medical endoscopy market. From 1993 to 1995, Mr. Meron was General Manager and Chief Operating Officer of Optibase Ltd., an Israeli manufacturer of hardware and software products that compress and playback digital video and sound for multimedia applications. From 1988 to 1993, Mr. Meron was Chief Financial Officer of InterPharm Laboratories Ltd., an Israeli company formerly listed on the Nasdaq National Market and a subsidiary of the Ares-Serono Group, a Swiss ethical pharmaceutical company. From 1983 to 1987, Mr. Meron held various management positions at the Tadiran Group, an Israeli telecommunications and semiconductor manufacturer. From 1973 to 1983, Mr. Meron served as an officer in the Israeli army overseeing the budgets of a range of military industries. Mr. Meron holds an M.B.A. from Tel Aviv University and a B.A. in economics and statistics from the Hebrew University, Jerusalem.
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 a 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 December 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. Gehrtz holds a Ph. D. in Physical Chemistry and a 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.
Yoram Ashery has served as our Corporate Vice President – Colon Products since January 1, 2006. Prior to that, since joining the Company in April 2001 until December 31, 2005, Mr. Ashery served as Corporate Vice President - Business Development. Prior to joining us, from 1995 to April 2001, Mr. Ashery was a corporate attorney, practicing in the fields of technology and medical devices and privatizations as an associate and, from January 2000, as a partner, with the law firm of Zellermayer, Pelossof & Co.. Prior to that, Mr. Ashery served at the Office of the Attorney General of the Government of Israel, from 1993 to 1994, during which period he also completed his internship under the direct supervision of the Israeli Attorney General. From 1992 to 1996, Mr. Ashery also served as a junior lecturer in Tax Law at the Buchman Faculty of Law of the Tel-Aviv University. Mr. Ashery holds an LL.B. from the Buchman Faculty of Law of the Tel-Aviv University and a B.A. in Economics from the School of Social Sciences of the Tel-Aviv University.
Sharon Koninsky, has served as Corporate Director at the Office of the CEO since January 1, 2006. Prior to that, from January 2002 until December 31, 2005, Ms. Koninsky served as Corporate Director, Human Resources and prior to that as Human Resources Manager. She has served as Executive Assistant to the President and Chief Executive Officer since 1998. Prior to joining us, from 1997 until 1998, Ms. Koninsky worked in the marketing department of Geotek Technologies Ltd., an Israeli telecommunications company. In 1996 Ms. Koninsky was responsible for placing personnel in administrative positions while employed at a manpower organization in Haifa.Ms. Koninsky holds a B.A. in social work and an M.A. in public administration, both from Haifa University.
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 Vice President-Finance 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. Effective November 15, 2005, Mr. Cornelius serves as the chairman of the board of directors and chief executive officer of Guidant Corporation, a U.S. cardiac and vascular medical device company. From 2000 until 2005, 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 currently also serves as a director of Bristol-Myers Squibb Company, The
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Chubb Corporation, The DIRECTV Group, Inc. and The National Bank of Indianapolis. 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 has served as a director of Guidant Corporation since 1999, and is currently 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.
Jonathan Silverstein has served as a director since September 2000. Mr. Silverstein is a General Partner at OrbiMed Advisors LLC, a global healthcare asset management firm. Mr. Silverstein joined OrbiMed in 1999. From 1996 to 1999, Mr. Silverstein was the Director of Life Sciences in the Investment Banking Department at the Sumitomo Bank Limited. From 1994 to 1996, Mr. Silverstein was an associate at Hambro Resource Development. Mr. Silverstein serves as a director of DOV Pharmaceuticals, Avanir Pharmaceuticals, Emphasys Medical Corporation, Superdimension, Ltd., aDiana Inc. and Predix Pharmaceuticals and is a former director for Auxilium Pharmaceuticals, Orthovita, Inc. and LifeCell Corporation. Mr. Silverstein has a B.A. in economics from Denison University and a J.D. and an M.B.A. from the University of San Diego.
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, vice-chairman or a director of several privately held companies in the fields of medical device and real estate. Mr. Barir holds an LLB 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 (acquired by Elan Corp. NYSE:ELN), 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.(acquired by AVX Corp. NYSE:AVX), 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 is the Director of the Department of Ophthalmology, Tel Aviv Medical Center, since January 2000 and a Professor at the Sackler School of Medicine, Tel Aviv University, 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.
Change in Senior Management
In April 2006, we entered into an employment agreement with Nachum Shamir who will commence serving as our President and Chief Executive Officer and a director on April 9, 2006. Our current President and Chief Executive Officer, Gavriel Meron, will cease serving as in such capacities on that date. Mr. Meron will continue serving as a director and will be appointed Executive Vice Chairman of our board of directors effective April 9, 2006.
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Prior to joining us, Mr. Shamir has 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. His prior position was with the Hong Kong based Scitex Asia Pacific (H.K.) Ltd. (now Creo Asia Pacific (H.K.) Ltd.) from 1993. Mr. Shamir holds a B.Sc from the Hebrew University of Jerusalem and an M.A. in public administration from Harvard University.
The aggregate compensation paid by us and our subsidiaries to our directors and executive officers, including stock-based compensation, for the year ended December 31, 2005 was $3.1 million (excluding director fees detailed below). This amount includes approximately $0.4 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.
During 2005, we paid each director, excluding Gavriel Meron, 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. We paid an additional quarterly fee of $1,250 to the chairman of the audit committee. The total amount of these payments in 2005 was $338,750. The directors fees for service by our director, Doron Birger, are paid to Elron Electronics Industries, where he serves as President and Chief Executive Officer. Directors fees for services by our director, Jonathan Silverstein, are paid to OrbiMed Advisors LLC, where he is a General Partner. Director fees for service by our former director, Reuben Baron, who stepped down from our board of directors in August 2005, were paid to RDC Rafael Development Corporation, where he served as President and Chief Executive Officer. In addition, all of our directors were reimbursed for their expenses for each board of directors meeting attended. In addition, in 2005, we granted options to purchase 29,000 ordinary shares to our director and Chairman of the Audit Committee, Michael Grobstein, 25,000 ordinary shares to each of our directors, James Cornelius and Anat Loewenstein, options to purchase 14,000 shares to our Chairman, Doron Birger, and options to purchase 11,000 ordinary shares to each of our directors, Jonathan Silverstein, Chen Barir and Eyal Lifschitz. The exercise price of these options was equal to the fair market value of our ordinary shares on the date of grant.
In 2005, we paid Mr. Meron, our President and Chief Executive Officer an annual base salary of $271,750. In addition, Mr. Meron received options to purchase 70,000 ordinary shares of the company at an exercise price of $36.10 per share, equal to the closing price of our ordinary shares on the Nasdaq National Market on the date of the grant. 25% of these options were immediately vested and another 25% will vest in each of the subsequent three years. Mr. Meron was also awarded a bonus of $300,000 in respect of 2005.
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 Gavriel Meron, our President and Chief Executive Officer, and Nahum Shamir, our President and Chief Executive Officer elect, which are subject to shareholder approval.
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 board of directors currently consists of eight 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 in December 31, 2007. Other than Gavriel Meron, our President and Chief Executive Officer, none of our directors are our employees or are party to a service contract with us. In April 2006, we entered into an employment agreement with Nachum Shamir, our President and Chief Executive Officer elect. In August 2005, Prof. Anat Loewenstein was elected to our board of directors to replace Dr. Dalia Megiddo, who resigned from the board. Mr. Reuben Baron also left our board of directors in August 2005.
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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 general 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. Zvi Ben-David, our former Chief Financial Officer, resigned his position effective July 2005 and was replaced by Yuval Yanai. Nancy Sousa, the former President of our U.S. subsidiary resigned her position effective June 2005. A search for her replacement is still ongoing. Mr. Meron, our President and Chief Executive Officer, was also serving as acting President of our U.S. subsidiary during part of 2005. Effective January 1, 2006, Mr. Ehud Har-Chen was appointed to the position of Senior Vice President of Human Resources and effective February 1, 2006, Christopher Rowland was appointed as our Senior Vice President of Business Development and Corporate Strategy.
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 National 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 and he or she may be reelected to one additional term of three years by a majority vote at a shareholders’ meeting, subject to the conditions described above for election of outside directors. 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.
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, such as us, 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 currently expected in 2007. In addition, this amendment requires Israeli companies to determine no later than April 19, 2006, 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, both Doron Birger and Gavriel Meron qualify as a “financial and accounting expert,” as defined in the applicable regulations.
In addition to the requirements of the Companies Law, we must comply with the Nasdaq National 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 National Market. Our board of directors has determined that all of our directors, except Mr. Gavriel Meron, qualify as independent directors in accordance with the applicable rules.
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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 National 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 National Market and 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. Our board of directors has determined that the current members of our audit committee, Michael Grobstein, James Cornelius, Chen Barir and Eyal Lifschitz, each meet 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 National 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 accountant, 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 a 5% or greater shareholder, 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. In 2005, we appointed the Israeli member firm of Deloitte Touche Tohmatsu to serve as our internal auditor following the resignation of our former internal auditor in order to preserve the independence of his accounting firm that is engaged as the independent auditor of one of our affiliates.
Compensation and Nominating Committee
Our compensation and nominating committee consists of our directors, James Cornelius, Doron Birger, Michael Grobstein and Jonathan Silverstein. In accordance with the rules of the Nasdaq National 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 National Market’s independent director requirements.
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 National Market |
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| 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. |
The executive committee currently consists of our directors, Gavriel Meron (Chairman), Doron Birger, James Cornelius and Michael Grobstein.
As of December 31, 2005, we and our subsidiaries had 339 employees of whom 183 were based in Israel, 107 in the United States, 37 in Europe, nine in Japan and three in Australia. This reflects a 20% increase in the number of employees since December 31, 2004. This increase is mainly in research and development employees in Israel and sales personnel in our U.S. subsidiary. In December 2005, we implemented an internal reorganization of our sales, marketing and product management teams. 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 is intended to realign our activities along product lines and to allow 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. As a result of the reorganization and the expected continued growth of our business, we expect our headcount to increase in 2006, primarily in research and development, clinical and regulatory affairs 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, minimal 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.
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 Gavriel Meron, our President and Chief Executive Officer, see Item 7 “Major Shareholders and Related Party Transactions.”
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Stock Option Plans
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, 2005, we had outstanding options to purchase 244,078 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% to become exercisable on each of the third and fourth anniversaries of the date of the grant. However, in cases of subsequent grants plans, 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 exercising 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 expiry. 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 expire.
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 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 following the date of the grant. 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 capital gains tax of 25%. 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, 2005, we had outstanding options to purchase 998,745 shares under the 2000 stock option plan. Ordinary 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
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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 and 25% 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 expire.
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, 2005, we had outstanding options to purchase 2,790,337 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 and 25% 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 expire.
