-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, ObthJ4X+Wn0s1PlzoaMjduuYR7nAqB5MOBFrEiQtmoWEhQUmLUtWWKUpOqJSMwGj sBZ4mn17b2en+vzFn2D4CQ== 0000950123-07-000252.txt : 20070109 0000950123-07-000252.hdr.sgml : 20070109 20070109171414 ACCESSION NUMBER: 0000950123-07-000252 CONFORMED SUBMISSION TYPE: 8-K/A PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20061024 ITEM INFORMATION: Financial Statements and Exhibits FILED AS OF DATE: 20070109 DATE AS OF CHANGE: 20070109 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BARR PHARMACEUTICALS INC CENTRAL INDEX KEY: 0000010081 STANDARD INDUSTRIAL CLASSIFICATION: PHARMACEUTICAL PREPARATIONS [2834] IRS NUMBER: 221927534 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K/A SEC ACT: 1934 Act SEC FILE NUMBER: 001-09860 FILM NUMBER: 07521178 BUSINESS ADDRESS: STREET 1: 2 QUAKER RD BOX 2900 CITY: POMONA STATE: NY ZIP: 10970-0519 BUSINESS PHONE: 8453621100 MAIL ADDRESS: STREET 1: 2 QUAKER RD STREET 2: BOX 2900 CITY: POMONA STATE: NY ZIP: 10970-0519 FORMER COMPANY: FORMER CONFORMED NAME: BARR LABORATORIES INC DATE OF NAME CHANGE: 19920703 8-K/A 1 y28523e8vkza.htm AMENDMENT NO. 1 TO FORM 8-K 8-K/A
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SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 8-K/A
(Amendment No. 1)
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of report (Date of earliest event reported) October 24, 2006
BARR PHARMACEUTICALS, INC.
(Exact name of registrant as specified in its charter)
         
Delaware   1-9860   42-1612474
         
(State or other jurisdiction   (Commission   (IRS Employer
of incorporation)   File Number)   Identification No.)
         
         
400 Chestnut Ridge Road, Woodcliff Lake, NJ
     07677
(Address of principal executive offices)
     (Zip code)
(201) 930-3300
(Registrant’s telephone number, including area code)
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:
o   Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
 
o   Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
 
o   Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
 
o   Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))
 
 

 

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Item 9.01 Financial Statements and Exhibits
SIGNATURES
EX-99.2: AUDITED AND UNAUDITED FINANCIAL STATEMENTS
EX-99.3: UNAUDITED PRO FORMA CONDENSED FINANCIAL INFORMATION

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Explanatory Note
     On October 24, 2006, a subsidiary of Barr Pharmaceuticals, Inc. (“Barr”) completed the acquisition through a tender offer of 17,056,977 shares of PLIVA d.d. (“PLIVA”), based in Zagreb, Croatia, representing approximately 92% of PLIVA’s total outstanding share capital being tendered to Barr’s subsidiary. With the addition of treasury shares held by PLIVA, Barr acquired in excess of 95% of PLIVA’s voting share capital. The purchase price was HRK 820 per share, or approximately $2.5 billion. On October 24, 2006, Barr filed a Current Report on Form 8-K (the “Current Report”) to report completion of the acquisition.
     This Current Report on Form 8-K/A is being filed to amend Item 9.01 of the Current Report in order to provide the financial statements of the business acquired as required by Item 9.01(a) and the pro forma financial information required by Item 9.01(b), which financial statements and information were omitted from the Current Report that was filed on October 24, 2006.
Item 9.01 Financial Statements and Exhibits
     (a) Financial statements of business acquired
     The following financial statements relating to PLIVA are attached hereto as Exhibit 99.2 and are incorporated herein by reference:
     Unaudited Financial Statements:
Unaudited Condensed Consolidated Interim Income Statements for the six-month periods ended 30 June 2006 and 2005
Unaudited Condensed Consolidated Interim Balance Sheets as of 30 June 2006 and 31 December 2005
Unaudited Condensed Consolidated Statement of Changes in Equity for the six-month periods ended 30 June 2006 and 30 June 2005
Unaudited Condensed Consolidated Interim Statement of Cash Flows for the six-month periods ended 30 June 2006 and 2005
Notes to the Unaudited Condensed Consolidated Interim Financial Statements
     Audited Financial Statements:
Report of Independent Auditors
Audited Consolidated Income Statements for the years ended 31 December 2005, 2004 and 2003
Audited Consolidated Balance Sheets as of 31 December 2005 and 2004
Audited Consolidated Statements of Changes in Equity for the years ended 31 December 2005, 2004 and 2003
Audited Consolidated Statements of Cash Flows for the years ended 31 December 2005, 2004 and 2003
Notes to the Audited Consolidated Financial Statements
     (b) Pro Forma Financial Information
     The following unaudited pro forma condensed financial information for Barr Pharmaceuticals, Inc. is attached hereto as Exhibit 99.3 and is incorporated herein by reference:
Unaudited Condensed Pro Forma Combined Balance Sheet as of June 30, 2006
Unaudited Condensed Pro Forma Combined Statement of Operations for the twelve months ended June 30, 2006
Notes to the Unaudited Pro Forma Condensed Combined Financial Statements

2

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     (d) Exhibits
     The following materials are attached as exhibits to this Current Report on Form 8-K/A:
     
Exhibit    
Number   Description
99.1*
  Barr Pharmaceuticals, Inc. press release dated October 24, 2006
 
    
99.2
  Audited and Unaudited Financial Statements of PLIVA d.d.
 
    
99.3
  Unaudited Pro Forma Condensed Financial Information for Barr Pharmaceuticals, Inc.
 
*   Previously filed as an exhibit to the Company’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on October 24, 2006.

3

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SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
         
Date: January 9, 2007   BARR PHARMACEUTICALS, INC.
 
        
 
  By:   /s/ William T. McKee
 
       
 
      William T. McKee
 
      Vice President, Chief Financial Officer and Treasurer

4

EX-99.2 2 y28523exv99w2.htm EX-99.2: AUDITED AND UNAUDITED FINANCIAL STATEMENTS EX-99.2
 

Exhibit 99.2
PLIVA D.D.
UNAUDITED CONDENSED CONSOLIDATED INTERIM INCOME STATEMENTS
FOR THE SIX MONTH PERIODS ENDED 30 JUNE 2006 AND 2005
                                         
In ’000 USD   Note             2006             2005  
Continuing operations
                                        
Sales
                     516,732               504,630  
Royalties
                     11,866               105,422  
Other revenue
                     12,686               20,172  
 
                                    
 
                                        
Total revenue
     3               541,284               630,224  
 
                                        
Cost of sales
                     (257,771 )             (257,743 )
 
                                    
 
                                        
Gross profit
                     283,513               372,481  
 
                                        
General and administrative expenses
                     (66,970 )             (60,430 )
Research and development expenses
                     (38,952 )             (31,872 )
Selling and distribution expenses
                     (117,928 )             (106,663 )
Restructuring costs
     4               (4,530 )             (8,692 )
 
                                    
 
                                        
Results from operating activities
                     55,133               164,824  
 
                                        
Finance income
     5               9,551               5,659  
Finance expenses
     5               (11,503 )             (17,447 )
 
                                        
Net financial expenses
                     (1,952 )             (11,788 )
 
                                        
Share of (loss)/profit of equity accounted investees
                     (14 )             206  
 
                                    
 
                                        
Profit before income tax
                     53,167               153,242  
 
                                        
Income tax expense
                     (9,306 )             (13,893 )
 
                                    
 
                                        
Profit from continuing operations
                     43,861               139,349  
 
                                        
Discontinued operations
                                        
Profit (loss) from discontinued operations (net of tax)
     6               19,054               (222,661 )
 
                                    
 
                                        
Profit (loss) for the period
                     62,915               (83,312 )
 
                                    
Attributable to:
                                        
PLIVA d.d. shareholders
                     62,899               (83,129 )
Minority interest
                     16               (183 )
 
                                    
Earnings (loss) per:
           Share     GDR     Share     GDR  
- basic (USD)
             3.60       0.72       (4.77 )     (0.95 )
- diluted (USD)
             3.56       0.71       (4.72 )     (0.94 )
 
                                        
Earnings from continuing operations per:
           Share     GDR     Share     GDR  
- basic (USD)
             2.51       0.50       8.01       1.60  
- diluted (USD)
             2.48       0.50       7.95       1.59  
 
                                
See accompanying “Notes to the Unaudited Condensed Consolidated Interim Financial Statements”

F-1

 

PLIVA D.D.
UNAUDITED CONDENSED CONSOLIDATED INTERIM BALANCE SHEETS
AS OF 30 JUNE 2006 AND 31 DECEMBER 2005
                         
In ’000 USD   Note     30 June 2006     31 December 2005  
                    Restated - Note 2  
                    (Audited)  
ASSETS
                        
Property, plant and equipment
             531,311       510,559  
Intangible assets
     8       231,372       211,825  
Investment in equity accounted investees
             10,270       9,824  
Other investments
             951       903  
Receivables
             4,457       4,369  
Deferred tax assets
             30,868       35,478  
 
                    
Total non-current assets
             809,229       772,958  
 
                        
Inventories
             227,637       211,994  
Other investments
             1,973       3,392  
Income tax receivable
             1,131       2,843  
Trade and other receivables
             389,043       361,372  
Cash and cash equivalents
             211,314       296,897  
Assets classified as held for sale
             —       18,356  
 
                    
Total current assets
             831,098       894,854  
 
                    
TOTAL ASSETS
             1,640,327       1,667,812  
 
                    
See accompanying “Notes to the Unaudited Condensed Consolidated Interim Financial Statements”

F-2

 

PLIVA D.D.
UNAUDITED CONDENSED CONSOLIDATED INTERIM BALANCE SHEETS
AS OF 30 JUNE 2006 AND 31 DECEMBER 2005
                         
In USD’000   Note     30 June 2006     31 December 2005  
                    Restated – Note 2  
                    (Audited)  
EQUITY
                        
Share capital
             359,862       359,862  
Share premium
             25,066       10,151  
Legal and other reserves
             75,425       28,616  
Retained earnings
             693,426       630,557  
 
                    
Equity attributable to PLIVA d.d. shareholders
             1,153,779       1,029,186  
Equity attributable to minority interest
             5,178       5,129  
 
                    
TOTAL EQUITY
             1,158,957       1,034,315  
 
                    
LIABILITIES
                        
Interest bearing loans and borrowings
             172,749       223,536  
Employee benefits
             18,009       15,552  
Provisions
             5,450       5,891  
Other non-current liabilities
             4,191       5,017  
Deferred tax liabilities
             1,996       193  
 
                    
Total non-current liabilities
             202,395       250,189  
 
                        
Interest bearing loans and borrowings
             40,958       103,784  
Income tax payable
             6,055       4,492  
Trade and other payables
             215,730       241,480  
Employee benefits
             2,277       3,261  
Provisions
             13,955       27,693  
Liabilities classified as held for sale
             —       2,598  
 
                    
Total current liabilities
             278,975       383,308  
 
                    
TOTAL LIABILITIES
             481,370       633,497  
 
                    
TOTAL EQUITY AND LIABILITIES
             1,640,327       1,667,812  
 
                    
See accompanying “Notes to the Unaudited Condensed Consolidated Interim Financial Statements”

F-3

 

PLIVA D.D.
UNAUDITED CONDENSED CONSOLIDATED INTERIM STATEMENT OF CHANGES IN EQUITY
FOR THE SIX MONTH PERIOD ENDED 30 JUNE 2006
                                                                                         
                                                                            Equity        
                                            Equity     Fair value             Total     attributable        
                            Legal and             share     reserve: AFS             attributable     to        
    Share     Share     Treasury     other     Translation     options     financial     Retained     to PLIVA d.d.     minority     Total  
In ’000 USD   capital     premium     shares     reserves     reserve     issued     assets     earnings     shareholders     interest     equity  
    USD’000     USD’000     USD’000     USD’000     USD’000     USD’000     USD’000     USD’000     USD’000     USD’000     USD’000  
At 1 January 2006
     359,862       10,151       (15,626 )     24,551       16,087       3,443       132       647,364       1,045,964       5,129       1,051,093  
Correction of prior period error (note 2.2)
     —       —       —       —       29       —       —       (16,807 )     (16,778 )     —       (16,778 )
 
