mutuelles AXA”), as a group. The address of AXA Assurances I.A.R.D Mutuelle and AXA Assurances Vie Mutuelle is 26, rue Drouot, 75009 Paris, France. The address of AXA Courtage Assurance Mutuelle is 26, rue Drouot, 75009 Paris, France. The address of AXA is 25, avenue Matignon, 75008 Paris, France. The address of AXA Financial, Inc. is 1290 Avenue of the Americas, New York, NY 10104. Each of the Mutuelles AXA, as a group, expressly disclaims beneficial ownership of any securities owned by the foregoing entities. |
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(3) | Based on a Schedule 13G/A filed on February 14, 2007, consists of 1,551,404 ordinary shares owned by OrbiMed Capital LLC and 289,600 ordinary shares held by OrbiMed Advisors LLC. Based on the information contained in the Schedule 13G/A, OrbiMed Capital and OrbiMed Advisors hold 1,299,233 of these ordinary shares on behalf of Caduceus Private Investments L.P., or Caduceus; 202,600 ordinary shares on behalf of Eaton Vance Worldwide Health Sciences Portfolio, or Eaton Vance; 202,500 ordinary shares on behalf of Finsbury Worldwide Pharmaceutical Trust, or Finsbury; 87,000 ordinary shares on behalf of UBS Juniper Crossover Fund LLC, or Juniper; and 47,369 ordinary shares on behalf of OrbiMed Associates LLC, or OrbiMed Associates. In addition, Caduceus owns 2,157 warrants to purchase ordinary shares and OrbiMed Associates owns 145 warrants to purchase ordinary shares. Samual D. Isaly owns a controlling interest in OrbiMed Advisors and OrbiMed Capital. The address of OrbiMed Advisors, OrbiMed Capital and Samuel D. Isaly is 767 Third Avenue, 30th Floor, New York, NY 10017. |
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(4) | Consists of 5,000 ordinary shares, 100,000 shares of restricted stock and options to purchase 75,000 ordinary shares. |
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(5) | Consists of 5,000 ordinary shares and options to purchase 7,500 ordinary shares. |
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(6) | Consists of options to purchase 240,000 ordinary shares. |
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(7) | Consists of 3,000 ordinary shares and options to purchase 5,000 ordinary shares. |
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(8) | Consists of 1,400 ordinary shares and options to purchase 192,500 ordinary shares. |
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(9) | Consists of 1,000 ordinary shares and options to purchase 75,000 ordinary shares. |
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(10) | Consists of 2,878 ordinary shares and 20,000 options to purchase ordinary shares owned by Mr. Birger personally, 2,662,110 ordinary shares owned by RDC Rafael Development Corporation and 4,622,703 ordinary shares owned by Elron Electronic Industries. Mr. Birger is a director of RDC Rafael Development Corporation and President and Chief Executive Officer of Elron Electronic Industries and by virtue of his position may be deemed to have voting and investment power, and thus beneficial ownership with respect to the shares that Elron Electronic Industries and RDC Rafael Development Corporation own. Mr. Birger disclaims such beneficial ownership except to the extent of his pecuniary interest therein. |
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(11) | Consists of 121,038 ordinary shares held in person, 38,962 ordinary shares held in a trust to the benefit of family members to which Mr. Cornelius disclaims beneficial ownership, and options to purchase 125,000 ordinary shares. |
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(12) | Consists of 30,000 ordinary shares and options to purchase 157,000 ordinary shares. |
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(13) | Consists of options to purchase 50,500 ordinary shares. |
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(14) | Consists of options to purchase 45,500 ordinary shares. |
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(15) | Consists of options to purchase 12,500 ordinary shares. |
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(16) | Includes 11,286,975 ordinary shares beneficially owned by IDB Holding Corporation, as well as ordinary shares and options to purchase ordinary shares held by directors and officers in their personal capacities or by their nominees. Our directors and officers disclaim beneficial ownership of the shares owned by the foregoing entities except to the extent of their pecuniary interest therein. |
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B. | RELATED PARTY TRANSACTIONS |
Registration Rights Agreement
In December 2006, our Audit Committee and Board of Directors approved a proposed Registration Rights Agreement among us, Elron, DIC and RDC. Elron, DIC and RDC own an aggregate of 39.4% of our ordinary shares and are collectively referred to as the “affiliated shareholders.” This Registration Rights Agreement is intended to replace earlier registration rights granted by us to Elron, DIC, RDC, entities affiliated with OrbiMed Capital LLC and other shareholders in connection with a private placement completed in September 2000, before our initial public offering. These earlier registration rights expired in October 2006.
Our Board of Directors believes that this agreement is necessary to protect the market for our ordinary shares. During 2006, the affiliated shareholders demonstrated their commitment to our business by increasing their ownership level by purchasing additional shares in the open market. The proposed Registration Rights Agreement provides the affiliated shareholders means for liquidity that are otherwise not available to them under applicable law given their ownership level. At the same time, it increases the likelihood that a sale by the affiliated shareholders will be coordinated with us and not disrupt the ordinary activity in the market for our shares due to the sale of a large number of shares at one time or during a short period.
This registration Rights Agreement requires approval by our shareholders and will be submitted for approval in our next annual meeting of shareholders expected in July 2007. Since the affiliated shareholders are considered controlling shareholders under the Companies Law, the approval of this Registration Rights Agreement requires the vote of a majority of the shares present at the meeting, provided that either such majority includes (1) the affirmative vote of at least one-third of the shares of shareholders who do not have a personal interest in the subject matter of the proposed resolution, voting in person or by proxy, not including abstention votes, or (2) the total number of shares voted against the approval by
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shareholders who do not have a personal interest in the subject matter of the proposed resolutions, does not exceed one percent (1%) of the aggregate voting rights in the company. Elron, DIC and RDC are controlling shareholders of the Company.
The main terms of the proposed registration rights agreement are as follows:
Demand Registration Rights
At the request of one or more of the affiliated shareholders holding at least 5% of our then outstanding ordinary shares, we must use our best efforts to register any or all of these shareholders’ ordinary shares on the condition that the minimum aggregate offering price of the shares to be registered is at least $15 million. We must also give notice of the registration to other affiliated shareholders and include in the registration any ordinary shares that they request to include. This registration also may include ordinary shares offered by us for our own account and by our directors and officers. We may only be requested to carry out two of these demand registrations.
In connection with any such demand registration, the managing underwriter may limit the number of shares offered for marketing reasons. In such case, the managing underwriter must exclude first any shares to be registered by us for the company’s own account and, second, any shares to be registered by our directors and officers. Thereafter, the shares to be registered by the affiliated shareholders would be reduced pro rata among the affiliated shareholders requesting inclusion of their shares according to the number of shares held by each of them.
Incidental Registration Rights
The affiliated shareholders also have the right to request that we includes their ordinary shares in any registration statements filed byus in the future for the purposes of a public offering, subject to specified limitations. The managing underwriter may limit the number of shares offered for marketing reasons. In this case, the managing underwriter must exclude first any shares to be registered by us, unless we initiated the registration, second the shares that the affiliated shareholders have requested to include in the registration, and third the shares of the party initiating the registration.
Form F-3 Registration Rights
At the request of an affiliated shareholder, we must make our best efforts to register such shareholder’s ordinary shares on Form F-3. We must also give notice of the registration to other affiliated shareholders to whom we have granted registration rights and include in the registration any ordinary shares they request to include. These demand rights may only be exercised if nine months have passed since the last registration that we filed in which the affiliated shareholder requesting registration was entitled to include its shares. The minimum aggregate offering price of the shares to be registered is $15 million, in case of an underwritten offering, or $5.0 million, in case of a non-underwritten offering. The managing underwriter may limit the number of shares offered for marketing reasons. In such case, the rights of each shareholder to include its ordinary shares in the registration are allocated in the same manner as in a demand registration described above.
Termination
All registration rights will expire on the fifth anniversary of the agreement. With respect to any shareholder, registration rights will expire if that shareholder can sell all of its ordinary shares within a 90 day period under Rule 144 under the United States Securities Act of 1933, as amended.
Expenses
Generally, we will pay all expenses incurred in carrying out the above registrations, as well as the fees and expenses of one legal counsel for the selling shareholders in each registration.
Agreement for Travel Services
In 2005, we engaged Diesenhaus to provide us with travel-related services for Israeli employees. Diesenhaus is a provider of travel services in Israel and is controlled by IDB Holding Corporation Ltd., which beneficially owns approximately 39.4% of our ordinary shares. The terms of our engagement with Diesenhaus are similar to the terms we have
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with other providers of travel services to us. In 2006, we paid Diesenhaus a total of $146,000, or 26% of our travel expenses. This agreement was approved by our audit committee and board of directors in accordance with Israeli law.
Agreement for Mobile Communication Services.
In December 2005, we entered into an agreement with Cellcom Ltd., an Israeli provider of mobile communication services. Cellcom is controlled by IDB Holding Corporation Ltd., which is also a controlling shareholder of our company. Under the agreement, Cellcom will be the sole provider of mobile communication to us during the term of the agreement. This agreement was approved by our audit committee and Board of Directors in accordance with Israeli law. In 2006, we paid Cellcom a total of $155,000.
Directors Fees
We pay directors fees in respect of service by our directors (other than our President and Chief Executive Officer, Nachum Shamir). See Item 6 “Directors, Senior Management and Employees — Compensation.”
Agreements with Directors and Officers
Employment Agreements
We maintain written employment agreements with all of our officers. These agreements all contain provisions standard for a company in our industry regarding noncompetition, confidentiality of information and assignment of inventions. The enforceability of covenants not to compete in Israel is limited.
In April 2006, we signed an employment agreement with Mr. Nachum Shamir, our President and Chief Executive Officer. The employment agreement contains provisions standard for a firm in our industry regarding non-competition, confidentiality of information and assignment of inventions. Since Mr. Shamir is also a director, under Israeli law his employment agreement and terms, as well as any changes to the agreement, are subject to approval by our shareholders. Our shareholders approved the employment agreement with Mr. Shamir in May 2006.
Under his employment agreement, in fiscal year 2006, Mr. Shamir received (1) an annual base salary of $330,000, pro rated for the number of complete calendar months during which Mr. Shamir was employed by us in 2006, (2) a cash bonus of $371,125, which is 150% of Mr. Shamir’s annual salary, pro rated for the number of complete calendar months during which Mr. Shamir was employed by us in 2006, (3) a grant of options to purchase 300,000 of our ordinary shares at an exercise price of $17.78 per share, equal to the closing price of the ordinary shares on the Nasdaq Global Market on the date the shareholders approved the grant, vesting in four equal installments beginning on the first anniversary of the date of commencement of Mr. Shamir’s employment, and (4) a grant of 100,000 restricted shares, vesting in four equal installments beginning on the first anniversary of the date of commencement of Mr. Shamir’s employment. We have also agreed to pay Mr. Shamir a relocation bonus of $50,000. Mr. Shamir is also entitled to other standard benefits, such as a car allowance, medical and life insurance benefits and reimbursement of expenses.
Mr. Shamir’s employment may be terminated by us without cause upon three months’ prior written notice, in which case Mr. Shamir is entitled to receive his base salary and benefits payable during the 12 months following such notice of termination and accelerated vesting with respect to those options and shares of restricted stock that would have vested during such period. Mr. Shamir’s employment may be terminated by us immediately for cause. Mr. Shamir may terminate his employment with us upon three months’ prior written notice or immediately if such termination is for good reason, which consists of an uncured breach of the employment agreement by us or a continuous and material reduction in the scope or conditions of Mr. Shamir’s employment. In the event of such termination, Mr. Shamir is entitled to receive his base salary and benefits payable during the three months following notice of such termination (twelve months in the event Mr. Shamir terminates his employment for good reason) and accelerated vesting with respect to those options and shares of restricted stock that would have vested during the applicable period.
If we terminate Mr. Shamir’s employment following a change of control event (as defined in the employment agreement) or if Mr. Shamir terminates his employment for good reason following a change of control event, Mr. Shamir is entitled to receive (1) all remuneration, including any earned but unpaid bonus, and benefits payable during the 24-
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month period following notice of termination, and (2) accelerated vesting with respect to those options and shares of restricted stock that would have vested during the 24-month period following the effective date of such termination.
For fiscal year 2007, our audit committee and board of directors approved for Mr. Shamir (1) an annual base salary of $354,750, effective July 1, 2007, (2) a cash bonus of up to 200% of Mr. Shamir’s annual salary, subject to meeting certain personal and company performance targets determined from time to time at the discretion of the board of directors, and (3) a grant of options to purchase 80,000 of our ordinary shares, the exercise price of which will be equal to the closing price of the ordinary shares on the Nasdaq Global Market on the date the shareholders approve the grant, vesting in four equal installments beginning on the first anniversary of the date of the grant. The compensation of Mr. Shamir in 2007 as described above is subject to approval by our shareholders at our next annual shareholders’ meeting expected in July 2007.
Exculpation, Insurance and Indemnification
Under the Companies Law, an Israeli company may not exculpate an office holder from liability for a breach of the duty of loyalty of the office holder. However, a company may approve an act performed in breach of the duty of loyalty of an office holder provided that the office holder acted in good faith, the act or its approval does not harm the company, and the office holder discloses the nature of his or her personal interest in the act and all material facts and documents a reasonable time before discussion of the approval. An Israeli company may exculpate an office holder in advance from liability to the company, in whole or in part, for a breach of duty of care, subject to specified exceptions, but only if a provision authorizing such exculpation is inserted in its articles of association. Our articles of association include such a provision.
An Israeli company may indemnify an office holder in respect of certain liabilities either in advance of an event or following an event provided a provision authorizing such indemnification is inserted in its articles of association. Our articles of association contain such an authorization. An undertaking by an Israeli company to indemnify an office holder must be limited to foreseeable liabilities and reasonable amounts determined by the board of directors. A company may indemnify an office holder against the following liabilities incurred for acts performed as an office holder:
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| • | a financial liability imposed on him or her in favor of another person pursuant to a judgment, settlement or arbitrator’s award approved by a court; |
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| • | reasonable litigation expenses, including attorneys’ fees, incurred by the office holder or imposed by a court in proceedings instituted against him or her by the company, on its behalf or by a third party, in connection with criminal proceedings in which the office holder was acquitted or as a result of a conviction for a crime that does not require proof of criminal intent; and |
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| • | reasonable expenses incurred by the office holder in connection with an investigation or other proceeding by a governmental authority, if such proceeding did not result in an indictment of the office holder, or if such proceeding did not result in an indictment of the office holder and the office holder was requested to pay a fine for a crime that does not require proof of criminal intent. |
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An Israeli company may insure an office holder against the following liabilities incurred for acts performed as an office holder: |
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| • | a breach of duty of loyalty to the company, to the extent that the office holder acted in good faith and had a reasonable basis to believe that the act would not prejudice the company; |
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| • | a breach of duty of care to the company or to a third party; and |
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| • | a financial liability imposed on the office holder in favor of a third party. |
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An Israeli company may not indemnify, insure or exculpate an office holder against any of the following: |
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| • | a breach of duty of loyalty, except for insurance and indemnification where the office holder acted in good faith and had a reasonable basis to believe that the act would not prejudice the company; |
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| • | a breach of duty of care committed intentionally or recklessly; |
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| • | an act or omission committed with intent to derive illegal personal benefit; or |
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| • | a fine levied against the office holder. |
Under the Companies Law, exculpation, indemnification and insurance of office holders must be approved by our audit committee and our board of directors and, in respect of our directors, by our shareholders as well.
Our articles of association allow us to exculpate, indemnify and insure our office holders to the fullest extent permitted by the Companies Law. Our office holders are currently covered by a directors and officers’ liability insurance policy. To date, no claims for directors and officers’ liability insurance have been filed under this policy.
We have entered into agreements with each of our office holders undertaking to exculpate, indemnify and insure them to the fullest extent permitted by law. We may enter into additional agreements to indemnify or insure our directors and officers when circumstances change or when new directors and officers join us. This indemnification is limited to events and amounts determined as foreseeable by the board of directors, and the insurance is subject to our discretion depending on its availability, effectiveness and cost. In the opinion of the U.S. Securities and Exchange Commission, however, indemnification of directors and office holders for liabilities arising under the Securities Act is against public policy and therefore unenforceable.
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C. | INTERESTS OF EXPERTS AND COUNSEL |
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| Not applicable. |
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ITEM 8. FINANCIAL INFORMATION |
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A. | CONSOLIDATED FINANCIAL STATEMENTS AND OTHER INFORMATION |
Financial Statements
See Item 18 for audited consolidated financial statements.
Export Sales
Our manufacturing facilities for the data recorder and the PillCam capsules forming part of the Given System are located in Israel. Most of our products are exported out of Israel. For information regarding our revenues by geographic market, see Item 5: “Operating and Financial Review and Prospects.”
Legal Proceedings
Patent Disputes
On May 19, 2006, Olympus Corporation, Olympus Medical Systems Corp. and Olympus America Inc., collectively referred to in this section as “Olympus”, filed a complaint against us in the District Court for the Eastern District of Pennsylvania. In the complaint, Olympus alleged that our capsule endoscopes infringe U.S. Patent No. 5,010,412, or the ‘412 patent, entitled “High Frequency, Low Power Light Source for Video Camera.” Olympus contended that the ‘412 patent covers low power light sources of the kind used by us in our PillCam capsules. According to the complaint, Olympus did not develop this technology. Instead, in July 2005, Olympus acquired the ‘412 patent from The Boeing Company. The ‘412 patent will expire in December 2008. In addition, Olympus sought a declaratory judgment that its capsule endoscope product will not infringe our ‘531 patent and that the ‘531 patent is invalid. The ‘531 patent is our first patent that we acquired from Rafael Armament Development Authority, or Rafael, which is a division of the Israeli Defense Ministry. In its complaint, Olympus requested an injunction that will prevent us from selling in the United States any product that infringes on the ‘412 patent as well as damages in an unspecified amount.
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We filed our answer and counterclaim on October 20, 2006. In our answer and counterclaim we denied infringement of the ‘412 patent, and alleged that the ‘412 patent is invalid. In addition, we alleged that the ‘531 patent is valid and will be infringed by Olympus once it begins marketing and selling its capsule endoscopy product in the United States. We also alleged that Olympus will infringe our U.S. Patent Nos. 6,934,093, entitled “Optical System,” 7,022,067, entitled “System and Method For Controlling In Vivo Camera Capture and Display Rate,” and 7,119,814, entitled “System and Method for Annotation on a Moving Image.” In the complaint, we requested an injunction to prevent Olympus from selling in the United States any product that infringes our patents. If Olympus sells its capsule endoscopy system in the United States, we may also request the assessment of damages.
Olympus filed its reply and “counterclaims in response” on November 13, 2006, denying that Olympus will infringe our ‘531, ‘093, ‘067 and ‘814 patents, and alleging that our patents are invalid. We filed our reply to Olympus’s counterclaims on December 6, 2006, denying Olympus’s counterclaim.
On March 30, 2007 Olympus filed an amended complaint asserting that our capsule endoscopes infringe three additional patents owned by Olympus: U.S. Patent #5,794,226 entitled “Image Manipulation System Including Means For Assigning a File Name,” U.S. Patent #6,269,379 entitled “Medical Image Filing System Enabling Registration and Retrieval of a Plurality of Medical Images,” and U.S. Patent #6,939,292 entitled “Capsule Type Endoscope.” We have filed our answer to the amended complaint in April 2007 denying infringement of these patents and alleging their invalidity.
We believe we have reasonable chance of success in this case. However, at the current time, prior to the completion of discovery and prior to Olympus’s sale of its capsule endoscopy products in the United States., it is premature to predict the outcome of this case. We believe 2007 will be dedicated to the discovery phase in this litigation and we are not expecting a ruling before the end of 2008. The ongoing litigation and any unfavorable outcome in the litigation may have a material adverse effect on our operating results.
From time to time we may be involved in legal proceedings. Other than described above, currently we are not party to any legal proceedings whose outcome we expect will be material to our financial condition or results of operations.
Dividend Policy
We have never declared or paid any cash dividends on our ordinary shares and we do not anticipate paying any cash dividends on our ordinary shares in the foreseeable future. We currently intend to retain all future earnings to finance our operations and to expand our business. Any future determination relating to our dividend policy will be made at the discretion of our board of directors and will depend on a number of factors, including future earnings, capital requirements, legal restrictions, financial condition and future prospects and other factors the board of directors may deem relevant.
Significant Changes
Except as otherwise disclosed in this Form 20-F, there has been no significant change in our financial position since December 31, 2006.