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 February 28, 2006 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 the date of this annual report. 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) | | 10,207,533 | | | 36.5 | % | |
OrbiMed Advisors LLC, OrbiMed Capital LLC and Samuel D. Isaly (2) | | 3,638,904 | | | 13.0 | | |
AXA Assurances I.A.R.D. Mutuelle, AXA Assurances Vie Mutuelle,
AXA Courtage Assurance Mutuelle, AXA, AXA Financial, Inc.(3) | | 2,319,302 | | | 8.3 | | |
Directors and executive officers: | | | | | | | |
Gavriel D. Meron (4) | | 926,709 | | | 3.2 | | |
Yuval Yanai | | — | | | — | | |
Ehud Har-Chen | | — | | | ¾ | | |
Kevin Rubey (5) | | 208,750 | | | * | | |
Christopher Rowland | | — | | | ¾ | | |
Shoshana Friedman (6) | | 111,526 | | | * | | |
Mark Gilreath (7) | | 151,250 | | | * | | |
Manfred Gehrtz (8) | | 21,000 | | | * | | |
Doron Birger (9) | | 6,746,592 | | | 24.1 | | |
James M. Cornelius (10) | | 223,500 | | | * | | |
Michael Grobstein (11) | | 143,500 | | | * | | |
Jonathan Silverstein (12) | | 3,711,926 | | | 13.3 | | |
Chen Barir (13) | | 41,000 | | | * | | |
Eyal Lifschitz (14) | | 25,000 | | | — | | |
Anat Loewenstein | | — | | | ¾ | | |
All directors and executive officers as a group (15) | | 15,754,194 | | | 53.2 | % | |
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(1) | Based on a Schedule 13D/A filed on November 4, 2004 and on information provided to us supplementally, this number consists of 4,082,982 ordinary shares owned by Elron Electronic Industries Ltd., or Elron, 3,462,441 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. 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 February 28, 2006, DIC owned approximately 47.5% 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 February 28, 2006, IDB Holding Corporation, or IDBH, owned approximately 71.8% of the outstanding shares of IDB Development Corporation Ltd., or IDBD, which, in turn, owned approximately 73.3% 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 is a public company traded on the Tel Aviv Stock Exchange. Approximately 51.7% of the outstanding share capital of IDBH is owned by a group comprised of (i) Ganden Investments I.D.B. Ltd. (“Ganden Investments”), a wholly owned Israeli subsidiary of Ganden Holdings Ltd. (“Ganden Holdings”), a private Israeli company controlled by Nochi Dankner and his sister, Shelly Bergman, which holds approximately 31.02% of the equity of and voting power in IDBH; (ii) Manor Investments-IDB Ltd. (“Manor Investments), a majority owned Israeli subsidiary of Manor Holdings B.A. Ltd. (“Manor Holdings”), a private Israeli company controlled by Ruth Manor, which holds approximately 10.34% of the equity of and voting power in IDBH; and (iii) Avraham Livnat Investments (2002) Ltd. (“Livnat Investments”), a wholly owned Israeli subsidiary of Avraham Livnat Ltd. (“Livnat Ltd.”), a private Israeli company controlled by Avraham Livnat, which holds approximately 10.34% of the equity of and voting power in IDBH. Ganden Investments, Manor Investments and Livnat Investments entered into a Shareholders Agreement relating, among other things, to their joint control of IDBH, the term of which is until May 19, 2023. |
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| In addition to the above-mentioned holdings of shares of IDBH, as of February 28, 2006, (a) Ganden Holdings held approximately 10.58% of the equity and voting power of IDBH; (b) Ganden Investments held approximately 6.7% of the equity and voting power of IDBH; (c) Shelly Bergman held, through a private Israeli company wholly owned by her, approximately 7.2% of the equity and voting power in IDBH; (d) Manor Holdings held approximately 0.03% of the equity and voting power in IDBH and (e) Livnat Ltd. held approximately 0.04% of the equity and voting power in IDBH. These additional holdings of shares of IDBH are not subject to the Shareholders Agreement referred to above. |
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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 13D/A filed on September 29, 2004 and on information provided to us supplementally, consists of 2,250,733 ordinary shares and options to purchase 2,157 ordinary shares owned by Caduceus Private Investments L.P., or Caduceus; 485,000 ordinary shares and options to purchase 771 ordinary shares owned by Eaton Vance Worldwide Health Sciences Portfolio, or Eaton Vance; 485,000 ordinary shares and options to purchase 771 ordinary shares owned by Finsbury Worldwide Pharmaceutical Trust, or Finsbury; 330,000 ordinary shares owned by UBS Juniper Crossover Fund LLC, or Juniper; 82,171 ordinary shares and options to purchase 144 ordinary shares owned by OrbiMed Associates LLC, or OrbiMed Associates; 2,157 options to purchase ordinary shares owned by OrbiMed Advisors LLC, or OrbiMed Advisors. OrbiMed Capital GPI LLC is the general partner of Caduceus, OrbiMed Capital LLC acts as managing member of OrbiMed Associates, OrbiMed Advisors acts as investment manager of Juniper, OrbiMed Capital LLC acts as investment advisor to Finsbury and OrbiMed Advisors LLC acts as investment adviser to Eaton Vance. As a result, OrbiMed Advisors, OrbiMed Capital and OrbiMed Capital GPI LLC have discretionary investment management authority with respect to the assets of Caduceus, Eaton Vance, Finsbury, OrbiMed Associates and Juniper. Samual D. Isaly owns a controlling interest in OrbiMed Advisors LLC and OrbiMed Capital. Samuel D. Isaly, Sven Borho, Michael Sheffery Carl L. Gordon and Jonathan Silverstein, share ownership and control of OrbiMed Capital GPI LLC, OrbiMed Capital and OrbiMed Advisors LLC. The address of OrbiMed Advisors LLC, OrbiMed Capital, OrbiMed Capital GPI LLC, Samuel D. Isaly, Sven Borho, Michael Sheffery, Carl L. Gordon and Jonathan Silverstein is 767 Third Avenue, 30th Floor, New York, NY 10017. These individuals each disclaim beneficial ownership of the shares owned by the foregoing entities except to the extent of his pecuniary interest therein. |
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| (3) | Based on a Schedule 13G filed on February 14, 2006, consists of 2,188,242 ordinary shares owned by Alliance Capital Management L.P., or Alliance, and 131,060 ordinary shares owned by AXA Equitable Life Insurance Company, or AXA Equitable. Based on information contained in the Schedule 13G, 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 owns AXA Financial, Inc. AXA Assurances I.A.R.D Mutuelle, AXA Assurances Vie Mutuelle and AXA Courtage Assurance Mutuelle (collectively, the "Mutuelles AXA"), as a group, control AXA. 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, and AXA expressly disclaims beneficial ownership of any securities owned by the foregoing entities. |
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(4) | Consists of 111,416 ordinary shares and options to purchase 815,293 ordinary shares. |
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(5) | Consist of options to purchase 208,750 ordinary shares. |
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(6) | Consists of 19,026 ordinary shares owned by Ms. Friedman and options to purchase 92,500 ordinary shares owned by Ms. Friedman. |
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(7) | Consists of options to purchase 151,250 ordinary shares. |
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(8) | Consists of 1,000 ordinary shares and options to purchase 20,000 ordinary shares. |
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(9) | Consists of 1,500 ordinary shares owned by Mr. Birger personally, 2,662,110 ordinary shares owned by RDC Rafael Development Corporation and 4,082,982 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 |
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| 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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(10) | Consists of 135,000 ordinary shares and options to purchase 88,500 ordinary shares. |
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(11) | Consists of 30,000 ordinary shares and options to purchase 113,500 ordinary shares. |
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(12) | Consists of 522 ordinary shares and options to purchase 78,500 ordinary shares owned by Mr. Silverstein and 3,638,904 ordinary shares beneficially owned by the OrbiMed investors. Mr. Silverstein is a principal of OrbiMed Advisors LLC and by virtue of his position may be deemed to have voting and investment power, and thus beneficial ownership with respect to the shares which the OrbiMed investors owns or over which they exercise voting and investment power. Mr. Silverstein disclaims such beneficial ownership except to the extent of his pecuniary interest therein. |
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(13) | Consists of options to purchase 41,000 ordinary shares |
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(14) | Consists of options to purchase 25,000 ordinary shares. |
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(15) | Includes 10,207,533 ordinary shares beneficially owned by IDB Holding Corporation and 3,636,747 ordinary shares beneficially owned by the OrbiMed entities, 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 |
Agreement with Rafael
In January 1998, we entered into a technology purchase and license agreement with Rafael Armament Development Authority, or Rafael, which is a division of the Israeli Ministry of Defense. Rafael beneficially owns 47.8% of the outstanding shares of our shareholder, RDC Rafael Development Corporation. Pursuant to this agreement, we purchased from Rafael, for $30,000 in cash, all of Rafael’s rights to the technology associated with an in vivo video camera and an autonomous video endoscope, including a swallowable capsule with a camera and an optical system, a transmitter and a reception system, which was then being developed by Rafael, which we refer to as the PillCam capsule and system. Rafael transferred to us the patents that it had been issued in connection with the PillCam capsule and system technology. Rafael also granted us an exclusive, perpetual, worldwide, royalty-free license to use other technology and know-how of Rafael which was used at Rafael for the development of the PillCam capsule and system, provided that we use this technology and know-how solely for commercial exploitation of the PillCam capsule and system. We are permitted to transfer or sublicense this other technology to third parties in connection with the commercial exploitation of the PillCam capsule and system provided that we receive Rafael’s consent which is not to be unreasonably withheld. We have not received any technology from Rafael pursuant to this license. In connection with our commercial exploitation of the PillCam capsule and system, Rafael agreed to provide us with technical support in the form of equipment and use of its laboratories, subject to their availability, and access to its existing documentation. We agreed to pay to Rafael its costs plus 10% for any of Rafael’s manpower that we use. Rafael also agreed to provide us with research and development and prototype manufacturing services in connection with the PillCam capsule and system at customary commercial rates. Rafael has the right to provide such services to us if it is competitive in terms of quality, quantity, timing and price. In connection with this technical support, we paid an aggregate amount to Rafael of $12,000 in 1998 only.
In connection with our acquisition of this technology, we granted to Rafael an exclusive, perpetual, worldwide, royalty-free license to use all technology that we acquired from Rafael solely in the military and security fields. Rafael has the exclusive right to file patent applications for inventions developed by Rafael in connection with the use of the PillCam capsule and system in these fields. We are required to assist Rafael in connection with these patent applications. Rafael has granted to us an exclusive, perpetual, worldwide, royalty-free license to use outside of the military and security fields any technology covered by these patents. We and Rafael have also agreed to notify each other if either of us develops any improvements to the PillCam capsule and system technology provided that doing so does not breach any
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confidentiality undertaking to a third party, or in the case of Rafael, security requirements. We have each agreed to grant to the other exclusive rights to use any improvement in our case in the commercial field and in Rafael’s case in the military and security fields, in consideration for payment of royalties in an amount to be agreed upon.
Registration Rights
Demand Registration Rights
Pursuant to an investor rights agreement, at the request of one or more of our former Series A preferred shareholders that hold at least 20% of our then outstanding ordinary shares held by our former Series A preferred shareholders, we must use our best efforts to register any or all of these shareholders’ ordinary shares. We must also give notice of the registration to our other former Series A preferred shareholders and to some of our ordinary shareholders, including Discount Investment Corporation and its affiliates, and Elron Electronic Industries, and include in the registration any ordinary shares that they request to include. We are also permitted to include our shares in the registration. The minimum aggregate offering price of the shares to be registered is $5.0 million. We may only be requested to carry out two of these demand registrations.
In addition to the registrations described above that may be requested by our former Series A preferred shareholders, at the request of some of our ordinary shareholders, including Discount Investment Corporation and its affiliates, Elron Electronic Industries and PW Juniper Crossover Fund, holding at least 20% of our ordinary shares then outstanding, we must use our best efforts to register any or all of these shareholders’ ordinary shares. We must also give notice of the registration to all other shareholders to whom we have granted registration rights and include in the registration any ordinary shares that they request to include. We are also permitted to include our shares in the registration. The minimum aggregate offering price of the shares to be registered is $5.0 million. We may only be requested to carry out three of these demand registrations.