                                                                  
At 1 January 2006 (restated - - Note 2)
     359,862       10,151       (15,626 )     24,551       16,116       3,443       132       630,557       1,029,186       5,129       1,034,315  
Transfer to reserves
     —       —       —       30       —       —       —       (30 )     —       —       —  
Disposal of subsidiary
     —       —       —       (765 )     —       —       —       —       (765 )     —       (765 )
Fair value reserve: AFS financial assets
     —       —       —       —       —       —       21       —       21       —       21  
Profit for the period
     —       —       —       —       —       —       —       62,899       62,899       16       62,915  
Exchange differences
     —       —       —       —       44,805       —       —       —       44,805       33       44,838  
 
                                                                  
Total recognised income for the period
     —       —       —       (735 )     44,805       —       21       62,869       106,960       49       107,009  
 
                                                                  
Sale of treasury shares
     —       2,651       978       —       —       —       —       —       3,629       —       3,629  
Debt to equity swap (Note 9)
     —       11,215       2,380       —       135       —       —       —       13,730       —       13,730  
Equity share options issued
     —       —       —       —       —       274       —       —       274       —       274  
Equity share option used
     —       1,049       —       —       —       (1,049 )     —       —       —       —       —  
 
                                                                  
 
     —       14,915       3,358       —       135       (775 )     —       —       17,633       —       17,633  
 
                                                                  
At 30 June 2006
     359,862       25,066       (12,268 )     23,816       61,056       2,668       153       693,426       1,153,779       5,178       1,158,957  
 
                                                                  
See accompanying “Notes to the Unaudited Condensed Consolidated Interim Financial Statements”

F-4

 

PLIVA D.D.
UNAUDITED CONDENSED CONSOLIDATED INTERIM STATEMENT OF CHANGES IN EQUITY
FOR THE SIX MONTH PERIOD ENDED 30 JUNE 2005
                                                                                         
                                            Equity     Fair value             Total     Equity        
                            Legal and             share     reserve: AFS             attributable     attributable to        
    Share     Share     Treasury     other     Translation     options     financial     Retained     to PLIVA d.d.     minority     Total  
    capital     premium     shares     reserves     reserve     issued     assets     earnings     shareholders     interest     equity  
    USD’000     USD’000     USD’000     USD’000     USD’000     USD’000     USD’000     USD’000     USD’000     USD’000     USD’000  
At 1 January 2005
     359,862       9,406       (15,988 )     18,578       98,667       2,201       90       764,658       1,237,474       5,676       1,243,150  
 
                                                                                        
Transfer to reserves
     —       —       —       5,582       379       —       —       (5,961 )     —       —       —  
Fair value reserve: AFS financial assets
     —       —       —       —       —       —       30       —       30       —       30  
Loss for the period
     —       —       —       —       —       —       —       (83,129 )     (83,129 )     (183 )     (83,312 )
Exchange differences
     —       —       —       —       (68,220 )     —       —       —       (68,220 )     (597 )     (68,817 )
 
                                                                  
Total recognised income for the period
     —       —       —       5,582       (67,841 )     —       30       (89,090 )     (151,319 )     (780 )     (152,099 )
 
                                                                  
Sale of treasury shares
     —       43       22       —       —       —       —       —       65       —       65  
Equity share options issued
     —       —       —       —       1       681       —       —       682       —       682  
Dividend declared (Note 14)
     —       —       —       —       —       —       —       (36,661 )     (36,661 )     —       (36,661 )
 
                                                                  
 
     —       43       22       —       1       681       —       (36,661 )     (35,914 )     —       (35,914 )
 
                                                                  
At 30 June 2005
     359,862       9,449       (15,966 )     24,160       30,827       2,882       120       638,907       1,050,241       4,896       1,055,137  
 
                                                                  
See accompanying “Notes to the Unaudited Condensed Consolidated Interim Financial Statements”

F-5

 

PLIVA D.D.
UNAUDITED CONDENSED CONSOLIDATED INTERIM STATEMENTS OF CASH FLOWS
FOR THE SIX-MONTH PERIODS ENDED 30 JUNE 2006 AND 2005
                         
In ’000 USD   Note     2006     2005  
Cash flows from operating activities:
                        
Profit/(loss) for the period
             62,915       (83,312 )
Adjustments for:
                        
Income tax expense
             9,306       13,893  
Share of loss/(profit) of equity accounted investees
             14       (206 )
Interest expense (net)
     5       1,862       4,652  
Other finance (income)/expense (net)
     5       (232 )     6,193  
Depreciation
             31,662       35,038  
Amortisation
             11,625       24,500  
Impairment
             5,807       8,958  
Gain on sale of property, plant and equipment and intangible assets
             (273 )     (191 )
Gain on sale of subsidiary
     7       (19,401 )     (4,277 )
Loss on sale of intangible assets
             —       99,979  
Inventories provision
             3,627       11,993  
Impairment of trade receivables
             1,180       (4,395 )
Share based payments
             3,512       822  
Fair value of conversion feature
             3,730       —  
Release of over accrued expenses
             (4,695 )     —  
Other non-cash income and expenses
             (644 )     1,831  
 
                    
Operating profit before working capital changes
             109,995       115,478  
Change in inventories
             (15,285 )     24,157  
Change in trade and other receivables
             (33,447 )     28,509  
Change in trade and other payables
             (27,371 )     (16,970 )
Change in employee benefits and provisions
             (6,106 )     18,554  
 
                    
Cash generated by operations
             27,786       169,728  
Income taxes paid
             380       5,668  
Interest and other financial charges paid
             (7,877 )     (15,957 )
Effect of foreign exchange rates on operating cash flow
             8,525       (38,863 )
 
                    
Net cash from operating activities
             28,814       120,576  
Net cash used in operating activities – discontinued operations
             (8,866 )     (70,183 )
Net cash from operating activities – continuing operations
             37,680       190,759  
 
                    
Cash flow from investing activities:
                        
Interest and other income received
             5,339       3,467  
Proceeds from sale of property, plant and equipment and intangible assets
             9,875       3,428  
Proceeds from sale of subsidiary
     7       34,968       7,917  
Net purchase of marketable securities and investments
             1,717       (1,262 )
Purchase of property, plant and equipment
             (29,629 )     (13,511 )
Purchase of intangible assets
             (6,805 )     (15,551 )
Acquisition of subsidiary, net of cash acquired
     7       (25,545 )     —  
Change in loans given
             (493 )     3,766  
 
                    
Net cash used in investing activities
             (10,573 )     (11,746 )
Net cash from investing activities – discontinued operations
             41,718       —  
Net cash used in investing activities – continuing operations
             (52,291 )     (11,746 )
 
                    
See accompanying “Notes to the Unaudited Condensed Consolidated Interim Financial Statements”

F-6

 

PLIVA D.D.
UNAUDITED CONDENSED CONSOLIDATED INTERIM STATEMENTS OF CASH FLOWS
FOR THE SIX-MONTH PERIODS ENDED 30 JUNE 2006 AND 2005
                 
In USD’000   2006     2005  
Cash flow from financing activities:
                
Proceeds from sale of treasury shares
     3,629       65  
Proceeds from interest bearing loans and borrowings
     12,453       176,926  
Repayment of interest bearing loans and borrowings
     (127,684 )     (127,068 )
 
            
Net cash (used in)/from financing activities
     (111,602 )     49,923  
Net cash from financing activities – discontinued operations
     —       —  
Net cash(used in)/ from financing activities – continuing operations
     (111,602 )     49,923  
 
            
Net (decrease)/increase in cash and cash equivalents
     (93,361 )     158,753  
Effects of foreign exchange rate changes on cash and cash equivalents
     7,778       (12,657 )
Cash and cash equivalents at 1 January
     296,897       167,853  
 
            
Cash and cash equivalents at 30 June
     211,314       313,949  
 
            
See accompanying “Notes to the Unaudited Condensed Consolidated Interim Financial Statements”

F-7

 

PLIVA D.D.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
1   Statement of Compliance
 
    The interim financial statements present the unaudited financial results and selected notes of PLIVA d.d (“the Company”), a company incorporated and domiciled in Croatia and its subsidiaries (together referred to as “the Group”) and the Group’s interest in associates at 30 June 2006 and the results of its operations from 1 January 2006 to 30 June 2006.
 
    These condensed consolidated interim financial statements do not constitute statutory financial statements. These condensed consolidated interim financial statements have been prepared in accordance with International Accounting Standards (“IAS”) 34 Interim Financial Reporting. They do not include all of the information required for full annual financial statements, and should be read in conjunction with the consolidated financial statements of the Company as at and for the year ended 31 December 2005.
 
    These condensed consolidated interim financial statements were approved by the Company on 9 January 2007.
 
    Basis of preparation
 
    Except as noted below, the condensed consolidated interim financial statements have been prepared on a basis consistent with the accounting policies set out in the audited financial statements of the Company for the period ended 31 December 2005 and in accordance with International Financial Reporting Standards (“IFRS”).
 
2   Significant accounting policies
 
    Effective from 1 January 2006 the Company applied the Amendment to IAS 21 The Effects of Changes in Foreign Exchange Rates – Net Investment in a Foreign Operation (the Amendment requires retrospective application), the Amendment to IAS 39 Financial Instruments: Recognition and Measurement – The Fair Value Option and the Amendment to IAS 19 Employee Benefits. The application of these amendments had no effect on the comparative figures.
 
2.1   Estimates
 
    The preparation of interim financial statements requires management to make judgments, estimates and assumptions that affect the application of policies and reported amounts of assets and liabilities, income and expenses. Actual results may differ from these estimates.
 
    Except as described below, in preparing these condensed consolidated interim financial statements, the significant judgments made by management in applying the Group’s accounting policies and the key sources of estimation uncertainty were the same as those applied to the consolidated financial statements as at and for the year ended 31 December 2005.
 
    During the six months ended 30 June 2006 management reassessed its estimates in respect of:
  •   The recoverable amount of certain intangible assets (refer to Note 8).
2.2   Comparative information
 
    Correction of prior period error
 
    During 2006, management identified that one of the Company’s subsidiaries had incorrectly recognised revenue for certain customer arrangements and omitted certain expenses from its financial results reported to the Company. Collectively, the incorrect revenue recognition and expense omission issues resulted in excessive revenue being reported by the Company and an understatement and overstatement of the amounts due to the subsidiary’s suppliers and due from customers, respectively.
 
    Consequently, management concluded that the previously reported financial results should be restated to reflect the correction of these errors. In line with the requirements of IAS 8, Accounting Policies, Changes in Accounting Estimates and Errors, these errors are corrected in the comparative information presented in these financial statements.

F-8

 

PLIVA D.D.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(continued)
2   Significant accounting policies (continued)
 
2.2   Comparative information (continued)
 
    Correction of prior period error (continued)
 
    Since the errors relate solely to the six months ended 31 December 2005, no corrections have been made to the comparative information related to the profit and loss account for the six months ended 30 June 2005. The comparative balance sheet as at 31 December 2005 has been restated.
 
    The impact on the consolidated financial statements for the year ended 31 December 2005 is given in Note 12.
 
3   Segment information
 
    Business segments are:
  •   Generics,
 
  •   Pharma Chemicals, which includes sales of Azithromycin and other active pharmaceutical ingredients, and
 
  •   Non-core, which includes DDDI (diagnostics, disinfectants, dialysis, and infusions) and Animal Health and Agrochemicals.
    Discontinued operations are discussed further in Note 6.
 
    Comparative segment information has been restated in order to be presented consistently with the six month period ended 30 June 2006. The restatement is due to proprietary products that were not divested by the end of 2005 that are now included within Generics. The discontinued Proprietary segment is now presented so that it includes only proprietary products that were actually divested as well as the operations of proprietary research that were divested, while royalty income from Pfizer for the sale of Zithromax (Azithromycin) on the international market is no longer allocated to a specific business segment (in 2005 such royalties were included in the Proprietary segment).