ITEM 9. THE OFFER AND LISTING
| |
A. | OFFER AND LISTING DETAILS |
Nasdaq Global Market
The following table lists the high and low closing sale prices of our ordinary shares for the periods indicated as reported by the Nasdaq Global Market:
| | | | | | | |
Annual Highs and Lows | | High | | Low | |
| |
| |
| |
| | | | | | | |
2006 | | $ | 28.37 | | $ | 14.46 | |
2005 | | $ | 36.04 | | $ | 20.39 | |
2004 | | $ | 44.08 | | $ | 17.87 | |
2003 | | $ | 18.80 | | $ | 6.65 | |
2002 | | $ | 18.05 | | $ | 6.91 | |
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| | | | | | | |
Quarterly Highs and Lows | | High | | Low | |
| |
| |
| |
| | | | | | | |
1st quarter 2007 | | $ | 22.04 | | $ | 19.25 | |
| | | | | | | |
1st quarter 2006 | | $ | 28.37 | | $ | 21.65 | |
| | | | | | | |
2nd quarter 2006 | | $ | 24.07 | | $ | 15.06 | |
3rd quarter 2006 | | $ | 19.85 | | $ | 14.46 | |
4th quarter 2006 | | $ | 22.76 | | $ | 18.85 | |
| | | | | | | |
1st quarter 2005 | | $ | 36.04 | | $ | 29.53 | |
2nd quarter 2005 | | $ | 29.66 | | $ | 22.51 | |
3rd quarter 2005 | | $ | 26.41 | | $ | 20.92 | |
4th quarter 2005 | | $ | 27.46 | | $ | 20.39 | |
| | | | | | | |
Most Recent Six Months | | High | | Low | |
| |
| |
| |
| | | | | | | |
April 2007 | | $ | 21.22 | | $ | 24.49 | |
March 2007 | | $ | 22.04 | | $ | 19.79 | |
February 2007 | | $ | 21.75 | | $ | 20.21 | |
January 2007 | | $ | 21.69 | | $ | 19.25 | |
December 2006 | | $ | 21.81 | | $ | 19.07 | |
November 2006 | | $ | 22.76 | | $ | 20.51 | |
On March 31, 2007, the closing price of our ordinary shares on the Nasdaq Global Market was $21.60 per share. According to our transfer agent, as of March 31, 2007, there were approximately 122 holders of record of our ordinary shares.
Tel Aviv Stock Exchange
The following table lists the high and low closing sale prices of our ordinary shares for the periods indicated as reported by the Tel Aviv Stock Exchange:
| | | | | | | |
Annual Highs and Lows | | High | | Low | |
| |
| |
| |
| | | | | | | |
2006 | | | NIS132.60 | | | NIS65.02 | |
2005 | | | NIS155.30 | | | NIS95.79 | |
2004 | | | NIS194.60 | | | NIS123.90 | |
| | | | | | | |
Quarterly Highs and Lows | | High | | Low | |
| |
| |
| |
| | | | | | | |
1st quarter 2007 | | | NIS92.74 | | | NIS81.47 | |
| | | | | | | |
1st quarter 2006 | | | NIS132.60 | | | NIS101.60 | |
2nd quarter 2006 | | | NIS109.80 | | | NIS 67.36 | |
3rd quarter 2006 | | | NIS86.50 | | | NIS 65.02 | |
4th quarter 2006 | | | NIS98.27 | | | NIS 80.54 | |
| | | | | | | |
1st quarter 2005 | | | NIS155.30 | | | NIS129.20 | |
2nd quarter 2005 | | | NIS129.30 | | | NIS102.90 | |
3rd quarter 2005 | | | NIS118.50 | | | NIS95.99 | |
4th quarter 2005 | | | NIS126.00 | | | NIS95.79 | |
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| | | | | | | |
Most Recent Six Months | | High | | Low | |
| |
| |
| |
| | | | | | | |
April 2007 | | | NIS96.20 | | | NIS86.14 | |
March 2007 | | | NIS92.63 | | | NIS83.88 | |
February 2007 | | | NIS92.74 | | | NIS86.01 | |
January 2007 | | | NIS91.44 | | | NIS81.47 | |
December 2006 | | | NIS92.95 | | | NIS80.54 | |
November 2006 | | | NIS98.27 | | | NIS90.34 | |
The average exchange ratio of NIS to U.S. dollar in 2006 was NIS 4.4565 to $1.00.
| |
B. | PLAN OF DISTRIBUTION |
| |
| Not applicable. |
| |
C. | MARKETS |
Our ordinary shares have traded publicly on the Nasdaq Global Market under the symbol “GIVN” since October 2001 and on the Tel Aviv Stock Exchange under the symbol “GIVN” since March 2004. Our ordinary shares trade publicly only on the Nasdaq Global Market and the Tel Aviv Stock Exchange.
| |
D. | SELLING SHAREHOLDERS |
| |
| Not applicable. |
| |
E. | DILUTION |
| |
| Not applicable. |
| |
F. | EXPENSES OF THE ISSUE |
| |
| Not applicable. |
|
ITEM 10. ADDITIONAL INFORMATION |
| |
A. | SHARE CAPITAL |
| |
| Not applicable. |
| |
B. | MEMORANDUM AND ARTICLES OF ASSOCIATION |
Objects
Our objects under our memorandum of association are to engage in any type of manufacturing, trade, production, labor, agriculture, and professional and business services in all branches and areas of economic activity, to advance trade, importing and exporting, and any other object determined by our board of directors from time to time. Our objects under our articles of association are to engage in any lawful business.
Transfer of Shares and Notices
Fully paid ordinary shares are issued in registered form and may be freely transferred under our articles of association unless the transfer is restricted or prohibited by another instrument, Israeli law or the rules of a stock exchange on
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which the shares are traded. Our articles of association provide that each shareholder of record is entitled to receive at least 21 days’ prior notice of any shareholders’ meeting.
Election of Directors
Our ordinary shares do not have cumulative voting rights for the election of directors. Rather, under our articles of association our directors are appointed by the holders of a simple majority of our ordinary shares at a general shareholder meeting. As a result, the holders of our ordinary shares that represent more than 50% of the voting power represented at a shareholder meeting have the power to elect or remove any or all of our directors, subject to the special approval requirements for outside directors described under “Management-Outside Directors.” Under the Companies Law, the procedures for the appointment and removal and the term of office of directors, other than outside directors, may be contained in the articles of association of a company. Our articles of association currently do not contain provisions for staggered terms for directors. However, our articles of association may be amended in the future by a majority of our shareholders at a general shareholder meeting to provide for a staggered board or other method of electing our directors, other than with respect to our outside directors.
Dividend and Liquidation Rights
Our board of directors may declare a dividend to be paid to the holders of ordinary shares in proportion to the paid up capital attributable to the shares that they hold. Dividends may only be paid out of our profits and other surplus funds, as defined in the Companies Law, as of the end of the most recent fiscal year or as accrued over a period of two years, whichever is higher, provided that there is no reasonable concern that a payment of a dividend will prevent us from satisfying out existing and foreseeable obligations as they become due. In the event of our liquidation, after satisfaction of liabilities to creditors, our assets will be distributed to the holders of ordinary shares in proportion to the paid up capital attributable to the shares that they hold. This right may be affected by the grant of preferential dividend or distribution rights to the holders of a class of shares with preferential rights that may be authorized in the future.
Shareholder Meetings
We are required to convene an annual general meeting of our shareholders once every calendar year within a period of not more than 15 months following the preceding annual general meeting. Our board of directors is required to convene a special general meeting of our shareholders at the request of two directors or one quarter of the members of our board of directors or at the request of one or more holders of 5% or more of our share capital and 1% of our voting power or the holder or holders of 5% or more of our voting power. All shareholder meetings require prior notice of at least 21 days. The chairperson of our board of directors or any other directors designated by the board presides over our general meetings. Shareholders entitled to participate and vote at general meetings are the shareholders of record on a date to be decided by the board of directors, which may be between four and 40 days prior to the date of the meeting.
Quorum
The quorum required for an ordinary meeting of shareholders consists of at least two shareholders present, in person or by proxy, who hold or represent between them at least one-third of our issued share capital. A meeting adjourned for lack of a quorum generally is adjourned to the same day in the following week at the same time and place or any time and place as the directors designate in a notice to the shareholders. At the reconvened meeting, the required quorum consists of one or more shareholders present in person or by proxy, unless the meeting was called pursuant to a request by our shareholders in which case the quorum required is the number of shareholders required to call the meeting as described under “—Shareholder Meetings.”
Voting
Holders of our ordinary shares have one vote for each ordinary share held on all matters submitted to a vote of shareholders at a shareholder meeting. Shareholders may vote at shareholder meetings either in person or by proxy. Israeli law does not provide for public companies such as us to have shareholder resolutions adopted by means of a written consent in lieu of a shareholder meeting. Shareholder voting rights may be affected by the grant of any special voting rights to the holders of a class of shares with preferential rights that may be authorized in the future. The Companies Law provides that a shareholder, in exercising his or her rights and performing his or her obligations toward the company and its other
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shareholders, must act in good faith and in an acceptable manner, and avoid abusing his or her powers. This is required when voting at general meetings on matters such as changes to the articles of association, increasing the company’s registered capital, mergers and approval of related party transactions. A shareholder must also avoid oppression of other shareholders. In addition, any controlling shareholder, any shareholder who knows that its vote can determine the outcome of a shareholder vote and any shareholder who, under the company’s articles of association, can appoint or prevent the appointment of an office holder, is required to act with fairness towards the company. The Companies Law does not describe the substance of this duty and there is no binding case law that addresses this subject directly. Any voting agreement is also subject to these duties.
Resolutions
An ordinary resolution requires approval by the holders of a simple majority of the voting rights represented at the meeting, in person, by proxy or by written ballot, and voting on the resolution.
Under the Companies Law, unless otherwise provided in the articles of association or applicable law, approval of all resolutions of the shareholders requires a simple majority. A resolution for the voluntary winding up of the company requires approval by holders of 75% of the voting rights represented at the meeting, in person, by proxy or by written ballot and voting on the resolution.
Access to Corporate Records
Under the Companies Law, all shareholders generally have the right to review minutes of our general meetings, our shareholder register, our articles of association and any document we are required by law to file publicly with the Israeli Companies Registrar. Any shareholder who specifies the purpose of its request may request to review any document in our possession that relates to any action or transaction with a related party which requires shareholder approval under the Companies Law. We may deny a request to review a document if we determine that the request was not made in good faith, that the document contains a commercial secret or a patent or that the document’s disclosure may otherwise harm our interests.
Acquisitions under Israeli Law
Tender Offer. A person wishing to acquire shares or any class of shares of a publicly traded Israeli company and who would as a result hold over 90% of the company’s issued and outstanding share capital or of a class of shares which are listed is required by the Companies Law to make a tender offer to all of the company’s shareholders or all shareholders of such class of shares, as applicable, for the purchase of all of the issued and outstanding shares of the company or of that class of shares, as applicable. If the shareholders who do not respond to the offer hold less than 5% of the issued share capital of the company or of that class of shares, as applicable, all of the shares that the acquirer offered to purchase will be transferred to the acquirer by operation of law. However, the shareholders may petition the court to alter the consideration for the acquisition. If the dissenting shareholders hold more than 5% of the issued and outstanding share capital of the company or of such class of shares, as applicable, the acquirer may not acquire additional shares of the company or of such class of shares, as applicable, from shareholders who accepted the tender offer if following such acquisition the acquirer would then own over 90% of the company’s issued and outstanding share capital or of the shares comprising such class, as applicable.
The Companies Law provides that, except in specified circumstances, an acquisition of shares of a public company must be made by means of a tender offer if as a result of the acquisition the purchaser would become a 25% or greater shareholder of the company. This rule does not apply if there is already another 25% shareholder of the company. We believe that IDB Holding Corporation Ltd., which is controlled by four individuals in Israel, currently holds more than 25% of our outstanding ordinary shares as determined in accordance with the Companies Law. Similarly, the Companies Law provides that, except in specified circumstances, an acquisition of shares in a public company must be made by means of a tender offer if as a result of the acquisition the purchaser would become a 45% or greater shareholder of the company, if at such time there is no 45% or greater shareholder of the company.
Merger. The Companies Law permits merger transactions if approved by each party’s board of directors and the majority of each party’s shares voted on the proposed merger at a shareholders’ meeting called on at least 21 days’ prior notice. Shareholder approval is not required in certain specified circumstances, such as a merger between a company and its wholly-owned subsidiary. Under the Companies Law, merger transactions may be approved by holders of a simple majority of our shares present, in person or by proxy, at a general meeting and voting on the transaction. In determining whether the
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required majority has approved the merger, if our shares are held by the other party to the merger, or by any person holding at least 25% of the outstanding voting shares or 25% of the means of appointing directors of the other party to the merger, then a vote against the merger by holders of the majority of the shares present and voting, excluding shares abstaining and shares held by the other party or by such person, or anyone acting on behalf of either of them, is sufficient to reject the merger transaction. If the transaction would have been approved but for the exclusion of the votes of certain shareholders as provided above, a court may still approve the merger upon the request of holders of at least 25% of the voting rights of a company, if the court holds that the merger is fair and reasonable, taking into account the value of the parties to the merger and the consideration offered to the shareholders. Upon the request of a creditor of either party to the proposed merger, the court may delay or prevent the merger if it concludes that there exists a reasonable concern that, as a result of the merger, the surviving company will be unable to satisfy the obligations of any of the parties to the merger. In addition, a merger may not be executed unless at least 50 days have passed from the time that a proposal for approval of the merger has been filed with the Israeli Registrar of Companies and at least 30 days have passed from the approval of the shareholders of each of the parties.
Anti-Takeover Measures
The Companies Law allows us to create and issue shares having rights different to those attached to our ordinary shares, including shares providing certain preferred or additional rights to voting, distributions or other matters and shares having preemptive rights. In the future, if we do create and issue a class of shares other than ordinary shares, such class of shares, depending on the specific rights that may be attached to them, may delay or prevent a takeover or otherwise prevent our shareholders from realizing a potential premium over the market value of their ordinary shares. The authorization of a new class of shares will require an amendment to our articles of association which requires the prior approval of a majority of our shareholders at a general meeting. Shareholders voting at such a meeting will be subject to the restrictions under the Companies Law described in “Voting.”
Transfer Agent and Registrar
The transfer agent and registrar for our ordinary shares is American Stock Transfer & Trust Company. Its address is 59 Maiden Lane, New York, New York 10038 and its telephone number at this location is (212) 936-5100.
Summaries of the following material contracts and amendments to these contracts are included in this Form 20-F in the places indicated:
| | |
Material Contract | | Location |
| |
|
Agreements with Micron Technology, Inc. | | Item 4.B: “Information on the Company – Part B: Business Overview – Manufacturing.” |
Agreement with Zarlink Semiconductors AB | | Item 4.B: “Information on the Company – Part B: Business Overview – Manufacturing.” |
Agreement with Ethicon Endo-Surgery Inc. | | Item 4.B: “Information on the Company – Part B: Business Overview – Marketing and Distribution.” |
In 1998, Israeli currency control regulations were liberalized significantly, so that Israeli residents generally may freely deal in foreign currency and foreign assets, and non-residents may freely deal in Israeli currency and Israeli assets. There are currently no Israeli currency control restrictions on remittances of dividends on the ordinary shares or the proceeds from the sale of the shares provided that all taxes were paid or withheld; however, legislation remains in effect pursuant to which currency controls can be imposed by administrative action at any time.
Non-residents of Israel may freely hold and trade our securities. Neither our memorandum of association nor our articles of association nor the laws of the State of Israel restrict in any way the ownership or voting of ordinary shares by non-residents, except that such restrictions may exist with respect to citizens of countries which are in a state of war with Israel. Israeli residents are allowed to purchase our ordinary shares.
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Israeli Tax Considerations and Government Programs
The following is a description of the material Israeli income tax consequences of the ownership of our ordinary shares. The following also contains a description of material relevant provisions of the current Israeli income tax structure applicable to companies in Israel, with special reference to its effect on us. To the extent that the discussion is based on new tax legislation which has not been subject to judicial or administrative interpretation, we cannot assure shareholders that the tax authorities will accept the views expressed in the discussion in question. The discussion is not intended, and should not be taken, as legal or professional tax advice and is not exhaustive of all possible tax considerations.
The following description is not intended to constitute a complete analysis of all tax consequences relating to the ownership or disposition of our ordinary shares. Shareholders should consult their own tax advisors concerning the tax consequences of their particular situation, as well as any tax consequences that may arise under the laws of any state, local, foreign or other taxing jurisdiction.
Taxation of Companies
General Corporate Tax Structure. In 2006, Israeli companies were subject to corporate tax at the rate of 31% of taxable income. This tax rate has been reduced to 29% in 2007 and is expected to decrease gradually to 25% by 2010. However, the effective tax rate payable by a company that derives income from an approved enterprise, as discussed further below, may be considerably less.
Tax Benefits Under the Law for the Encouragement of Capital Investments, 1959. The Law for the Encouragement of Capital Investments, 1959, commonly referred to as the Investment Law, provides that a proposed capital investment in eligible facilities may, upon application to the Investment Center of the Ministry of Industry, Trade and Labor of the State of Israel, be designated as an approved enterprise. Each certificate of approval for an approved enterprise relates to a specific investment program delineated both by its financial scope, including its capital sources, and by its physical characteristics, for example, the equipment to be purchased and utilized under the program. The tax benefits derived from any certificate of approval relate only to taxable income attributable to the specific approved enterprise. If a company has more than one approval or only a portion of its capital investments is approved, its effective tax rate is the result of a weighted average of the applicable rates.
Generally, taxable income of a company derived from an approved enterprise is subject to company tax at the maximum rate of 25%, rather than the regular corporate tax rate, for a period of seven years, or ten years if the company qualifies as a foreign investors’ company as described below, commencing with the year in which the approved enterprise first generates taxable income. However, the ten-year period may not extend beyond the later of 14 years from the year in which approval was granted or 12 years from the year in which operations or production by the enterprise began. A company’s undistributed income derived from an approved enterprise in top priority locations (commonly known as “Zone A”) will be exempt from corporate tax for a period of ten years.
A company having an approved enterprise status may elect to receive an alternative package of benefits. Under the alternative package of benefits, a company’s undistributed income derived from an approved enterprise will be exempt from company tax for a period of between two and ten years from the first year of taxable income, depending on the geographic location of the approved enterprise within Israel, and the company will be eligible for a reduced tax rate for the remainder of the benefits period.
A company that has an approved enterprise in Zone A or that has elected the alternative package of benefits and that subsequently pays a dividend out of income derived from the approved enterprise during the tax exemption period will be subject to corporation tax on the amount distributed. The rate of the tax will be the rate which would have been applicable had the company not been tax exempt. This corporation tax rate is 10% to 25%, depending on the percentage of the company’s shares held by foreign shareholders. The recipient of dividends distributed from such income is taxed at the rate applicable to dividends from approved enterprises which is 15%, or less under certain anti double-taxation treaties, if the dividend is distributed during the tax benefit period or within 12 years after the period and there is no time limit with respect to dividend distributed from an exempt income of foreign investors’ company. The company must withhold this tax at source.
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Subject to applicable provisions concerning income under the alternative package of benefits, all dividends are considered to be attributable to the entire enterprise and their effective tax rate is the result of a weighted average of the various applicable tax rates. Under the Investment Law, a company that has elected the alternative package of benefits is not obliged to distribute exempt retained profits, and may generally decide from which year’s profits to declare dividends. We currently intend to reinvest any income derived from our approved enterprise programs and not to distribute the income as a dividend.
The Investment Center bases its decision whether or not to approve an application on the criteria in the Investment Law and regulations, the then prevailing policy of the Investment Center and the specific objectives and financial criteria of the applicant. In addition, the benefits available to an approved enterprise are conditional upon the fulfillment of conditions stipulated in the Investment Law and its regulations and the criteria in the specific certificate of approval, as described above. If a company does not meet these conditions, it would be required to refund the amount of tax benefits, with the addition of a consumer price index linkage adjustment and interest. There can be no assurance that any future approved enterprises that we may be awarded will be entitled to the same package of benefits as we currently have.