In connection with each of the above registrations, 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 and second, any shares to be registered by our directors and officers. Thereafter, the shares to be registered by our former Series A preferred shareholders or ordinary shareholders would be reduced pro rata among the shareholders requesting inclusion of their shares according to the number of shares held by each shareholder.
Piggyback Registration Rights
Our former Series A preferred shareholders also have the right to request that we include their ordinary shares which were issued upon conversion of our Series A preferred shares in any registration statements filed by us in the future for the purposes of a public offering, subject to specified limitations. Some of our ordinary shareholders, including Discount Investment Corporation and its affiliates, Elron Electronic Industries and PW Juniper Crossover Fund, have similar rights with respect to the ordinary shares they currently hold. 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 our 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 some of our shareholders including Discount Investment Corporation and its affiliates, Elron Electronic Industries and PW Juniper Crossover Fund, or any of our former Series A preferred shareholders, we must register such shareholder’s ordinary shares on Form F-3. We must also give notice of the registration to our other 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 shareholder requesting registration was entitled to include its shares. The minimum aggregate offering price of the shares to be registered is $5.0 million. 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.
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Termination
All registration rights will expire on October 10, 2006. 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 of the Securities Act.
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. Diesenhaus is a provider of travel services in Israel and is controlled by IDB Holding Corporation Ltd., which is also a controlling shareholders of our company. The terms of our engagement with Diesenhaus are similar to the terms we have with other providers of travel services to us. In 2005, we paid Diesenhaus a total of $61,500, or 5.5% 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. The prices we pay Cellcom are lower than the prices we paid our previous provider of mobile communication services, which was a non-affiliated party. This agreement was approved by our audit committee and Board of Directors in accordance with Israeli law.
Directors Fees
We pay directors fees in respect of service by our directors (other than our President and Chief Executive Officer, Gavriel Meron). See Item 6 “Directors, Senior Management and Employees¾ 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.
The terms of our employment agreements with Gavriel Meron, our President and Chief Executive Officer, and Nachum Shamir, our President and Chief Executive Officer elect, are described below. Since Messrs. Shamir and Meron are directors, under Israeli law their employment agreements and terms are subject to approval by our shareholders at our next annual shareholders’ meeting.
Gavriel Meron.
In April 2006, we amended and restated Mr. Meron’s employment agreement. The employment agreement contains provisions standard for a firm in our industry regarding non-competition, confidentiality of information and assignment of inventions.
For the fiscal year 2006, Mr. Meron is entitled to receive (1) an annual base salary of $330,000 for the fiscal year 2006, (2) a cash bonus of up to 200% of Mr. Meron 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 60,000 ordinary shares, the exercise price of which will be equal to the closing price of the ordinary shares on the Nasdaq National Market on the date the shareholders approve the grant, vesting in four equal installments beginning on
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the first anniversary of the grant. Mr. Meron is also entitled to other fringe benefits, such as the use of a company car and contributions for study, disability and severance funds.
Mr. Meron’s employment may be terminated by us without cause upon three month’s prior written notice, in which case Mr. Meron is entitled to receive his base salary and benefits payable during the three months following such notice of termination and continued vesting of options during such period. In addition, Mr. Meron is entitled to receive a cash payment equal to 12 times his average monthly base salary during the three months prior to the notice of termination and to accelerated vesting with respect to those options that would have vested during the 12 months following the notice of termination. Mr. Meron’s employment may be terminated by us immediately for cause. Mr. Meron may terminate his employment with us upon three month’s prior written notice in which event, Mr. Meron is entitled to receive his base salary and benefits payable during the 3 months following such notice of termination and continued vesting with respect to those options that would have vested during such three months period. In the event that Mr. Meron terminates his employment after April 15, 2007, he is entitled to the same benefits as we would have paid him had we terminated his employment without cause.
Mr. Meron’s employment may be terminated following a change of control event (as defined in the employment agreement) by us or our successor upon three month’s prior written notice. In the event of such termination, Mr. Meron is entitled to receive a cash payment equal to 24 times his average monthly base salary during the three months prior to the notice of termination and to accelerated vesting with respect to those options and shares of restricted stock that would have vested during the 24 months following the notice of termination.
Nachum Shamir.
In April 2006, we signed an employment agreement with Mr. Shamir. The employment agreement contains provisions standard for a firm in our industry regarding non-competition, confidentiality of information and assignment of inventions.
For the fiscal year 2006, Mr. Shamir is entitled to receive (1) an annual base salary of $330,000, pro rated for the number of complete calendar months during which Mr. Shamir is employed by us in 2006, (2) a cash bonus of up to 200% of Mr. Shamir’s annual salary, pro rated for the number of complete calendar months during which Mr. Shamir is employed by us in 2006, subject to meeting certain personal and company performance targets determined from time to time at the discretion of the board of directors, (3) a grant of options to purchase 300,000 of our ordinary shares, the exercise price of which will be equal to the closing price of the ordinary shares on the Nasdaq National Market on the date the shareholders approve 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 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, insurance benefits and reimbursement of expenses.
Mr. Shamir’s employment may be terminated by us without cause upon three month’s 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 month’s 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-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.
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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 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. |
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. |
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.
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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. |
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. The majority 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
In March 2004, the U.S. Patent and Trademark Office notified us that it would conduct a reexamination of some of the claims in one of our U.S. patents in the U.S. Patent and Trademark Office pursuant to a request submitted by Olympus Corporation. In August 2005, we filed our response to an office action issued by the U.S. Patent and Trademark Office and we are awaiting its decision. We do not believe that the outcome of this reexamination proceeding will affect our ability to market and sell the Given System.
On August 9, 2004, a former employee of our U.S. subsidiary filed a complaint in California against the U.S. subsidiary and two other individual defendants for, among other things, wrongful termination, and alleged discrimination and harassment based on age. The former employee claims he is entitled to damages, in an unstated amount, as well as interest and attorneys’ fees. The court assigned the case to mediation, which resulted in us paying the former employee $185,000 in full settlement of his claims, including attorneys’ fees, without admitting any wrongdoing.
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 may 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, 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, 2005.
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ITEM 9. THE OFFER AND LISTING
A. OFFER AND LISTING DETAILS
Nasdaq National 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 National Market:
| | | | | | | |
Annual Highs and Lows | | High | | Low | |
| |
| |
| |
| | | | | |
2005 | | $ | 36.04 | | $ | 20.39 | |
2004 | | $ | 44.08 | | $ | 17.87 | |
2003 | | $ | 18.80 | | $ | 6.65 | |
2002 | | $ | 18.05 | | $ | 6.91 | |
| | | | | | | |
Quarterly Highs and Lows | | High | | Low | |
| |
| |
| |
| | | | | |
1st quarter 2006 | | $ | 28.37 | | $ | 21.65 | |
|
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 | |
| | | | | | | |
1st quarter 2004 | | $ | 34.25 | | $ | 17.87 | |
2nd quarter 2004 | | $ | 38.51 | | $ | 30.30 | |
3rd quarter 2004 | | $ | 39.35 | | $ | 31.35 | |
4th quarter 2004 | | $ | 44.08 | | $ | 27.10 | |
| | | | | | | |
Most Recent Six Months | | High | | Low | |
| |
| |
| |
| | | | | | | |
March 2006 | | $ | 23.76 | | $ | 21.65 | |
February 2006 | | $ | 26.61 | | $ | 23.04 | |
January 2006 | | $ | 28.37 | | $ | 26.53 | |
December 2005 | | $ | 27.46 | | $ | 23.59 | |
November 2005 | | $ | 25.24 | | $ | 22.26 | |
October 2005 | | $ | 23.96 | | $ | 20.39 | |
On March 15, 2006, the closing price of our ordinary shares on the Nasdaq National Market was $22.91 per share. According to our transfer agent, as of March 15, 2006, there were approximately 137 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 | |
| |
| |
| |
| | | | | |
2005 | | | NIS155.30 | | | NIS95.79 | |
2004 | | | NIS194.60 | | | NIS123.90 | |
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| | | | | | | |
Quarterly Highs and Lows | | | High | | | Low | |
| | |
| | |
| |
|
1st quarter 2006 | | | NIS132.60 | | | NIS101.60 | |
|
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 | |
|
1st quarter 2004 | | | NIS155.90 | | | NIS140.40 | |
2nd quarter 2004 | | | NIS181.00 | | | NIS140.30 | |
3rd quarter 2004 | | | NIS175.40 | | | NIS141.10 | |
4th quarter 2004 | | | NIS194.60 | | | NIS123.90 | |
| | | | | | | |
Most Recent Six Months | | | High | | | Low | |
| | |
| | |
| |
| | | | | | | |
March 2006 | | | NIS110.90 | | | NIS101.60 | |
February 2006 | | | NIS124.30 | | | NIS109.40 | |
January 2006 | | | NIS132.60 | | | NIS122.20 | |
December 2005 | | | NIS126.00 | | | NIS110.20 | |
November 2005 | | | NIS117.70 | | | NIS104.10 | |
October 2005 | | | NIS109.70 | | | NIS95.79 | |
The average exchange ratio of NIS to U.S. dollar in 2005 was NIS 4.4878 to $1.0.
B. PLAN OF DISTRIBUTION
Not applicable.
C. MARKETS
Our ordinary shares have traded publicly on the Nasdaq National 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 National 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
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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 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 33 1¤3% 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.”
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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 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 observance of 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, all resolutions of the shareholders require a simple majority. A resolution for the voluntary winding up of the company requires the 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
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tender offer if as a result of the acquisition the purchaser would become a 45% or greater shareholder of the company, if 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 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.
C. MATERIAL CONTRACTS
Summaries of the following material 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.” |
Agreement Rafael Armament Development Authority | | Item 7: “Major Shareholder and Related Party Transactions.” |
Investor Rights Agreement | | Item 7: “Major Shareholder and Related Party Transactions.” |
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D. EXCHANGE CONTROLS
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.
E. TAXATION
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 2005, Israeli companies were subject to corporate tax at the rate of 34% of taxable income. This tax rate was reduced to 31% in 2006 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
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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 of 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 dividend 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.
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 the 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
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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:
| | |
| | Royalties to the Chief Scientist |
Manufacturing Volume Outside of Israel | | as a Percentage of Grant |
| |
|
| | |
less than 50% | | 120% |
between 50% and less than 90% | | 150% |
90% and more | | 300% |
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
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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:
| | |
| • | deduction of purchases of know-how and patents over an eight-year period for tax purposes; and |
| | |
| • | 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.
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 2005 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.
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:
| | |
| • | 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. |
| | |
| • | 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. |
| | |
| • | Depreciation deductions on fixed assets and losses carried forward are adjusted for inflation based on the increase in the consumer price index. |
| | |
| • | 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. |
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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.
Under new legislation, which became effective on January 1, 2003, 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 National 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 purchase 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 National 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 2005 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% 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 National 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, or not, therein. In June 2003, the Israeli statute imposing the stamp duty was amended in a manner believed by many to significantly expand the tax basis. Following this amendment, the Israeli Tax Authority has increased enforcement of this statute. To date, we have not received a demand for payment of stamp duty following this amendment. We currently do not believe that any stamp duty that may be imposed on us as a result of this amendment would materially adversely affect our financial condition. The Israeli legislator 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
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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.
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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, 2008 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 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 NIS, any such dividend or distribution will be included in your gross income in an amount equal to the U.S. dollar value of NIS on the date of receipt. You will have a tax basis for United States federal income tax purposes in the NIS received equal to that dollar value, and any subsequent gain or loss in respect of the NIS 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
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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, 2005. Our status in future years will depend on our assets and activities in those years, although you will be treated as continuing to 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 U.S. Securities Exchange Act of 1934, as amended (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 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 will be 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 NIS 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
None.