F-9

 

PLIVA D.D.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(continued)
3   Segment Information (continued)
For the six month period ended 30 June 2006
                                                 
            Pharma   Proprietary            
    Generics   Chemicals   (discontinued)   Non-core   Non-allocated   Group
    USD’000   USD’000   USD’000   USD’000   USD’000   USD’000
Gross segment sales
     443,040       55,256       —       26,346       1,515       526,157  
Intersegment sales
     —       (9,425 )     —       —       —       (9,425 )
Other revenue
     11,469       46       3,065       432       739       15,751  
Royalties
     —       —       —       —       11,866       11,866  
Total revenue
     454,509       45,877       3,065       26,778       14,120       544,349  
Gross profit
     239,610       22,112       3,065       9,089       12,702       286,578  
Net result from operating activities
     37,530       18,527       (347 )     (489 )     (435 )     54,786  
 
                                                
Result from operating activities (discontinued operations)                     (347 )
Result from operating activities (continuing operations)                     55,133  
 
                                                

F-10

 

PLIVA D.D.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(continued)
3   Segment information (continued)
For the six month period ended 30 June 2005 (restated — Note 2)
                                                 
            Pharma   Proprietary            
    Generics   Chemicals   (discontinued)   Non-core   Non-allocated   Group
    USD’000   USD’000   USD’000   USD’000   USD’000   USD’000
Gross segment sales
     391,498       86,952       21,392       29,983       1,966       531,791  
Intersegment sales
     —       (5,769 )     —       —       —       (5,769 )
Other revenue
     14,161       129       13       632       5,250       20,185  
Royalties
     —       —       —       —       105,422       105,422  
Total revenue
     405,659       81,312       21,405       30,615       112,638       651,629  
Gross profit
     205,997       44,215       (1,892 )     11,561       110,708       370,589  
Net result from operating activities
     31,137       38,319       (122,682 )     2,284       93,084       42,142  
 
                                                
Result from operating activities (discontinued operations)                     (122,682 )
Result from operating activities (continuing operations)                     164,824  
 
                                                

F-11

 

PLIVA D.D.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(continued)
4   Restructuring costs
                 
            2005  
    2006     Restated - Note 2  
    USD’000     USD’000  
Severance payments
     29       6,870  
Asset impairment
     31       1,822  
Other
     4,470       —  
 
            
Total
     4,530       8,692  
 
            
    In 2006, restructuring expenses relate primarily to additional expenses related to the divestment of the manufacturing plant in Germany.
 
5   Finance income and finance expenses
                 
    2006     2005  
    USD’000     USD’000  
Finance income
                
Interest income
     5,335       3,491  
Gain on interest rate derivatives
     965       99  
Dividend income
     27       24  
Net foreign exchange gains
     2,769       796  
Other financial income
     455       1,249  
 
            
Total
     9,551       5,659  
 
            
Finance expenses
                
Interest expense
     (7,197 )     (8,143 )
Amortisation of fees and discounts on interest bearing loans
     (353 )     (1,100 )
Loss on interest rate derivatives
     —       (762 )
Fair value of conversion feature (Note 9)
     (3,730 )     —  
Other financial expenses
     (223 )     (7,442 )
 
            
Total
     (11,503 )     (17,447 )
 
            
Net financial expenses
     (1,952 )     (11,788 )
 
            

F-12

 

PLIVA D.D.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(continued)
6   Profit/(loss) from discontinued operations
 
    Discontinued operations include:
  •   Proprietary research (predominantly based in Croatia), refer also to Note 3,
 
  •   Proprietary marketing and sales operations related to VoSpire and SANCTURA (based in the USA),
 
  •   Gains and losses from sale of parts of proprietary operations.
Results of discontinued operations for the six month period ended 30 June:
                 
            2005  
    2006     Restated - Note 2  
    USD’000     USD’000  
Sales
     —       21,392  
Other revenue
     3,065       13  
Cost of sales
     —       (23,297 )
 
            
Gross profit
     3,065       (1,892 )
General and administrative expenses
     (1,409 )     (5,905 )
Research and development expenses
     (4,986 )     (13,746 )
Selling and distribution expenses
     —       (62,546 )
Restructuring costs
     2,983       (38,593 )
 
            
Results from operating activities
     (347 )     (122,682 )
Income tax expense
     —       —  
 
            
Loss after tax but before gain/(loss) on sale of discontinued operations
     (347 )     (122,682 )
 
            
Gain/(loss) on sale of discontinued operations (*)
     19,401       (99,979 )
Tax on gain/(loss) on sale of discontinued operations
     —       —  
 
            
Profit/(loss) for the period
     19,054       (222,661 )
 
            
 
(*)   Gain on sale of discontinued operations in 2006 relates to gain on sale of subsidiaries (refer to Note 7) and the loss in 2005 on the sale of SANCTURA.

F-13

 

PLIVA D.D.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(continued)
7   Acquisition and disposal of subsidiary
 
    Acquisition of subsidiary
 
    On 14 February 2006, the Group acquired 100% of the interests in USO Rational SA, a company incorporated in Spain, for USD 26,340 thousand (EUR 21,900 thousand) in cash consideration (which includes EUR 21,400 thousand paid for the assignment of loans). The company distributes generics products. In the period from 14 February 2006 to 30 June 2006 the company contributed a loss of USD 1,937 thousand to the condensed consolidated profit for the interim period.
 
    If the acquisition had occurred on 1 January 2006, the estimated Group revenue from continuing operations would have been USD 542,417 thousand and profit before tax of USD 51,721 thousand for the six month period ended 30 June 2006. These amounts have been calculated using the Group’s accounting policies and by adjusting the results of the subsidiary to reflect the additional amortisation that would have been charged assuming the fair value adjustments to intangible assets had applied from 1 January 2006.
 
    Effect of acquisition
 
    The acquisition had the following effect on the Group’s assets and liabilities:
                         
                    Pre-  
    Recognised             acquisition  
    value on     Fair value     carrying  
    acquisition     adjustments     amounts  
    USD’000     USD’000     USD’000  
Property, plant and equipment
     38       —       38  
Intangible assets
     15,287       7,099       8,188  
Inventories
     3,986       —       3,986  
Trade and other receivables
     2,710       —       2,710  
Cash and cash equivalents
     795       —       795  
Trade and other payables
     (1,570 )     —       (1,570 )
 
                  
Net identifiable assets and liabilities
     21,246       7,099       14,147  
 
                    
Goodwill on acquisition
     5,094                  
 
                      
Consideration paid, satisfied in cash
     26,340                  
Cash acquired
     (795 )                
 
                      
Net cash outflow
     25,545                  
 
                      

F-14

 

PLIVA D.D.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(continued)
7   Acquisition and disposal of subsidiary (continued)
 
    Disposal of subsidiary
 
    In May 2006, the Group disposed of all the shares in PLIVA – Research Institute Ltd. for total consideration of USD 35 million. In the period from 1 January 2006 to 30 April 2006 the subsidiary contributed a loss of USD 5,897 thousand to the consolidated profit for the interim period (loss of USD 11,120 thousand in the period from 1 January 2005 to 30 June 2005).
 
    In June 2005, the Company sold its subsidiary Velaris d.o.o. for a consideration of USD 7,917 thousand, which was received in cash during 2005.
                 
    2006     2005  
    USD’000     USD’000  
Disposal group held for sale
                
Property, plant and equipment
     (10,115 )     (3,205 )
Intangible assets
     (201 )     —  
Goodwill on acquisition
     (1,841 )     —  
Inventories
     (355 )     —  
Trade and other receivables
     (3,553 )     (134 )
Cash and cash equivalents
     (2,043 )     (301 )
Trade and other payables
     2,541       —  
 
            
Total disposal group held for sale
     (15,567 )     (3,640 )
 
            
 
Consideration received, satisfied in cash
     34,158       7,917  
Consideration receivable (*)
     810       —  
 
            
Total consideration
     34,968       7,917  
 
            
 
(*)   Amount receivable based on the provisions of share purchase agreement (calculated based on changes in working capital and closing cash).
8   Intangible assets
 
    Impairment loss
 
    As stated in Note 2.2, the financial results reported by one subsidiary for the year ended 31 December 2005 were restated. Consequently, the Company reassessed its estimates related to this subsidiary and, accordingly, an impairment loss of USD 6,710 thousand was recorded. Of that amount, USD 2,266 thousand was recorded as a correction to the prior period (refer to Note 12) and the remaining amount was recorded in June 2006. The estimate of the recoverable amount was based on value in use, calculated using pre-tax discount rates ranging from 10.4% to 12.4%.
 
9   Interest bearing loans and borrowings
 
    Convertible loan
 
    In May 2006 the lender exercised the right to convert a loan in the amount of USD 10,000 thousand into shares of PLIVA d.d. at a conversion rate of USD 73.75 per share. The lender was entitled to receive 677,966 GDRs (five GDRs for one share) that were transferred to the lender from the treasury shares of PLIVA d.d.
 
    The conversion feature in a convertible freestanding instrument issued in a functional currency other than the functional currency of the issuing entity is a derivative liability. As such, the conversion feature was accounted for under IAS 39 at fair value through profit or loss resulting in USD 3,730 thousand of expense recognised based on the fair value of the derivative liability.

F-15

 

PLIVA D.D.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(continued)
10   Share based payments
 
    Terms and conditions of the share option programme are disclosed in the consolidated financial statements as at and for the year ended 31 December 2005. In April 2006 a further grant on similar terms was made to management personnel including non-board executives (“Directors”) and Management Board members.
                                 
    Share options     Share options              
    Management Board     Directors     Share appreciation rights     Share appreciation rights  
    granted after 7 November 2002     granted after 7 November 2002     Management Board     Directors  
Number of options
                                
At 1 January 2006
     73,135       90,534       —       29,702  
Transfer
     —       (5,500 )     —       5,500  
Granted during the period
     —       14,369       —       47,828  
Exercised during the period
     —       (38,772 )     —       (1,126 )
Forfeited during the period
     —       —       —       (5,645 )
 
                        
At 30 June 2006
     73,135       60,631       —       76,259  
 
                        
 
                                
Number of options (in GDRs)
                                
At 1 January 2006
                     108,150       300,000  
Granted during the period
                     —       691,505  
 
                            
At 30 June 2006
                     108,150       991,505  
 
                            
 
 
   Share options     Share options                  
 
   Management Board     Directors                  
 
   granted before 7 November 2002     granted before 7 November 2002                  
Number of options
                                
At 1 January 2006
     12,000       25,947                  
Exercised during the period
     —       (18,283 )                
 
                            
At 30 June 2006
     12,000       7,664                  
 
                            

F-16

 

PLIVA D.D.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(continued)
10   Share based payments (continued)
 
    The terms and conditions of the grants made during the six month periods ended 30 June 2006 are as follows:
                 
    Share options   Share options
    Share appreciation rights   Share appreciation rights
Arrangement   Directors   Management Board
Vesting conditions
   Employment at date of vesting   Employment at date of vesting
 
   There are no market conditions   There are no market
 
   associated with the share options   conditions associated with
 
   granted   the share options granted
Vesting period
   The first upcoming 1st of January   The first upcoming 1st of
 
   following two full years after   January following two full
 
   the Date of Grant or such other   years after the Date of
 
   date specified by the Management   Grant or such other date
 
   Board at the Date of   specified by the Management
 
   Grant   Board at the Date of Grant
Exercise period
   Four years   Seven years
Valuation model
                            
Volatility (%) – based on historic volatility   34.5% – 36.1 %
Risk free interest rate (%) – government bonds with similar maturity   4.5% – 6.2 %
Dividend yield
   Up to 4.10%
Departures – based on historic data on options forfeited   4 %
Valuation model
   Trinomial
 
                    
11   Related parties
 
    Associate
The following transactions were carried out with Medika d.d.:
                                 
    Transaction value        
    six month period ended     Balance outstanding  
    30 June 2006     30 June 2005     30 June 2006     31 December 2005  
    USD’000     USD’000     USD’000     USD’000  
Sales of goods and services
     27,017       26,900       —       —  
Purchases of goods and services
    24       6       —       —  
Period-end receivables
     —       —       29,018       23,245  
Period-end liabilities
     —       —       —       —  
    Management Board
 
    Short-term employee benefits
 
    During the period, remuneration in the amount of USD 1,346 thousand (2005: USD 690 thousand) was paid to the Management Board.
 