The Investment Center of the Ministry of Industry and Trade granted our manufacturing facility approved enterprise status under the Investment Law in 1999. We have elected the alternative package of benefits under these approved enterprise programs. Since our manufacturing facility is located in a “Zone A”, the portion of our income derived from this approved enterprise program will be exempt from tax for a period of ten years, commencing when we begin to realize net income from these programs, but such period may not extend beyond the later of 14 years from the year in which approval was granted or 12 years from the year in which operations or production by the enterprise began. The period of tax benefits for our approved enterprise programs has not yet commenced because we have yet to realize taxable income. We expect to derive a substantial portion of our income from our approved enterprise program. The benefits available to an approved enterprise program are dependent upon the fulfillment of conditions stipulated in applicable law and in the certificate of approval.
The Investment Law and the criteria for receiving an “approved enterprise” status may be amended from time to time and there is no assurance that we will be able to obtain additional benefits under the Investment Law when we apply for such benefits.
A reform in the Investment Law was made in March 2005. According to this reform, instead of filing application for tax benefits with the Investment Center, companies are now allowed to claim the tax benefits on their corporate tax returns subject to fulfilling certain conditions, without prior approval and without submitting any reports to the Investment Center. Audit of any claim for tax benefits will take place by the Israeli income tax authority as part of general tax audits it may perform from time to time.
Grants Under the Law for the Encouragement of Industrial Research and Development, 1984. Under the Law for the Encouragement of Industrial Research and Development, 1984, commonly referred to as the Research Law, research and development programs which meet specified criteria and are approved by a governmental committee of the Office of the Chief Scientist are eligible for grants of up to 50% of the project’s expenditure, as determined by the research committee, in exchange for the payment of royalties from the sale of products developed under the program. Regulations under the Research Law generally provide for the payment of royalties to the Chief Scientist of 3.0% to 3.5% on sales of products and services derived from our technology developed using these grants until 100% of the dollar-linked grant is repaid, together with interest equal to the 12 month London Interbank Offered Rate applicable to dollar deposits that is published on the first business day of each calendar year. Following the full repayment of the grant, there is no further liability for repayment.
The terms of the Israeli government participation also require that the manufacture of products developed with government grants be performed in Israel. However, under the regulations of the Research Law, if any of the manufacturing is performed outside Israel by any entity other than us, assuming we receive approval from the Chief Scientist for the foreign manufacturing, we may be required to pay increased royalties. The increase in royalties depends upon the manufacturing volume that is performed outside of Israel follows:
| | | | |
Manufacturing Volume Outside of Israel | | Royalties to the Chief Scientist
as a Percentage of Grant | |
| |
| |
| | | | |
less than 50% | | | 120% | |
between 50% and less than 90% | | | 150% | |
90% and more | | | 300% | |
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If the manufacturing is performed outside of Israel by us, the rate of royalties payable by us on revenues from the sale of products manufactured outside of Israel will increase by 1% over the regular rates. If the manufacturing is performed outside of Israel by a third party, the rate of royalties payable by us on those revenues will be a percentage equal to the percentage of our total investment in the Given System that was funded by grants. In addition, in recent years the government of Israel has accelerated the repayment of Chief Scientist grants, and may further accelerate them in the future. Following our request, the Office of the Chief Scientist has approved the manufacture of limited quantities of the PillCam capsule using the back-up production line that we have established at Pemstar’s facilities in Ireland without increasing royalty rates.
The technology developed with Chief Scientist grants may not be transferred to third parties without the prior approval of a governmental committee under the Research Law, and may not be transferred to non-residents of Israel. The approval, however, is not required for the export of any products developed using the grants. Approval of the transfer of technology to residents of Israel may be granted in specific circumstances, only if the recipient abides by the provisions of the Research Law and related regulations, including the restrictions on the transfer of know-how and the obligation to pay royalties in an amount that may be increased. We cannot provide any assurance that any consent, if requested, will be granted.
The funds available for grants from the Chief Scientist depend on several criteria and prevailing government policy and budget, and may be reduced or eliminated in the future. Even if these grants are maintained, there is no assurance that we will receive Chief Scientist grants in the future. In addition, each application to the Chief Scientist is reviewed separately, and grants are based on the program approved by the research committee. Expenditures supported under other incentive programs of the State of Israel are not eligible for grants from the Chief Scientist. We cannot provide any assurance that applications to the Chief Scientist will be approved and, until approved, the amounts of any grants are not determinable.
Tax Benefits and Grants for Research and Development. Israeli tax law allows, under specific conditions, a tax deduction in the year incurred for expenditures that were paid in cash, including capital expenditures, relating to scientific research and development projects, if:
| | |
| • | the expenditures are approved by the relevant Israeli government ministry, determined by the field of research; |
| | |
| • | the research and development is for the promotion of the company; and |
| | |
| • | the research and development is carried out by or on behalf of the company seeking the deduction. |
Expenditures not so approved are deductible over a three-year period. However, the amounts of any government grant made available to us are subtracted from the amount of the deductible expenses according to Israeli law.
Tax Benefits Under the Law for the Encouragement of Industry (Taxes), 1969. According to the Law for the Encouragement of Industry (Taxes), 1969, generally referred to as the Industry Encouragement Law, an industrial company is a company resident in Israel, at least 90% of the income of which, in a given tax year, determined in Israeli currency exclusive of income from specified government loans, capital gains, interest and dividends which are not classified for such company as business income, is derived from an industrial enterprise owned by it. An industrial enterprise is defined as an enterprise whose major activity in a given tax year is industrial production activity.
Under the Industry Encouragement Law, industrial companies are entitled to certain preferred corporate tax benefits, including the following:
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| • | deduction of purchases of know-how and patents over an eight-year period for tax purposes; and |
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| • | claiming of stock exchange issuance expenses over three years. |
Eligibility for benefits under the Industry Encouragement Law is not subject to receipt of prior approval from any governmental authority.
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If we qualify as an industrial company within the definition of the Industry Encouragement Law, we are entitled to the benefits described above. We believe that in 2006 we qualified as an Industrial Company under the Industry Encouragement Law. We cannot provide any assurance that the Israeli tax authorities will agree with the determination that we qualified as an industrial company in the past or that we will maintain this qualification or our status as an industrial company.
Special Provisions Relating to Taxation Under Inflationary Conditions. The Income Tax Law (Inflationary Adjustments), 1985, generally referred to as the Inflationary Adjustments Law, represents an attempt to overcome the problems presented to a traditional tax system by an economy undergoing rapid inflation. The Inflationary Adjustments Law is highly complex. Its features which are material to us can generally be described as follows:
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| • | Where a company’s equity, as calculated under the Inflationary Adjustments Law, exceeds the depreciated cost of fixed assets, a deduction from taxable income is permitted equal to the excess multiplied by the applicable annual rate of inflation. The maximum deduction permitted in any single tax year is 70% of taxable income, with the unused portion permitted to be carried forward. |
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| • | Where a company’s depreciated cost of fixed assets exceeds its equity, then the excess multiplied by the applicable annual rate of inflation is added to taxable income. |
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| • | Depreciation deductions on fixed assets and losses carried forward are adjusted for inflation based on the increase in the consumer price index. |
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| • | Gains on traded securities are taxable in specified circumstances. |
Taxation of Our Shareholders
Capital Gains on Sales of Our Ordinary Shares. Israeli law imposes a capital gains tax on the sale of capital assets. The law distinguishes between real gain and inflationary surplus. The inflationary surplus is the portion of the total capital gain that is equivalent to the increase of the relevant asset’s purchase price which is attributable to the increase in the Israeli consumer price index between the date of purchase and the date of sale. Foreign residents who purchased an asset in foreign currency may request that the inflationary surplus be computed on the basis of the devaluation of the Shekel against such foreign currency. The real gain is the excess of the total capital gain over the inflationary surplus. The inflationary surplus accumulated from and after December 31, 1993, is exempt from any capital gains tax in Israel while the real gain is taxed at the applicable rate discussed below.
Dealers in securities in Israel are taxed at regular tax rates applicable to business income.
Under the convention between the United States and Israel concerning taxes on income, Israeli capital gains tax will not apply to the sale, exchange or disposition of ordinary shares by a person:
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| • | who qualifies as a resident of the United States within the meaning of the U.S.-Israel tax treaty; and |
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| • | who is entitled to claim the benefits available to the person by the U.S.-Israel tax treaty. |
However, this exemption does not apply, among other cases, if the gain is attributable to a permanent establishment of such person in Israel, or if the holder is a resident of the United States within the meaning of the U.S.-Israeli tax treaty who holds, directly or indirectly, shares representing 10% or more of our voting power during any part of the 12-month period preceding the sale, exchange or disposition, subject to specified conditions. Under these circumstances, the sale, exchange or disposition would be subject to Israeli tax, to the extent applicable. However, under the U.S.-Israel tax treaty, a U.S. resident generally would be permitted to claim a credit for the Israeli taxes paid against the U.S. federal income tax imposed on the sale, exchange or disposition, subject to the limitations under U.S. law applicable to foreign tax credits. The U.S.-Israel tax treaty does not relate to U.S. state or local taxes.
For residents of other countries, the purchaser of shares may be required to withhold 25% capital gains tax on all amounts received for the sale of our ordinary shares, for so long as the capital gain from such a sale is not exempt from Israeli capital gains tax, and unless a different rate is provided in a treaty between Israel and the seller’s country of residence.
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Under Israeli law, the capital gain from the sale of shares by non Israeli residents is tax exempt in Israel as long as our shares are listed on the Nasdaq Global Market or any other stock exchange recognized by the Israeli Ministry of Finance, and provided certain other conditions are met, the most relevant of which are: (A) the capital gain is not attributed to the foreign resident’s permanent establishment in Israel, and (B) the shares were acquired by the foreign resident after the company’s shares had been listed for trading on the foreign exchange. In addition, capital gains from the sale of our ordinary shares by non-Israeli residents who purchased or will have purchased the shares between July 1, 2005 and December 31, 2008 and whose state of residence has a double tax treaty with Israel will generally be tax exempt irrespective of whether our shares are listed on any stock exchange. If the shares were sold by Israeli residents, then (A) for the period ending December 31, 2002, their sale would be tax exempt so long as (1) the shares are listed on a stock exchange, such as the Nasdaq Global Market, which is recognized by the Israeli Ministry of Finance, and (2) we qualified as an industrial company or industrial holding company under the Law for Encouragement of Industry (Taxes) 1969, and (B) for the period commencing January 1, 2003, the sale of the shares would be subject to a 20% tax, or 25% if the seller holds 10% or more of the “means of control” of our company, as such term is defined by the law. We believe that in 2006 we qualified as an Industrial Company under the Law for Encouragement of Industry (Taxes) 1969. We cannot provide any assurance that the Israeli tax authorities will agree with the determination that we qualified as an industrial company in the past or that we will maintain this qualification or our status as an industrial company. If we are delisted, gains from the sale of our ordinary shares will be subject to capital gains tax at a rate of 20% or 25% if the seller holds 10% or more of the “means of control” of our company, as such term is defined by the law, unless an exemption or other lower tax rate applies in accordance with a tax treaty between Israel and the shareholder’s country of residence.
Non-residents of Israel are subject to tax on income accrued or derived from sources in Israel. These sources of income include passive income such as dividends, royalties and interest, as well as non-passive income, such as income received for services rendered in Israel. We are required to withhold income tax at the rate of 25% with respect to passive income (or 15% for dividends distributed from income generated by an approved enterprise) unless a different rate or an exemption is provided in a tax treaty between Israel and the shareholder’s country of residence.
Under an amendment to the Inflationary Adjustments Law, non-Israeli corporations might be subject to Israeli taxes on the sale of shares in an Israeli company which are traded on certain stock markets, including The Nasdaq Global Market, subject to the provisions of any applicable double taxation treaty.
Stamp Duty
Until December 31, 2005, stamp duty applied in Israel to various types of documents at various rates, depending primarily on the type of the document and the amount specified therein, if any. The Israeli legislature has cancelled the stamp duty for any documents or transactions, effective January 1, 2006.
United States Federal Income Taxation
The following is a description of the material United States federal income tax consequences of the ownership of our ordinary shares. This description does not purport to address all of the tax considerations that may be relevant to a decision to purchase, own or dispose of our ordinary shares. This description assumes that holders of our ordinary shares will hold the ordinary shares as capital assets. This summary does not address tax considerations applicable to holders who may be subject to special tax rules, including:
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| • | dealers or traders in securities or currencies; |
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| • | tax-exempt entities; |
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| • | banks, financial institutions or insurance companies; |
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| • | real estate investment trusts, regulated investment companies or grantor trusts; |
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| • | persons who received our ordinary shares as compensation for the performance of services; |
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| • | holders who own, or are deemed to own, at least 10% or more, by voting power or value, of our shares; |
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| • | certain former citizens or residents of the United States; |
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| • | investors whose functional currency is not the United States dollar; or |
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| • | holders who hold our ordinary shares as part of a position in a “straddle” or as part of a “hedging” or “conversion” transaction for United States federal income tax purposes. |
Further, this description does not address any United States federal estate and gift or alternative minimum tax consequences, nor any state, local, or foreign tax consequences relating to the acquisition, ownership and disposition of our ordinary shares.
This description is based on the Internal Revenue Code of 1986, as amended, United States Treasury Regulations and judicial and administrative interpretations thereof, in each case as in effect and available on the date of this annual report. The United States tax laws and the interpretation thereof are subject to change, which change could apply retroactively and could affect the tax consequences described below.
Unless specifically noted below, the following description applies only to owners of our ordinary shares that are U.S. Holders, as defined below, for United States federal income tax purposes.
For purposes of this description, a “U.S. Holder” is a beneficial owner of ordinary shares that, for United States federal income tax purposes, is:
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| • | citizen or resident of the United States; |
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| • | a corporation or partnership created or organized in or under the laws of the United States or any state thereof, including the District of Columbia; |
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| • | an estate if its income is subject to United States federal income taxation regardless of its source; or |
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| • | a trust if such trust validly has elected to be treated as a United States person for United States federal income tax purposes or if a United States court can exercise primary supervision over its administration and one or more United States persons have the authority to control all of its substantial decisions. |
A non-U.S. Holder is a beneficial owner of ordinary shares that is not a U.S. Holder.
If a partnership (or any other entity treated as a partnership for U.S. federal income tax purposes) holds our ordinary shares, the tax treatment of the partnership and a partner in such partnership generally will depend on the status of the partner and the activities of the partnership. Such a partner or partnership should consult its own tax advisor as to its consequences.
Shareholders should consult their own tax advisors with respect to the United States federal, state, local and foreign tax consequences of acquiring, owning or disposing of our ordinary shares.
Distributions
Subject to the discussion below under “Passive Foreign Investment Company Considerations”, the entire amount of any distribution made to you with respect to ordinary shares, other than any distributions of our ordinary shares made to all our shareholders, will constitute dividends to the extent of our current or accumulated earnings and profits as determined under United States federal income tax principles. For these purposes, the amount of the distribution will not be reduced by the amount of any Israeli tax withheld from the distribution. Subject to the discussion below under “Passive Foreign Investment Company Considerations”, non-corporate U.S. Holders may be taxed on the dividend distributions made in taxable years beginning on or before December 31, 2010 at the lower rates applicable to long-term capital gains (i.e., gains with respect to capital assets held for more than one year), provided that certain conditions are met, including certain holding period requirements and the absence of certain risk reduction transactions. In addition, the dividends will be included in your gross income as ordinary income and will not be eligible for the dividends received deduction generally allowed to corporate United States holders. Subject to the discussion below under “Passive Foreign Investment Company Considerations”, if distributions with respect to our ordinary shares exceed our current and accumulated earnings and profits
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as determined under United Stated federal income tax principles, the excess distributed with respect to any ordinary share would be treated first as a tax-free return of capital to the extent of your adjusted basis in that ordinary share and thereafter as capital gain. We do not maintain calculations of our earnings and profits under U.S. federal income tax principles.
If we pay a dividend or distribution in Shekels, any such dividend or distribution will be included in your gross income in an amount equal to the U.S. dollar value of Shekels on the date of receipt. You will have a tax basis for United States federal income tax purposes in the Shekels received equal to that dollar value, and any subsequent gain or loss in respect of the Shekels arising from exchange rate fluctuations will generally be taxable as U.S. source ordinary income or loss.
Dividends received by you with respect to your ordinary shares generally will be treated as foreign source income, which may be relevant in calculating your foreign tax credit limitation. You may generally elect to claim the Israeli income tax withheld from dividends and distributions you receive with respect to your ordinary shares as a foreign tax credit against your United States federal income tax liability, subject to a number of limitations. Among the limitations, the foreign tax credits allowable with respect to specific classes of income cannot exceed the U.S. federal income tax payable with respect to each such class. Dividends we pay generally will be included in the “passive income” class for these purposes, or, in the case of certain financial services entity holders, “financial services income.” U.S. Holders should note, however, that the “financial services income” category will be eliminated for taxable years beginning after December 31, 2006. Under the recently enacted legislation, the foreign tax credit limitation categories are limited to “passive category income” and “general category income.”
Subject to the discussion below under “Backup Withholding and Information Reporting,” if you are a non-U.S. Holder of our ordinary shares, you generally will not be subject to United States federal income or withholding tax on dividends you receive on your ordinary shares, unless the dividends are effectively connected with your conduct of a trade or business in the United States.
Sale or Exchange of Our Ordinary Shares
Subject to the discussion below under “Passive Foreign Investment Company Considerations”, if you are a U.S. Holder, you generally will recognize capital gain or loss for United States federal income tax purposes when you sell, exchange or otherwise dispose of our ordinary shares equal to the difference between your adjusted tax basis in the ordinary shares and the amount realized on their disposition. If you are a non-corporate U.S. Holder, the maximum marginal United States federal income tax rate applicable to such gain will be lower than the maximum marginal United States federal income tax rate applicable to ordinary income (other than certain dividends) if your holding period for our ordinary shares exceeds one year (i.e., such gain is long-term capital gain). Any gain or loss recognized by you generally will be treated as United States source income or loss for United States foreign tax credit purposes. The deductibility of capital losses is subject to limitations.
Subject to the discussion below under “Backup Withholding and Information Reporting,” if you are a non-U.S. Holder of our ordinary shares, you generally will not be subject to United States federal income or withholding tax on gain realized on the sale or exchange of such ordinary shares unless (1) such gain is effectively connected with your conduct of a trade or business in the United States, or (2) in the case of gain realized by an individual non-United States holder, you are present in the United States for 183 days or more in the taxable year of the sale or exchange and certain other conditions are met.
Passive Foreign Investment Company Considerations
A non-United States corporation will be classified as a “passive foreign investment company” or a PFIC, for United States federal income tax purposes in any taxable year in which, after applying applicable look-through rules, either (1) at least 75% of its gross income is “passive income,” or (2) at least 50% of the value of its gross assets is attributable to assets that produce passive income or are held for the production of passive income. Passive income for this purpose includes items such as dividends, interest, royalties, rents and gains from commodities and securities transactions.
Based on our estimated gross income, the average value of our gross assets (determined by reference to the market value of our shares and valuing our intangible assets using the methods prescribed for publicly traded corporations) and the nature of our business, we believe that we will not be classified as a PFIC for the taxable year ended December 31, 2006. Our status in future years will depend on our assets and activities in those years, although you will be treated as continuing to
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own an interest in a PFIC if we are a PFIC in any year while you own your shares unless you make certain elections. We have no reason to believe that our assets or activities will change in a manner that would cause us to be classified as a PFIC, but because the market price of our ordinary shares is likely to fluctuate, we cannot assure you that we will not be considered a PFIC for any taxable year. If we were a PFIC, you generally would be subject to imputed interest charges and other disadvantageous tax treatment (including the denial of the taxation of such dividends at the lower rates applicable to long-term capital gains, as discussed above under “Distributions”) with respect to any gain from the sale or exchange of, and excess distributions with respect to, the ordinary shares.
If we were a PFIC, you could make a variety of elections that may alleviate the tax consequences referred to above, and one of these elections may be made retroactively. However, it is expected that the conditions necessary for making certain of such elections will not apply in the case of our ordinary shares. You should consult your own tax advisor regarding our potential status as a PFIC and the tax consequences that would arise if we were treated as a PFIC.
Backup Withholding and Information Reporting
United States backup withholding taxes and information reporting requirements generally apply to certain payments to certain non-corporate holders of stock. Information reporting requirements will, and a backup withholding tax may, apply to payments of dividends on, and to proceeds from the sale, exchange or redemption of, our ordinary shares made within the United States, or by a U.S. payor or U.S. middleman, to a holder of our ordinary shares, other than an exempt recipient, including a corporation, a payee that is not a United States person that provides an appropriate certification and certain other persons. Backup withholding is not an additional tax and may be claimed as a credit against your U.S. federal income tax liability, and you may obtain a refund of any excess amounts withheld under the backup withholding rules by filing an appropriate claim for refund with the IRS and furnishing any required information. The backup withholding tax rate is 28% for years through 2010.
