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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Teva Pharmaceutical Industries
Limited page 3
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Note 6 - Long-Term Loans and other Long-Term Liabilities:
Long-term loans and other long-term liabilities consisted of the following:
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Interest rate as of
December 31, |
December 31 |
| |
2000 |
2000 |
1999 |
| |
% |
U.S. $ in thousands |
| Loans from banks: |
|
|
|
| In dollars(1) |
6.5 |
$ 5,035 |
$ 206,300 |
| In other non-Israeli currencies(2)(5) |
5.4 |
190,339 |
55,728 |
| Missouri Economic Development Bond (3) |
6.7 |
16,000 |
18,400 |
| Debentures - in dollars(4)(5) |
6.9 |
110,000 |
115,000 |
| Others |
|
|
2,760 |
| Capital lease obligations |
|
657
 |
1,734
|
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322,031 |
399,922 |
| Less - current portion |
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(58,139)
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(8,503)
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| |
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$ 263,892
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$ 391,419
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(1) The interest on these loans is determined on the basis of dollar LIBOR, plus a margin which is included in the interest rate listed above.
(2) The balance as of December 31, 2000 is composed mainly of a loan in the amount of $ 51 million due in June 2001 and a loan in the amount of $ 135 million due in July 2005. The interest on these loans is determined on the basis of the Euro, plus margins which are included in the interest rate listed above.
(3) Bearing interest at a variable or fixed rate determined according to a certain formula, maturing serially through September 2004. The Bond is secured by a letter of credit which provides for a mortgage on the Mexico, Missouri facility.
(4) The balance as of December 31, 2000 is composed of debentures, which were issued in 1998 in a private placement to institutional investors in the United States for periods of 7, 10 and 20 years (of which $ 75 million is for a period of 10 years) at a fixed annual interest rate, the weighted average of which is 6.9%.
(5) Certain loan agreements contain restrictive covenants, mainly the requirement to maintain certain financial ratios.
b. As of December 31, 2000, the required annual principal payments of long-term debt, excluding $ 550 million of convertible senior debentures due in 2005 as described in note 7, starting from the year 2002, are as follows: 2002- $ 3.9 million; 2003- $ 4.0 million; 2004 - $ 7.9 million; 2005 - $ 156.0 million; 2006 and thereafter - $ 92.1 million.
c. The Company and certain subsidiaries entered into negative pledge agreements with certain banks and institutional investors. Under the agreements, the Company and said subsidiaries have undertaken not to register floating charges on assets in favor of any third parties without the prior consent of the banks, to maintain certain financial ratios and to fulfill other restrictions, as stipulated by the agreements.
Note 7 - Convertible Senior Debentures:
In October 2000, Teva Pharmaceutical Finance, LLC ("Teva Finance"), an indirect wholly-owned subsidiary of the Company, sold an aggregate principal amount of $ 550 million of its 1.50% Convertible Senior Debentures due 2005. Interest is payable on a semi-annual basis. Payment of all principal, interest, premium and additional amounts (as defined), if any, payable on the debenture is unconditionally guaranteed by the Company.
Holders of the debentures may convert them into ADRs, each of which represents one ordinary share of the Company, subject to certain conditions, at a conversion price of $ 86.2314 per ADR, (upon a full conversion 6,378,165 ordinary shares are issuable), subject to adjustments in certain circumstances. On or after October 15, 2003, Teva Finance may redeem some or all of the debentures at the redemption prices set forth in the offering memorandum. On October 15, 2003 each Holder may require Teva Finance to repurchase some or all of the Holders' debentures at a redemption price set forth in the offering memorandum. If such requirement is made, Teva Finance can elect to pay the repurchase price in cash or in Teva ADRs (the number of Teva ADRs to be computed as set forth in the offering memorandum), or any combination thereof.
The Group incurred debt issuance costs of approximately $ 12.6 million. These costs are deferred and amortized as a component of interest expense.
Note 8 - Commitments and Contingencies:
a. Commitments:
1) Operating leases:
As of December 31, 2000, total minimum future rentals under operating leases of buildings, machinery and equipment for periods in excess of one year were as follows: 2001 - $ 10.3 million; 2002 - $ 9.2 million; 2003 - $ 8.5 million; 2004 - $ 7.0 million; 2005 - $ 4.6 million; 2006 and thereafter - $ 10.7 million.
The lease fees for each of the years ended December 31, 2000, 1999 and 1998 were $ 7.6 million, $ 7.4 million and $ 5.3 million, respectively.
2) Royalty commitments:
a) The Company is committed to pay royalties to owners of know-how and to parties that financed research and development, at rates ranging from mainly 1% to 8% of net sales of certain products, as defined in the agreements. In some cases, the royalty period is not defined; in other cases, the royalties will be paid for a period of up to 17 years, commencing on the date of the first royalty payment.
b) The Company has also undertaken to pay royalties to the Government of Israel, at the rates of 2.0% - 3.5% of gross sales relating to a product or a development resulting from the research funded by the office of the Chief Scientist. The royalties due to the Government should not exceed the amount of participation, in dollar terms (in respect of research grants commencing 1999 - with the addition of LIBOR interest). The maximum amount of the contingent liability in respect of royalties to those entities at December 31, 2000 amounts to $ 40.6 million.
c) The royalty expense for the years ended December 31, 2000, 1999, and 1998 was $ 35.3 million, $ 16.1 million, and $ 14.7 million, respectively.
b. Contingent liabilities:
1) In July 1997, the Company received an Israeli value added tax ("VAT") assessment requiring the Company to pay an amount of $ 4.9 million in respect of sales to certain health funds. The Company contested this assessment and the value added tax authorities rejected the Company's arguments. The Company appealed this assessment in Court. Based on the opinion of its legal counsel, management is of the opinion that the Company has a reasonable chance to prevail, due to the merits of its case and in light of the fact that it had received a pre-ruling on the disputed sales. Accordingly, no provision for this matter has been included in the accounts.