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
Not applicable.
ITEM 15. 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.
In connection with the preparation and audit of our 2004 financial statements, we discovered that a former employee of our U.S. subsidiary had misappropriated approximately $0.4 million during the period 2002 through 2004, with the bulk of the misappropriation taking place in 2004. See Part A “Operating Results” under Item 5 “Operating and Financial Review and Prospectus.” We undertook an investigation, which was completed in February 2005, with the assistance of independent legal counsel and forensic accountants. The investigators concluded that insufficient supervision and a lack of segregation of duties regarding cash and cash processing at our U.S. subsidiary may have facilitated the misappropriation. Between March and September 2005, we recovered an aggregate of $0.4 million from this former employee.
We have taken a number of remedial actions to address the internal control deficiencies that contributed to the misappropriation. First, we have replaced the entire financial management team of our U.S. subsidiary. Second, we have instituted a whistleblower policy, in accordance with legal requirements that became applicable to us in July 2005, to enable employees to report anonymously and confidentially any accounting, financial and other events of which they believe management should be aware. Third, we implemented new signature rights policy requiring dual signatures on all company checks. Finally, we have instituted a policy of conducting background checks on employees engaged in financial, accounting and other specified positions.
In June 2005, the financial management team of our U.S. subsidiary advised us that our U.S. subsidiary has not collected state sales tax on its sales since sales in the United States began in the fourth quarter of 2001. We believe the failure to collect and remit sales tax was a result of a good faith error that sales are exempt since most of the initial sales by our U.S. subsidiary were to non-profit hospitals, which are exempt from sales tax in most states. Following our discovery of the matter we contacted our customers in order to collect the required sales tax and remit it to the relevant states. In addition, we immediately took remedial measures to ensure that all invoices are issued with the applicable sales tax. We also included in our financial statements for the year ended December 31, 2005 a provision of $1.8 million, before tax effect, for possible uncollectible sales tax due from our customers related to all affected periods (2001 through the second quarter of 2005) plus interest and penalties. We believe this provision is adequate to cover any obligations we may have as a result of this matter.
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Other than as described above, during the period covered by this annual report, there have not been any changes in our internal control over financial reporting that have materially affected, or that are reasonably likely to materially affect, our internal control over financial reporting.
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 National Marketing 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 the total remuneration that was paid by us and our subsidiaries to our independent accountants, KPMG, in each of our previous two fiscal years:
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| | | 2004 | | 2005 | |
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| Audit and audit-related fees | | $ | 249 | | $ | 710 | |
| Tax fees | | | 64 | | | 114 | |
| All other fees | | | 146 | | | 92 | |
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|
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|
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| Total | | $ | 459 | | $ | 916 | |
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| (1) | “Audit-related fees” includes fees related to our audit procedures and the audit procedures of all of our subsidiaries. |
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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, compliance with Sarbanes-Oxley Act requirements and advice regarding U.S. sales tax. |
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-29.
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 | | Investor Rights Agreement, dated as of September 15, 2000, by and among the Registrant and the parties thereto, incorporated by reference to Exhibit 10.10 of the Registration Statement on Form F-1 (File No. 333-68142) filed with the Commission on August 22, 2001. |
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4.2 | | Amendment No. 1 to Investor Rights Agreement, dated as of July 16, 2001, by and among the Registrant and the parties thereto, incorporated by reference to Exhibit 10.17 of the Registration Statement on Form F-1 (File No. 333-68142) filed with the Commission on August 22, 2001. |
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4.3 | | 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 | | 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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4.5 | | 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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4.6 | | Lease Agreement, dated as of December 15, 1999, by and between B. A. T. M. Lands Ltd. and the Registrant, incorporated by reference to Exhibit 10.16 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 | | Purchase and Sale Contract, dated as of August 25, 2001, by and between Pemstar, Inc. and the Registrant, incorporated by reference to Exhibit 10.18 of the Registration Statement on Form F-1 (File No. 333-68142) filed with the Commission on August 22, 2001. |
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4.8 | | 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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4.9 | | 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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4.10 | | 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 |
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| | 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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4.11 | | 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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4.12 | | Addendum to Development and Supply Agreement, dated July 2005, by and between Zarlink Semiconductor AB and the Registrant.† |
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4.13 | | 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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4.14 | | 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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4.15 | | 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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4.16 | | 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. |
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4.17 | | 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. |
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4.18 | | 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. |
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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. |
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9.1 | | Consent of KPMG Somekh Chaikin, independent registered public accountants. |
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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. |
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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.* |
-90-
| |
† | Portions of this exhibit were omitted and have been filed separately with the Secretary of the Securities and 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. |
-91-
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/ Gavriel D. Meron | |
| | |
| | |
| | Name: Gavriel D. Meron | |
| | Title: President and Chief Executive Officer | |
| | | |
| | By: /s/ Yuval Yanai | |
| | |
| | |
| | Name: Yuval Yanai | |
| | Title: Chief Financial Officer | |
Date: April 6, 2006
ANNUAL REPORT ON FORM 20-F
INDEX OF EXIBITS
| | |
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 | | Investor Rights Agreement, dated as of September 15, 2000, by and among the Registrant and the parties thereto, incorporated by reference to Exhibit 10.10 of the Registration Statement on Form F-1 (File No. 333-68142) filed with the Commission on August 22, 2001. |
| | |
4.2 | | Amendment No. 1 to Investor Rights Agreement, dated as of July 16, 2001, by and among the Registrant and the parties thereto, incorporated by reference to Exhibit 10.17 of the Registration Statement on Form F-1 (File No. 333-68142) filed with the Commission on August 22, 2001. |
| | |
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 | | 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. |
| | |
4.5 | | 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. |
| | |
4.6 | | Lease Agreement, dated as of December 15, 1999, by and between B. A. T. M. Lands Ltd. and the Registrant, incorporated by reference to Exhibit 10.16 of the Registration Statement on Form F-1 (File No. 333-68142) filed with the Commission on August 22, 2001. |
| | |
4.7 | | Purchase and Sale Contract, dated as of August 25, 2001, by and between Pemstar, Inc. and the Registrant, incorporated by reference to Exhibit 10.18 of the Registration Statement on Form F-1 (File No. 333-68142) filed with the Commission on August 22, 2001. |
| | |
4.8 | | 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. |
| | |
4.9 | | 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. |
| | |
4.10 | | 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. |
| | |
4.11 | | 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.† |
| | |
4.12 | | Addendum to Development and Supply Agreement, dated July 2005, by and between Zarlink Semiconductor AB and the Registrant.† |
| | |
4.13 | | 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.† |
| | |
4.14 | | 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.† |
| | |
4.15 | | 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.† |
| | |
4.16 | | 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. |
| | |
4.17 | | 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. |
| | |
4.18 | | 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. |
| | |
9.1 | | Consent of KPMG Somekh Chaikin, independent registered public accountants. |
| | |
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.* |
| |
† | Portions of this exhibit were omitted and have been filed separately with the Secretary of the Securities and 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 Consolidated 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. and its subsidiaries (the “Company”) as of December 31, 2005 and 2004, 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, 2005. 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 as of December 31, 2005 and 2004, and the consolidated results of its operations and cash flows for each of the years in the three year period ended December 31, 2005, in conformity with U.S. generally accepted accounting principles.
Somekh Chaikin
Certified Public Accountants (Israel)
Member Firm of KPMG International
Tel - Aviv, Israel
February 7, 2006
F-2
Given Imaging Ltd. and its Consolidated Subsidiaries
Consolidated Balance Sheets
(In thousands except share data)
| | | | | | | | | |
| | | | December 31 | |
| | | |
| |
| | Note | | 2004 | | 2005 | |
| |
| |
| |
| |
|
Assets | | | | | | | | | |
| | | | | | | | | |
Current assets | | | | | | | | | |
Cash and cash equivalents | | 1D; 2 | | $ | 80,861 | | $ | 65,356 | |
Accounts receivable: | | | | | | | | | |
Trade (net of provision for doubtful debts of $115 and $431 as of December 31, 2004 and 2005, respectively) | | 1E | | | 12,261 | | | 18,325 | |
Other | | 3 | | | 1,271 | | | 6,552 | |
Inventories | | 1F; 4 | | | 13,794 | | | 16,172 | |
Advances to suppliers | | | | | 555 | | | 332 | |
Deferred taxes | | 1P; 14C | | | 737 | | | 1,219 | |
Prepaid expenses | | | | | 954 | | | 1,020 | |
| | | |
|
| |
|
| |
| | | | | | | | | |
Total current assets | | | | | 110,433 | | | 108,976 | |
| | | | | | | | | |
Assets held for employee severance payments | | 1G; 10 | | | 1,339 | | | 1,690 | |
| | | | | | | | | |
Marketable securities | | 1H; 5 | | | — | | | 21,664 | |
| | | | | | | | | |
| | | | | | | | | |
Fixed assets, at cost, less accumulated depreciation | | 1I; 6 | | | 9,862 | | | 13,862 | |
| | | | | | | | | |
| | | | | | | | | |
Other assets, at cost, less accumulated amortization | | 1J; 7 | | | 2,590 | | | 2,918 | |
| | | |
|
| |
|
| |
| | | | | | | | | |
Total Assets | | | | $ | 124,224 | | $ | 149,110 | |
| | | |
|
| |
|
| |
The accompanying notes are an integral part of these consolidated financial statements.
F-3
Given Imaging Ltd. and its Consolidated Subsidiaries
Consolidated Balance Sheets
(In thousands except share data)
| | | | | | | | | |
| | | | December 31 | |
| | | |
| |
| | Note | | 2004 | | 2005 | |
| |
| |
| |
| |
|
Liabilities and shareholders’ equity | | | | | | | | | |
| | | | | | | | | |
Current liabilities | | | | | | | | | |
| | | | | | | | | |
Current installments of obligation under capital lease | | 8B | | $ | 11 | | $ | 11 | |
Accounts payable: | | | | | | | | | |
Trade | | | | | 5,147 | | | 5,529 | |
Other | | 9 | | | 8,678 | | | 13,886 | |
Deferred income | | 1N; 8C | | | 3,610 | | | 3,333 | |
| | | |
|
| |
|
| |
| | | | | | | | | |
Total current liabilities | | | | | 17,446 | | | 22,759 | |
| | | |
|
| |
|
| |
| | | | | | | | | |
Long-term liabilities | | | | | | | | | |
Deferred income | | 8C | | | 9,340 | | | 22,172 | |
Obligation under capital lease | | 8B | | | 48 | | | 34 | |
Liability in respect of employee severance payments | | 10 | | | 1,596 | | | 2,040 | |
| | | |
|
| |
|
| |
| | | | | | | | | |
Total long-term liabilities | | | | | 10,984 | | | 24,246 | |
| | | |
|
| |
|
| |
| | | | | | | | | |
Total liabilities | | | | | 28,430 | | | 47,005 | |
| | | |
|
| |
|
| |
| | | | | | | | | |
Commitments and contingencies | | 8 | | | | | | | |
| | | | | | | | | |
Minority interest | | | | | 1,177 | | | 61 | |
| | | | | | | | | |
Shareholders’ equity | | | | | | | | | |
Share capital: | | 11 | | | | | | | |
Ordinary Shares, NIS 0.05 par value each (90,000,000 shares authorized as of December 31, 2004 and 2005, 27,621,386 and 27,950,281 shares issued and fully paid as of December 31, 2004 and 2005, respectively) | | | | | 323 | | | 327 | |
Additional paid-in capital | | | | | 147,878 | | | 148,955 | |
Capital reserve | | | | | 2,166 | | | 2,166 | |
Unearned compensation | | | | | (3 | ) | | — | |
Accumulated deficit | | | | | (55,747 | ) | | (49,404 | ) |
| | | |
|
| |
|
| |
Total shareholders’ equity | | | | $ | 94,617 | | | 102,044 | |
| | | |
|
| |
|
| |
| | | | | | | | | |
Total liabilities and shareholders’ equity | | | | $ | 124,224 | | | 149,110 | |
| | | |
|
| |
|
| |
The accompanying notes are an integral part of these consolidated financial statements.