In the case of such payments made within the United States, or by a U.S. payor or U.S. middleman, to a foreign simple trust, foreign grantor trust or foreign partnership, other than payments to a foreign simple trust, foreign grantor trust or foreign partnership that qualifies as a “withholding foreign trust” or a “withholding foreign partnership” within the meaning of the applicable United States Treasury Regulations and payments to a foreign simple trust, foreign grantor trust or foreign partnership that are effectively connected with the conduct of a trade or business in the United States, the beneficiaries of the foreign simple trust, the person treated as the owner of the foreign grantor trust or the partners of the foreign partnership, as the case may be, will be required to provide the certification discussed above in order to establish an exemption from backup withholding tax and information reporting requirements. Moreover, a payor may rely on a certification provided by a payee that is not a United States person only if such payor does not have actual knowledge or a reason to know that any information or certification stated in such certificate is incorrect.
The above description is not intended to constitute a complete analysis of all tax consequences relating to the acquisition, ownership or disposition of our ordinary shares. Shareholders should consult their own tax advisors concerning the tax consequences of your particular situation, as well as any tax consequences that may arise under the laws of any state, local, foreign or other taxing jurisdiction.
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F. | DIVIDENDS AND PAYING AGENTS |
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�� | Not applicable. |
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G. | STATEMENTS BY EXPERTS |
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| Not applicable. |
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H. | DOCUMENTS ON DISPLAY |
We are currently subject to the information and periodic reporting requirements of the Exchange Act, and file periodic reports and other information with the Securities and Exchange Commission through its electronic data gathering, analysis and retrieval (EDGAR) system. Our securities filings, including this Annual Report and the exhibits thereto, are available for inspection and copying at the public reference facilities of the Securities and Exchange Commission located at 1580 100 F Street, N.E., Washington, D.C. 20549. You may also obtain copies of the documents at prescribed rates by
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writing to the Public Reference Section of the Securities and Exchange Commission at 100 F Street, N.E., Washington, DC 20549. Please call the Securities and Exchange Commission at 1-800-SEC-0330 for further information on the public reference room. The Commission also maintains a website at http://www.sec.gov from which certain filings may be accessed.
As a foreign private issuer, we are exempt from the rules under the Exchange Act relating to the furnishing and content of proxy statements, and our officers, directors and principal shareholders are exempt from the reporting and short-swing profit recovery provisions contained in Section 16 of the Exchange Act. In addition, we are not required under the Exchange Act to file periodic reports and financial statements with the Securities and Exchange Commission as frequently or as promptly as United States companies whose securities are registered under the Exchange Act.
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I. | SUBSIDIARY INFORMATION |
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| Not applicable. |
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We develop and manufacture products primarily in Israel and sell the majority of the products in the United States, and to a lesser extent in other countries. As a result, our financial results could be affected by factors such as changes in foreign currency exchange rates or weak economic conditions in foreign markets. As most of our sales are made in U.S. dollars, a strengthening of the U.S. dollar could make our products less competitive in foreign markets. In addition, the lower value of the U.S. dollar compared to the Shekels increases the operating expenses reported in our financial statements. Our interest income is sensitive to changes in the general level of interest rates in the United States and Israel since the majority of our investments are in short-term instruments that are tied to the interest rates in these countries. Due to the nature of our short-term investments, we do not believe that there is any material market risk exposure. Therefore, we believe that no quantitative tabular disclosures are required.
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
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PART II
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
ITEM 15T. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to provide reasonable assurance that information required to be disclosed in our periodic filings with the SEC is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer (CEO) and Chief Financial Officer (CFO), as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. Furthermore, management necessarily was required to use its judgment in evaluating the cost to benefit relationship of possible disclosure controls and procedures.
As of the end of the period covered by this report, we performed an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures. The evaluation was performed with the participation of senior management of each business segment and key corporate functions, and under the supervision of our CEO and CFO. Based on the evaluation, our management, including the CEO and CFO, concluded that our disclosure controls and procedures were effective at the reasonable assurance level.
Management’s Annual Report on Internal Control Over Financial Reporting
Management of the company is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act, as a process designed by, or under the supervision of, the company’s principal executive and principal financial officers and effected by the company’s board of directors, management and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:
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| • | pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the company; |
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| • | provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and |
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| • | provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements. |
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risks that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
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Management assessed the effectiveness of the company’s internal control over financial reporting as of December 31, 2006. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) inInternal Control-Integrated Framework.
Based on our assessment, management believes that, as of December 31, 2006, the company’s internal control over financial reporting is effective.
ITEM 16. [RESERVED]
ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT.
The board of directors has determined that Michael Grobstein is the financial expert serving on its audit committee and that Mr. Grobstein is independent as that term is defined under the Nasdaq Global Market listing requirements.
ITEM 16B. CODE OF ETHICS.
We have adopted a code of ethics applicable to our chief executive officer, chief financial officer, controller and persons performing similar functions. The code of ethics was filed with the SEC as Exhibit 11.1 to our Annual Report on Form 20-F for the fiscal year ended December 31, 2003 and is also available on our website, www.givenimaging.com.
ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The following table sets forth fees for professional audit services rendered by Somekh Chaikin, a member firm of KPMG International, for the audit of our financial statements for the years ended December 31, 2005 and 2006, and fees billed for other services rendered by Somekh Chaikin, including through other offices of KPMG worldwide:
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| | 2005 | | 2006 | |
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| | (in thousands) | |
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Audit fees | | $ | 309 | | $ | 316 | |
Audit-related fees | | | 401 | | | 24 | |
Tax fees | | | 114 | | | 67 | |
All other fees | | | 92 | | | 162 | |
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|
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Total | | $ | 916 | | $ | 569 | |
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| (1) | “Audit-related fees” in 2005 and 2006 consists principally on advice regarding U.S. sales tax. |
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| (2) | “Tax fees” includes fees for professional services rendered by our auditors for tax compliance and tax advice on actual or contemplated transactions. |
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| (3) | “All other fees” includes fees related to advice on international transfer prices and compliance with Sarbanes-Oxley Act requirements. |
Our audit committee pre-approved all audit and non-audit services provided to us and to our subsidiaries during the periods listed above.
ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES.
None.
ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
None.
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PART III
ITEM 17. FINANCIAL STATEMENTS
Not applicable.
ITEM 18. FINANCIAL STATEMENTS
See pages F-2 to F-33.
ITEM 19. EXHIBITS
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Exhibit | | Description |
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1.1 | | Articles of Association, incorporated by reference to Exhibit 3.2 of the Registration Statement on Form F-1 (File No. 333-68142) filed with the Commission on August 22, 2001. |
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4.1 | | [Intentionally omitted] |
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4.2 | | [Intentionally omitted] |
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4.3 | | Production Development, Manufacturing and Sales Agreement, dated as of November 26, 2002, by and between Micron Technology, Inc. and the Registrant, incorporated by reference to Exhibit 4.3 of the Annual Report on Form 20-F for the year ended December 31, 2003, filed with the Commission on March 17, 2004.† |
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4.4 | | Addendum, dated as of June 10, 2005, to Production Development, Manufacturing and Sales Agreement, dated as of November 26, 2002, by and between Micron Technology, Inc. and the Registrant. † |
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4.5 | | Technology Purchase and License Agreement, dated as of January 29, 1998, by and between Rafael Armament Development Authority of the Israeli Ministry of Defense and the Registrant, incorporated by reference to Exhibit 10.12 of the Registration Statement on Form F-1 (File No. 333-68142) filed with the Commission on August 22, 2001. |
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4.6 | | Form of Indemnification Agreement between directors and officers of the Registrant and the Registrant, incorporated by reference to Exhibit 10.15 of the Registration Statement on Form F-1 (File No. 333-68142) filed with the Commission on August 22, 2001. |
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4.7 | | [Intentionally omitted] |
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4.8 | | [Intentionally omitted] |
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4.9 | | Form of Standard Distribution Agreement of the Registration, incorporated by reference to Exhibit 10.19 of the Registration Statement on Form F-1 (File No. 333-81514) filed with the Commission on February 1, 2002. |
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4.10 | | Lease Agreement, dated as of November 26, 2001, by and between Sha’ar Yoqneam L.P. and the Registrant, incorporated by reference to Exhibit 10.20 of the Registration Statement on Form F-1 (File No. 333-81514) filed with the Commission on February 1, 2002. |
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4.11 | | Summary of Material Terms of Addendum, dated December 2002, to Lease Agreement, dated as of November 26, 2001, by and between Sha’ar Yoqneam and the Registrant, incorporated by reference to Exhibit 4.11 of the Annual Report on Form 20-F for the year ended December 31, 2002, filed with the Commission on April 10, 2003. |
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4.12 | | Development and Supply Agreement, dated April 8, 2002, by and between Zarlink Semiconductor AB and the Registrant, incorporated by reference to Exhibit 4.11 of the Annual Report on Form 20-F for the year ended December 31, 2004, filed with the Commission on March 25, 2005.† |
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4.13 | | Addendum to Development and Supply Agreement, dated July 2005, by and between Zarlink Semiconductor AB and the Registrant, incorporated by reference to Exhibit 4.12 of the Annual Report on Form 20-F for the year ended December 31, 2005, filed with the Commission on April 7, 2006.† |
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4.14 | | Exclusive Sales, Representation, Co-Promotion and Cooperation Agreement, dated May 10, 2004, by and between Ethicon Endo-Surgery, Inc. and the Registrant, incorporated by reference to Exhibit 4.12 of the Annual Report on Form 20-F for the year ended December 31, 2004, filed with the Commission on March 25, 2005.† |
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4.15 | | Amendment No. 1, dated June 2004, to the Exclusive Sales, Representation, Co-Promotion and Cooperation Agreement, dated May 10, 2004, by and between Ethicon Endo-Surgery, Inc. and the Registrant, incorporated by reference to Exhibit 4.13 of the Annual Report on Form 20-F for the year ended December 31, 2004, filed with the Commission on March 25, 2005.† |
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4.16 | | Amendment No. 2, dated October 4, 2004, to the Exclusive Sales, Representation, Co-Promotion and Cooperation Agreement, dated May 10, 2004, by and between Ethicon Endo-Surgery, Inc. and the Registrant, incorporated by reference to Exhibit 4.14 of the Annual Report on Form 20-F for the year ended December 31, 2004, filed with the Commission on March 25, 2005.† |
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4.17 | | Amendment No. 3, dated October 27, 2005, to the Exclusive Sales, Representation, Co-Promotion and Cooperation Agreement, dated May 10, 2004, by and between Ethicon Endo-Surgery, Inc. and the Registrant, incorporated by reference to Exhibit 4.16 of the Annual Report on Form 20-F for the year ended December 31, 2005, filed with the Commission on April 7, 2006. |
| | |
4.18 | | Amendment No. 4, dated November 14, 2005, to the Exclusive Sales, Representation, Co-Promotion and Cooperation Agreement, dated May 10, 2004, by and between Ethicon Endo-Surgery, Inc. and the Registrant, incorporated by reference to Exhibit 4.17 of the Annual Report on Form 20-F for the year ended December 31, 2005, filed with the Commission on April 7, 2006. |
| | |
4.19 | | Amendment No. 5, dated September 6, 2006, to the Exclusive Sales, Representation, Co-Promotion and Cooperation Agreement, dated May 10, 2004, by and between Ethicon Endo-Surgery, Inc. and the Registrant. † |
| | |
4.20 | | Amendment No. 6, dated February 16, 2007, to the Exclusive Sales, Representation, Co-Promotion and Cooperation Agreement, dated May 10, 2004, by and between Ethicon Endo-Surgery, Inc. and the Registrant. |
| | |
4.21 | | Second Addendum, dated July 5, 2004, to the Lease Agreement, dated as of November 26, 2001, by and between Sha’ar Yoqneam L.P. and the Registrant, incorporated by reference to Exhibit 4.15 of the Annual Report on Form 20-F for the year ended December 31, 2004, filed with the Commission on March 25, 2005. |
| | |
8.1 | | List of subsidiaries of the Registrant, incorporated by reference to Exhibit 8.1 of the Annual Report on Form 20-F for the year ended December 31, 2004, filed with the Commission on March 25, 2005. |
| | |
11.1 | | Code of Ethics adopted on December 9, 2003, incorporated by reference to Exhibit 11.1 of the Annual Report on Form 20-F for the year ended December 31, 2003, filed with the Commission on March 17, 2004. |
| | |
12.1 | | Certification of Chief Executive Officer of the Registrant pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| | |
12.2 | | Certification of Chief Financial Officer of the Registrant pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| | |
13.1 | | Certification of Chief Executive Officer of the Registrant pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.* |
-93-
| | |
13.2 | | Certification of Chief Financial Officer of the Registrant pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.* |
| | |
15.1 | | Consent of KPMG Somekh Chaikin, independent registered public accountants. |
| |
† | Portions of this exhibit were omitted and have been filed separately with the Secretary of the Securities and Exchange Commission pursuant to an application requesting confidential treatment under Rule 24b-2 of the Securities Exchange Act of 1934. |
| |
* | This document is being furnished in accordance with SEC Release Nos. 33-8212 and 34-47551. |
-94-
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act of 1934, the registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.
| | |
| | GIVEN IMAGING LTD. |
| | |
| By: | /s/ Nachum Shamir |
| |
|
| Name: Nachum Shamir |
| Title: President and Chief Executive Officer |
| | |
| By: | /s/ Yuval Yanai |
| |
|
| Name: Yuval Yanai |
| Title: Chief Financial Officer |
| |
Date: May 16, 2007 | |
ANNUAL REPORT ON FORM 20-F
INDEX OF EXHIBITS
| | |
Exhibit | | Description |
| |
|
| | |
1.1 | | Articles of Association, incorporated by reference to Exhibit 3.2 of the Registration Statement on Form F-1 (File No. 333-68142) filed with the Commission on August 22, 2001. |
| | |
4.1 | | [Intentionally omitted] |
| | |
4.2 | | [Intentionally omitted] |
| | |
4.3 | | Production Development, Manufacturing and Sales Agreement, dated as of November 26, 2002, by and between Micron Technology, Inc. and the Registrant, incorporated by reference to Exhibit 4.3 of the Annual Report on Form 20-F for the year ended December 31, 2003, filed with the Commission on March 17, 2004.† |
| | |
4.4 | | Addendum, dated as of June 10, 2005, to Production Development, Manufacturing and Sales Agreement, dated as of November 26, 2002, by and between Micron Technology, Inc. and the Registrant. † |
| | |
4.5 | | Technology Purchase and License Agreement, dated as of January 29, 1998, by and between Rafael Armament Development Authority of the Israeli Ministry of Defense and the Registrant, incorporated by reference to Exhibit 10.12 of the Registration Statement on Form F-1 (File No. 333-68142) filed with the Commission on August 22, 2001. |
| | |
4.6 | | Form of Indemnification Agreement between directors and officers of the Registrant and the Registrant, incorporated by reference to Exhibit 10.15 of the Registration Statement on Form F-1 (File No. 333-68142) filed with the Commission on August 22, 2001. |
| | |
4.7 | | [Intentionally omitted] |
| | |
4.8 | | [Intentionally Omitted] |
| | |
4.9 | | Form of Standard Distribution Agreement of the Registration, incorporated by reference to Exhibit 10.19 of the Registration Statement on Form F-1 (File No. 333-81514) filed with the Commission on February 1, 2002. |
| | |
4.10 | | Lease Agreement, dated as of November 26, 2001, by and between Sha’ar Yoqneam L.P. and the Registrant, incorporated by reference to Exhibit 10.20 of the Registration Statement on Form F-1 (File No. 333-81514) filed with the Commission on February 1, 2002. |
| | |
4.11 | | Summary of Material Terms of Addendum, dated December 2002, to Lease Agreement, dated as of November 26, 2001, by and between Sha’ar Yoqneam and the Registrant, incorporated by reference to Exhibit 4.11 of the Annual Report on Form 20-F for the year ended December 31, 2002, filed with the Commission on April 10, 2003. |
| | |
4.12 | | Development and Supply Agreement, dated April 8, 2002, by and between Zarlink Semiconductor AB and the Registrant, incorporated by reference to Exhibit 4.11 of the Annual Report on Form 20-F for the year ended December 31, 2004, filed with the Commission on March 25, 2005.† |
| | |
4.13 | | Addendum to Development and Supply Agreement, dated July 2005, by and between Zarlink Semiconductor AB and the Registrant, incorporated by reference to Exhibit 4.12 of the Annual Report on Form 20-F for the year ended December 31, 2005, filed with the Commission on April 7, 2006.† |
| | |
4.14 | | Exclusive Sales, Representation, Co-Promotion and Cooperation Agreement, dated May 10, 2004, by and between Ethicon Endo-Surgery, Inc. and the Registrant, incorporated by reference to Exhibit 4.12 of the |
| | |
| | Annual Report on Form 20-F for the year ended December 31, 2004, filed with the Commission on March 25, 2005.† |
| | |
4.15 | | Amendment No. 1, dated June 2004, to the Exclusive Sales, Representation, Co-Promotion and Cooperation Agreement, dated May 10, 2004, by and between Ethicon Endo-Surgery, Inc. and the Registrant, incorporated by reference to Exhibit 4.13 of the Annual Report on Form 20-F for the year ended December 31, 2004, filed with the Commission on March 25, 2005.† |
| | |
4.16 | | Amendment No. 2, dated October 4, 2004, to the Exclusive Sales, Representation, Co-Promotion and Cooperation Agreement, dated May 10, 2004, by and between Ethicon Endo-Surgery, Inc. and the Registrant, incorporated by reference to Exhibit 4.14 of the Annual Report on Form 20-F for the year ended December 31, 2004, filed with the Commission on March 25, 2005.† |
| | |
4.17 | | Amendment No. 3, dated October 27, 2005, to the Exclusive Sales, Representation, Co-Promotion and Cooperation Agreement, dated May 10, 2004, by and between Ethicon Endo-Surgery, Inc. and the Registrant, incorporated by reference to Exhibit 4.16 of the Annual Report on Form 20-F for the year ended December 31, 2005, filed with the Commission on April 7, 2006. |
| | |
4.18 | | Amendment No. 4, dated November 14, 2005, to the Exclusive Sales, Representation, Co-Promotion and Cooperation Agreement, dated May 10, 2004, by and between Ethicon Endo-Surgery, Inc. and the Registrant, incorporated by reference to Exhibit 4.17 of the Annual Report on Form 20-F for the year ended December 31, 2005, filed with the Commission on April 7, 2006. |
| | |
4.19 | | Amendment No. 5, dated September 6, 2006, to the Exclusive Sales, Representation, Co-Promotion and Cooperation Agreement, dated May 10, 2004, by and between Ethicon Endo-Surgery, Inc. and the Registrant. † |
| | |
4.20 | | Amendment No. 6, dated February 16, 2007, to the Exclusive Sales, Representation, Co-Promotion and Cooperation Agreement, dated May 10, 2004, by and between Ethicon Endo-Surgery, Inc. and the Registrant. |
| | |
4.21 | | Second Addendum, dated July 5, 2004, to the Lease Agreement, dated as of November 26, 2001, by and between Sha’ar Yoqneam L.P. and the Registrant, incorporated by reference to Exhibit 4.15 of the Annual Report on Form 20-F for the year ended December 31, 2004, filed with the Commission on March 25, 2005. |
| | |
8.1 | | List of subsidiaries of the Registrant, incorporated by reference to Exhibit 8.1 of the Annual Report on Form 20-F for the year ended December 31, 2004, filed with the Commission on March 25, 2005. |
| | |
11.1 | | Code of Ethics adopted on December 9, 2003, incorporated by reference to Exhibit 11.1 of the Annual Report on Form 20-F for the year ended December 31, 2003, filed with the Commission on March 17, 2004. |
| | |
12.1 | | Certification of Chief Executive Officer of the Registrant pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| | |
12.2 | | Certification of Chief Financial Officer of the Registrant pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| | |
13.1 | | Certification of Chief Executive Officer of the Registrant pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.* |
| | |
13.2 | | Certification of Chief Financial Officer of the Registrant pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.* |
| | |
15.1 | | Consent of KPMG Somekh Chaikin, independent registered public accountants. |
| |
† | Portions of this exhibit were omitted and have been filed separately with the Secretary of the Securities and Exchange Commission pursuant to an application requesting confidential treatment under Rule 24b-2 of the Securities Exchange Act of 1934. |
| |
* | This document is being furnished in accordance with SEC Release Nos. 33-8212 and 34-47551. |
Given Imaging Ltd.
and its Subsidiaries
Consolidated
Financial Statements
As of and for the
Year Ended December 31, 2006
Given Imaging Ltd. and its subsidiaries
Index to Consolidated Financial Statements
F-1
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
Given Imaging Ltd.:
We have audited the accompanying consolidated balance sheets of Given Imaging Ltd. (the “Company”) and its subsidiaries as of December 31, 2006 and 2005, and the related consolidated statements of operations, changes in shareholders’ equity and cash flows for each of the years in the three year period ended December 31, 2006. These consolidated financial statements are the responsibility of the Company’s Board of Directors and of its management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statements presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company and its subsidiaries as of December 31, 2006 and 2005, and the consolidated results of their operations and their cash flows for each of the years in the three year period ended December 31, 2006, in conformity with U.S. generally accepted accounting principles.