    Equity compensation benefits
 
    During the period, the Management Board members exercised zero share options (2005: zero). Details on share based payments are given in Note 10.
 
    Supervisory Board
 
    During the period, remuneration in the amount of USD 258 thousand (2005: USD 266 thousand) was paid to the Supervisory Board.

F-17

 

PLIVA D.D.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(continued)
12   Retrospective correction of error
 
    The correction of the error explained in Note 2.2 had the following impact on the consolidated financial statements for the year ended 31 December 2005:
                 
            2005  
            USD’000  
(Decrease) in sales
             (3,158 )
(Decrease) in other revenue
             (222 )
(Increase) in cost of sales
             (5,513 )
(Increase) in general and administrative expenses
             (335 )
(Increase) in sales and distribution expenses
             (7,579 )
 
              
(Decrease) in profit
             (16,807 )
 
              
(Decrease) in intangible assets
             (2,266 )
(Decrease) in inventories
             (2,230 )
(Decrease) in trade and other receivables
             (3,334 )
(Increase) in trade and other payables
             (7,240 )
(Increase) in provisions
             (1,708 )
 
              
(Decrease) in equity
             (16,778 )
 
              
                 
    Share     GDR  
Total   USD     USD  
(Decrease) in basic earnings per
     (0.96 )     (0.19 )
(Decrease) in diluted earnings per
     (0.96 )     (0.19 )
                 
  Share     GDR  
Continuing operations
   USD     USD  
(Decrease) in basic earnings per
     (0.96 )     (0.19 )
(Decrease) in diluted earnings per
     (0.96 )     (0.19 )
    The restatement did not effect the 6 months ended 30 June 2005 as explained in Note 2.2.
 
13   Contingent liabilities
 
    A United States subsidiary of PLIVA d.d., PLIVA Inc., along with a number of other companies, is a named defendant in a number of lawsuits pending in the United States in which the plaintiffs claim to have sustained personal injuries as a result of using products containing phenylpropanolamine (“PPA”). PLIVA Inc., which was acquired by a subsidiary of PLIVA d.d. in 2002, terminated its manufacture of PPA products in the first quarter of 2001. PLIVA Inc. was a contract manufacturer of products containing PPA and two of such customers sought indemnification from PLIVA Inc. with respect to PPA-related personal injury claims that had been asserted against them. PLIVA Inc. has effectively resolved all PPA-related claims and lawsuits involving OTC appetite suppressants containing PPA. In addition, substantially all claims and lawsuits involving prescription nasal decongestant products containing PPA have been dismissed or settled. PLIVA Inc.’s insurer has been funding the defense costs incurred by PLIVA Inc. and the settlement costs associated with the PPA-related matters that have settled. PLIVA Inc. also has certain contractual indemnification rights against the former owner of PLIVA Inc. PLIVA Inc. intends to continue to defend any remaining actions vigorously. PLIVA d.d. was also named as a defendant in several of these actions and maintains that it has meritorious defenses to any claims that have been asserted.

F-18

 

PLIVA D.D.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(continued)
14   Subsequent events
 
    Future milestones/royalties
 
    As explained in Note 4 to the 2005 financial statements, the Company is entitled to a significant amount of proceeds related to the divestment of SANCTURA and VoSpire which is conditional on certain future events and achievement of sales milestones. To the extent not due and payable to PLIVA, these conditional proceeds have not been taken into account in calculating loss on sale of the discontinued business as management believes there is not sufficient certainty in realizing relevant conditions. As of 30 June 2006 PLIVA successfully collected USD 1,000 thousand of these conditional proceeds.
 
    Dividend
 
    On 29 August 2006 the Company’s shareholders approved a dividend in respect of 2005 of HRK 12.00 (USD 2.11) per share totaling USD 37,173 thousand, after adjusting to exclude treasury shares (2005: HRK 12.00 (USD 2.10) per share totaling USD 36,661 thousand in respect of 2004). The dividend was paid on 31 August 2006.
 
    Change of Control
 
    On 24 October 2006, Barr Pharmaceutical’s European subsidiary finalized the legal and regulatory requirements to acquire PLIVA.
 
    Under the terms of Barr’s USD 2.5 billion cash tender offer, Barr made a payment of HRK 820 per share for all shares tendered during the offer period. The transaction closed with 17,056,977 shares being tendered as part of the process, representing 92% of PLIVA’s total share capital being tendered to Barr. With the addition of the Treasury Shares held by PLIVA, Barr at that date owned or controlled in excess of 95% of PLIVA’s voting share capital.
 
    Barr has indicated its intention to utilize the provisions provided for under Croatian law to acquire the remaining outstanding shares from minority shareholder interests and will undertake the necessary steps to initiate the purchase of these shares at HRK 820 per share, the same price offered to shareholders during the formal tender period. The duration of this process and the subsequent pay out to remaining shareholders is expected to be completed during the first quarter of 2007.
 
    Stock Options
 
    In accordance with PLIVA’s internal by-laws, the vesting date of stock options granted to its current and previous employees was accelerated at the change in control date. The option holders were entitled to exercise any subsisting options held from the date of the change of control to the expiry of a period ending three months from the change of control date. At the end of this period any unexercised portions of such options shall lapse. As a result of this accelerated vesting date, an additional USD 24.4 million was expensed on 24 October 2006, the date of the change in control.
 
    Management Board and Supervisory Board changes
 
    On 31 October 2006 PLIVA announced changes to the Management Board of PLIVA d.d ., which resulted from the meeting of PLIVA’s Supervisory Board that was held on 30 October 2006 in Zagreb, Croatia.
 
    PLIVA’s Management Board now consists of Zeljko Covic as President and Chief Operating Officer, Ivan Mijatovic, Chief Financial Officer, Zdravka Knezevic, PLIVA’s Executive Director of Global Research and Development, Paul M. Bisaro, President and Chief Operating Officer of Barr Pharmaceuticals, Inc. and Tim Sawyer, Vice President, Sales for Generic Products in Barr Laboratories, Inc.
 
    At an extraordinary General Assembly held on 19 December 2006, a new Supervisory Board was elected and PLIVA’s Articles of Association were amended to reflect Barr’s legal and regulatory reporting requirements in the United States.
 
    Resignations of Supervisory Board members: Massimo Armanini, Franjo Lukovic, Branko Jeren, Zdenko Adrovic, Slobodan Vukicevic, Ivan Vidakovic, Ettore del’Isolla, Ronald Freeman and Michael Unsworth were accepted, and the following new members were elected: Jack Kay, President & Chief Operating Officer of Apotex Inc.; George Peter Stephan, member of the Board of Directors of Barr Pharmaceuticals Inc.; Frederick Jay Killion, Senior Vice President and General Counsel of Barr Pharmaceuticals, Inc.; George Frederick Wilkinson, President & Chief Operating Officer of Duramed Pharmaceuticals Inc; Martin Zeiger, partner of the investment bank Life Sciences Funds of Sanders Morris Harris and consultant in the pharmaceutical industry area.

F-19

 

PLIVA D.D.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(continued)
15   Significant differences between International Financial Reporting Standards (“IFRS”) and United States of America Generally Accepted Accounting Principles (“US GAAP”)
 
    The Company’s consolidated financial statements are prepared in accordance with International Financial Reporting Standards (“IFRS”), which differ in certain respects from accounting principles generally accepted in the United States of America (“US GAAP”). The principal differences between IFRS and US GAAP are presented below together with explanations of certain adjustments that affect consolidated net income and total shareholders’ equity under US GAAP as of and for the six month periods ended 30 June (in thousands of US dollars):
                 
    2006     2005 Restated  
    (unaudited)     (unaudited)  
Net income (loss) reported under IFRS
     62,915       (83,312 )
 
US GAAP adjustments:
                
- Revenue recognition (a)
     (74 )     (6,096 )
- In-process research and development costs (b)
     (4,121 )     5,300  
- Goodwill (c)
     1,833       (17,134 )
- Deferred income on disposal of VoSpire (d)
     3,091       -  
- Licenses and similar rights (e)
     97       31,114  
- Restructuring (f)
     (5,972 )     (216 )
- Pension expense and other post-employment benefits (g)
     (101 )     -  
- Share-based compensation (h)
     (913 )     113  
- Early retirement program (i)
     (158 )     (108 )
- Derivatives (j)
     (3,652 )     2,817  
- Minority interest (k)
     (16 )     183  
- Other (l)
     (169 )     11  
- Deferred taxes (m)
     6,743       (996 )
 
            
 
                
Total US GAAP adjustments
     (3,412 )     14,988  
 
                
Net Income (loss) under US GAAP
     59,503       (68,324 )
 
            
Earnings per share from continuing operations:
                
- Basic under US GAAP
     3.41       7.57  
- Diluted under US GAAP
     3.40       7.52  
Earnings per GDR from continuing operations:
                
- Basic under US GAAP
     0.68       1.51  
- Diluted under US GAAP
     0.68       1.51  
 
                
Earnings (loss) per share from discontinuing operations (1):
                
- Basic under US GAAP
             (11.49 )
- Diluted under US GAAP
             (11.40 )
Earnings (loss) per GDR from discontinuing operations (1):
                
- Basic under US GAAP
             (2.29 )
- Diluted under US GAAP
             (2.29 )
 
                
Earnings per share
                
- Basic under US GAAP
     3.41       (3.92 )
- Diluted under US GAAP
     3.40       (3.88 )
Earnings per GDR
                
- Basic under US GAAP
     0.68       (0.78 )
- Diluted under US GAAP
     0.68       (0.78 )
 
(1)   There were no discontinued operations under US GAAP for the 6 month period ended 30 June 2006.

F-20

 

PLIVA D.D.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(continued)
15   Significant differences between International Financial Reporting Standards (“IFRS”) and United States of America Generally Accepted Accounting Principles (“US GAAP”) (continued)
 
    The effect of the application of US GAAP on equity, as reported under IFRS, is set out in the table below (in thousands of US Dollars):
                 
    30 June 2006     31 December 2005  
    (unaudited)     Restated  
Equity reported under IFRS
     1,158,957       1,034,315  
   
US GAAP adjustments:
                
- Revenue recognition (a)
     (8,022 )     (7,667 )
- In-process research and development costs (b)
     (7,310 )     (3,000 )
- Goodwill (c)
     24,656       21,109  
- Deferred income on disposal of VoSpire (d)
     (27,576 )     (30,667 )
- License and similar rights (e)
     (19,048 )     (17,971 )
- Restructuring (f)
     3,443       8,791  
- Pension expense and other post-employment benefits (g)
     (944 )     (946 )
- Share-based compensation (h)
     -       527  
- Early retirement program (i)
     436       561  
- Derivatives (j)
     (2 )     3,502  
- Minority interest (k)
     (5,178 )     (5,129 )
- Other (l)
     (135 )     32  
- Deferred taxes (m)
     3,165       (3,415 )
 
            
Equity under US GAAP
     1,122,442       1,000,042  
 
            
    Changes in equity under US GAAP for the six month period ended 30 June 2006 and 2005, respectively are set out in the tables below (in thousands of US Dollars):
         
Equity under US GAAP at 31 December 2005
     1,000,042  
 
        
Net income under US GAAP
     59,503  
Other comprehensive income (loss):
        
- Additional minimum pension liability, net of tax
     74  
- Foreign currency translation
     45,548  
- Disposal of subsidiary
     (765 )
- Fair value reserve of AFS financial assets
     21  
Stock compensation
     1,187  
Adoption of FAS 123(R) (h)
     (527 )
Sale of treasury stock
     3,629  
Debt conversion
     13,730  
 
        
Equity under US GAAP at 30 June 2006 (unaudited)
     1,122,442  
 
        