F-4
Given Imaging Ltd. and its Consolidated Subsidiaries
Consolidated Statements of Operations
(In thousands except share and per share data)
| | | | | | | | | | | | |
| | | | Year ended December 31, | |
| | | |
| |
| | Note | | 2003 | | 2004 | | 2005 | |
| |
| |
| |
| |
| |
|
Revenues | | 1N; 12 | | $ | 40,539 | | $ | 65,020 | | $ | 86,776 | |
Cost of revenues | | | | | 13,551 | | | 17,734 | | | 22,070 | |
| | | |
|
| |
|
| |
|
| |
| | | | | | | | | | | | |
Gross profit | | | | | 26,988 | | | 47,286 | | | 64,706 | |
| | | |
|
| |
|
| |
|
| |
| | | | | | | | | | | | |
Operating expenses | | | | | | | | | | | | |
Research and development, gross | | 1Q | | | (7,037 | ) | | (7,363 | ) | | (8,833 | ) |
Royalty bearing participation | | 1O | | | 1,303 | | | 1,140 | | | 1,244 | |
| | | |
|
| |
|
| |
|
| |
| | | | | | | | | | | | |
Research and development, net | | | | | (5,734 | ) | | (6,223 | ) | | (7,589 | ) |
| | | | | | | | | | | | |
Sales and marketing | | | | | (26,804 | ) | | (33,652 | ) | | (43,281 | ) |
General and administrative | | | | | (5,312 | ) | | (6,916 | ) | | (9,657 | ) |
| | | |
|
| |
|
| |
|
| |
| | | | | | | | | | | | |
Total operating expenses | | | | | (37,850 | ) | | (46,791 | ) | | (60,527 | ) |
| | | |
|
| |
|
| |
|
| |
| | | | | | | | | | | | |
Operating profit (loss) | | | | | (10,862 | ) | | 495 | | | 4,179 | |
| | | | | | | | | | | | |
Financing income, net | | 13 | | | 995 | | | 956 | | | 762 | |
| | | |
|
| |
|
| |
|
| |
| | | | | | | | | | | | |
Profit (loss) before taxes on income | | | | | (9,867 | ) | | 1,451 | | | 4,941 | |
| | | | | | | | | | | | |
Taxes on income | | 1P, 14 | | | — | | | 690 | | | 286 | |
| | | |
|
| |
|
| |
|
| |
| | | | | | | | | | | | |
Profit (loss) before minority share | | | | | (9,867 | ) | | 2,141 | | | 5,227 | |
| | | | | | | | | | | | |
Minority share in losses of subsidiary | | | | | 258 | | | 747 | | | 1,116 | |
| | | |
|
| |
|
| |
|
| |
| | | | | | | | | | | | |
Net profit (loss) | | | | $ | (9,609 | ) | $ | 2,888 | | $ | 6,343 | |
| | | |
|
| |
|
| |
|
| |
| | | | | | | | | | | | |
Profit (loss) per share | | | | | | | | | | | | |
| | | | | | | | | | | | |
Basic profit (loss) per Ordinary Share | | 1L | | $ | (0.38 | ) | $ | 0.11 | | $ | 0.23 | |
| | | |
|
| |
|
| |
|
| |
| | | | | | | | | | | | |
Diluted profit (loss) per Ordinary Share | | | | $ | (0.38 | ) | $ | 0.10 | | $ | 0.21 | |
| | | |
|
| |
|
| |
|
| |
| | | | | | | | | | | | |
Weighted average number of Ordinary Shares used to compute basic profit (loss) per Ordinary Share | | 1L | | | 25,493,073 | | | 26,633,964 | | | 27,781,223 | |
| | | |
|
| |
|
| |
|
| |
| | | | | | | | | | | | |
Weighted average number of Ordinary Shares used to compute diluted profit (loss) per Ordinary Share | | 1L | | | 25,493,073 | | | 29,353,448 | | | 29,695,164 | |
| | | |
|
| |
|
| |
|
| |
The accompanying notes are an integral part of these consolidated financial statements.
F-5
Given Imaging Ltd. and its Consolidated Subsidiaries
Consolidated Statements of Changes in Shareholders’ Equity
(In thousands except share data)
| | | | | | | | | | | | | | | | | | | | | | |
| | | | Additional | | | | | | | | | |
| | | | Paid-In | | Capital | | Unearned | | Accumulated | | | |
| | Ordinary shares | | Capital | | Reserve | | Compensation | | Deficit | | Total | |
| |
| |
| |
| |
| |
| |
| |
| | Shares | | Amount | | | | | | | | | | | | | | | | |
| |
| |
| | | | | | | | | | | | | | | | |
|
Balance as of December 31, 2002 | | | 25,373,513 | | $ | 298 | | $ | 100,262 | | $ | 2,166 | | $ | (123 | ) | $ | (49,026 | ) | $ | 53,577 | |
| | | | | | | | | | | | | | | | | | | | | | |
Changes during the year 2003: | | | | | | | | | | | | | | | | | | | | | | |
Exercise of stock options | | | 275,675 | | | 3 | | | 722 | | | — | | | — | | | — | | | 725 | |
Forfeiture of stock options | | | — | | | — | | | (78 | ) | | — | | | 78 | | | — | | | — | |
Acceleration of vesting | | | — | | | — | | | 31 | | | — | | | — | | | — | | | 31 | |
Non-employees’ stock options | | | — | | | — | | | 59 | | | — | | | — | | | — | | | 59 | |
Amortization of unearned compensation | | | — | | | — | | | — | | | — | | | 15 | | | — | | | 15 | |
Net loss | | | — | | | — | | | — | | | — | | | — | | | (9,609 | ) | | (9,609 | ) |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| | | | | | | | | | | | | | | | | | | | | | |
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 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
The accompanying notes are an integral part of these consolidated financial statements.
F-6
Given Imaging Ltd. and its Consolidated Subsidiaries
Consolidated Statements of Cash Flows
(In thousands)
| | | | | | | | | | |
| | Year ended December 31, | |
| |
| |
| | 2003 | | 2004 | | 2005 | |
| |
| |
| |
| |
|
Cash flows from operating activities: | | | | | | | | | | |
Net profit (loss) | | $ | (9,609 | ) | $ | 2,888 | | $ | 6,343 | |
| | | | | | | | | | |
Adjustments required to reconcile net profit (loss) to net cash provided by (used in) operating activities: | | | | | | | | | | |
| | | | | | | | | | |
Minority share in losses of subsidiary | | | (258 | ) | | (747 | ) | | (1,116 | ) |
Depreciation and amortization | | | 3,030 | | | 3,147 | | | 3,596 | |
Deferred taxes | | | — | | | (737 | ) | | (482 | ) |
Employees’ stock option compensation | | | 46 | | | 16 | | | 3 | |
Non-employees’ stock option compensation | | | 59 | | | 62 | | | — | |
Other | | | 9 | | | 48 | | | 98 | |
Increase in accounts receivable – trade | | | (80 | ) | | (5,316 | ) | | (6,064 | ) |
Decrease (increase) in other accounts receivable | | | 1,018 | | | (804 | ) | | (4,993 | ) |
Decrease (increase) in prepaid expenses | | | (80 | ) | | 360 | | | (66 | ) |
Decrease (increase) in advances to suppliers | | | (23 | ) | | (508 | ) | | 223 | |
Decrease (increase) in inventories | | | 1,860 | | | (5,648 | ) | | (2,378 | ) |
Increase (decrease) in accounts payable | | | (4,708 | ) | | 7,107 | | | 5,769 | |
Increase in deferred income | | | 223 | | | 12,000 | | | 12,555 | |
Decrease in payable to related parties | | | (35 | ) | | — | | | — | |
| |
|
| |
|
| |
|
| |
Net cash provided by (used in) operating activities | | $ | (8,548 | ) | $ | 11,868 | | $ | 13,488 | |
| |
|
| |
|
| |
|
| |
| | | | | | | | | | |
Cash flows from investing activities: | | | | | | | | | | |
Purchase of fixed assets and other assets | | $ | (2,550 | ) | $ | (3,245 | ) | $ | (7,948 | ) |
Proceeds from sales of fixed assets | | | 60 | | | 57 | | | — | |
Deposits, net | | | (157 | ) | | (42 | ) | | (16 | ) |
Acquisition of marketable securities | | | — | | | — | | | (21,919 | ) |
| |
|
| |
|
| |
|
| |
Net cash used in investing activities | | $ | (2,647 | ) | $ | (3,230 | ) | $ | (29,883 | ) |
| |
|
| |
|
| |
|
| |
| | | | | | | | | | |
Cash flows from financing activities: | | | | | | | | | | |
Principal payments on capital lease obligation | | $ | (72 | ) | $ | (37 | ) | $ | (12 | ) |
Proceeds from the issuance of Ordinary Shares | | | 725 | | | 46,853 | | | 1,081 | |
| |
|
| |
|
| |
|
| |
Net cash provided by financing activities | | $ | 653 | | $ | 46,816 | | $ | 1,069 | |
| |
|
| |
|
| |
|
| |
| | | | | | | | | | |
Effect of exchange rate changes on cash | | $ | 117 | | $ | 40 | | $ | (179 | ) |
| |
|
| |
|
| |
|
| |
| | | | | | | | | | |
Increase (decrease) in cash and cash equivalents | | $ | (10,425 | ) | $ | 55,494 | | $ | (15,505 | ) |
Cash and cash equivalents at beginning of year | | | 35,792 | | | 25,367 | | | 80,861 | |
| |
|
| |
|
| |
|
| |
Cash and cash equivalents at end of year | | $ | 25,367 | | $ | 80,861 | | $ | 65,356 | |
| |
|
| |
|
| |
|
| |
Supplementary cash flow information
| | | | | | | | | | |
| | Year ended December 31, | |
| |
| |
| | 2003 | | 2004 | | 2005 | |
| |
| |
| |
| |
Interest paid | | $ | 3 | | $ | — | | $ | — | |
Income taxes paid | | $ | 68 | | $ | 107 | | $ | 163 | |
| |
|
| |
|
| |
|
| |
The accompanying notes are an integral part of these consolidated financial statements.