As discussed in Note 1K to the consolidated financial statements, effective January 1, 2006, the Company has adopted Statement of Financial Accounting Standard No. 123 (revised 2004), “Share-Based Payment”.
|
/s/ Somekh Chaikin |
|
Somekh Chaikin |
Certified Public Accountants (Israel) |
Member Firm of KPMG International |
Tel - Aviv, Israel
April 12, 2007
F-2
Given Imaging Ltd. and its subsidiaries
Consolidated Balance Sheets
(In thousands except per share data)
| | |
| | | |
Assets | | | |
| | | |
Current assets | | | |
Cash and cash equivalents | 1D; 2 | $ 65,356 | $ 44,510 |
Short-term investments | 5 | 288 | 17,245 |
Accounts receivable: | | | |
Trade, net | 1E | 18,325 | 18,887 |
Other | 3 | 6,264 | 1,463 |
Inventories | 1F; 4 | 16,172 | 18,168 |
Advances to suppliers | | 332 | 82 |
Deferred taxes | 1P; 14C | 1,219 | 1,374 |
Prepaid expenses | | | |
| | | |
Total current assets | | 108,976 | 103,069 |
| | | |
Deposits | | 401 | 469 |
| | | |
Assets held for employees’ severance payments | 1G; 10 | 1,690 | 1,984 |
| | | |
Marketable securities | 1H; 5 | 21,664 | 34,769 |
| | | |
Fixed assets, at cost, less accumulated depreciation | 1I; 6 | 13,862 | 14,811 |
| | | |
Other assets, at cost, less accumulated amortization | 1J; 7 | | |
| | | |
Total Assets | | | |
The accompanying notes are an integral part of these consolidated financial statements.
F-3
Given Imaging Ltd. and its subsidiaries
Consolidated Balance Sheets
(In thousands except share data)
| | | | | | | | | | |
| | | | December 31 | |
| | | |
| |
| | Note | | 2005 | | 2006 | |
| |
| |
| |
| |
Liabilities and shareholders’ equity | | | | | | | | | | |
| | | | | | | | | | |
Current liabilities | | | | | | | | | | |
| | | | | | | | | | |
Current installments of obligation under capital lease | | | 8B | | $ | 11 | | $ | 13 | |
Accounts payable: | | | | | | | | | | |
Trade | | | | | | 5,529 | | | 5,550 | |
Other | | | 9 | | | 13,886 | | | 14,620 | |
Deferred income | | | 1N; 8C | | | 3,333 | | | 3,871 | |
| | | | |
|
| |
|
| |
| | | | | | | | | | |
Total current liabilities | | | | | | 22,759 | | | 24,054 | |
| | | | |
|
| |
|
| |
Long-term liabilities | | | | | | | | | | |
Deferred income | | | 8C | | | 22,172 | | | 20,411 | |
Obligation under capital lease | | | 8B | | | 34 | | | 20 | |
Liability in respect of employees’ severance payments | | | 10 | | | 2,040 | | | 2,407 | |
| | | | |
|
| |
|
| |
| | | | | | | | | | |
Total long-term liabilities | | | | | | 24,246 | | | 22,838 | |
| | | | |
|
| |
|
| |
| | | | | | | | | | |
Total liabilities | | | | | | 47,005 | | | 46,892 | |
| | | | |
|
| |
|
| |
| | | | | | | | | | |
Commitments and contingencies | | | 8 | | | | | | | |
| | | | | | | | | | |
Minority interest | | | | | | 61 | | | 3,499 | |
| | | | | | | | | | |
Shareholders’ equity | | | | | | | | | | |
Share capital: | | | 11 | | | | | | | |
Ordinary Shares, NIS 0.05 par value each (90,000,000 shares authorized as of December 31, 2005 and 2006, 27,950,281 and 28,641,291 shares issued and fully paid as of December 31, 2005 and 2006, respectively) | | | | | | 327 | | | 335 | |
Additional paid-in capital | | | | | | 148,955 | | | 156,197 | |
Capital reserve | | | | | | 2,166 | | | 2,166 | |
Accumulated deficit | | | | | | (49,404 | ) | | (50,912 | ) |
| | | | |
|
| |
|
| |
Total shareholders’ equity | | | | | | 102,044 | | | 107,786 | |
| | | | |
|
| |
|
| |
| | | | | | | | | | |
Total liabilities and shareholders’ equity | | | | | $ | 149,110 | | $ | 158,177 | |
| | | | |
|
| |
|
| |
The accompanying notes are an integral part of these consolidated financial statements.
F-4
Given Imaging Ltd. and its subsidiaries
Consolidated Statements of Operations (In thousands except share and per share data)
| | | | | | | | | | | | | |
| | | | Year ended December 31, | |
| | | |
| |
| | Note | | 2004 | | 2005 | | 2006 | |
| |
| |
| |
| |
| |
|
Revenues | | | 1N; 12 | | $ | 65,020 | | $ | 86,776 | | $ | 95,029 | |
Cost of revenues | | | | | | 17,734 | | | 22,070 | | | 24,154 | |
| | | | |
|
| |
|
| |
|
| |
| | | | | | | | | | | | | |
Gross profit | | | | | | 47,286 | | | 64,706 | | | 70,875 | |
| | | | |
|
| |
|
| |
|
| |
| | | | | | | | | | | | | |
Operating expenses | | | | | | | | | | | | | |
Research and development, gross | | | 1Q | | | (7,363 | ) | | (8,833 | ) | | (12,678 | ) |
Royalty bearing government grants | | | 1O; 8A | | | 1,140 | | | 1,244 | | | 1,867 | |
| | | | |
|
| |
|
| |
|
| |
| | | | | | | | | | | | | |
Research and development, net | | | | | | (6,223 | ) | | (7,589 | ) | | (10,811 | ) |
| | | | | | | | | | | | | |
Sales and marketing | | | | | | (33,652 | ) | | (43,281 | ) | | (50,732 | ) |
General and administrative | | | | | | (6,916 | ) | | (9,657 | ) | | (16,027 | ) |
| | | | |
|
| |
|
| |
|
| |
| | | | | | | | | | | | | |
Total operating expenses | | | | | | (46,791 | ) | | (60,527 | ) | | (77,570 | ) |
| | | | |
|
| |
|
| |
|
| |
| | | | | | | | | | | | | |
Operating profit (loss) | | | | | | 495 | | | 4,179 | | | (6,695 | ) |
| | | | | | | | | | | | | |
Financial income, net | | | 13 | | | 956 | | | 762 | | | 3,980 | |
| | | | |
|
| |
|
| |
|
| |
| | | | | | | | | | | | | |
Profit (loss) before taxes on income and minority share | | | | | | 1,451 | | | 4,941 | | | (2,715 | ) |
| | | | | | | | | | | | | |
Taxes on income | | | 1P, 14 | | | 690 | | | 286 | | | (127 | ) |
| | | | |
|
| |
|
| |
|
| |
| | | | | | | | | | | | | |
Profit (loss) before minority share | | | | | | 2,141 | | | 5,227 | | | (2,842 | ) |
| | | | | | | | | | | | | |
Minority share in losses of subsidiary | | | | | | 747 | | | 1,116 | | | 1,334 | |
| | | | |
|
| |
|
| |
|
| |
| | | | | | | | | | | | | |
Net profit (loss) | | | | | $ | 2,888 | | $ | 6,343 | | $ | (1,508 | ) |
| | | | |
|
| |
|
| |
|
| |
| | | | | | | | | | | | | |
Profit (loss) per share | | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Basic profit (loss) per Ordinary Share | | | 1L | | $ | 0.11 | | $ | 0.23 | | $ | (0.05 | ) |
| | | | |
|
| |
|
| |
|
| |
| | | | | | | | | | | | | |
Diluted profit (loss) per Ordinary Share | | | | | $ | 0.10 | | $ | 0.21 | | $ | (0.05 | ) |
| | | | |
|
| |
|
| |
|
| |
| | | | | | | | | | | | | |
Weighted average number of Ordinary Shares used to compute basic profit (loss) per Ordinary Share | | | 1L | | | 26,633,964 | | | 27,781,223 | | | 28,053,849 | |
| | | | |
|
| |
|
| |
|
| |
| | | | | | | | | | | | | |
Weighted average number of Ordinary Shares used to compute diluted profit (loss) per Ordinary Share | | | 1L | | | 29,353,448 | | | 29,695,164 | | | 28,053,849 | |
| | | | |
|
| |
|
| |
|
| |
The accompanying notes are an integral part of these consolidated financial statements.
F-5
Given Imaging Ltd. and its subsidiaries
Consolidated Statements of Changes in Shareholders’ Equity (In thousands except share data)
| | | | | | | | | | | | | | | | | | | | | | |
| | Ordinary shares | | Additional
Paid-In
Capital | | Capital
Reserve | | Unearned
Compensation | | Accumulated
Deficit | | Total | |
| |
| |
| |
| |
| |
| |
| |
| | Shares | | Amount | | | | | | | | | | | |
| |
| |
| | | | | | | | | | | |
|
Balance as of December 31, 2003 | | | 25,649,188 | | $ | 301 | | $ | 100,996 | | $ | 2,166 | | $ | (30 | ) | $ | (58,635 | ) | $ | 44,798 | |
| | | | | | | | | | | | | | | | | | | | | | |
Changes during the year 2004: | | | | | | | | | | | | | | | | | | | | | | |
Ordinary shares issued | | | 1,500,000 | | | 17 | | | 44,250 | | | — | | | — | | | — | | | 44,267 | |
Exercise of stock options | | | 472,198 | | | 5 | | | 2,581 | | | — | | | — | | | — | | | 2,586 | |
Forfeiture of stock options | | | — | | | — | | | (11 | ) | | — | | | 3 | | | — | | | (8 | ) |
Non-employees’ stock options | | | — | | | — | | | 62 | | | — | | | — | | | — | | | 62 | |
Amortization of unearned compensation | | | — | | | — | | | — | | | — | | | 24 | | | — | | | 24 | |
Net profit | | | — | | | — | | | — | | | — | | | — | | | 2,888 | | | 2,888 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| | | | | | | | | | | | | | | | | | | | | | |
Balance as of December 31, 2004 | | | 27,621,386 | | $ | 323 | | $ | 147,878 | | $ | 2,166 | | $ | (3 | ) | $ | (55,747 | ) | $ | 94,617 | |
| | | | | | | | | | | | | | | | | | | | | | |
Changes during the year 2005: | | | | | | | | | | | | | | | | | | | | | | |
Exercise of stock options | | | 328,895 | | | 4 | | | 1,077 | | | — | | | — | | | — | | | 1,081 | |
Amortization of unearned compensation | | | — | | | — | | | — | | | — | | | 3 | | | — | | | 3 | |
Net profit | | | — | | | — | | | — | | | — | | | — | | | 6,343 | | | 6,343 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| | | | | | | | | | | | | | | | | | | | | | |
Balance as of December 31, 2005 | | | 27,950,281 | | $ | 327 | | $ | 148,955 | | $ | 2,166 | | $ | — | | $ | (49,404 | ) | $ | 102,044 | |
| | | | | | | | | | | | | | | | | | | | | | |
Changes during the year 2006: | | | | | | | | | | | | | | | | | | | | | | |
Exercise of stock options | | | 591,010 | | | 7 | | | 2,029 | | | — | | | — | | | — | | | 2,036 | |
Restricted shares issued | | | 100,000 | | | 1 | | | — | | | — | | | — | | | — | | | 1 | |
Stock based compensation | | | — | | | — | | | 5,213 | | | — | | | — | | | — | | | 5,213 | |
Net loss | | | — | | | — | | | — | | | — | | | — | | | (1,508 | ) | | (1,508 | ) |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| | | | | | | | | | | | | | | | | | | | | | |
Balance as of December 31, 2006 | | | 28,641,291 | | $ | 335 | | $ | 156,197 | | $ | 2,166 | | $ | — | | $ | (50,912 | ) | $ | 107,786 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
The accompanying notes are an integral part of these consolidated financial statements.
F-6
Given Imaging Ltd. and its subsidiaries
Consolidated Statements of Cash Flows
(In thousands)
| | | | | | | | | | |
| | Year ended December 31, | |
| |
| |
| | 2004 | | 2005 | | 2006 | |
| |
| |
| |
| |
| | | | | | | | | | |
Cash flows from operating activities: | | | | | | | | | | |
Net profit (loss) | | $ | 2,888 | | $ | 6,343 | | $ | (1508 | ) |
| | | | | | | | | | |
Adjustments required to reconcile net profit (loss) to net cash provided by operating activities: | | | | | | | | | | |
| | | | | | | | | | |
Minority share in losses of subsidiary | | | (747 | ) | | (1,116 | ) | | (1,334 | ) |
Depreciation and amortization | | | 3,147 | | | 3,596 | | | 4,237 | |
Deferred taxes | | | (737 | ) | | (482 | ) | | (155 | ) |
Employees’ stock option compensation | | | 16 | | | 3 | | | 5,213 | |
Non-employees’ stock option compensation | | | 62 | | | — | | | — | |
Other | | | 48 | | | 98 | | | 18 | |
Net increase in trading securities | | | — | | | — | | | (5,060 | ) |
Increase in accounts receivable – trade | | | (5,316 | ) | | (6,064 | ) | | (562 | ) |
Decrease (increase) in other accounts receivable | | | (804 | ) | | (4,993 | ) | | 4,801 | |
Decrease (increase) in prepaid expenses | | | 360 | | | (66 | ) | | (320 | ) |
Decrease (increase) in advances to suppliers | | | (508 | ) | | 223 | | | 250 | |
Increase in inventories | | | (5,648 | ) | | (2,378 | ) | | (1,996 | ) |
Increase in accounts payable | | | 7,107 | | | 5,769 | | | 500 | |
Increase (decrease) in deferred income | | | 12,000 | | | 12,555 | | | (1,223 | ) |
| |
|
| |
|
| |
|
| |
Net cash provided by operating activities | | $ | 11,868 | | $ | 13,488 | | $ | 2,861 | |
| |
|
| |
|
| |
|
| |
| | | | | | | | | | |
Cash flows from investing activities: | | | | | | | | | | |
Purchase of fixed assets and other assets | | $ | (3,245 | ) | $ | (7,948 | ) | $ | (5,876 | ) |
Proceeds from sales of fixed assets | | | 57 | | | — | | | — | |
Deposits, net | | | (42 | ) | | (16 | ) | | (41 | ) |
Proceeds from sales of marketable securities | | | — | | | — | | | 13,120 | |
Investments in marketable securities | | | — | | | (21,919 | ) | | (37,960 | ) |
| |
|
| |
|
| |
|
| |
Net cash used in investing activities | | $ | (3,230 | ) | $ | (29,883 | ) | $ | (30,757 | ) |
| |
|
| |
|
| |
|
| |
| | | | | | | | | | |
Cash flows from financing activities: | | | | | | | | | | |
Principal payments on capital lease obligation | | $ | (37 | ) | $ | (12 | ) | | (14 | ) |
Proceeds from the issuance of Ordinary Shares | | | 46,853 | | | 1,081 | | | 2,037 | |
Issuance of shares by consolidated company | | | — | | | — | | | 4,772 | |
| |
|
| |
|
| |
|
| |
Net cash provided by financing activities | | $ | 46,816 | | $ | 1,069 | | $ | 6,795 | |
| |
|
| |
|
| |
|
| |
| | | | | | | | | | |
Effect of exchange rate changes on cash | | $ | 40 | | $ | (179 | ) | $ | 255 | |
| |
|
| |
|
| |
|
| |
| | | | | | | | | | |
Increase (decrease) in cash and cash equivalents | | $ | 55,494 | | $ | (15,505 | ) | $ | (20,846 | ) |
Cash and cash equivalents at beginning of year | | | 25,367 | | | 80,861 | | | 65,356 | |
| |
|
| |
|
| |
|
| |
Cash and cash equivalents at end of year | | $ | 80,861 | | $ | 65,356 | | $ | 44,510 | |
| |
|
| |
|
| |
|
| |
| | | | | | | | | | |
Supplementary cash flow information | | | |
| | | | | | | | | | |
| | Year ended December 31, | |
| |
| |
| | 2004 | | 2005 | | 2006 | |
| |
| |
| |
| |
Income taxes paid | | $ | 107 | | $ | 163 | | $ | 300 | |
| |
|
| |
|
| |
|
| |
The accompanying notes are an integral part of these consolidated financial statements.