F-21

 

PLIVA D.D.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL
STATEMENTS
(continued)
15   Significant differences between International Financial Reporting Standards (“IFRS”) and United States of America Generally Accepted Accounting Principles (“US GAAP”) (continued)
         
Equity under US GAAP at 31 December 2004
     1,192,650  
 
        
Net loss under US GAAP
     (68,324 )
Other comprehensive income (loss):
        
- Additional minimum pension liability, net of tax
     —  
- Foreign currency translation
     (68,102 )
- Fair value reserve of AFS financial assets
     30  
Stock compensation
     682  
Sale of treasury stock
     65  
Dividends
     (36,661 )
 
        
 
      
Equity under US GAAP at 30 June 2005 (unaudited)
     1,020,340  
 
      
Explanatory notes
The following statements summarise adjustments that reconcile net income and equity from that reported under IFRS to that which would have been reported had US GAAP been applied.
(a) Revenue recognition
In 2004, the United States Securities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin (“SAB”) 104 which amended SAB 101. Under this guidance, revenue earned from non-refundable upfront charges and milestone payments related to license and supply arrangements is recognised over the estimated remaining life of the contract. Under IFRS, this revenue is recognized immediately upon receipt when no uncertainty as to collectibility exists.
(b) In-process research and development (“IPR&D”)
Under IFRS, the Group recognises IPR&D acquired as a part of a business combination as a separate identifiable intangible asset apart from goodwill. The Group capitalizes the related amount and amortises it over its estimated useful life beginning when the asset is available for use (upon completion of the IPR&D). Further, until the asset is available for use, the Group tests it for impairment on an annual basis by comparing its carrying amount to its estimated recoverable amount.
Under US GAAP, IPR&D is considered to be a separate asset that needs to be written-off immediately following an acquisition when the feasibility of the acquired research and development has not been fully tested and the technology has no alternative future use.
On 14 February 2006 as part of its acquisition of USO Rational SA (Note 7), the Group capitalized USD 4,347 thousand under IFRS as an intangible asset related to products that had not yet received marketing authorization in the relevant territory. The impairment was reversed under US GAAP since the IPR&D had already been written-off at the date of acquisition.
In the six months ended 30 June 2005, the Group recorded an IPR&D impairment of USD 5,300 thousand under IFRS. This impairment related to the write-off of Urecholine Buccal. Under US GAAP, since this amount was written off as IPR&D at the date of acquisition in 2002, it was reversed.
In the six months ended 30 June 2006, the Group recorded amortisation of USD 226 thousand under IFRS. This has been reversed under US GAAP. There was no amortisation of IPR&D under IFRS for the six month period ended 30 June 2005.

F-22

 

PLIVA D.D.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL
STATEMENTS
(continued)
15   Significant differences between International Financial Reporting Standards (“IFRS”) and United States of America Generally Accepted Accounting Principles (“US GAAP”) (continued)
(c) Goodwill
Under IFRS, the Group adopted the provisions of IFRS 3 on 1 January 2005. At that date, goodwill was assigned to cash generating units based on a combination of the source of the previously recognised goodwill and the relative fair values of the cash generating units (or group of cash generating units) at that date. Subsequent to 1 January 2005, goodwill is no longer subject to amortisation, but is tested for impairment on an annual basis, or more frequently if events or changes in circumstances indicate that it might be impaired. When such indicators are identified, the impairment is determined by comparing the carrying value of goodwill with the recoverable amount of the cash-generating unit that contains the goodwill. If the recoverable amount of the cash-generating unit is less than the carrying value of the goodwill, an impairment charge is recorded for the difference. Under the transitional provisions of IFRS 3, this change in accounting policy was effective immediately for acquisitions made after 31 March 2004.
Under US GAAP, the Group records goodwill in accordance with Financial Accounting Standard (“FAS”) 142 Goodwill and Other Intangible Assets. The Group adopted the provisions of FAS 142 on 1 January 2002 and as a result, goodwill relating to purchase acquisitions and acquisitions of associated companies is no longer subject to amortisation subsequent to the date of adoption. At the date of adoption of FAS 142, the Group assigned goodwill to its US GAAP determined reporting units existing at 1 January 2002 taking into consideration a combination of the source of the previously recognised goodwill and the relative fair values of the relevant reporting units. At the date of adoption, the Group also performed its transitional goodwill impairment test. On an annual basis, thereafter the Group tests goodwill for impairment. At transition and for the years 2002 through 2005, there was no goodwill impairment under US GAAP.
The income statement adjustment recorded for the six month period ended 30 June 2005 relates to US GAAP goodwill of USD 21,200 thousand that was assigned to the disposal of a portion of the Proprietary business. Under IFRS, the goodwill that was assigned to the disposition was USD 4,066 thousand. The difference in goodwill amounts assigned under IFRS and US GAAP is due to the difference in fair values of reporting units (US GAAP) and cash generating units or group of cash generating units (IFRS), and therefore the amount of goodwill assigned, between the date of adoption of FAS 142 under US GAAP at 1 January 2002 and the date of adoption of IAS 36 at 1 January 2005. The income statement adjustment for the six months ended 30 June 2006 relates to the goodwill assigned to the disposal of Research Institute Ltd under IFRS. Under US GAAP this amount was expensed as acquired IPR&D in 1999.
(d) Deferred income on disposal of VoSpire
In October of 2005 the Group disposed of VoSpire to a third party in return for a payment of USD 32,000 thousand at the date of disposal. The Group may be entitled to a further maximum of USD 35,500 thousand in future periods conditional on the achievement of various milestones. As part of the disposal the Group also entered into a transitional supply arrangement for a period of four years during which time PLIVA will continue to supply VoSpire product to the third party until the third party arranges for another supplier.
Under IFRS the USD 32,000 thousand payment was recognized immediately since no uncertainty as to collectibility exists. Under US GAAP the Group deferred the USD 32,000 thousand payment and will also defer any milestone payments due under the arrangement and recognize them ratably over the remaining period of the arrangement (four years).
(e) License and similar rights
Under IFRS, the costs of the acquisition of licenses and similar rights through in-licensing agreements or from third parties were capitalised as intangible assets to the extent that future economic benefits were probable and would flow to the Group. Internal development costs are capitalised as intangible assets when the criteria specified in IAS 38, Intangibles Assets are satisfied and when it is probable that future economic benefits will flow to the Group. Under IFRS, intangible assets are stated at cost less accumulated amortisation. Under US GAAP, all costs incurred prior to obtaining regulatory approval are expensed.

F-23

 

PLIVA D.D.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL
STATEMENTS
(continued)
15   Significant differences between International Financial Reporting Standards (“IFRS”) and United States of America Generally Accepted Accounting Principles (“US GAAP”) (continued)
(e) License and similar rights (continued)
Under US GAAP, for the six month period ended 30 June 2006 and 2005, the Group expensed USD 1,501 thousand and USD 10,962 thousand, respectively, for intangibles for license and similar rights that were capitalized under IFRS. For the same periods under US GAAP the Group reversed USD 1,598 thousand and USD 1,306 thousand of related amortisation expense.
Also included in the adjustment for the six months ended 30 June 2005 is a USD 40,770 thousand reversal of a portion of the loss recorded under IFRS upon disposal of SANCTURA. Under US GAAP the carrying value of SANCTURA was lower by this amount at the date of disposal due to payments related to SANCTURA in 2004 that were expensed under US GAAP since the payments were made prior to FDA approval. Under IFRS these payments were capitalized as intangible assets since it was deemed probable that future economic benefits would flow to the Group.
(f) Restructuring
Under IFRS, a restructuring provision is recognised when the Group has approved a detailed formal plan and the restructuring has either commenced or has been publicly announced. In addition, under IFRS a liability is recorded for an onerous contract in which the unavoidable costs of meeting the obligations under the contracts exceed the economic benefits expected to be received from the contract.
Under US GAAP, a restructuring charge is recorded when a detailed plan for exit costs has been developed and those costs relating to employee termination benefits have been developed in sufficient detail so that employees who may be subject to termination would be aware of the benefit they were to receive upon involuntary termination. US GAAP requires that significant changes in the plan are unlikely.
Furthermore, under US GAAP, a liability associated with an exit activity is recognised when an event has occurred that creates a present obligation to transfer assets or provide services in the future that meets the definition of a liability. Under US GAAP, a restructuring provision is recognised and measured at its fair value at the communication date.
In addition, under US GAAP, a liability for costs that will continue to be incurred under a contract for its remaining term without economic benefit to the entity shall be recognised and measured at its fair value when the entity ceases using the right conveyed by the contract.
For the six month periods ended 30 June 2006 and 2005, certain provisions of the restructuring accruals recorded under IFRS related to workforce reduction, certain other exit costs, and onerous contracts did not meet the US GAAP requirements. Accordingly, these restructuring accruals were reversed and instead recognised as incurred upon the communication date or the date that the Group ceased using the right conveyed under contract. Under US GAAP, at 30 June 2006 and 31 December 2005 the Group has reversed restructuring accruals of USD 3,443 thousand and USD 8,791 thousand, respectively. The US GAAP adjustments that impact the balance sheet and income statement consist of the following:
                         
    Provision for             Provision for  
    restructuring             restructuring  
    accruals under             accruals under US  
    IFRS     Adjustments     GAAP  
 
Balance at 31 December 2005
     24,928       (8,791 )     16,137  
Increase made during the year
     —       486       486  
Provisions used during the year
     (14,670 )     5,486       (9,184 )
Foreign exchange movements
     1,030       (624 )     406  
 
                  
 
                        
Balance at 30 June 2006
     11,288       (3,443 )     7,845  

F-24

 

PLIVA D.D.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL
STATEMENTS
(continued)
15   Significant differences between International Financial Reporting Standards (“IFRS”) and United States of America Generally Accepted Accounting Principles (“US GAAP”) (continued)
(g) Pension expense and other post-employment benefits
Under IFRS, defined benefit pension liabilities and pension expense are determined in a similar manner to US GAAP. However, under IFRS, the Group adopted IAS 19, Employee Benefits from the year ended 31 December 2001. Under US GAAP, the Group adopted FAS 87, Employers’ Accounting for Pensions from the year ended 31 December 2003 since it was not feasible to apply FAS 87 on the effective date specified by the standard (the inception date of the plan was 1993). The different adoption dates gave rise to a different unrecognised actuarial loss for the six month periods ended 30 June 2006 and 30 June 2005 under IFRS versus US GAAP. For the six month period ended 30 June 2006, the application of the 10% corridor approach under both IFRS and US GAAP and the effects of settlement accounting related to AWD’s divestment of its manufacturing plant in Dresden, Germany gave rise to a difference in pension expense of USD 101 thousand.
Furthermore, under US GAAP and unlike IFRS, when the accumulated benefit obligation (“ABO”) exceeds the fair value of plan assets, a liability at least equal to the unfunded ABO must be recognised in the balance sheet. If an additional minimum liability (“AML”) is recognised, a contra amount is recognised first as an intangible asset up to the amount of unrecognised prior service costs, with any excess being reported in other comprehensive income. If the unfunded ABO is less than the liability already recognised, no further liability is recognised. The accumulated AML for the six month period ended 30 June 2006 was USD 602 thousand.
(h) Share-based compensation
The Group maintains several share-based employee compensation plans. As of 1 January 2005 the Group adopted IFRS 2 Share-based Payment. Prior to the adoption of IFRS 2, the Group did not record an expense related to the share-based payments in the income statement until such payments were settled. In accordance with the transitional provisions of IFRS 2, the standard has been applied retrospectively to all grants of share appreciation rights and share options that were granted after 7 November 2002 and that were not yet vested at 1 January 2005.
Under US GAAP, for periods prior to 1 January 2006, the Group elected to apply FAS 123, Accounting for Stock-Based Compensation to all share-based awards. Under FAS 123 employee stock option grants are expensed on a straight-line basis over the related option vesting period based on the fair value at the date the options were granted. Share appreciation rights were expensed based on intrinsic value prior to 1 January 2006. As a result under US GAAP the Group recorded less expense for share-based compensation of USD 113 thousand for the six month period ended 30 June 2005. The Group adopted FAS 123(R) Share-Based Payment, using the modified prospective method transition method, beginning 1 January 2006. Upon adoption of FAS 123 (R) the Group recorded the cumulative effect of recording the stock appreciation rights at fair value as an adjustment of USD 527 thousand to opening US GAAP retained earnings.
Additionally, under FAS 123(R) for some stock option awards the Group begins to recognise compensation expense at the service inception date which precedes the grant date. The service inception date precedes the grant date for these awards because the award is authorised, service begins before the option exercise price is known and the award contains a performance condition based on a target level of earnings that, if not achieved in the year before the grant date, results in forfeiture of the award. Additional expense recorded under US GAAP for the six month period ending 30 June 2006 for the service inception date is USD 913 thousand.
(i) Early retirement program
In Germany, the Group offers an early retirement program to its employees that provides an employee with the opportunity to work fulltime for a period of up to three years and receive fifty percent of his or her base salary for up to six years (i.e., including a period of up to three years of non-work), plus additional bonus payments during each of those six years. Under IFRS, the Group immediately accrued and expensed the full additional bonus payments for certain qualified employees who participate or are expected to participate in this program in future periods. Under US GAAP, the additional bonus payments are accrued over the employees’ remaining service lives for participating employees that signed an early retirement agreement. As a result, there was an increase to net equity of USD 436 thousand as of 30 June 2006.