2) Novopharm and Granutec, Inc. ("Granutec"), a U.S. subsidiary of Novopharm, are defendants in a contract dispute brought by Genpharm Inc. ("Genpharm") with respect to a profit sharing agreement entered into by Genpharm, Novopharm and Granutec in July 1997, regarding the sale of Ranitidine by Novopharm in the United States during the last five months of 1997. Genpharm, the manufacturer of generic Ranitidine, obtained exclusivity for the marketing of Ranitidine for a period of six months. The amount of Genpharm's claim is approximately $ 44.8 million together with costs and interest. Genpharm claims, among other things, that certain deductions taken by Novopharm in arriving at net sales, from which royalties to Genpharm were paid, should be disallowed.
Novopharm and Granutec have filed a counterclaim in the sum of up to approximately $ 53.6 million, representing the total amount of payments made by Novopharm to Genpharm, claiming that these royalties are not owing to Genpharm, since Genpharm is not entitled to any period of exclusivity in relation to marketing and/or since they refer to sales made prior to the effective exclusivity period, and therefore calling for said amounts to be returned to Novopharm. Hearings in this case are not likely to be scheduled prior to 2002. As of the date of issue of these financial statements, the parties are holding negotiations aimed at resolving this matter in a compromise. Management has made an appropriate provision in respect of this matter, based on the advice of legal counsel.
3) The Ministry of Health for Quebec, Canada, has attempted since May 1998 to delist Novopharm's products from the provincial formulary for a period of three months, due to Novopharm's alleged violations of best available pricing legislation. Novopharm has been successful to date in obtaining a stay to prevent the Ministry from delisting its products. In a separate but related action, the Quebec Health Insurance Bureau is suing Novopharm for approximately $ 7 million in respect of the amounts which the Quebec Health Insurance Bureau claims were improperly reimbursed to pharmacies during the period from 1995 to 1997, on account of' Novopharm's alleged violations of the best available pricing legislation. An appropriate provision has been made in respect of this matter, based on the advice of legal counsel.
4) In 1995, Copley and its insurers have reached a compromise agreement in respect of a class action, which was lodged against Copley in the United States, in respect of damages caused as a result of use of the product known as "Albuterol". Under that agreement, the amount payable to the claimants to settle the claim will be no less than $ 65 million and no more than $ 150 million. Pursuant to the terms of the settlement, amounts were set aside in funds for various classes of affected plaintiffs by Copley and its insurance carriers. All but approximately ten claims have been discharged and released under the terms of the class action settlement. Teva believes that it has adequate insurance to cover these claims and that the outcome of the remaining litigation in which Copley is involved, including opt-outs from the class, will not have a material adverse effect on Teva's financial position.
5) In 2000, Teva USA, along with Elan Corporation, Elan Pharma Ltd. (collectively "Elan") and Biovail, are defendants in a patent litigation brought by Bayer AG and Bayer Corporation (collectively "Bayer"). Bayer alleges that a certain Elan product, which Teva USA markets, infringes a Bayer patent. Bayer is seeking enhanced damages and attorneys' fees in unspecified amounts, preliminary and permanent injunctions, and a recall of the Elan product. The Company, based on the advice of legal counsel, believes that the defendants are vigorously defending themselves against Bayer's attempt to assert the patent. No provision for this matter has been included in the accounts.
6) Teva USA is a party to numerous claims, including class actions in unspecified amounts, alleging negative health effects due to the use, in the course of a weight control plan known as "Fen-Phen", of one of the subsidiary's products in conjunction with two products of other pharmaceutical companies. The Company is vigorously defending itself against these claims, inter alia, with the assistance of experts. The Company and its legal counsel believe that this matter will not have a material adverse effect on the results of the Company's operations and its financial position. No provision for this matter has been included in the accounts.
7) The Hungarian subsidiary - Biogal - has been sued for additional royalties arising out of a series of contracts for the development of a pharmaceutical active ingredient. Although the plaintiff has not made any claims for a specific amount, in an interim decision, the court ordered Biogal to submit an accounting on the contested items. Biogal has appealed the decision and based upon the advice of its legal counsel, expects to prevail. No provision for this matter has been included in the accounts.
8) The Company may from time to time seek to develop generic products for sale prior to patent expiration in various territories. In the United States this developed is governed by the patent challenge procedures set forth in the Waxman-Hatch Act of 1984. To the extent that it seeks to utilize such patent challenge procedures, the Company is involved and expects to be involved in patent litigation regarding the validity or infringement of the originator's patent. Additionally, the Company may be involved in patent litigation involving the extent to which alternate manufacturing process techniques may infringe on originator or third party process patents.
9) The Company and its subsidiaries are from time to time subject to claims arising in the ordinary course of their business, including product liability. The Company believes it has meritorious defenses to such claims and legal proceedings pending as of December 31, 2000 and maintains adequate product liability insurance to cover the related damages. In the opinion of the Company, the outcome of the litigation in which the Company and its subsidiaries are presently involved will not have a material adverse effect on the results of the operations or the financial position of the Company.
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