F-7
Given Imaging Ltd. and its subsidiaries
Notes To The Consolidated Financial Statements
(In thousands except share and per share data)
Note 1 - Organization and Summary of Significant Accounting Policies
| | |
| A. | General |
| | |
| Given Imaging Ltd. (the “Company”) was incorporated in Israel in January 1998. |
| | |
| The Company has developed the Given System, a proprietary wireless imaging system that represents a new approach to visual examination of the gastrointestinal tract. The system uses a miniaturized video camera contained in a capsule, referred to as the PillCam™ capsule, which is ingested by the patient and delivers high quality color images in a painless and noninvasive manner. |
| | |
| The Given System consists of three principal components: |
| | |
| • | a single-use, disposable PillCam color-imaging capsule that is ingested by the patient; |
| | |
| • | a portable data recorder and array of sensors that are worn by the patient; and |
| | |
| • | a computer workstation with a proprietary RAPID software for downloading, processing and analyzing recorded data. |
| | |
| After receiving marketing clearance from the United States Food and Drug Administration (“FDA”) in August of 2001, the Company commenced the marketing of the Given System with its first video capsule, the PillCam Small Bowel Capsule, or PillCam SB, for detection of disorders of the small bowel. In November 2004, following receipt of FDA marketing clearance, the Company began marketing and sales of its second video capsule, PillCam ESO, for detection of disorders in the esophagus. The Company markets the PillCam ESO capsule through a strategic marketing alliance with InScope, a division of Ethicon Endo-Surgery, a Johnson & Johnson company (see Note 8C). In late 2006, the Company completed the development of its third video capsule, PillCam Colon, for visual examination of the colon and received the regulatory clearance that permits the Company to market and sell this capsule in Europe. The Company has also submitted this capsule for FDA clearance in the United States. |
| |
| The medical device industry in which the Company is involved is characterized by the risks of regulatory barriers and reimbursement issues. Penetration into the world market requires the investment of considerable resources and continuous development efforts. The Company’s future success is dependent upon several factors including technological quality, regulatory approvals, sufficient reimbursement for its products and the cost and diagnostic-effectiveness of its products compared to other methods for the examination of the gastrointestinal tract. |
| | |
| B. | Basis of presentation |
| | |
| The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America and include the accounts of the Company and its wholly-owned subsidiaries in the United States, Germany, France, the Netherlands and Australia and its 51% owned subsidiary in Japan. The accounts of its subsidiaries are consolidated from the date of their inception. All the subsidiaries were established for the purpose of marketing and selling the Given System. All intercompany balances and transactions have been eliminated in consolidation. The Company considers that it operates in only one segment. |
F-8
Given Imaging Ltd. and its subsidiaries
Notes To The Consolidated Financial Statements
(In thousands except share and per share data)
Note 1 - Organization and Summary of Significant Accounting Policies (cont’d)
| | |
| C. | Functional and reporting currency |
| | |
| The Company’s functional and reporting currency is the U.S. dollar. |
| | |
| Transactions denominated in foreign currencies other than the U.S. dollar are translated into the functional currency using current exchange rates. Gains and losses from the translation of foreign currency transactions are recorded in other income or expenses. |
| | |
| D. | Cash and cash equivalents |
| | |
| All highly-liquid investments with original maturity of three months or less from the date of deposit are considered to be cash equivalents. |
| | |
| E. | Provision for doubtful accounts receivable |
| | |
| The provision for doubtful accounts receivable is calculated on the basis of specific identification of balances, the collection of which, in management’s opinion, is doubtful. In determining the adequacy of the provision, management bases its opinion on the estimated risk, in reliance on available information with respect to the debtor’s financial position and an evaluation of the collateral received. |
| |
| The activity in the provision for doubtful accounts for the three years ended December 31, 2006 is as follows: |
| | | | | | | | | | |
| | Year ended December 31, | |
| |
| |
| | 2004 | | 2005 | | 2006 | |
| |
| |
| |
| |
|
Opening balance | | $ | — | | $ | 115 | | $ | 431 | |
Additions during the year | | | 115 | | | 316 | | | 356 | |
| |
|
| |
|
| |
|
| |
| | | | | | | | | | |
Closing balance | | $ | 115 | | $ | 431 | | $ | 787 | |
| |
|
| |
|
| |
|
| |
| | |
| F. | Inventories |
| |
| Inventories are stated at lower of cost or market. Cost is determined using the average cost method for raw materials and components and finished goods and on the basis of actual manufacturing costs for work in progress. |
| | |
| G. | Assets held for employees’ severance payments |
| | |
| Assets held for employees’ severance payments represent contributions to insurance policies that are recorded at their current redemption value. |
F-9
Given Imaging Ltd. and its subsidiaries
Notes To The Consolidated Financial Statements
(In thousands except share and per share data)
Note 1 - Organization and Summary of Significant Accounting Policies (cont’d)
| | |
| H. | Marketable securities |
| | |
| The Company accounts for marketable securities under Statement of Financial Accounting Standards (SFAS) No. 115 “Accounting for Certain Investments in Debt and Equity Securities (“Statement 115”). Marketable securities consist of U.S. government bonds and corporate bonds, which the Company classified as “held to maturity” and auction rate securities and money market funds, which the Company classified as “trading”, all in accordance with the guidance of statement 115. |
| |
| Held-to-maturity debt securities are securities that the Company has the ability and intent to hold until maturity and are recorded at amortized cost, adjusted for the amortization or accretion of premiums or discounts. Premiums and discounts are amortized or accreted over the life of the related held-to-maturity security as an adjustment to yield using the effective-interest method. |
| |
| Trading securities are bought and held principally for the purpose of selling them in the near term. Trading securities are recorded at fair value and changes in the fair value, based on closing market prices of the at balance sheet date, represent unrealized gains and losses which are included in earnings. |
| |
| A decline in the market value of any “held-to-maturity” security below cost that is deemed to be other than temporary results in a reduction in the carrying amount to fair value. The impairment is charged to earnings and a new cost basis for the security is established. |
| |
| I. | Fixed assets |
| | |
| Fixed assets are stated at cost. Depreciation is computed by the straight-line method over the estimated useful lives of the assets at the following annual rates: |
| | | | | |
| | % | | |
| |
| | |
|
Computers and software | | | 33 | | |
Instruments and laboratory equipment | | | 15 | | |
Leasehold improvements | | | 10 | | |
Motor vehicles | | | 15 | | |
Machinery and equipment | | | 15 | | |
Communication equipment | | | 15 | | |
Office furniture and equipment | | | 10-15 | | |
| |
| Motor vehicles purchased under capital lease arrangements are recorded at the present value of the minimum lease payments at lease inception. Such assets and leasehold improvements are depreciated and amortized respectively, using the straight-line method over the shorter of the lease term or estimated useful life of the asset. |
| |
| The Company accounts for long-lived assets and certain intangible assets in accordance with the provisions of SFAS No. 144, “Accounting for the Impairment of or Disposal of Long-Lived Assets” (“Statement 144”). This Statement requires that long-lived assets and certain identifiable intangible assets be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to undiscounted future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. |
F-10
Given Imaging Ltd. and its subsidiaries
Notes To The Consolidated Financial Statements
(In thousands except share and per share data)
Note 1 - Organization and Summary of Significant Accounting Policies (cont’d)
| | |
| J. | Other assets |
| | |
| a. | The Company developed proprietary software for its computer workstations that permits downloading and viewing recorded data from the portable data recorder. The costs of developing this software were capitalized in accordance with SFAS No. 86, “Accounting for Costs of Computer Software to be Sold, Leased or Otherwise Marketed” (“Statement 86”). As such, capitalization of software development costs begins upon the establishment of technological feasibility as defined in Statement 86 and continues up to the time the software is available for general release to customers, at which time capitalized software costs are amortized on a straight-line basis over the expected life of the related product, which is generally five years. |
| | |
| b. | Legal expenses related to patent and trademark registration have been capitalized and amortized over the remaining life of the asset, which is generally eight years. |
| | |
| c. | Technology and content costs are generally expensed as incurred, except for certain costs relating to the development of the Company’s web site that are capitalized and amortized over their estimated useful lives which are generally three years. |
| | |
| K. | Stock compensation plans |
| | |
| Employees and directors |
| |
| Effective January 1, 2006, the Company adopted the fair value recognition provisions of SFAS No. 123 (revised 2004), “Share-Based Payment” (“SFAS No. 123R”). This Statement requires compensation expense relating to share-based payments to be recognized in net income using a fair-value measurement method. Under the fair value method, the estimated fair value of awards is charged to income on a straight-line basis over the requisite service period, which is generally the vesting period. The Company elected the modified-prospective method and therefore prior periods were not restated. Under the modified-prospective method, compensation costs recognized in 2006 include also compensation costs for all share-based payments granted prior to, but not yet vested, as of December 31, 2005. |
| |
| Stock-based compensation recognized in the Consolidated Statement of Operations for the year ended December 31, 2006 is based on awards ultimately expected to vest. As a result the expense has been reduced for estimated forfeitures. SFAS No. 123R required forfeitures to be estimated at the time of grant and revised, in necessary, in subsequent periods if actual forfeitures differ from those estimates. In the Company’s pro forma information required under SFAS No. 123, “Accounting for Stock-Based Compensation” (“SFAS No. 123”) for the periods prior to fiscal 2006, the Company accounted for forfeitures as they occurred. |
F-11
Given Imaging Ltd. and its subsidiaries
Notes To The Consolidated Financial Statements
(In thousands except share and per share data)
Note 1 - Organization and Summary of Significant Accounting Policies (cont’d)
| | |
| K. | Stock compensation plans (cont’d) |
| | |
| The effect of the implementation of SFAS No. 123R was to increase expenses by $5,213, which changed the profit before taxes and net profit to losses by the same amount. The per share effect $(0.19) was to turn the basic and diluted earnings per share into loss per share. |
| | |
| Prior to January 1, 2006, the Company has followed SFAS No. 123, which permitted entities to recognize as an expense over the vesting period, the fair value on the date of grant of all stock-based awards. Alternatively, Statement 123 allowed entities to continue to apply the provisions of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees and related interpretations” (“APB Opinion No. 25”) and provide pro forma net income and pro forma earnings per share disclosures for employee stock option grants as if the fair-value based method defined in Statement 123 had been applied. |
| | |
| The Company elected to apply the intrinsic value-based method prescribed in APB Opinion No. 25 for its stock compensation to employees and directors and provide the pro forma disclosure provisions of SFAS No. 123, as amended by SFAS No. 148, “Accounting for Stock-Based Compensation - Transition and Disclosure, an amendment of SFAS No. 123”. |
| | |
| As such, the Company computed and recorded compensation expense for grants whose terms were fixed with respect to the number of shares and option price only if the market price on the date of grant exceeded the exercise price of the stock option. The compensation cost for the fixed plans was recorded over the period the employee performs the service to which the stock compensation relates. |
| | |
| The following table shows the effect on net profit and profit per Ordinary Share if the Company had applied the fair value recognition provisions of Statement 123: |
| | | | | | | | | |
| | | | Year ended December 31, | |
| | | |
| |
| | | | 2004 | | 2005 | |
| | | |
| |
| |
| |
| Net profit as reported | | $ | 2,888 | | $ | 6,343 | |
| - | Compensation expenses according to APB 25 included in the reported net profit | | | 16 | | | 3 | |
| | | | | | | | | |
| - | Application of compensation expenses according to Statement 123 | | | (13,432 | ) | | (10,327 | ) |
| | | |
|
| |
|
| |
| Pro forma net loss | | $ | (10,528 | ) | $ | (3,981 | ) |
| | | |
|
| |
|
| |
| Basic profit (loss) per Ordinary Share: | | | | | | | |
| As reported | | $ | 0.11 | | $ | 0.23 | |
| | | |
|
| |
|
| |
| Pro forma | | $ | (0.39 | ) | $ | (0.14 | ) |
| | | |
|
| |
|
| |
| Diluted profit (loss) per ordinary share: | | | | | | | |
| As reported | | $ | 0.10 | | $ | 0.21 | |
| | | |
|
| |
|
| |
| Pro forma | | $ | (0.39 | ) | $ | (0.14 | ) |
| | | |
|
| |
|
| |
F-12
Given Imaging Ltd. and its subsidiaries
Notes To The Consolidated Financial Statements
(In thousands except share and per share data)
Note 1 - Organization and Summary of Significant Accounting Policies (cont’d)
| | |
| K. | Stock compensation plans (cont’d) |
| | |
| Non-Employees |
| | |
| Effective January 1, 2006, the Company applies the provisions of SFAS No. 123R to account for stock based compensation to non-employees. Prior to January 1, 2006, the Company applied the fair value-based method of accounting set forth in Statement 123 and Emerging Issues Task Force (“EITF”) Issue No. 96-18, “Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services” for such compensation expenses. Using the fair value method, the total compensation expense is computed based on the fair value of the options on the date the options are granted to the non-employees and are recognized over the vesting period. |
| | |
| The Company recorded compensation expense of $62 in the year ended December 31, 2004 related to the above options. There were no such expenses in 2005 or 2006. |
| | |
| L. | Profit (loss) per Ordinary Share |
| | |
| Basic and diluted profit (loss) per Ordinary Share is presented in conformity with SFAS No. 128, “Earnings Per Share”, for all years presented. Basic profit (loss) per Ordinary Share is calculated by dividing the net profit (loss) attributable to Ordinary Shares, by the weighted average number of Ordinary Shares outstanding. Diluted profit (loss) per Ordinary share calculation is similar to Basic Earnings Per Share except that the weighed average of common shares outstanding is increased to include the number of additional common shares that would have been outstanding if the dilutive potential common shares from options had been exercised. |
| | |
| The following table summarizes information related to the computation of basic and diluted profit (loss) per Ordinary Share for the years indicated. |
| | | | | | | | | | | |
| | | Year ended December 31, | |
| | |
| |
| | | 2004 | | 2005 | | 2006 | |
| | |
| |
| |
| |
|
| Net profit (loss) attributable to Ordinary Shares | | $ | 2,888 | | $ | 6,343 | | $ | (1,508 | ) |
| | |
|
| |
|
| |
|
| |
| | | | | | | | | | | |
| Weighted average number of Ordinary Shares outstanding Used in basic profit (loss) per Ordinary Share calculation | | | 26,633,964 | | | 27,781,223 | | | 28,053,849 | |
| | | | | | | | | | | |
| Add assumed exercise of outstanding dilutive potential Ordinary Shares | | | 2,719,484 | | | 1,913,941 | | | — | |
| | |
|
| |
|
| |
|
| |
| | | | | | | | | | | |
| Weighted average number of Ordinary Shares outstanding Used in diluted profit (loss) per Ordinary Share calculation | | | 29,353,448 | | | 29,695,164 | | | 28,053,849 | |
| | |
|
| |
|
| |
|
| |
| | | | | | | | | | | |
| Basic profit (loss) per Ordinary Share | | $ | 0.11 | | $ | 0.23 | | $ | (0.05 | ) |
| | |
|
| |
|
| |
|
| |
| | | | | | | | | | | |
| Diluted profit (loss) per Ordinary Share | | $ | 0.10 | | $ | 0.21 | | $ | (0.05 | ) |
| | |
|
| |
|
| |
|
| |
| | | | | | | | | | | |
| Number of options excluded from the diluted earning per share calculation because of anti-dilutive effect | | | 165,500 | | | 2,448,114 | | | 4,114,604 | |
| | |
|
| |
|
| |
|
| |
F-13
Given Imaging Ltd. and its subsidiaries
Notes To The Consolidated Financial Statements
(In thousands except share and per share data)
Note 1 - Organization and Summary of Significant Accounting Policies (cont’d)
| | |
| M. | Use of estimates |
| | |
| The preparation of the consolidated financial statements requires management of the Company to make a number of estimates and assumptions relating to the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the period. Actual results could differ from these estimates. |
| | |
| N. | Revenue recognition |
| | |
| Revenues from sales of products are recognized upon delivery provided that the collection of the resulting receivable is reasonably assured, there is persuasive evidence of an arrangement, no significant obligations in respect of installation remain and the price is fixed or determinable. |
| | |
| For sales contracts, which include a Post Contract Customer Support (“PCS”) component, revenues allocated to PCS in accordance with EITF 00-21 “Revenue Arrangements with Multiple Deliverables”, are deferred and recognized ratably over the term of the support period, which is generally one year. |
| | |
| The Company accrues estimated warranty costs at time of shipment based on contractual rights and historical experience. The Company’s policy is not to grant return rights. |
| | |
| Taxes collected from customers and remitted to Governmental Authorities are presented in the financial statements on a net basis. |
| | |
| The Company routinely evaluates its products for inclusion of any embedded software that is more than incidental thereby requiring consideration of AICPA Statements of Position 97-2, “Software Revenue Recognition”. Based on such evaluation, the Company has concluded that none of its products have such embedded software. |
| | |
| O. | Government-Sponsored Research and Development |
|
| The Company records grants received from the Office of the Chief Scientist of the Israeli Ministry of Industry and Trade (the “OCS”) as a reduction of research and development expenses. |
| | |
| Royalties payable to OCS are recognized pursuant to sale of related products and are classified under cost of revenues. |
| | |
| P. | Taxes on income |
| | |
| The Company accounts for income taxes under SFAS No. 109 “Accounting for Income Taxes” (“Statement 109”). |
| | |
| Under Statement 109 deferred tax assets or liabilities are recognized in respect of temporary differences between the tax bases of assets and liabilities and their financial reporting amounts as well as in respect of tax losses and other deductions which may be deductible for tax purposes in future years, based on enacted statutory tax rates applicable to the periods in which such deferred taxes will be realized. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. |
| | |
| Q. | Research and development costs |
| | |
| Research and development costs are expensed as incurred. |
F-14
Given Imaging Ltd. and its subsidiaries
Notes To The Consolidated Financial Statements
(In thousands except share and per share data)
| | |
Note 1 - Organization and Summary of Significant Accounting Policies (cont’d) |
|
| R. | Allowance for product warranty |
| | |
| It is the Company’s policy to grant a warranty for certain products. The balance sheet provision for warranties for all periods through December 31, 2006 is determined based upon the Company’s experience regarding the relationship between sales and warranty expenses. |
| |
| S. | Concentration of credit risk |
| | |
| Financial instruments that may subject the Company to significant concentrations of credit risk consist principally of cash and cash equivalents, trade accounts receivable and marketable securities. |
| |
| Cash and cash equivalents are deposited with major financial institutions in Europe, the United States, Japan, Australia and Israel. |
| |
| The Company performs ongoing credit evaluations of the financial condition of its customers. The risk of collection associated with trade receivables is reduced by the large number and geographical dispersion of the Company’s customer base and the Company’s policy of requiring collateral or security with respect to receivables due from distributors. |
| |
| T. | Recent accounting pronouncements |
| | |
| In June 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109” (“FIN 48”), which clarifies the accounting for uncertainty in income taxes. This Interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This Interpretation also provides guidance on de-recognition, classification, accounting in interim periods, disclosure, and transition. This Interpretation is effective for fiscal years beginning after December 15, 2006. The Company is currently evaluating the impact of FIN 48 on its consolidated financial position, results of operations and cash flows. |
| |
Note 2 - Cash and Cash Equivalents |
| | | | | | | | | | | |
| | | Interest rate
as of
December 31 | | December 31 | |
| | |
| |
| |
| | | 2006 | | 2005 | | 2006 | |
| | |
| |
| |
| |
| | | % | | | | | |
| | |
| | | | | |
| | | | | | | | |
| Denominated in U.S. dollars | | | 5.15-5.26 | | $ | 57,912 | | $ | 25,794 | |
| Denominated in New Israeli Shekels | | | 4.7-5.0 | | | 2,855 | | | 3,099 | |
| Denominated in Euro | | | 2.95 | | | 3,396 | | | 7,766 | |
| Denominated in Australian dollars | | | | | | 732 | | | 469 | |
| Denominated in Japanese Yen | | | | | | 461 | | | 7,382 | |
| | | | | |
|
| |
|
| |
| | | | | | | | | | | |