F-25

 

PLIVA D.D.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL
STATEMENTS
(continued)
15   Significant differences between International Financial Reporting Standards (“IFRS”) and United States of America Generally Accepted Accounting Principles (“US GAAP”) (continued)
(j) Derivatives
Under IFRS the Group designates its interest rate swap as a fair value hedge at the inception of the arrangement. Since the Group did not apply US GAAP at the time of inception of the arrangement, it did not designate the swap as a hedge for purposes of US GAAP. Accordingly, under US GAAP, the interest rate swap does not qualify for hedge accounting.
(k) Minority interest
Under IFRS, minority interest is included in the determination of the Group’s net income (loss) and total equity. Under US GAAP, minority interest is deducted in the determination of US GAAP net income (loss) and excluded from total equity.
(l) Other
Other adjustments include impairment reversals not allowed under US GAAP.
(m) Deferred taxes
Under IAS 12 (revised) Income Taxes and under US GAAP, unrealised profits resulting from intercompany transactions are eliminated from the carrying amount of assets, such as inventory. In accordance with IAS 12 (revised) the Group calculates the tax effect with reference to the local tax rate of the company that holds the inventory (the buyer) at period-end. However, US GAAP requires that the tax effect is calculated with reference to the local tax rate in the seller’s or manufacturer’s jurisdiction. The effect of this difference increased US GAAP income for the six month period ended 30 June 2006 by USD 4,086 thousand and decreased income by USD 1,486 thousand for the six month period ended 30 June 2005 and decreased equity by USD 925 thousand on 30 June 2006.
The deferred tax effect on US GAAP adjustments represents the tax effect for the temporary differences, resulting from US GAAP adjustments. The deferred tax effect on other US GAAP adjustments resulted in a reduction of USD 2,657 thousand and USD 490 thousand in tax expense for the six month period ended 30 June 2006 and 2005 and increased equity by USD 4,090 thousand on 30 June 2006.
Discontinued Operations
Under IFRS, the Group classified the divestiture of VoSpire as a discontinued operation in all periods presented. Under US GAAP, since the Group will continue to supply VoSpire to the buyer for a period of four years, and as the continuing cash flows are deemed to be significant, VoSpire would not be treated as a discontinued operation.
For US GAAP purposes, sales from discontinued operations are USD 3,065 thousand and USD 17,346 thousand, for the six month periods ended 30 June 2006 and 2005, respectively. The operating results of discontinued operations include gains on disposals of USD 21,234 thousand for the six-month period ended 30 June 2006 and losses on disposals of USD 88,213 thousand for the six-month period ended 30 June 2005.
Under US GAAP profit from sale of subsidiary, sale of assets and proceeds from litigation, amounting to USD 755 thousand and USD 4,478 for the six month periods ended 30 June 2006 and 2005, respectively, would be recorded under general and administrative expenses rather than as other revenue under IFRS. Furthermore, under US GAAP rebates and discounts amounting to USD 10,010 thousand and USD 9,461 thousand for the six month periods ended 30 June 2006 and 2005, respectively, would be recorded under sales rather than as operating expenses under IFRS.

F-26

 

Independent Auditors’ Report
The Board of Directors and Stockholders of
PLIVA d.d.
We have audited the accompanying consolidated balance sheets of PLIVA d.d. (and subsidiaries) as of December 31, 2005 and 2004, and the related consolidated income statements, statements of changes in 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 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 auditing standards generally accepted in the United States of America. 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 consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. 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 statement 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 PLIVA d.d. (and subsidiaries) as of December 31, 2005 and 2004, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2005, in conformity with International Financial Reporting Standards (IFRS).
As discussed in Note 2.25 to the consolidated financial statements, the Company adopted IFRS 2 Share-based payments and amendments to International Accounting Standard (IAS) 39 Financial Instruments: Recognition and Measurement. As required by IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors, these changes have been applied retrospectively to all periods presented.
As discussed in Note 2.26 to the consolidated financial statements, the Company has restated the 2005 consolidated financial statements.
International Financial Reporting Standards vary in certain significant respects from US generally accepted accounting principles. Information relating to the nature and effect of such differences is presented in Note 34 to the consolidated financial statements.
/s/ KPMG Croatia d.o.o. za reviziju
Zagreb, Croatia
January 9, 2007

F-27

 

PLIVA D.D.
AUDITED CONSOLIDATED INCOME STATEMENTS
FOR THE YEARS ENDED 31 DECEMBER 2005, 2004 AND 2003
                                                         
    Note             2005             2004             2003  
                    USD’000             USD’000             USD’000  
            Restated - Note 2     Restated - Note 2     Restated - Note 2  
Continuing operations
                                                        
Sales
                     973,155               893,711               845,580  
Royalties
                     160,257               169,798               182,457  
Other revenue
     5               37,292               42,261               27,758  
 
                                                  
Total revenue
     3               1,170,704               1,105,770               1,055,795  
 
                                                        
Cost of sales
                     (519,516 )             (475,296 )             (422,606 )
 
                                                  
Gross profit
                     651,188               630,474               633,189  
 
                                                        
General and administrative expenses
                     (120,912 )             (123,603 )             (110,117 )
Research and development expenses
                     (73,563 )             (66,157 )             (69,354 )
Selling and distribution expenses
                     (225,629 )             (196,051 )             (190,079 )
Restructuring costs
     6               (40,814 )             —               (33,591 )
 
                                                  
Results from operating activities
                     190,270               244,663               230,048  
 
                                                        
Net financial expenses
     7               (19,084 )             (23,696 )             (21,965 )
 
                                                        
Share of profit/(loss) of equity accounted investees
     13               754               (220 )             —  
 
                                                  
Profit before tax
                     171,940               220,747               208,083  
 
                                                        
Income tax expense
     9               (5,091 )             (12,970 )             (20,821 )
 
                                                  
Profit from continuing operations
                     166,849               207,777               187,262  
 
                                                        
Discontinued operations
                                                        
Loss from discontinued operations
     4               (258,812 )             (80,154 )             (41,403 )
 
                                                  
(Loss) profit for the year
                     (91,963 )             127,623               145,859  
 
                                                  
Attributable to
                                                        
PLIVA d.d. shareholders
                     (91,871 )             127,504               146,214  
Minority interest
     21               92               (119 )             355  
 
                                                  
Earnings (loss) per:
           Share   GDR   Share   GDR   Share   GDR
- basic (USD)
     10       (5.27 )     (1.05 )     7.33       1.47       8.43       1.68  
- diluted (USD)
     10       (5.20 )     (1.04 )     7.27       1.45       8.36       1.67  
 
                                                        
Earnings from continuing operations per:
           Share   GDR   Share   GDR   Share   GDR
- basic (USD)
     10       9.58       1.92       11.94       2.39       10.82       2.16  
- diluted (USD)
     10       9.50       1.90       11.83       2.36       10.72       2.14  
 
                                          
The consolidated financial statements were approved for issue by the Company on 9 January 2007.
         
Zeljko Covic, M. Sc.
  Ivan Mijatovic, B. Sc.    
President of the Management Board
  Chief Financial Officer    
See accompanying “Notes to the Audited Consolidated Financial Statements”

F-28

 

PLIVA D.D.
AUDITED CONSOLIDATED BALANCE SHEETS
AS OF 31 DECEMBER 2005 AND 2004
                         
            31 December 2005     31 December 2004  
            Restated - Note 2     Restated - Note 2  
    Note     USD’000     USD’000  
ASSETS
                        
 
                        
Non-current assets
                        
 
                        
Property, plant and equipment
     11       510,559       638,181  
Intangible assets
     12       211,825       422,968  
Investment in equity accounted investees
     13       9,824       11,386  
Other investments
     14       903       2,107  
Receivables
     15       4,369       8,302  
Deferred tax assets
     16       35,478       40,748  
 
                    
Total non-current assets
             772,958       1,123,692  
 
                        
Current assets
                        
 
                        
Inventories
     17       211,994       251,327  
Trade and other receivables
     18       361,370       407,614  
Income tax receivable
             2,843       16,495  
Other investments
     14       3,392       321  
Bank deposits
             2       109  
Cash and cash equivalents
     19       296,897       167,853  
Assets classified as held for sale
     4       18,356       —  
 
                    
Total current assets
             894,854       843,719  
 
                    
Total assets
             1,667,812       1,967,411  
 
                    
See accompanying “Notes to the Audited Consolidated Financial Statements”

F-29

 

PLIVA D.D.
AUDITED CONSOLIDATED BALANCE SHEETS
AS OF 31 DECEMBER 2005 AND 2004
                         
    Note     31 December 2005     31 December 2004  
            Restated - Note 2     Restated - Note 2  
            USD’000     USD’000  
EQUITY AND LIABILITIES
                        
 
                        
Equity
                        
 
                        
Share capital
             359,862       359,862  
Share premium
             10,151       9,406  
Treasury shares
             (15,626 )     (15,988 )
Legal and other reserves
             24,551       18,578  
Translation reserve
             16,116       98,668  
Equity share options issued
             3,443       2,201  
Fair value reserve: available-for-sale financial assets
             132       89  
Retained earnings
             630,557       764,658  
 
                    
Equity attributable to PLIVA d.d. shareholders
             1,029,186       1,237,474  
Equity attributable to minority interest
     21       5,129       5,676  
 
                    
Total equity
     20       1,034,315       1,243,150  
 
                    
 
                        
Liabilities
                        
 
                        
Non-current liabilities
                        
 
                        
Interest bearing loans and borrowings
     22       223,536       262,489  
Employee benefits
     23       15,552       16,481  
Provisions
     24       5,891       2,117  
Other non-current liabilities
             5,017       89  
Deferred tax liabilities
     16       193       759  
 
                    
Total non-current liabilities
             250,189       281,935  
 
                        
Current liabilities
                        
 
                        
Trade and other payables
     25       241,480       254,335  
Interest bearing loans and borrowings
     22       103,784       172,572  
Employee benefits
             3,261       3,873  
Provisions
     24       27,693       9,012  
Income tax payable
             4,492       2,534  
Liabilities classified as held for sale
     4       2,598       —  
 
                    
Total current liabilities
             383,308       442,326  
 
                    
Total liabilities
             633,497       724,261  
 
                    
Total equity and liabilities
             1,667,812       1,967,411  
 
                    
See accompanying “Notes to the Audited Consolidated Financial Statements”

F-30

 

     
PLIVA D.D.
AUDITED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
FOR THE YEARS ENDED 31 DECEMBER 2005, 2004 AND 2003
                                                                                         