F-7
Given Imaging Ltd. and its Consolidated 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 PillCam™ capsule, that 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 U.S. 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). As of December 31, 2005, the Company had an installed base of more than 2,860 Given Systems and had sold approximately 307,000 PillCam SB capsules in over 50 countries worldwide. |
| |
| 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 the technological quality, regulatory approvals and sufficient reimbursement for its products. |
| |
| B. | Basis of presentation |
| | |
| The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries in the USA, 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 intercompany balances and transactions have been eliminated in consolidation. |
| |
| All the subsidiaries were established for the purpose of marketing and selling the Given System. |
F-8
Given Imaging Ltd. and its Consolidated 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 accounting records of the Company are maintained in New Israeli Shekels (“NIS”) and U.S. dollars. 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 reporting currency using current exchange rates. Gains and losses from the translation of foreign currency balances are recorded in the statement of operations. |
| |
| 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 debts |
| | |
| The provision for doubtful debts is calculated on the basis of specific identification of balances, the collection of which, in management’s opinion, is doubtful and a general provision based on the Company’s experience. In determining the adequacy of the provision, management bases its opinion, inter alia, 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 change in the provision during the year: |
| | | | | | | | |
| | | Year ended December 31, | |
| | |
| |
| | | 2004 | | 2005 | |
| | |
| |
| |
| | | | | | | | |
| Opening balance | | $ | 115 | | $ | 115 | |
| Additions during the year | | | — | | | 316 | |
| | |
|
| |
|
| |
| | | | | | | | |
| Closing balance | | $ | 115 | | $ | 431 | |
| | |
|
| |
|
| |
| | |
| F. | Inventories |
|
| Inventories are stated at lower of cost or market. Cost is determined using the average cost method for raw materials and finished goods, and on the basis of actual manufacturing costs for work in progress. |
| |
| G. | Assets held for severance benefits |
| | |
| Assets held for employee severance benefits represent contributions to severance pay funds and cash surrender value of life insurance policies that are recorded at their current redemption value. |
F-9
Given Imaging Ltd. and its Consolidated 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 No. 115 “Accounting for Certain Investments in Debt and Equity Securities (“Statement 115”). Marketable securities consist of U.S. Government Bonds which the Company classified, under the guidance of Statement 115, “held-to-maturity”. |
| |
| Held-to-maturity debt securities are securities in which the Company has the ability and intent to hold the security until maturity. |
| |
| Held-to-maturity debt securities 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. |
| |
| 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: |
| | | | | |
| | | % | |
| | |
| |
| | | | | |
| Office furniture, leasehold improvements, laboratory equipment and other equipment | | 6 - 15 | | |
| Computers, software and related equipment | | 20 - 33 | | |
| Machinery and equipment | | 15 | | |
| Motor vehicles | | 15 | | |
| | |
| Motor vehicles purchased under capital lease arrangements are recorded at the present value of the minimum lease payments. Such assets and leasehold improvements are amortized using the straight-line method over the shorter of the lease term or estimated useful life of the asset. |
| | |
| J. | Other assets |
| | |
| 1. | 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 Statement of Financial Accounting Standards 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 three years. |
| | |
| 2. | Legal expenses related to patent and trademark registration have been capitalized and depreciated over the remaining life of the asset, which is generally eight years. |
F-10
Given Imaging Ltd. and its Consolidated 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 (cont’d) |
| | |
| 3. | 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 |
| |
| The Company has adopted Financial Accounting Standards Board’s Statement No. 123, “Accounting for Stock-Based Compensation” (“Statement 123”) which permits 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 allows 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 has 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 Statement 123, as amended by Statement 148, “Accounting for Stock-Based Compensation - Transition and Disclosure, an amendment of Statement No. 123”. |
| |
| As such, the Company computes and records compensation expense for grants whose terms are fixed with respect to the number of shares and option price only if the market price on the date of grant exceeds the exercise price of the stock option. The compensation cost for the fixed plans is recorded over the period the employee performs the service to which the stock compensation relates. |
F-11
Given Imaging Ltd. and its Consolidated 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 |
| |
| The Company applies the fair value-based method of accounting set forth in Statement 123 and 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” to account for stock based compensation to non-employees. 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 since the options are fully vested. |
| |
| The following table shows the effect on net profit (loss) and profit (loss) per Ordinary Share if the Company had applied the fair value recognition provisions of Statement 123: |
| | | | | | | | | | | | |
| | | Year ended December 31, | |
| | |
| |
| | | 2003 | | 2004 | | 2005 | |
| | |
| |
| |
| |
| | | | | | | | |
| Net profit (loss) as reported | | $ | (9,609 | ) | $ | 2,888 | | $ | 6,343 | |
| - | Compensation expenses according to APB 25 included in reported net profit (loss) | | | 46 | | | 16 | | | 3 | |
| - | Compensation expenses according to Statement 123 | | | (7,012 | ) | | (13,432 | ) | | (10,327 | ) |
| | |
|
| |
|
| |
|
| |
| Pro forma net loss | | $ | (16,575 | ) | $ | (10,528 | ) | $ | (3,981 | ) |
| | |
|
| |
|
| |
|
| |
| | | | | | | | | | | |
| Basic profit (loss) per Ordinary Share: | | | | | | | | | | |
| As reported | | $ | (0.38 | ) | $ | 0.11 | | $ | 0.23 | |
| | |
|
| |
|
| |
|
| |
| Pro forma | | $ | (0.65 | ) | $ | (0.39 | ) | $ | (0.14 | ) |
| | |
|
| |
|
| |
|
| |
| | | | | | | | | | | |
| Diluted profit (loss) per ordinary share: | | | | | | | | | | |
| As reported | | $ | (0.38 | ) | $ | 0.10 | | $ | 0.21 | |
| | |
|
| |
|
| |
|
| |
| Pro forma | | $ | (0.65 | ) | $ | (0.39 | ) | $ | (0.14 | ) |
| | |
|
| |
|
| |
|
| |
| Number of options excluded from diluted earning per share calculation because of anti-dilutive effect | | | 3,881,396 | | | 165,500 | | | 2,448,114 | |
| | |
|
| |
|
| |
|
| |
| | |
| L. | Profit (loss) per Ordinary Share |
| | |
| Basic and diluted profit (loss) per Ordinary Share is presented in conformity with Statement of Financial Accounting Standard 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 such as options had been exercised. |
F-12
Given Imaging Ltd. and its Consolidated 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)
| | |
| L. | Profit (loss) per Ordinary Share (cont’d) |
| | |
| 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, | |
| | |
| |
| | | 2003 | | 2004 | | 2005 | |
| | |
| |
| |
| |
| | | | | | | | |
| Net profit (loss) attributable to Ordinary Shares | | $ | (9,609 | ) | $ | 2,888 | | $ | 6,343 | |
| | |
|
| |
|
| |
|
| |
| | | | | | | | | | | |
| Weighted average number of Ordinary Shares outstanding used in basic profit (loss) per Ordinary Share calculation | | | 25,493,073 | | | 26,633,964 | | | 27,781,223 | |
| | | | | | | | | | | |
| 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 | | | 25,493,073 | | | 29,353,448 | | | 29,695,164 | |
| | |
|
| |
|
| |
|
| |
| | | | | | | | | | | |
| Basic profit (loss) per Ordinary Share | | $ | (0.38 | ) | $ | 0.11 | | $ | 0.23 | |
| | |
|
| |
|
| |
|
| |
| | | | | | | | | | | |
| Diluted profit (loss) per Ordinary Share | | $ | (0.38 | ) | $ | 0.10 | | $ | 0.21 | |
| | |
|
| |
|
| |
|
| |
| | |
| M. | Use of estimates |
| | |
| Management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these consolidated financial statements in accordance with accounting principles generally accepted in the United States of America. 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 probable, 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 from PCS 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. |
| |
| 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 classified as cost of revenues. |
F-13
Given Imaging Ltd. and its Consolidated 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)
| | |
| P. | Taxes on income |
| | |
| The Company accounts for income taxes under Statement of Financial Accounting Standards 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. |
| |
| R. | Concentration of credit risk |
| | |
| Financial instruments that may subject the Company to significant concentrations of credit risk consist principally of cash and cash equivalents and trade accounts receivable. |
| Cash and cash equivalents are deposited with major financial institutions in Europe, the United States, Japan 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 on sales to distributors. |
| |
| S. | Recent accounting pronouncements |
| | |
| The Company examined the recently issued accounting standards Statement No. 151, Statement No. 152, Statement No. 153, Statement No. 154 and EITF 03-1 and believes that the adoption of these standards will not have a significant impact on the Company’s financial position or results of operations. |
| |
| In December 2004, the FASB issued Statement No. 123 (revised 2004), “Share-Based Payment” (“Statement 123R”), which requires all companies to measure compensation cost for all share-based payments (including employee stock options) at fair value. Statement 123R provides two alternative adoption methods. The first method is a modified prospective transition method whereby a company would recognize share-based employee costs from the beginning of the fiscal period in which the recognition provisions are first applied as if the fair-value-based accounting method had been used to account for all employee awards granted, modified, or settled after the effective date and to any awards that were not fully vested as of the effective date. Measurement and attribution of compensation cost for awards that are unvested as of the effective date of Statement 123R would be based on the same estimate of the grant-date fair value and the same attribution method used previously under Statement 123. The second adoption method is a modified retrospective transition method whereby a company would |
F-14
Given Imaging Ltd. and its Consolidated 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)
| | |
| S. | Recent accounting pronouncements (cont’d) |
| | |
| recognize employee compensation cost for periods presented prior to the adoption of Statement 123R in accordance with the original provisions of Statement 123; that is, an entity would recognize employee compensation costs in the amounts reported in the pro forma disclosures provided in accordance with Statement 123. A company would not be permitted to make any changes to those amounts upon adoption of Statement 123R unless those changes represent a correction of an error. For periods after the date of adoption of Statement 123R, the modified prospective transition method described above would be applied. |
| |
| Statement 123R does not change the accounting guidance for share-based payment transaction with parties other than employees provided in Statement 123 as originally issued and 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”. |
| | |
| Statement 123R is effective for public entities that do not file as small business issuers as of the beginning of the first annual reporting period that begins after June 15, 2005. Accordingly, the company is required to adopt Statement 123R on January 1, 2006. The Company currently expects to adopt Statement 123R in the quarter ending March 31, 2006, using the modified prospective method. Based upon its projection of unvested stock options at the implementation date, the adoption of Statement 123R will result in the recognition of $5.7 million additional compensation expense in 2006. Future compensation expenses will also be impacted by various factors, including the number of options granted and their related fair value at the date of grant. |
Note 2 - Cash and Cash Equivalents
| | | | | | | | | | | |
| | | Interest rate
as of
December 31 | | December 31 | |
| | |
| |
| |
| | | 2005 | | 2004 | | 2005 | |
| | |
| |
| |
| |
| | | % | | | | | |
| | |
| | | | | |
| | | | | | | | |
| Denominated in U.S. dollars | | | 4.2 - 4.27 | | $ | 72,650 | | $ | 57,912 | |