| | | | | | $ | 65,356 | | $ | 44,510 | |
| | | | | |
|
| |
|
| |
F-15
Given Imaging Ltd. and its subsidiaries
Notes To The Consolidated Financial Statements
(In thousands except share and per share data)
Note 3 - Accounts Receivable - Other
| | | | | | | | |
| | | December 31 | |
| | |
| |
| | | 2005 | | 2006 | |
| | |
|
| |
|
| |
| | | | | | |
| Government institutions | | $ | 921 | | $ | 1,389 | |
| InScope (Note 8C) | | | 5,000 | | | — | |
| Other | | | 343 | | | 74 | |
| | |
|
| |
|
| |
| | | | | | | | |
| | | $ | 6,264 | | $ | 1,463 | |
| | |
|
| |
|
| |
Note 4 - Inventories
| | | | | | | | |
| | | December 31 | |
| | |
| |
| | | 2005 | | 2006 | |
| | |
| |
| |
| | | | | | |
| Raw materials and components | | $ | 7,399 | | $ | 7,721 | |
| Work in progress | | | 3,251 | | | 3,533 | |
| Finished goods | | | 5,522 | | | 6,914 | |
| | |
|
| |
|
| |
| | | | | | | | |
| | | $ | 16,172 | | $ | 18,168 | |
| | |
|
| |
|
| |
Note 5 - Marketable Securities
| |
| As of December 31, 2006 and 2005, marketable securities consist U.S. government bonds and corporate bonds, which the Company classified as “held-to-maturity” (““the Bonds”). As of December 31, 2006, marketable securities also included auction rate securities and money market funds, which are classified as “trading”. |
| |
| The amortized cost, gross unrealized losses and fair value of the “held-to-maturity” Bonds by major interest type were as follows: |
| | | | | | | | | | | |
| | | December 31, 2006 | |
| | |
| |
| | | Amortized
cost | | Gross unrealized
holding losses | | Fair
Value | |
| | |
| |
| |
| |
| | | | | | | | |
| Up to 5% | | $ | 33,574 | | $ | (601 | ) | $ | 32,973 | |
| 5.1% - 6%, 8.125% | | | 13,380 | | | (212 | ) | | 13,168 | |
| | | |
| |
|
| |
|
| |
| | | | | | | | | | | |
| | | $ | 46,954 | | $ | (813 | ) | $ | 46,141 | |
| | | |
| |
|
| |
|
| |
| | | | | | | | | | | |
| | | December 31, 2005 | |
| | |
| |
| | | Amortized
cost | | Gross unrealized
holding losses | | Fair
Value | |
| | |
| |
| |
| |
| | | | | | | | |
| 3.375% - 4.3% | | $ | 17,697 | | $ | (198 | ) | $ | 17,499 | |
| 5.9% - 6% | | | 4,255 | | | (86 | ) | | 4,169 | |
| | |
|
| |
|
| |
|
| |
| | | | | | | | | | | |
| | | $ | 21,952 | | $ | (284 | ) | $ | 21,668 | |
| | |
|
| |
|
| |
|
| |
F-16
Given Imaging Ltd. and its subsidiaries
Notes To The Consolidated Financial Statements
(In thousands except share and per share data)
Note 5 - Marketable Securities (cont’d)
Maturities of the “held-to-maturity” Bonds were as follows at December 31, 2006 and 2005:
| | | | | | | | |
| | | Amortized cost | | Fair value | |
| | |
| |
| |
| | | 2006 | | 2006 | |
| | |
| |
| |
| | | | | | |
| Current maturities | | $ | 12,185 | | $ | 12,063 | |
| Due after one year through five years | | | 34,769 | | | 34,078 | |
| | |
|
| |
|
| |
| | | | | | | | |
| | | $ | 46,954 | | $ | 46,141 | |
| | |
|
| |
|
| |
| | | | | | | | |
| | | Amortized cost | | Fair value | |
| | |
| |
| |
| | | 2005 | | 2005 | |
| | |
| |
| |
| | | | | | |
| Current maturities | | $ | 288 | | $ | 284 | |
| Due after one year through five years | | | 21,664 | | | 21,384 | |
| | |
|
| |
|
| |
| | | | | | | | |
| | | $ | 21,952 | | $ | 21,668 | |
| | |
|
| |
|
| |
| |
| As of December 31, 2006, marketable securities also included $5,060 in bonds classified as “trading” (2005 - $0). These investments are subject to price volatility associated with any interest-bearing instrument. Net realized gains on trading securities during the year ended December 31, 2006 were $133, and are included in financial income. Net unrealized losses on trading securities held as of December 31, 2006 were $15 and are included in financial income. |
| |
| Short-term investments are comprised of: |
| | | | | | | | |
| | | December 31 | |
| | |
| |
| | | 2005 | | 2006 | |
| | |
| |
| |
| | | | | | |
| Current maturities of “held-to-maturity” securities | | $ | 288 | | $ | 12,185 | |
| Trading securities | | | — | | | 5,060 | |
| | |
|
| |
|
| |
| | | | | | | | |
| | | $ | 288 | | $ | 17,245 | |
| | |
|
| |
|
| |
F-17
Given Imaging Ltd. and its subsidiaries
Notes To The Consolidated Financial Statements
(In thousands except share and per share data)
Note 6 - Fixed Assets, at Cost, Less Accumulated Depreciation
| | | | | | | |
| | December 31 | |
| |
| |
| | 2005 | | 2006 | |
| |
| |
| |
| | | | | |
Computers and software | | $ | 4,942 | | $ | 6,234 | |
Instruments and laboratory equipment | | | 682 | | | 791 | |
Leasehold improvements | | | 3,847 | | | 4,259 | |
Motor vehicles | | | 55 | | | 155 | |
Machinery and equipment | | | 12,702 | | | 14,952 | |
Communication equipment | | | 388 | | | 418 | |
Office furniture and equipment | | | 1,273 | | | 1,248 | |
| |
|
| |
|
| |
Fixed assets | | | 23,889 | | | 28,057 | |
| | | | | | | |
Accumulated depreciation | | | (10,027 | ) | | (13,246 | ) |
| |
|
| |
|
| |
| | | | | | | |
Fixed assets less accumulated depreciation | | $ | 13,862 | | $ | 14,811 | |
| |
|
| |
|
| |
| | | | | | | |
Depreciation expenses for the years ended December 31, 2004, 2005 and 2006 were $ 2,561, $ 2,936 and $ 3,599, respectively. |
Note 7 - Other Assets, at Cost, Less Accumulated Amortization
| | | | | | | |
| | December 31 | |
| |
| |
| | 2005 | | 2006 | |
| |
| |
| |
| | | | | |
Software development costs | | $ | 647 | | $ | 647 | |
Patents and trademarks | | | 3,425 | | | 4,594 | |
Web site application | | | 895 | | | 922 | |
| |
|
| |
|
| |
| | | | | | | |
Other assets | | | 4,967 | | | 6,163 | |
| | | | | | | |
Accumulated amortization | | | (2,450 | ) | | (3,088 | ) |
| |
|
| |
|
| |
| | | | | | | |
Other assets, net | | $ | 2,517 | | $ | 3,075 | |
| |
|
| |
|
| |
| | | | | | | |
Amortization expenses for the years ended December 31, 2004, 2005 and 2006 were $586, $660 and $ 638, respectively. . Estimated amortization expense for the next five years is: $573 in 2007, $560 in 2008, $516 in 2009, $453 in 2010, and $381 in 2011. |
F-18
Given Imaging Ltd. and its subsidiaries
Notes To The Consolidated Financial Statements
(In thousands except share and per share data)
Note 8 - Commitments and Contingencies
| | |
| A. | Office of the Chief Scientist Grants |
| | |
| The Company’s research and development efforts have been partially financed through grants from the Office of the Chief Scientist of the Israeli Ministry of Industry and Trade (the “OCS”). In return for the OCS’s participation, the Company is committed to pay royalties to the Israeli Government at the rate of 3% for each of the first three years and, from the fourth year onwards, at the rate of 3.5% of the sales of its product, up to 100% of the amount of the grants received, plus LIBOR interest. The grants are presented as an off-set to related research and development expenses. The Company is entitled to the grants only upon incurring research and development expenditures. There are no future performance obligations related to the grants received from the OCS. However, under certain limited circumstances, the OCS may withdraw its approval of a research program or amend the terms of its approval. |
| |
| Upon withdrawal of approval, the grant recipient may be required to refund the grant, in whole or in part, with or without interest, as the OCS determines. As of December 31, 2006, the Company has received from the OCS office a total cumulative amount of $ 6,751 of which the Company has already repaid $ 2,534 as royalties. The total outstanding future obligation, for royalties, based on royalty-bearing government participation totaled, before interest, approximately $ 4,217 as of December 31, 2006. Royalties payable to the OCS are recognized pursuant to sale of related products and are classified under cost of revenues. |
| |
| B. | Leases |
| | |
| Capital lease for motor vehicles |
| | |
| The capital lease is to be repaid in five years and bears interest of 7.47%. The vehicles are pledged as collateral. |
| |
| Operating leases |
| |
| The Company and its subsidiaries currently lease office space and manufacturing space for periods of up to 15 years (including options to extend the terms of the leases). The current lease for the Company’s headquarters is in Yoqneam, Israel. This facility houses the Company’s corporate headquarters, research and development and manufacturing facilities. Under this lease agreement, the Company will pay approximately $ 1,300 a year in rent and management fee. These payments are subject to adjustments based on changes in the Israeli Consumer Price Index. In addition, to secure its obligations under the lease, the Company provided a bank guaranty in the amount of approximately $ 750 in favor of the lessor. The lease expires on December 31, 2015. The Company has an option to extend the lease until December 31, 2020. |
| |
| The Company and its subsidiaries signed several motor vehicle lease agreements. The companies deposited a total amount of $ 196 to guarantee their performance under the terms of the lease agreements. |
F-19
Given Imaging Ltd. and its subsidiaries
Notes To The Consolidated Financial Statements
(In thousands except share and per share data)
Note 8 - Commitments and Contingencies (cont’d)
| | |
| B. | Leases (cont’d) |
| | |
| The Company is committed to minimum annual payments over the next five years as follows: |
| | | | | | | |
| | Capital leases | | Operating leases | |
| |
| |
| |
| | | | | |
2007 | | $ | 13 | | $ | 2,884 | |
2008 | | | 20 | | | 2,432 | |
2009 | | | — | | | 1,880 | |
2010 | | | — | | | 1,439 | |
2011 and thereafter | | | — | | | 6,577 | |
| |
|
| |
|
| |
| | $ | 33 | | $ | 15,212 | |
| |
|
| |
|
| |
| | | | | | | |
Rental expenses under the lease agreements for the years ended December 31, 2004, 2005 and 2006 were $1,999, $ 2,353 and $ 2,914, respectively. |
| | |
| C. | Agreement with InScope |
| | |
| On May 10, 2004, the Company entered into an exclusive sales representation, co-promotion and cooperation agreement with InScope, a division of Ethicon Endo-Surgery, a Johnson & Johnson company. InScope has exclusive rights to market the Company’s PillCam ESO capsule for visual examination of the esophagus. Under the terms of the agreement, the Company received, as of December 31, 2006, milestone payments of $25,000. The Company pays InScope a commission of 50% on sales of PillCam ESO capsules and a 10% commission on sales of capital equipment parts of the Given System, such as workstations and portable data recorders. According to a September 2006 amendment to the original agreement, the payment by InScope to the Company of the remaining $25,000 milestone payment originally due February 2007, plus 7% interest, will be made in six equal annual installments of $5,240 each, beginning in January 2008. Beginning in 2009, the remaining installments at any given time may be accelerated and paid sooner if one or more reimbursement or commission thresholds are achieved. In addition, pursuant to this amendment, the 10% commission the Company pays InScope on sales of capital equipment parts of the Given System will be paid only in respect of capital equipment sold to customers that use this equipment to perform procedures with the PillCam ESO capsule. InScope will fund certain reimbursement and clinical study activities concerning the PillCam ESO capsule. |
| |
| Subject to achieving specified minimum sales targets and meeting certain conditions, the exclusive term of the agreement will continue for up to 11 years, followed by a four-year co-exclusive transition period with the Company. |
| |
| All milestone payments received have been deferred and are being systematically recognized, on a straight-line basis, by the Company as a reduction of commission expense over the 15 year term of the agreement. |
| |
| Milestone payments are included under deferred income in the Consolidated Balance Sheet. |
F-20
Given Imaging Ltd. and its subsidiaries
Notes To The Consolidated Financial Statements
(In thousands except share and per share data)
Note 8 - Commitments and Contingencies (cont’d)
| | |
| D. | Agreements with key single - source suppliers and commitments to suppliers |
| | |
| (1) | In 2004, the Company entered into an agreement with a Canadian company (“Canadian Company”) that supplies a component that is integrated into the PillCam capsules. Under the agreement, the Company has agreed to purchase a minimum quantity of components during the first 36 months following the development and testing phase, and if it fails to do so it must make certain payments to the Canadian Company in respect of the shortfall. The agreement also includes non-compete provisions prohibiting the Canadian company from selling the component to other parties and, for a certain period of time following termination of the agreement, from transferring any of the intellectual property and design specifications associated with the development of the component to any potential competitors in the Company’s market. The initial term of the agreement was scheduled to expire in April 2007. |
| | |
| | In July 2005, the Company agreed with the Canadian Company that it will develop and manufacture an additional version of the component. The minimum purchase requirements will not apply to this version. In addition, the initial term of the agreement was extended until April 2012, subject to earlier termination in specified circumstances, with the option to extend annually thereafter for up to five years. |
| | |
| (2) | The Company is a party to a development, manufacturing and supply agreement with another supplier (“Supplier”), under which the Supplier has developed a component, that is integrated into the PillCam capsules and is also manufacturing and supplying this component exclusively to the Company. Under this contract, the Supplier may not offer the component as a standard catalog part. In the event that the Supplier ceases operations or enters into liquidation, the Company is entitled to receive all information necessary to manufacture the component upon the payment of reasonable royalties to be agreed upon with the Supplier. The agreement permits the Supplier to disregard the exclusive sales requirement if the Company fails to purchase agreed-upon minimum quantities. |
| | |
| | In February 2006, the Company signed an amendment to this agreement and agreed that the Supplier will develop and manufacture an enhanced version of the component. This amendment also extended the initial term of the agreement until November 2012, with an option to extend that term by mutual agreement. The Company has agreed to purchase the enhanced component only from the Supplier and the Supplier has agreed to sell the component exclusively to the Company. |
| | |
| (3) | The Company’s annual commitments under agreements with suppliers for the next 5 years are as follows: |
| | | | |
2007 | | $ | 3,808 | |
2008 | | | 2,329 | |
2009 | | | 2,250 | |
2010 | | | 2,250 | |
2011 and thereafter | | | 4,500 | |
| |
|
| |
| | $ | 15,137 | |
| |
|
| |
| | | | |
Payments under such agreements with suppliers for the years ended December 31, 2004, 2005 and 2006 were $3,723, $8,568 and $8,875 respectively. |
F-21
Given Imaging Ltd. and its subsidiaries
Notes To The Consolidated Financial Statements
(In thousands except share and per share data)
Note 8 - Commitments and Contingencies (cont’d)
| | |
| E. | Patent Litigation |
| | |
| On May 19, 2006, Olympus Corporation, Olympus Medical Systems Corp. and Olympus America Inc., collectively referred to in this section as “Olympus”, filed a complaint against the Company in the District Court for the Eastern District of Pennsylvania. In the complaint, Olympus alleged that the Company’s capsule endoscopes infringe one of its patents (“Olympus Patent”). The Olympus Patent will expire in December 2008. In addition, Olympus seeks a declaratory judgment that its endoscope product will not infringe the Company’s’ first U.S. Patent, known as the ‘531 patent, and that the ‘531 patent is invalid. In its complaint, Olympus requested an injunction that will prevent the Company from selling in the United States any product that infringes on the Olympus Patent as well as damages in an unspecified amount. |
| |
| The Company filed its answer and counterclaim on October 20, 2006. In this answer and counterclaim the Company denied infringement of the Olympus Patent and that the Olympus Patent is invalid. In addition, the Company alleged that the ‘531 patent is valid and will be infringed by Olympus once it begins marketing and selling its capsule endoscopy product in the United States. The Company also alleged that Olympus will infringe three other Company patents.. In the complaint, the Company requested an injunction to prevent Olympus from selling in the United States any product that infringes on the Company’s patents. If Olympus sells its capsule endoscopy system in the United States, the Company may also request the assessment of damages. |
| |
| On March 30, 2007 Olympus filed an amended complaint asserting that the Company’s capsule endoscopes infringe three additional patents owned by it. The Company is examining the amended complaint and will file its answer with the court within the time period permitted by the applicable procedural rules. |
| |
| The Company believes it has a reasonable chance of success in this case. However, litigation is in early stages and the outcome is uncertain at this time. The ongoing litigation and any unfavorable outcome may have an adverse effect on the Company’s results of operation. |
| |
| F. | Provision for Sales Tax |
| | |
| During the year ended December 31, 2005, the Company made a provision of $1,800 for potential uncollectible sales tax, interest and penalties resulting from the failure of the Company’s U.S. subsidiary to appropriately collect and remit sales tax on sales in the U.S. since the fourth quarter of 2001. The provision represented the Company’s estimate of the amounts it might not collect from its customers for remittance to the different jurisdictions, and any interest and penalties the Company may have to pay for failure to timely remit the sales tax. During 2005 and 2006 the Company has all required sales and use tax returns and collected tax amounts from its customers. As of December 31, 2006, accounts payable included $702 representing sales and use taxes, interest and penalties remaining to be resolved. |
F-22
Given Imaging Ltd. and its subsidiaries
Notes To The Consolidated Financial Statements
(In thousands except share and per share data)
Note 8 - Commitments and Contingencies (cont’d)
| | |
| G. | Investment in the Japanese Subsidiary |
| | |
| In 2006, the Company and its Japanese partners completed additional equity financing of approximately $9.6 million (in Japanese YEN) to finance the operations of Given Imaging K.K., the Company’s Japanese subsidiary, until it starts generating enough cash to finance its operations. The Company’s portion of the funding of approximately $4.8 million was paid out of its cash reserves. Following completion of this additional equity financing, the Company continues to have a controlling interest of 51% of its Japanese subsidiary |
Note 9 - Accounts Payable - Other
| | | | | | | |
| | December 31 | |
| |
| |
| | 2005 | | 2006 | |
| |
| |
| |
| | | | | | | |
Government institutions | | $ | 3,693 | | $ | 2,137 | |
Liabilities regarding employees | | | 4,700 | | | 6,863 | |
Advances from customers | | | 39 | | | 58 | |
Warranty | | | 71 | | | 102 | |
Royalties to the OCS | | | 306 | | | 214 | |
Commissions | | | 2,161 | | | 2,057 | |
Accrued expenses | | | 2,916 | | | 3,189 | |
| |
|
| |
|
| |
| | | | | | | |
| | $ | 13,886 | | $ | 14,620 | |
| |
|
| |
|
| |
Note 10 - - Liability in Respect of Employee Severance Payments
| |
| Under Israeli law and labor agreements the Company is required to pay severance payments to each employee who was employed by the Company for over one year and has been terminated by the Company or resigned under certain specified circumstances. The Company’s liability for severance payments is covered mainly by deposits with insurance companies in the name of the employee and/or by purchase of insurance policies. The liability is calculated on the basis of the latest salary of the employee multiplied by the number of years of employment as of the balance sheet date. The liability for employee severance payments included in the balance sheet represents the total amount due for such severance payment, while the assets held for severance benefits included in the balance sheet represents the Company’s contributions to insurance policies. The Company may make withdrawals from the funds only upon complying with the Israeli severance pay law or labor agreements. |
| |
| The U.S. subsidiary has a defined contribution retirement plan for its employees. Employees are allowed to contribute up to 18% of their salary in any one year, subject to a regulatory limit. The Company contributes 3% of an employee’s salary subject to regulatory limits. Employees are vested in the Company’s contributions after 30 days of employment. |
| |
| Expenses recorded in respect of employee severance payments for the years ended December 31, 2004, 2005 and 2006 are $525, $664 and $862, respectively. |
F-23
Given Imaging Ltd. and its subsidiaries
Notes To The Consolidated Financial Statements
(In thousands except share and per share data)
Note 11 - - Share Capital
| | |
| A. | Ordinary shares |
| | |
| All of the issued and outstanding Ordinary Shares of the Company are authorized, issued, fully paid and non-assessable. The Ordinary Shares of the Company are not redeemable and have no preemptive rights. The ownership or voting of Ordinary Shares by non-residents of Israel is not restricted in any way by the Company’s memorandum or articles of association or the laws of the State of Israel, except that citizens of countries which are, or have been, in a state of war with Israel may not be recognized as owners of Ordinary Shares. |
| |
| B. | Employees’ and non employees’ stock options |
| | |
| In 2003, the Company adopted a stock option plan for directors, employees and consultants. The 2003 Plan replaced and superseded previous option plans adopted by the Company in 1998 and 2000. Under these plans, the Board of Directors (or a compensation committee appointed by the board) (the “Board”) has the authority to grant options to employees of the Company and its subsidiaries, directors or consultants. Each option entitles the holder to purchase one Ordinary Share of par value of NIS 0.05 and expires after 10 years from the date of grant. The Company has reserved for issuance a total of 2,500,000 Ordinary Shares under the plan. As of December 31, 2006, 21,516 options out of this plan had not been granted. |
| |
| The purchase price of each share pursuant to the options granted under the 2003 Plan shall be the fair market value on the date the Board approves the grant of the option or as otherwise determined by the Board. |
| |