                                                                                   
                                                                            Equity        
                                        Equity     Fair value             Equity     attributable        
                    Legal and         share     reserve: AFS             attributable     to        
    Share     Share     Treasury     other     Translation     options     financial     Retained     to PLIVA d.d.     minority        
    capital     premium     shares     reserves     reserve     issued     assets     earnings     shareholders     interest     Total equity  
    USD’000     USD’000     USD’000     USD’000     USD’000     USD’000     USD’000     USD’000     USD’000     USD’000     USD’000  
    Note 20(i)           Note 20(ii)     Note 20(iii)     Note 20(iv)                             Note 21        
At 1 January 2005, restated
     359,862       9,406       (15,988 )     18,578       98,668       2,201       89       764,658       1,237,474       5,676       1,243,150  
 
                                                                                        
Transfer to reserves
     —       —       —       5,973       (404 )     —       —       (5,569 )     —       —       —  
Fair value reserve: AFS financial assets
     —       —       —       —       —       —       43       —       43       —       43  
Loss for the year, restated
     —       —       —       —       —       —       —       (91,871 )     (91,871 )     (92 )     (91,963 )
Exchange differences
     —       —       —       —       (82,148 )     —       —       —       (82,148 )     (455 )     (82,603 )
 
                                                                  
Total recognised income for 2005
     —       —       —       5,973       (82,552 )     —       43       (97,440 )     (173,976 )     (547 )     (174,523 )
 
                                                                  
Sale of treasury shares (Note 20(v))
     —       745       362       —       —       —       —       —       1,107       —       1,107  
Equity share options issued (Note 27)
     —       —       —       —       —       1,242       —       —       1,242       —       1,242  
Dividends declared (Note 20 (vi))
     —       —       —       —       —       —       —       (36,661 )     (36,661 )     —       (36,661 )
 
                                                                  
 
     —       745       362       —       —       1,242       —       (36,661 )     (34,312 )     —       (34,312 )
 
                                                                  
At 31 December 2005, restated — Note 2
     359,862       10,151       (15,626 )     24,551       16,116       3,443       132       630,557       1,029,186       5,129       1,034,315  
 
                                                                  
See accompanying “Notes to the Audited Consolidated Financial Statements”

F-31

 

     
PLIVA D.D.
AUDITED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
FOR THE YEARS ENDED 31 DECEMBER 2005, 2004 AND 2003
(continued)
                                                                                         
                                                                    Equity              
                                            Equity                     attributable            
                                        share     Fair value             to PLIVA     Equity        
                                Translation     options     reserve: AFS     Retained     d.d.     attributable        
                    Legal and     reserve     issued     financial     earnings -     shareholders     to     Total equity  
    Share     Share     Treasury     other     - restated     - restated     assets- restated     restated     - restated     minority     - restated  
    capital     premium     shares     reserves     (Note 2)     (Note 2)     (Note 2)     (Note 2)     (Note 2)     interest     (note 2)  
    USD’000     USD’000     USD’000     USD’000     USD’000     USD’000     USD’000     USD’000     USD’000     USD’000     USD’000  
    Note 20(i)           Note 20(ii)     Note 20(iii)     Note 20(iv)                             Note 21        
At 1 January 2004, restated
     359,862       8,490       (17,005 )     19,013       12,305       580       54       683,797       1,067,096       4,488       1,071,584  
Transfer to reserves
     —       —       —       509       42       —       —       (551 )     —       —       —  
Other movements
     —       —       —       (944 )     (69 )     —       —       —       (1,013 )     —       (1,013 )
Fair value reserve: AFS financial assets
     —       —       —       —       (1 )     —       35       —       34       —       34  
Profit for the year (restated)
     —       —       —       —       —       —       —       127,504       127,504       119       127,623  
Exchange differences
     —       —       —       —       86,400       —       —       —       86,400       1,069       87,469  
 
                                                                  
Total recognised income for 2004
     —       —       —       (435 )     86,372       —       35       126,953       212,925       1,188       214,113  
 
                                                                  
Sale/grant of treasury shares (Note 20(v))
     —       916       1,017       —       —       —       —       —       1,933       —       1,933  
Equity share options issued (Note 27)
     —       —       —       —       (9 )     1,621       —       —       1,612       —       1,612  
Dividends declared (Note 20 (vi))
     —       —       —       —       —       —       —       (46,092 )     (46,092 )     —       (46,092 )
 
                                                                  
 
     —       916       1,017       —       (9 )     1,621       —       (46,092 )     (42,547 )     —       (42,547 )
 
                                                                  
As at 31 December 2004, restated — Note 2
     359,862       9,406       (15,988 )     18,578       98,668       2,201       89       764,658       1,237,474       5,676       1,243,150  
 
                                                                  
See accompanying “Notes to the Audited Consolidated Financial Statements”

F-32

 

     
PLIVA D.D.
AUDITED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
FOR THE YEARS ENDED 31 DECEMBER 2005, 2004 AND 2003
(continued)
                                                                    Equity                  
                                            Equity     Fair value             attributable              
                                            share     reserve: AFS             to PLIVA              
                                    Translation     options     financial     Retained     d.d.     Equity     Total  
                            Legal and     reserve     issued     assets     earnings     shareholders     attributable to     equity -  
    Share     Share     Treasury     other     - restated     - restated     - restated     - restated     - restated     minority     restated  
    capital     premium     shares     reserves     (note 2)     (note 2)     (note 2)     (note 2)     (note 2)     interest     (note 2)  
    USD’000     USD’000     USD’000     USD’000     USD’000     USD’000     USD’000     USD’000     USD’000     USD’000     USD’000  
    Note 20(i)           Note 20(ii)     Note 20(iii)     Note 20(iv)                             Note 21        
At 1 January 2003, restated
     359,862       8,097       (17,925 )     16,902       (95,090 )     16       —       582,276       854,138       4,780       858,918  
Transfer to reserves
     —       —       —       655       139       —       —       (794 )     —       —       —  
Change in share capital of PLIVA Krakow and Lachema
     —       —       —       —       —       —       —       —       —       (472 )     (472 )
Fair value reserve: AFS financial assets
     —       —       —       —       —       —       54       —       54       —       54  
Profit for the year (restated)
     —       —       —       —       —       —       —       146,214       146,214       (355 )     145,859  
Exchange differences
     —       —       —       —       107,256       —       —       —       107,256       535       107,791  
Cash flow hedge
     —       —       —       1,456       —       —       —       —       1,456       —       1,456  
 
                                                                  
 
                                                                                        
Total recognised income for 2003
     —       —       —       2,111       107,395       —       54       145,420       254,980       (292 )     254,688  
 
                                                                  
 
                                                                                        
Sale/grant of treasury shares (Note 20(v))
     —       393       920       —       —       —       —       —       1,313       —       1,313  
Equity share options issued (Note 27)
     —       —       —       —       —       564       —       —       564       —       564  
Dividends declared (Note 20 (vi))
     —       —       —       —       —       —       —       (43,899 )     (43,899 )     —       (43,899 )
 
                                                                  
 
                                                                                        
 
     —       393       920       —       —       564       —       (43,899 )     (42,022 )     —       (42,022 )
 
                                                                  
At 31 December 2003, restated — Note 2
     359,862       8,490       (17,005 )     19,013       12,305       580       54       683,797       1,067,096       4,488       1,071,584  
 
                                                                  
See accompanying “Notes to the Audited Consolidated Financial Statements”

F-33

 

PLIVA D.D.
AUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED 31 DECEMBER 2005, 2004 AND 2003
                                 
    Note     2005     2004     2003  
            Restated -     Restated -     Restated -  
            Note 2     Note 2     Note 2  
            USD’000     USD’000     USD’000  
Cash flows from operating activities
                                
Profit/(loss) for the period
             (91,963 )     127,623       145,859  
Adjustments for:
                                
Income tax expense
     9       5,091       12,970       20,821  
Share of loss/(profit) of associate
     13       (754 )     220       —  
Interest expense (net)
             10,161       9,521       7,949  
Other finance (income)/expense (net)
             11,030       12,647       9,776  
Depreciation
     11       68,022       66,788       58,079  
Amortisation
     12       35,841       36,882       31,547  
Impairment
     11,12       68,644       —       8,101  
Gain on sale of property, plant and equipment and intangible assets
             (1,646 )     (1,903 )     (399 )
(Gain)/loss on sale of subsidiary
     30       (4,277 )     —       4,542  
Loss on sale of intangible assets
     4       76,542       —       —  
Inventories provision
             10,129       2,340       11,307  
Impairment of trade receivables
             (3,746 )     966       3,700  
Share based payments
     27       1,760       1,746       575  
Other non-cash income and expenses
             (2,616 )     2,073       7,175  
 
                          
Operating profit before working capital changes
             182,218       271,873       309,032  
Change in inventories
             28,746       (44,344 )     (14,399 )
Change in trade and other receivables
             63,049       (24,298 )     (25,513 )
Change in trade and other payables
             (22,398 )     43,719       12,240  
Change in employee benefits and provisions
             21,596       3,760       14,136  
 
                          
Cash generated by operations
             273,211       250,710       295,496  
Income taxes paid
             15,224       (27,719 )     (43,915 )
Interest and other financial charges paid
             (29,934 )     (25,065 )     (23,552 )
Effect of foreign exchange rates on operating cash flow
             (35,200 )     36,926       (28,304 )
 
                          
Net cash from operating activities
             223,301       234,852       199,725  
Net cash(used in) operating activities — discontinued operations
             (134,208 )     (76,145 )     (35,756 )
Net cash from operating activities — continuing operations
             357,509       310,997       235,481  
 
                          
See accompanying “Notes to the Audited Consolidated Financial Statements”

F-34

 

PLIVA D.D.
AUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED 31 DECEMBER 2005, 2004 AND 2003
                                 
    Note     2005     2004     2003  
            Restated -     Restated -     Restated -  
            Note 2     Note 2     Note 2  
            USD’000     USD’000     USD’000  
Cash flow from investing activities
                                
Interest and other income received
             9,670       5,657       3,314  
Proceeds from sale of property, plant and equipment and intangible assets
             71,315       9,768       8,226  
Proceeds from sale of subsidiary
     30       7,917       —       746  
Net purchase of marketable securities and investments
             (3,298 )     (126 )     19,131  
Purchase of property, plant and equipment
             (37,091 )     (53,798 )     (56,799 )
Purchase of intangible assets
             (32,267 )     (177,100 )     (31,738 )
Acquisition of subsidiary, net of cash acquired
     30       —       —       (10,360 )
Change in loans given
             8,054       1,237       7,368  
 
                          
Net cash from investing activities
             24,300       (214,362 )     (60,112 )
Net cash used in investing activities — discontinued operations
             (44,648 )     (150,000 )     —  
Net cash from/(used in) investing activities — continuing operations
             68,948       (64,362 )     (60,112 )
 
                          
 
                                
Cash flow from financing activities
                                
Proceeds from sale of treasury shares
     20 (v)     1,107       1,933       1,313  
Proceeds from bonds issued
             —       88,962       —  
Proceeds from interest bearing loans and borrowings
             182,524       224,602       339,018  
Repayment of interest bearing loans and borrowings
             (254,218 )     (258,696 )     (371,638 )
Dividend paid
   20(vi)     (36,661 )     (46,092 )     (43,877 )
 
                                
Net cash (used in)/from financing activities
             (107,248 )     10,709       (75,184 )
Net cash(used in)/ from financing activities — discontinued operations
             —       —       —  
Net cash (used in)/from financing activities — continuing operations
             (107,248 )     10,709       (75,184 )
 
                          
Effects of foreign exchange rate changes on cash and cash equivalents
             (11,309 )     9,962       6,614  
 
                          
Net increase in cash and cash equivalents
             129,044       41,161       71,043  
Cash and cash equivalents at 1 January
             167,853       126,692       55,649  
 
                          
Cash and cash equivalents at 31 December
     19       296,897       167,853       126,692  
 
                          
See accompanying “Notes to the Audited Consolidated Financial Statements”

F-35

 

PLIVA D.D.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
1   General
 
    These financial statements for the years ended 31 December 2005, 2004 and 2003 comprise the consolidated financial statements of PLIVA d.d. (“the Company”), a company incorporated and domiciled in Croatia and its subsidiaries (together referred to as “the Group”) and the Group’s interest in associates. The Company is the ultimate parent company of the Group. The registered head office of the Company is in Zagreb, Croatia.
 