| Denominated in New Israeli Shekels | | | 4.23 - 4.28 | | | 2,538 | | | 2,855 | |
| Denominated in Euro | | | 2.12 | | | 2,508 | | | 3,396 | |
| Denominated in Australian dollars | | | | | | 648 | | | 732 | |
| Denominated in Japanese Yen | | | | | | 2,517 | | | 461 | |
| | | | | |
|
| |
|
| |
| | | | | | | | | | | |
| | | | | | $ | 80,861 | | $ | 65,356 | |
| | | | | |
|
| |
|
| |
F-15
Given Imaging Ltd. and its Consolidated Subsidiaries
Notes To The Consolidated Financial Statements
(In thousands except share and per share data)
Note 3 - Accounts Receivable - Other
| | | | | | | | |
| | | December 31 | |
| | |
| |
| | | 2004 | | 2005 | |
| | |
| |
| |
| | | | | | |
| Government institutions | | $ | 1,204 | | $ | 921 | |
| InScope (Note 8C) | | | — | | | 5,000 | |
| Current maturities of marketable securities | | | — | | | 288 | |
| Other | | | 67 | | | 343 | |
| | |
|
| |
|
| |
|
| | | $ | 1,271 | | $ | 6,552 | |
| | |
|
| |
|
| |
Note 4 - Inventories
| | | | | | | | |
| | | December 31 | |
| | |
| |
| | | 2004 | | 2005 | |
| | |
| |
| |
| | | | | | |
| Raw materials and components | | $ | 5,058 | | $ | 7,399 | |
| Work in progress | | | 3,891 | | | 3,251 | |
| Finished goods | | | 4,845 | | | 5,522 | |
| | |
|
| |
|
| |
|
| | | $ | 13,794 | | $ | 16,172 | |
| | |
|
| |
|
| |
Note 5 - Marketable Securities
| |
| As of December 31, 2005, marketable securities consist of U.S. Government Bonds which the Company classified as “held-to-maturity” (hereinafter – the Bonds). |
| |
| The amortized cost, gross unrealized gains, gross unrealized losses and fair value of the Bonds by major interest type were as follows: |
| | | | | | | | | | | |
| | | 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 | |
| | |
|
| |
|
| |
|
| |
Maturities of the Bonds were as follows at December 31, 2005
| | | | | | | | |
| | | 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 | |
| | |
|
| |
|
| |
F-16
Given Imaging Ltd. and its Consolidated 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 | |
| | |
| |
| | | 2004 | | 2005 | |
| | |
| |
| |
| | | | | | |
| Computers and software | | $ | 3,988 | | $ | 4,942 | |
| Instruments and laboratory equipment | | | 587 | | | 682 | |
| Leasehold improvements | | | 1,554 | | | 3,847 | |
| Motor vehicles | | | 55 | | | 55 | |
| Machinery and equipment | | | 10,167 | | | 12,702 | |
| Communication equipment | | | 375 | | | 388 | |
| Office furniture and equipment | | | 927 | | | 1,273 | |
| | |
|
| |
|
| |
| | | | | | | | |
| Fixed assets | | | 17,653 | | | 23,889 | |
| | | | | | | | |
| Accumulated depreciation | | | (7,791 | ) | | (10,027 | ) |
| | |
|
| |
|
| |
|
| Fixed assets less accumulated depreciation | | $ | 9,862 | | $ | 13,862 | |
| | |
|
| |
|
| |
| |
| Depreciation expense for the years ended December 31, 2003, 2004 and 2005 are $2,475, $2,561 and $2,936, respectively. |
Note 7 - Other Assets, at Cost, Less Accumulated Amortization
| | | | | | | | |
| | | December 31 | |
| | |
| |
| | | 2004 | | 2005 | |
| | |
| |
| |
| | | | | | |
| Software development costs | | $ | 647 | | $ | 647 | |
| Patents and trademarks | | | 2,485 | | | 3,425 | |
| Web site application and infrastructure | | | 823 | | | 895 | |
| Deposits | | | 425 | | | 401 | |
| | |
|
| |
|
| |
| | | | | | | | |
| Other assets | | | 4,380 | | | 5,368 | |
| | | | | | | | |
| Accumulated amortization | | | (1,790 | ) | | (2,450 | ) |
| | |
|
| |
|
| |
| | | | | | | | |
| Other assets, net | | $ | 2,590 | | $ | 2,918 | |
| | |
|
| |
|
| |
| |
| Amortization expense for the years ended December 31, 2003, 2004 and 2005 are $555, $586 and $660, respectively. |
F-17
Given Imaging Ltd. and its Consolidated 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. The grants are deducted from 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. The Company received from the OCS office a total cumulative amount of $4,884 of which it already repaid $2,102. The total outstanding obligation for royalties, based on royalty-bearing government participation totaled approximately $2,782 as of December 31, 2005. Royalties payable to the OCS are classified in cost of revenues. |
| |
| B. | Leases |
| | |
| 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 & development and manufacturing facilities. Under this lease agreement, the Company will pay approximately $1.2 million 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 $700 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 $154 to guarantee their performance under the terms of the lease agreements. |
F-18
Given Imaging Ltd. and its Consolidated 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) |
| | |
| Future minimum capital lease payments and future minimum operating lease payments are: |
| | | | | | | |
| | December 31, 2005 | |
| |
| |
| | Capital lease | | Operating leases | |
| |
| |
| |
2006 | | $ | 11 | | $ | 2,353 | |
2007 | | | 12 | | | 2,271 | |
2008 | | | 18 | | | 1,907 | |
2009 | | | — | | | 1,582 | |
2010 and thereafter | | | — | | | 7,155 | |
| |
|
| |
|
| |
| | $ | 41 | | $ | 15,268 | |
| |
|
| |
|
| |
| | |
| Office and manufacturing rental expense under the lease agreements for the years ended December 31, 2003, 2004 and 2005 are $1,140, $1,999 and $2,353 respectively. |
| |
| C. | Agreement with Ethicon Endo-Surgery |
| | |
| 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 visualization of the esophagus in the United States. Under the terms of the agreement, Inscope is committed to pay the Company up to $50 million, pending achievement of specified milestones by both parties. Out of this amount, the Company received, as of December 31, 2005, milestone payments of $20 million and an additional amount of $5 million for the achievement of a milestone is scheduled to be paid by April 1, 2006 (recorded in receivables). The Company pays InScope a commission of 50% on sales of PillCam ESO capsules and a 10% commission on sales of other parts of the Given System, such as workstations and portable data recorders. 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. InScope began marketing PillCam ESO in the United States in November 2004 following FDA clearance for the PillCam ESO capsule. |
| |
| All milestone payments are being deferred and systematically recognized by the Company as a reduction of commission expense over the 15 years term of the agreement. |
| |
| Milestone payments are included in deferred income in the Consolidated Balance Sheets. |
F-19
Given Imaging Ltd. and its Consolidated Subsidiaries
Notes To The Consolidated Financial Statements
(In thousands except share and per share data)
Note 8 - Commitments and Contingencies (cont’d)
| | |
| D. | Agreement with a Canadian supplier |
| | |
| The Company entered into an agreement with a Canadian company (hereinafter – the supplier) that supplies the transmitter that is integrated into the PillCam capsules. The supplier began supplying the transmitter to the Company in the fourth quarter of 2004, replacing its previous supplier. Under the agreement, the Company has agreed to purchase a minimum quantity of transmitters 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 supplier in respect of the shortfall. After this initial 36-month period, the supplier may terminate the agreement on six months notice if the Company does not order a minimum quantity of transmitters in each subsequent 12-month period, subject to the right of the Company to submit a final purchase order. The agreement also includes non-compete provisions prohibiting the supplier from selling the transmitters 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 transmitter to any potential competitors in the Company’s market. The initial term of the agreement expires in April 2007, subject to earlier termination in specified circumstances, with the option to extend annually thereafter for up to five years. |
| |
| In July 2005, the Company agreed with the supplier that it will develop and manufacture an enhanced version of the transmitter based on specifications that the Company provides, which it expects will replace the existing transmitter in 2007. The minimum purchase requirements will not apply to this enhanced transmitter. 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. |
| |
| E. | Patent reexamination |
| | |
| On December 30, 2003, a Japanese corporation filed a request for ex parte reexamination of some claims in one of the Company’s U.S. patents in the United States Patent and Trademark Office (USPTO). The USPTO issued an office action in the reexamination, to which the Company responded on August 17, 2005. In its reply, the Company defended the validity of the claims. |
| |
| The Company is not accused of infringing a third party’s patent and its ability to sell its products is not contested. |
| |
| F. | Provision for Sales Tax |
| | |
| The financial statements contain a provision of $1.8 million, before tax effect, 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. Under most state laws and the terms of its customer agreements, the Company has a right to collect the tax from its customers. This provision represents the Company’s estimation regarding the amounts it may not be able to collect from its customers and remit to the different jurisdictions, and any interest and penalties the Company may have to pay these jurisdictions for failure to timely remit the sales tax. |
F-20
Given Imaging Ltd. and its Consolidated Subsidiaries
Notes To The Consolidated Financial Statements
(In thousands except share and per share data)
Note 9 - Accounts Payable - Other
| | | | | | | |
| | | December 31 | |
| | |
| |
| | 2004 | | 2005 | |
| |
| |
| |
| | | | | |
Government institutions | | $ | 861 | | $ | 3,693 | |
Liabilities regarding employees | | | 3,795 | | | 4,700 | |
Advances from customers | | | 35 | | | 39 | |
Warranty | | | 39 | | | 71 | |
Royalties to the OCS | | | 246 | | | 306 | |
Commissions | | | 1,923 | | | 2,161 | |
Accrued expenses | | | 1,779 | | | 2,916 | |
| |
|
| |
|
| |
| | $ | 8,678 | | $ | 13,886 | |
| |
|
| |
|
| |
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 payment 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 provision for employee severance payment included in the balance sheet represents the total liability for such severance payment, while the assets held for severance benefits included in the balance sheet represents the Company’s contributions to severance pay funds and 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 a percentage of their salary in any one year, subject to a regulatory limit. The Company makes matching contributions of up to 3% of an employee’s salary. Employees are immediately vested in the Company’s contributions. |
| |
| Expenses recorded in respect of provision for employee severance payments for the years ended December 31, 2003, 2004 and 2005 are $489, $525 and $664, respectively. |
Note 11 - Share Capital
| | |
| A. | Ordinary shares |
| | |
| All of the issued and outstanding Ordinary Shares of the Company are duly authorized, validly 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 of association, its 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. |
F-21
Given Imaging Ltd. and its Consolidated 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 |
| | |
| 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 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. |
| |
| As of December 31, 2005, 4,502,695 Ordinary Shares of the Company, of a par value of NIS 0.05 each, are reserved for the exercise of options under the Plan. |
| |
| 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. |
| |
| Options granted to Israeli optionees are designated as Section 102 options or Section 3(i) options within the meaning of the Israeli Income Tax Ordinance and related regulations as amended under the tax reform and are held in trust on behalf of the Israeli employees, as required by such legislation. |
| |
| Options granted to non-Israeli optionees may or may not contain such terms that will qualify such options as Incentive Stock Options (“ISOs”) within the meaning of Section 422(b) of the United States Internal Revenue Code of 1986, as amended (the “Code”). Options that do not contain terms that will qualify them as ISOs are referred to herein as Non-Qualified Stock Options. Each option agreement is required to state whether such option will or will not be treated as an ISO. No ISO is granted unless such option, when granted, qualifies as an “incentive stock option” under Section 422 of the Code. |
| |
| Compensation expense related to options issued has been calculated based on the difference between the market price of the underlying shares and the option’s exercise price. Prior to the IPO date (October 4, 2001), the market price of the underlying shares was estimated on the basis of the price that was paid by various third parties, as well as increases in value attributable to the achievement of milestones in the Company’s business plan. The share price paid by third parties has been adjusted upwards between the dates of the various private offerings. Following the IPO date, the market price represents the underlying listing price on the Nasdaq National Market. |
| |