| Unless otherwise determined by the Board, where a grant of options under the 2003 Plan is the first grant of options made to a person, 50% of the options vest and become exercisable on the second anniversary of the date of grant. An additional 25% of the options vest and become exercisable on each of the third and fourth anniversaries of the date of the grant. If, however, a grant under the 2003 Plan is made to a person who previously received stock options under the 2003 Plan or a previous plan of the Company, 25% of the options granted are immediately vested and exercisable and an additional 25% of the options vest and become exercisable on each of the first, second and third anniversaries of the date of the grant. |
| |
| In 2006, the Company adopted the 2006 Equity Incentive Plan (“the Plan”) permitting the grant of equity awards, including options and restricted stock of the Company, to eligible employees, directors and consultants of the Company and its subsidiaries. The Plan is administered by the Company’s Board of Directors and Compensation and Nominating Committee. The Plan contains provisions concerning the vesting, price, exercise and other terms of awards; however, the Compensation and Nominating Committee has authority to grant awards under different terms at its discretion. The Company has reserved for issuance a total of 2,500,000 Ordinary Shares under the Plan. As of December 31, 2006, there were 539,500 shares outstanding under this plan, and 100,000 shares of restricted stock had been issued. |
| |
| Equity awards under this plan must be granted at no less than the fair market value of the Company’s ordinary shares on the date of the grant and the term of the awards may not exceed ten years. The Company’s current policy is that options granted under the Plan expire five years following the date of the grant. |
F-24
Given Imaging Ltd. and its subsidiaries
Notes To The Consolidated Financial Statements
(In thousands except share and per share data)
Note 11 - - Share Capital (cont’d)
| | |
| B. | Employees’ and non employees’ stock options (cont’d) |
| | |
| Generally, where a grant of an award under the plan is the first grant of equity to an employee or consultant, 50% of the award is exercisable on the second anniversary of the date of grant, and 25% becomes exercisable on each of the third and fourth anniversaries of the date of the grant. In cases of subsequent grants, awards vest in four equal installments beginning with the first anniversary of the grant. To the extent the awards have vested, they may be exercised in whole or in part from time to time until their expiration. |
| |
| In case of participating employees and consultants, all unvested awards are cancelled upon the termination of their employment or service. All vested awards may be exercised within 180 days following termination. All vested awards not exercised within this period are automatically forfeited and cancelled. Unvested awards to non-employee directors whose service is terminated or discontinued for any reason other than for cause after more than five years of service on the Company’s board of directors, will automatically vest and become exercisable immediately prior to termination or discontinuation of service. These vested awards may be exercised within 180 days following termination or discontinuation of service, except in cases where termination or discontinuation of service is a result of statutory requirements, death, disability or other circumstances of forced cessation of service, in which case awards may be exercised at any time until their expiration date. In a case of termination for cause of a plan participant, all awards, whether vested or unvested, are automatically forfeited and cancelled. |
| |
| Under this plan, in the event of an acquisition or merger in which the Company is not the surviving entity and the acquiring entity does not agree to assume the awards, all outstanding, but unvested, awards will be accelerated and exercisable, ten days prior to the acquisition or merger. In addition, if the employment of a holder of outstanding awards is terminated in anticipation of or during the 12 month period following an acquisition or merger, all awards that are scheduled to vest within two years of such acquisition or merger, will be automatically accelerated and exercisable, subject to certain adjustments and exceptions. |
| |
| Awards granted under the 2006 equity plan to Israeli residents may be granted under Section 102 of the Israeli Income Tax Ordinance pursuant to which the awards or the Ordinary Shares issued upon their exercise must be deposited with a trustee for at least two years following the date of the grant. Under Section 102, any tax payable by an employee from the grant or exercise of the awards is deferred until the transfer of the awards or ordinary shares by the trustee to the employee or upon the sale of the awards or ordinary shares. Gains on awards granted under the plan are subject to capital gains tax of 25% and the Company is not entitled to a tax deduction. Options granted under the plan to U.S. residents may also qualify as incentive stock options (ISO) within the meaning of Section 422 of the U.S. Internal Revenue Code of 1986. Options that do not contain terms that will qualify them as ISOs are treated as Non-Qualified Stock Options. |
F-25
Given Imaging Ltd. and its subsidiaries
Notes To The Consolidated Financial Statements
(In thousands except share and per share data)
Note 11 - - Share Capital (cont’d)
| | |
| B. | Employees’ and non employees’ stock options (cont’d) |
| | |
| Prior to the adoption of Statement 123R, effective January 1, 2006, the fair value of each option granted is estimated on the date of grant, using the Black-Scholes model with the following assumptions: |
| |
| 1. | Dividend yield of zero percent. |
| | |
| 2. | Risk-free average interest rate as follows: |
| |
Year ended December 31, | % |
|
|
| |
2004 | 1.0-2.5 |
2005 | 3.0-4.3 |
| | |
| 3. | Estimated expected lives of five years as of the date of grant. |
| | |
| 4. | Expected average volatility of 74% and 62%, for the year ended December 31, 2004 and 2005, respectively, which represents a weighted average standard deviation rate for the price of the Company’s Ordinary Shares on the NASDAQ National Market. |
| | |
| The fair value of each option granted in 2006 was estimated on the date of grant using the Black - Scholes model, with the following assumptions: |
| |
| 1. | Dividend yield of zero percent. |
| | |
| 2. | Risk free average interest rate of 4.89% which represents the risk free rate of US$zero - coupon Government Bonds. |
| | |
| 3. | Weighted average expected life of 3.69 years, which represents the period for which the options granted are expected to be outstanding. |
| | |
| | The expected life of the options granted to employees and directors, is calculated based on the Simplified Method as allowed under Staff Accounting Bulletin No. 107 (SAB 107), giving consideration to the contractual term of the options and their vesting schedules. |
| |
| 4. | Expected average volatility of 53.17% which represents a weighted average standard deviation rate for the price of the Company’s Ordinary Shares in the NASDAQ National Market. |
| | |
| | The following table summarizes information relating to stock options for Ordinary Shares outstanding and exercisable, as of December 31, 2006: |
F-26
Given Imaging Ltd. and its subsidiaries
Notes To The Consolidated Financial Statements
(In thousands except share and per share data)
Note 11 - - Share Capital (cont’d)
| | |
| B. | Employees’ and non employees’ stock options (cont’d) |
| | | | | | | |
| | Options outstanding | |
| |
| |
Exercise price | | Number outstanding at
December 31, 2006 | | Weighted average remaining
contractual life (in years) | |
| |
| |
| |
| | | | | | | |
$1 - $10 | | | 855,368 | | 4.86 | | |
$10.01-$20 | | | 1,862,025 | | 5.65 | | |
$20.01-$30 | | | 889,920 | | 6.45 | | |
$30.01-$40 | | | 507,291 | | 7.90 | | |
| |
|
| | | | |
| | | 4,114,604 | | | | |
| |
|
| | | | |
| | | | | | | |
| | Options exercisable | |
| |
| |
Exercise price | | Number exercisable at
December 31, 2006 | | Weighted average remaining
contractual life (in years) | |
| |
| |
| |
| | | | | | | |
$1 - $10 | | | 844,368 | | 4.84 | | |
$10.01-$20 | | | 1,294,525 | | 6.07 | | |
$20.01-$30 | | | 236,250 | | 7.71 | | |
$30.01-$40 | | | 410,674 | | 7.88 | | |
| |
|
| | | | |
| | | 2,785,817 | | | | |
| |
|
| | | | |
| |
| The stock option activity under the Plans is as follows: |
| | | | | | | | | | |
| | Number of shares | | Weighted average
exercise price | | Weighted average
grant date fair value | |
| |
| |
| |
| |
| | | | | | | | | | |
Balance at January 1, 2004 | | | 3,881,396 | | | | | | | |
Granted | | | 1,011,340 | | | $ 34.09 | | | $ 23.31 | |
Forfeited | | | (119,000 | ) | | 14.84 | | | 10.36 | |
Exercised | | | (472,198 | ) | | 5.44 | | | 4.11 | |
| |
|
| | | | | | | |
Balance at December 31, 2004 | | | 4,301,538 | | | | | | | |
Granted | | | 266,000 | | | 25.06 | | | 13.93 | |
Forfeited | | | (205,483 | ) | | 26.96 | | | 16.78 | |
Exercised | | | (328,895 | ) | | 3.29 | | | 2.78 | |
| |
|
| | | | | | | |
Balance at December 31, 2005 | | | 4,033,160 | | | | | | | |
Granted | | | 1,077,070 | | | 18.75 | | | 10.21 | |
Forfeited | | | (404,616 | ) | | 25.87 | | | 15.29 | |
Exercised | | | (591,010 | ) | | 3.45 | | | 2.95 | |
| |
|
| | | | | | | |
Balance at December 31, 2006 | | | 4,114,604 | | | | | | | |
| |
|
| | | | | | | |
The aggregate intrinsic value of options outstanding as at December 31, 2006, is $ 19,673. The aggregate intrinsic value of options excisable as at December 31, 2006, is $ 18,778. The total intrinsic value of options exercised during the year ended December 31, 2006, is $ 10,610.
F-27
Given Imaging Ltd. and its subsidiaries
Notes To The Consolidated Financial Statements
(In thousands except share and per share data)
Note 11 - - Share Capital (cont’d)
| | |
| B. | Employees’ and non employees’ stock options (cont’d) |
| |
| On May 30, 2006, the Company issued 100,000 restricted shares to its CEO. The restricted shares will vest in four installments over a period of four years, beginning on May 30, 2007. The fair value of the restricted shares as of the date of issue is being amortized over the vesting period. |
| |
| Unrecognized compensation costs related to the restricted shares, as of December 31, 2006, to be recognized over 3.4 years, were $1,516 and compensation expenses of $263 were recognized in 2006. |
| |
| The following summarizes the allocation of the stock-based compensation charge for both employees and non-employee stock option grants: |
| | | | | | | | | | |
| | Year ended December 31, | |
| |
| |
| | 2004 | | 2005 | | 2006 | |
| |
| |
| |
| |
| | | | | | | | | | |
Research and development costs | | $ | 63 | | $ | — | | $ | 569 | |
Selling and marketing expenses | | | 1 | | | — | | | 1,839 | |
General and administrative expenses | | | 14 | | | 3 | | | 2,805 | |
| |
|
| |
|
| |
|
| |
| | | | | | | | | | |
| | $ | 78 | | $ | 3 | | $ | 5,213 | |
| |
|
| |
|
| |
|
| |
As of December 31, 2006, there was approximately $10,200 of unrecognized compensation costs related to non-vested options to be recognized over a weighted average period of 2.67 years. The total grant date fair value of options vested during the year ended December 31, 2006, was $8,368
Note 12 - - Revenues
| | | | | | | | | | |
| | Year ended December 31, | |
| |
| |
| | 2004 | | 2005 | | 2006 | |
| |
| |
| |
| |
| | | | | | | | | | |
Workstations and recorders | | $ | 18,669 | | $ | 16,145 | | $ | 12,513 | |
PillCam SB capsule | | | 41,622 | | | 62,528 | | | 76,360 | |
PillCam ESO capsule | | | 1,829 | | | 4,384 | | | 1,438 | |
Patency capsules and scanners | | | 188 | | | 174 | | | 353 | |
Service | | | 2,712 | | | 3,545 | | | 4,365 | |
| |
|
| |
|
| |
|
| |
| | | | | | | | | | |
| | $ | 65,020 | | $ | 86,776 | | $ | 95,029 | |
| |
|
| |
|
| |
|
| |
F-28
Given Imaging Ltd. and its subsidiaries
Notes To The Consolidated Financial Statements
(In thousands except share and per share data)
Note 12 – Revenues (cont’d)
| | |
| B. | Revenues by geographic areas |
| | | | | | | | | | |
| | Year ended December 31, | |
| |
| |
| | 2004 | | 2005 | | 2006 | |
| |
| |
| |
| |
| | | | | | | | | | |
United States | | $ | 46,694 | | $ | 63,896 | | $ | 66,415 | |
Europe | | | 13,447 | | | 16,765 | | | 21,053 | |
Rest of the world | | | 4,879 | | | 6,115 | | | 7,561 | |
| |
|
| |
|
| |
|
| |
| | $ | 65,020 | | $ | 86,776 | | $ | 95,029 | |
| |
|
| |
|
| |
|
| |
Note 13 - - Financial Income, net
| | | | | | | | | | |
| | Year ended December 31, | |
| |
| |
| | 2004 | | 2005 | | 2006 | |
| |
| |
| |
| |
| | | | | | | | | | |
Currency gains (losses) | | $ | 444 | | $ | (837 | ) | $ | 778 | |
Interest income | | | 685 | | | 1,963 | | | 1,639 | |
Income from marketable securities | | | — | | | 422 | | | 1,849 | |
Other | | | (173 | ) | | (786 | ) | | (286 | ) |
| |
|
| |
|
| |
|
| |
| | $ | 956 | | $ | 762 | | $ | 3,980 | |
| |
|
| |
|
| |
|
| |
Note 14 - - Taxes on Income
| | |
| A. | Company |
| | |
| (1) | Israeli income tax is computed on the basis of the Company’s results in New Israeli Shekels (“NIS”) determined for statutory purposes. The Company is assessed for tax purposes under the Income Tax Law (Inflationary Adjustments 1985), the purpose of which is to prevent taxation on inflationary profits. |
| | |
| | Pursuant to the Israeli tax law, the Company was awarded “Approved Enterprise” status under the government alternative benefits track. The program is for investments in the development of infrastructure and for investments in locally produced and imported equipment. The main benefits to which the Company will be entitled, if it implements all the terms of an approved program, are the exemption from tax on income deriving from an approved enterprise, and reduced tax rates on dividends originating from this income. |
| | |
| | The income derived from an approved enterprise will be exempt from tax for a ten year period, commencing on the date that taxable income is first generated by the approved enterprise (limited to the earlier of a maximum period of 12 years from the year of commencement of operations or 14 years from the year the approval letter was received). As of December 31, 2006, the benefit term had not commenced. |
| | |
| | Dividend distributions originating from income of the Approved Enterprise will be subject to tax at the rate of 15%, provided that the dividend is distributed during the period stipulated under Israeli law. |
F-29
Given Imaging Ltd. and its subsidiaries
Notes To The Consolidated Financial Statements
(In thousands except share and per share data)
Note 14 - Taxes on Income (cont’d)
| | |
| A. | Company (cont’d) |
| | |
| | In the event of a dividend distribution (including withdrawals and charges that are deemed to be dividends) out of the income originating from the approved enterprise, and on which the Company received a tax exemption, the distribution is subject to corporate taxes at rates varying from 10% - 25% depending on the percentage of foreign investment holding in the Company as defined by the Law. |
| | |
| | If the Company derives income from sources other than the approved enterprise during the relevant period of benefits, such income will be taxable at regular corporate tax rates (see (4) below). |
| | |
| | On March 30, 2005, the Knesset approved a reform of the Encouragement of Capital Investments Law – 1959. The primary changes are as follows: |
| | | |
| a. | Companies that meet the criteria of the Alternate Path of tax benefits will receive those benefits without prior approval. In addition there will be no requirement to file reports with the Investment Center. Audit will take place via the Income Tax Authorities as part of the tax audits. Request for pre-ruling is possible. |
| | |
| b. | Tax benefits of the Alternate Path include lower tax rates or zero tax depending on the investment zone and the path chosen, lower tax rates on dividends and accelerated depreciation. |
| | |
| c. | In order to receive benefits in the Grant Path or the Alternate Path, the Industrial Enterprise must contribute to the economic independence of the Country’s economy in one of the following ways: |
| | | |
| | 1. | Its primary activity is in the Biotechnology or Nanotechnology fields and pre-approval is received from the head of research and development at the Office of the Chief Scientist; |
| | | |
| | 2. | Its revenue from a specific country is not greater than 75% of its total revenues that year; |
| | | |
| | 3. | 25% or more of its revenues are derived from a specific market of at least 12 million residents. |
| | |
| | The amendments to the Law do not retroactively apply for investment programs having an Approved Enterprise approval certificate from the Investment Center issued up to December 31, 2004 (even when investments under these programs are conducted after January 1, 2005). Consequently, the amendments should not impact an existing Approved Enterprise, which received written approval. The new tax regime shall apply for a new Approved Enterprise and for an Approved Enterprise expansion for which the first year of benefits may be as early as 2004. |
| | | |
| (2) | The Company has net operating loss carryforwards in Israel of approximately $ 13.9 million as of December 31, 2006. These net operating loss carryforwards are linked to the Israeli Consumer Price Index and are available to offset future taxable income, if any, indefinitely. |
| | |
| (3) | As explained above, the Israeli Company is exempt from tax for a ten-year period. Therefore, the Israeli Company has not recorded deferred tax assets and liabilities. |
F-30
Given Imaging Ltd. and its subsidiaries
Notes To The Consolidated Financial Statements
(In thousands except share and per share data)
Note 14 - Taxes on Income (cont’d)
| | |
| A. | Company (cont’d) |
| | |
| (4) | On July 25, 2005 the Knesset passed the Law for the Amendment of the Income Tax Ordinance (No. 147 and Temporary Order) - 2005 (“the Amendment”). |
| | |
| | The Amendment provides for a gradual reduction in corporate tax rate in the following manner: in 2006 - 31%, 2007 - 29%, 2008 - 27%, 2009 - 26% and from 2010 onward 25%. Furthermore, as from 2010, upon reduction of the corporate tax rate to 25%, capital gains will be subject to tax of 25%. |
| | |
| | This change has no effect on the financial statements of the Company. |
| | |
| B. | Subsidiaries |
| | |
| At December 31, 2006 the subsidiaries had local, federal and state net operating loss carryforwards of approximately $ 26.6 million. Federal and state losses carryforwards in the US subsidiary, totaling $ 9.1 million will be expired through 2026. Operating loss carryforwards in the Japanese subsidiary, totaling $ 6.4 million will be expired through 2013. The remaining balance could be utilized with no limitation of time. |
| | |
| C. | Profit (loss) before tax and tax expense (benefit) included in the statement of operations |
| | |
| | | | | | | | | | |
| | Year ended December 31 | |
| |
| |
| | 2004 | | 2005 | | 2006 | |
| |
| |
| |
| |
| | | | | | | | | | |
Profit (loss) before taxes on income and minority share: | | | | | | | | | | |
Israel | | $ | 4,494 | | $ | 5,011 | | $ | 3,459 | |
Foreign jurisdiction | | | (3,043 | ) | | (70 | ) | | (6,174 | ) |
| |
|
| |
|
| |
|
| |
| | $ | 1,451 | | $ | 4,941 | | $ | (2,715 | ) |
| |
|
| |
|
| |
|
| |
Taxes on income: | | | | | | | | | | |
| | | | | | | | | | |
Current taxes: | | | | | | | | | | |
Israel | | $ | — | | $ | — | | $ | 200 | |
Foreign jurisdiction | | | 47 | | | 196 | | | 82 | |
| |
|
| |
|
| |
|
| |
| | $ | 47 | | $ | 196 | | $ | 282 | |
| |
|
| |
|
| |
|
| |
| | | | | | | | | | |
Deferred taxes: | | | | | | | | | | |
Israel | | $ | — | | $ | — | | $ | — | |
Foreign jurisdiction | | | (737 | ) | | (482 | ) | | (155 | ) |
| |
|
| |
|
| |
|
| |
| | $ | (737 | ) | $ | (482 | ) | $ | (155 | ) |
| |
|
| |
|
| |
|
| |
Tax expense (benefit) | | $ | (690 | ) | $ | (286 | ) | $ | 127 | |
| |
|
| |
|
| |
|
| |
F-31
Given Imaging Ltd. and its subsidiaries
Notes To The Consolidated Financial Statements
(In thousands except share and per share data)
Note 14 - Taxes on Income (cont’d)
| | |
| D. | Deferred Taxes |
| | |
| In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers projected future taxable income and tax planning strategies in making this assessment. |
| | |
| Based upon projections for future taxable income over the periods in which the deferred tax assets are deductible, management believes it is more likely than not that the Company will realize the benefits of these deductible differences, net of the existing valuation allowances at December 31, 2006. The amount of the deferred tax asset considered realizable, however, could be reduced in the near term if estimates of future taxable income during the carryforward period are reduced. |
| | |
| The tax effects of significant items comprising the Company’s deferred taxes: |
| | | | | | | |
| | December 31 | |
| |
| |
| | 2005 | | 2006 | |
| |
| |
| |
| | | | | | | |
Net operating tax assets regarding carryforward losses of subsidiaries | | $ | 9,960 | | $ | 10,137 | |
Other timing difference | | | 1,576 | | | 2,343 | |
| |
|
| |
|
| |
Deferred tax asset | | | 11,536 | | | 12,480 | |
Valuation allowance | | | (10,317 | ) | | (11,106 | ) |
| |
|
| |
|
| |
Net deferred tax asset | | $ | 1,219 | | $ | 1,374 | |
| |
|
| |
|
| |
| | |
| The net changes in the total valuation allowance for the years ended December 31, 2004, 2005 and 2006 are $ 3,840, ($ 2,779) and $ 789, respectively. |
| | |
| E. | Reconciliation of the statutory tax expense (benefit) to actual taxes on income |
| | | | | | | | | | |
| | Year ended December 31, | |
| |
| |
| | 2004 | | 2005 | | 2006 | |
| |
| |
| |
| |
Profit (loss) before taxes on income and minority share | | $ | 1,451 | | $ | 4,941 | | $ | (2,715 | ) |
Tax rate | | | 0 | % | | 0 | % | | 0 | % |
| |
|
| |
|
| |
|
| |
Statutory income tax on the above amount | | | — | | | — | | | — | |
Increase (decrease) in taxed on income resulting from: | | | | | | | | | | |
Differences between the definition of capital and assets for tax purposes | | | — | | | — | | | 200 | |
Changes in valuation allowance | | | 3,840 | | | (2,779 | ) | | 789 | |
Foreign tax rate differential in subsidiaries | | | (4,530 | ) | | 2,493 | | | (862 | ) |
| |
|
| |
|
| |
|
| |
Tax expense (benefit) | | $ | (690 | ) | $ | (286 | ) | $ | 127 | |
| |
|
| |
|
| |
|
| |
F-32
Given Imaging Ltd. and its subsidiaries
Notes To The Consolidated Financial Statements
(In thousands except share and per share data)
Note 15 - - Fair Value of Financial Instruments
| |
| The Company’s financial instruments include cash and cash equivalents, accounts receivable, deposits, assets held for severance benefits, marketable securities and accounts payable. Except for marketable securities considering the short term nature of these financial instruments, their carrying amounts approximate fair value. The fair value of the Company’s marketable securities is disclosed in Note 5. |
F-33