| The Company applies APB Opinion No. 25 in respect of options granted to employees and directors, and recorded compensation expense of $46, $16 and $3 in the years ended December 31, 2003, 2004 and 2005, respectively, according to the intrinsic value of the above options. |
| |
| The Company applies Statement 123 in respect of options granted to consultants and recorded compensation expense of $59, $62 and $0 in the years ended December 31, 2003, 2004 and 2005, respectively, related to the above options according to the Black-Scholes model. |
F-22
Given Imaging Ltd. and its Consolidated 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) |
| | |
| The following table illustrates the effect on net profit (loss) and profit (loss) per Ordinary Share if the Company had applied the fair value recognition provisions of Statement 123: |
| | | | | | | | | | | |
| | | Year ended December 31, | |
| | |
| |
| | | 2003 | | 2004 | | 2005 | |
| | |
| |
| |
| |
|
| Net profit (loss) as reported | | $ | (9,609 | ) | $ | 2,888 | | $ | 6,343 | |
| - Compensation expenses according to APB 25 included in the reported net loss | | | 46 | | | 16 | | | 3 | |
| - Compensation expenses according to Statement 123 | | | (7,012 | ) | | (13,432 | ) | | (10,327 | ) |
| | |
|
| |
|
| |
|
| |
| Pro forma net loss | | $ | (16,575 | ) | $ | (10,528 | ) | $ | (3,981 | ) |
| | |
|
| |
|
| |
|
| |
| | | | | | | | | | | |
| Basic profit (loss) per Ordinary Share | | | | | | | | | | |
| As reported | | $ | (0.38 | ) | $ | 0.11 | | $ | 0.23 | |
| | |
|
| |
|
| |
|
| |
| Pro forma | | $ | (0.65 | ) | $ | (0.39 | ) | $ | (0.14 | ) |
| | |
|
| |
|
| |
|
| |
| | | | | | | | | | | |
| Diluted profit (loss) per Ordinary Share | | | | | | | | | | |
| As reported | | $ | (0.38 | ) | $ | 0.10 | | $ | 0.21 | |
| | |
|
| |
|
| |
|
| |
| Pro forma | | $ | (0.65 | ) | $ | (0.39 | ) | $ | (0.14 | ) |
| | |
|
| |
|
| |
|
| |
| | |
| The fair value of each option granted is estimated on the date of grant, using the Black-Scholes model using the following assumptions: |
| | |
| 1. | Dividend yield of zero percent. |
| | |
| 2. | Risk-free average interest rate as follows: |
| | | | | | |
| Year ended December 31, | | | % | |
|
| | |
| |
|
| 2003 | | | 1.5 | |
| 2004 | | | 1.0-2.5 | |
| 2005 | | | 3.0-4.3 | |
| | |
| 3. | Estimated expected lives of seven years as of the date of grant in regard to options granted until the end of 2003. Options granted in 2004 and 2005 have estimated expected lives of five years. |
| | |
| 4. | Expected average volatility of 81%, 74% and 62%, for the years ended December 31, 2003, 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. |
F-23
Given Imaging Ltd. and its Consolidated 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) |
| | |
| | The following table summarizes information relating to stock options for Ordinary Shares outstanding as of the years indicated: |
| | | | | | | | | | | |
| | | | | | Options outstanding | | Options exercisable | |
| | |
| |
| |
| Exercise price | | Number outstanding at
December 31, 2005 | | Weighted average remaining
contractual life (in years) | | Number exercisable at
December 31, 2005 | |
| | |
| |
| |
| |
| | | | | | | | |
| NIS 0.05 | | | 159,578 | | | 2.50 | | | 159,578 | |
| $1 - $10 | | | 1,250,600 | | | 5.83 | | | 1,166,225 | |
| $10.01-$20 | | | 1,527,450 | | | 6.86 | | | 1,159,075 | |
| $20.01-$30 | | | 453,275 | | | 9.29 | | | 94,575 | |
| $30.01-$40 | | | 642,257 | | | 8.83 | | | 273,807 | |
| | |
|
| | | | |
|
| |
| | | | 4,033,160 | | | | | | 2,853,260 | |
| | |
|
| | | | |
|
| |
The option allotments are as follows:
| | | | | | | | | | | |
| | | Number of shares | | Weighted average
exercise price | | Weighted average
grant date fair value | |
| | |
| |
| |
| |
| Balance at January 1, 2003 | | | 2,977,463 | | | | | | | |
| Granted | | | 1,331,500 | | | 13.78 | | | 9.89 | |
| Forfeited | | | (151,892 | ) | | 9.08 | | | 8.92 | |
| Exercised | | | (275,675 | ) | | 2.63 | | | 3.34 | |
| | |
|
| | | | | | | |
| Balance at December 31, 2003 | | | 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 | | | | | | | |
| | |
|
| | | | | | | |
| |
| The following summarizes the departmental allocation of the stock-based compensation charge for both employees and non-employee stock option grants: |
| | | | | | | | | | | |
| | | Year ended December 31, | |
| | |
| |
| | | 2003 | | 2004 | | 2005 | |
| | |
| |
| |
| |
|
| Research and development costs | | $ | (18 | ) | $ | 63 | | $ | — | |
| Selling and marketing expenses | | | 94 | | | 1 | | | — | |
| General and administrative expenses | | | 29 | | | 14 | | | 3 | |
| | |
|
| |
|
| |
|
| |
| | | | | | | | | | | |
| | | $ | 105 | | $ | 78 | | $ | 3 | |
| | |
|
| |
|
| |
|
| |
F-24
Given Imaging Ltd. and its Consolidated Subsidiaries
Notes To The Consolidated Financial Statements
(In thousands except share and per share data)
Note 12 - Revenues
| | | | | | | | | | | |
| | | Year ended December 31, | |
| | |
| |
| | | 2003 | | 2004 | | 2005 | |
| | |
| |
| |
| |
|
| Workstations and recorders | | $ | 15,879 | | $ | 18,669 | | $ | 16,145 | |
| PillCam SB capsule | | | 22,865 | | | 41,622 | | | 62,528 | |
| PillCam ESO capsule | | | — | | | 1,829 | | | 4,384 | |
| Patency capsules and scanners | | | 15 | | | 188 | | | 174 | |
| Service | | | 1,780 | | | 2,712 | | | 3,545 | |
| | |
|
| |
|
| |
|
| |
| | | | | | | | | | | |
| | | $ | 40,539 | | $ | 65,020 | | $ | 86,776 | |
| | |
|
| |
|
| |
|
| |
| | |
| B. | Revenues by geographic areas |
| | | | | | | | | | | |
| | | Year ended December 31, | |
| | |
| |
| | | 2003 | | 2004 | | 2005 | |
| | |
| |
| |
| |
|
| United States | | $ | 26,162 | | $ | 46,694 | | $ | 63,896 | |
| Europe | | | 11,838 | | | 13,447 | | | 16,765 | |
| Rest of the world | | | 2,539 | | | 4,879 | | | 6,115 | |
| | |
|
| |
|
| |
|
| |
| | | | | | | | | | | |
| | | $ | 40,539 | | $ | 65,020 | | $ | 86,776 | |
| | |
|
| |
|
| |
|
| |
Note 13 - Financial Income, net
| | | | | | | | | | | |
| | | Year ended December 31, | |
| | |
| |
| | | 2003 | | 2004 | | 2005 | |
| | |
| |
| |
| |
|
| Currency gains (losses) | | $ | 840 | | $ | 444 | | $ | (837 | ) |
| Interest income | | | 272 | | | 685 | | | 1,963 | |
| Income from marketable securities | | | — | | | — | | | 422 | |
| Other | | | (117 | ) | | (173 | ) | | (786 | ) |
| | |
|
| |
|
| |
|
| |
| | | | | | | | | | | |
| | | $ | 995 | | $ | 956 | | $ | 762 | |
| | |
|
| |
|
| |
|
| |
F-25
Given Imaging Ltd. and its Consolidated Subsidiaries
Notes To The Consolidated Financial Statements
(In thousands except share and per share data)
Note 14 - Taxes on Income
| | |
| A. | Company |
| | |
| (1) | Israeli income tax is computed on the basis of the Company’s results in nominal 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 (2014, for the first program)). As of December 31, 2005, the benefit term had not commenced. |
| | |
| | Dividend distributions originating from the 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. |
| | |
| | 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 (hereinafter - “the reform”), which allows companies that meet the criteria of the alternative tax benefits track, to receive these benefits, subject to certain conditions, without prior approval and with no requirement to file reports with the Investment Center. Audits will take place via the Income Tax Authorities as part of the tax audits. |
F-26
Given Imaging Ltd. and its Consolidated 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) |
| | |
| | The reform does not retroactively apply for investment programs having an approved enterprise approval certificate from the Investment Center issued up to December 31, 2004 and should not impact an existing approved enterprise, which received written approval. The reform 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 $14 million as of December 31, 2005. 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) | The Israeli Company is exempt from tax for a ten-year period. Therefore, the Israeli Company has not recorded deferred tax assets and liabilities. |
| | |
| (4) | On July 25, 2005 the Knesset passed the Law for the Amendment of the Income Tax Ordinance (No.147 and Temporary Order) - 2005 (hereinafter - the Amendment). |
| | |
| | The Amendment provides for a gradual reduction in corporate tax rates 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 |
| | |
| Because of operating losses, the Company’s subsidiaries incurred no income tax expense for the period from inception through December 31, 2005. At December 31, 2005, the subsidiaries had local, federal and state net operating loss carryforwards of approximately $22 million. |
F-27
Given Imaging Ltd. and its Consolidated Subsidiaries
Notes To The Consolidated Financial Statements
(In thousands except share and per share data)
Note 14 - Taxes on Income (cont’d)
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| C. | Deferred Taxes |
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| 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. |
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| 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, 2005. 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. |
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| The tax effects of significant items comprising the Company’s deferred taxes are: |
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| | | December 31 | |
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| | | 2004 | | 2005 | |
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| Net operating tax assets regarding carryforward losses of subsidiaries | | $ | 8,349 | | $ | 9,960 | |
| Other timing differences | | | 5,484 | | | 1,576 | |
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| Deferred tax asset | | | 13,833 | | | 11,536 | |
| Valuation allowance | | | (13,096 | ) | | (10,317 | ) |
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| | | $ | 737 | | $ | 1,219 | |
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| The net change in the total valuation allowance for the year ended December 31, 2005 was $2,779. |
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| D. | Reconciliation of the statutory tax expense (benefit) to actual taxes on income |
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| | | Year ended December 31, | |
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| | | 2003 | | 2004 | | 2005 | |
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| Profit (loss) before taxes on income as reported in the consolidated statements of operations | | $ | (9,867 | ) | $ | 2,141 | | $ | 5,227 | |
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| Tax rate | | | 0 | % | | 0 | % | | 0 | % |
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| Statutory income tax on the above amount | | | — | | | — | | | — | |
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| Tax benefits in subsidiaries | | | — | | | (690 | ) | | (286 | ) |
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| Taxes on income | | $ | — | | $ | (690 | ) | $ | (286 | ) |
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F-28
Given Imaging Ltd. and its Consolidated Subsidiaries
Notes To The Consolidated Financial Statements
(In thousands except share and per share data)
Note 15 - Related Parties Transactions and Balances
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| Agreement with Rafael |
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| On January 29, 1998, the Company entered into a technology purchase and license agreement (the “Technology Purchase Agreement”) with Rafael Armament Development Authority (“Rafael”) which is a division of the Israeli Ministry of Defense. |
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| Rafael is a related party because it beneficially owns approximately 49% of the outstanding shares of RDC Rafael Development Corporation, and they both hold approximately 10% of the Company’s shares. |
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| Pursuant to the Technology Purchase Agreement, the Company purchased from Rafael for $30 all of Rafael’s rights to the technology associated with and the patent issued in connection with the prototype PillCam capsule and system. Rafael and the Company each granted each other certain rights in connection with the know-how and technology associated with the PillCam capsule and system, in the case of Rafael, solely for use in the military and security fields and, in the case of the Company, solely for commercial exploitation of the PillCam capsule. |
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| In consideration for payment of royalties in an amount to be agreed upon, the Company and Rafael have agreed to grant to the other the exclusive right to use any improvements to the PillCam capsule and system technology developed by the other party in these fields. |
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| None of the parties has exercised these certain rights to date. |
Note 16 - Fair Value of Financial Instruments
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| The Company’s financial instruments include cash and cash equivalents, accounts receivable, deposits, assets held for severance benefits, marketable securities and accounts payable. The carrying amounts of these financial instruments approximate fair value. |
F-29