    The Group manufactures and supplies a wide range of pharmaceutical products as its core business. Non-core businesses consist of the manufacture and supply of animal health and agrochemical products and DDDI (diagnostics, disinfectants, dialysis, and infusions).
 
    These financial statements differ from the consolidated financial statements that were included in the Company’s annual reports for 2005, 2004 and 2003. As explained in Notes 2.17 and 4, part of the Company’s business was classified as discontinued operations as at 31 December 2005. Consequently, comparative information for 2004 and 2003 is presented consistently with 2005 information.
 
    The Company changed the presentation of the discontinued operations compared to the presentation of the originally published financial statements for 2005. Instead of presenting a detailed breakdown of the discontinued operations on the face of the income statement, the Company is now presenting these in Note 4 and discontinued operations are presented as a single line item, net income /(loss) from discontinuing operations, in the consolidated income statements.
 
    In addition, as further explained in Note 2.26, the 2005 financial statements have been restated to reflect the correction of an error that was discovered subsequent to the publication of the 2005 financial statements.
 
    Furthermore, as explained in Note 2.25, 2004 and 2003 financial statements have been restated for the effect of the retrospective application of revised accounting standards.
 
2   Significant accounting policies
 
2.1   Statement of compliance
 
    The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”) issued by the International Accounting Standards Board (“IASB”), currently applicable interpretations issued by the International Financial Reporting Interpretations Committee (“IFRIC”) of the IASB and Croatian accounting law.
 
2.2   Basis of preparation
 
    These financial statements are presented in USD, rounded to the nearest thousand. Functional currency of the Company is Croatian Kuna (“HRK”).
 
    These financial statements are prepared on the historical cost basis, except that:
  •   the following assets and liabilities are stated at their fair value: derivative financial instruments, investments held for trading and investments classified as available-for-sale (except for those which are not traded in active markets, in which case they are measured at cost less impairment),
 
  •   non-current assets and disposal groups held for sale are stated at the lower of carrying amount and fair value less costs to sell.

F-36

 

PLIVA D.D.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
2   Significant accounting policies (continued)
 
2.2   Basis of preparation (continued)
 
    From 1 January 2005, the preparation of financial statements in conformity with IFRS requires management to make judgments, estimates and assumptions that affect the application of policies and reported amounts of assets and liabilities, income and expenses. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making the judgments about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.
 
    The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period or in the period of revision and future periods if the revision affects both current and future periods.
 
    Judgments made by management in the application of accounting policies that have significant effect on the amounts recognised in the financial statements are discussed in Note 32. Key assumptions concerning the future on which significant estimates are based, and other key sources of estimation uncertainty, which involve a significant risk of causing a material adjustment to the carrying value of assets and liabilities within the next financial year, are also disclosed in Note 32.
 
    The accounting policies set out below have been applied consistently to all periods presented in these consolidated financial statements except as indicated in Note 2.25. The accounting policies have been applied consistently by all Group entities.
 
    The financial statements are prepared on a going concern basis.
 
2.3   Principles and methods of consolidation
 
    (i) Subsidiaries
 
    Subsidiaries are entities in which the Company has the power, directly or indirectly, to exercise control over their operations. Control is achieved where a company has the power to govern the financial and operating policies of an entity so as to obtain benefit from its activities. Subsidiaries are consolidated from the date on which control commences and are no longer consolidated from the date that control ceases. Subsidiaries are listed in Note 29.
 
    (ii) Associates
 
    Associates are entities in which the Group has significant influence, but which it does not control. Significant influence is the power to participate in the financial and operating policy decisions of the investee but is not control or joint control over those policies. Investments in associates are accounted for by the equity method of accounting. Under this method the Company’s share of profits or losses of associates is recognised in the income statement from the date that significant influence commences until the date that significant influence ceases. The investment is initially recognised at cost and adjusted thereafter for the post-acquisition change in the investor’s share of net assets of the investee. Unrealised profits on transactions with associates are eliminated to the extent of the investor’s interest in the associate. The cumulative movements are adjusted against the cost of the investment. When the Group’s share of losses in an associate equals or exceeds its interest in the associate, the Group does not recognise further losses, unless the Group has incurred obligations or made payments on behalf of the associate.
 
    (iii) Transactions eliminated on consolidation
 
    All intra-group transactions, balances and unrealised gains on transactions between Group entities are eliminated in preparing the consolidated financial statements; unrealised losses are also eliminated but only to the extent that there is no evidence of impairment.
 
    Unrealised gains arising from transactions with associates are eliminated to the extent of the Group’s interest in the associate. Unrealised losses are eliminated in the same way as unrealised gains, but only to the extent that there is no evidence of impairment.

F-37

 

PLIVA D.D.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
2   Significant accounting policies (continued)
 
2.4   Foreign currencies
 
    (i) Transactions and balances
 
    In preparing the financial statements of the individual entities, foreign currency transactions are translated into the functional currency of the entity using the exchange rates prevailing at the dates of the transactions. Monetary assets and liabilities denominated in foreign currency at the balance sheet date are translated into the functional currency at the foreign exchange rate ruling at that date. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation of monetary assets and liabilities denominated in foreign currencies are recognised in the income statement.
 
    Non-monetary assets and items that are measured in terms of historical cost of a foreign currency are not retranslated.
 
    Non-monetary assets and liabilities denominated in foreign currencies that are stated at fair value are translated into the functional currency at foreign exchange rates in effect at the dates the values were determined.
 
    (ii) Group companies
 
    Items included in the financial statements of each of the Group’s entities are measured using the currency of the primary economic environment in which the entity operates (“the functional currency”). The consolidated financial statements are presented in USD, which differs from the Company’s functional currency, Croatian Kuna (“HRK”). Having regard to the requirements of international investors, the Management Board of the Company has determined that the operations of the Group should most appropriately be presented in USD.
 
    Income and expense items and cash flows of foreign operations that have a functional currency different from the presentation currency are translated into the Company’s presentation currency at rates approximating the foreign exchange rates ruling at the dates of transactions (average exchange rates for the month) and their assets and liabilities are translated at the exchange rates ruling at the year end. All resulting exchange differences are recognised in a separate component of equity.
 
    (iii) Net investment in Group companies
 
    Exchange differences arising from the translation of the net investment in foreign operations are taken to equity. When a foreign operation is sold, such exchange differences are released in the income statement as part of the gain or loss on sale.
 
2.5   Property, plant and equipment
 
    (i) Owned assets
 
    Items of property, plant and equipment are stated at cost less accumulated depreciation and impairment losses (refer to accounting policy 2.10). Cost includes all costs directly attributable to bringing the asset to working condition for its intended use, including the proportion of the related borrowing costs for property, plant and equipment incurred during the period of their construction.
 
    (ii) Subsequent expenditure
 
    Subsequent expenditure is capitalised only when it increases the future economic benefits embodied in the item of property, plant and equipment and those benefits will flow to the Group. All other expenditure is recognised in the income statement as an expense as incurred.
 
    (iii) Depreciation
 
    Depreciation is charged to the income statement on a straight-line basis over the estimated useful lives of each part of an item of property, plant and equipment. Land and assets in the course of construction are not depreciated. The estimated useful lives are as follows:
     
Buildings
  10 — 40 years
 
    
Equipment
  4 — 20 years
    Depreciation methods and useful lives, as well as residual values, are reassessed annually.

F-38

 

PLIVA D.D.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
2   Significant accounting policies (continued)
 
2.6   Intangible assets
 
    (i) Goodwill
 
    Goodwill arising on business acquisition represents the excess of the cost of business acquisition over the fair value of the Group’s share of the net identifiable assets of the acquired subsidiary or associate at the date of acquisition.
 
    Goodwill and fair value adjustments arising on the acquisition of a foreign entity are treated as assets and liabilities of the foreign entity and translated at the closing rate. Goodwill is expressed in the functional currency of the foreign operation and is translated each year using the exchange rate at the balance sheet date. In respect of associates, the carrying amount of goodwill is included in the carrying amount of the investment in the associate.
 
    Prior to 1 January 2005, goodwill was stated at cost less accumulated amortisation and impairment losses. Goodwill arising on each acquisition was amortised on a straight-line basis depending on the nature of the acquisition and management’s estimate of its useful economic life, generally 10 to 15 years. Goodwill amortisation was included in the income statement line “General and administrative expenses”.
 
    From 1 January 2005, goodwill is stated at cost less any accumulated impairment losses. Goodwill is allocated to cash-generating units and is no longer amortised but is tested annually for impairment (refer to accounting policy 2.10). The allocation is made to those cash generating units expected to benefit from the business combination in which the goodwill arose. Negative goodwill arising on acquisition is recognised directly in the income statement. When the Group disposes of an operation within a cash-generating unit, the goodwill associated with the operation disposed of is:
  •   included in the carrying amount of the operation when determining the gain or loss on disposal, and
 
  •   measured on the basis of the relative values at the date of disposal of the operation disposed of and the portion of the cash-generating unit retained.
    (ii) Patents, licenses and similar rights
 
    Where patents, licences and similar rights are acquired by the Group from third parties the costs of acquisition are capitalised to the extent that future economic benefits are probable and will flow to the Group. Licences to compounds in development are amortised over their estimated useful lives, but not exceeding 10 years. Estimated useful lives are reviewed annually and impairment reviews are undertaken if events occur which call into question the carrying values of the assets (refer to accounting policy 2.10).
 
    (iii) Subsequent expenditure
 
    Subsequent expenditure on capitalised intangible assets is capitalised only if it is probable that it increases the future economic benefits embodied in the specific asset to which it relates. All other expenditure is recognised in the income statement as an expense as incurred.
 
    (iv) Amortisation
 
    Amortisation is charged to the income statement on a straight-line basis over the estimated useful lives of intangible assets other than goodwill, unless such lives are indefinite. Goodwill and intangible assets with indefinite useful lives are tested for impairment annually, at the balance sheet date. Other intangible assets are amortised from the date on which they are available for use.

F-39

 

PLIVA D.D.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
2   Significant accounting policies (continued)
 
2.6   Intangible assets (continued)
 
    (v) Research and development costs
 
    Research costs are charged against income as incurred.
 
    Internal development costs are capitalised as intangible assets when the criteria specified in International Accounting Standard 38 Intangible Assets (“IAS 38”) are satisfied and when it is probable that future economic benefits will flow to the Group.
 
    In-process research and development assets acquired either through in-licensing arrangements, business combinations or separate purchases are capitalised as intangible assets (in the amount of payments made by Group companies to third parties and associates). Such intangible assets are stated at cost less accumulated amortisation and impairment losses. They are amortised on a straight-line basis over the period of the expected benefit, and are reviewed for impairment at each balance sheet date (refer to accounting policy 2.10).
 
2.7   Investments
 
    (i) Classification
 
    Investments that are acquired principally for the purpose of generating a profit from short-term fluctuations in price are classified as financial assets at fair value through profit or loss (that is, held for trading) and included in current assets. These include debt securities and derivative instruments, which do not qualify for hedge accounting. They are stated at fair value with any resultant gain or loss recognised in the income statement.
 
    Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market, other than those that the Group plans to sell immediately or in the near term.
 
    Non-derivative financial assets with fixed or determinable payment for which the Group has a positive intent and the ability to hold to maturity are classified as held-to-maturity and are included in assets based on their remaining maturity.
 
    Other investments, which may be sold in response to needs for liquidity, and all equity investments (other than subsidiaries and associates) are classified as available-for-sale; these are included in non-current assets unless management has the express intention of holding the investment for less than 12 months from the balance sheet date, in which case they are included in current assets.
 
    (ii) Recognition
 
    All financial assets classified as at fair value through profit or loss, held-to-maturity and available-for-sale are recognised on the trade date, which is the date that the Group commits to purchase the asset. Loans and receivables are recognised on the day they are transferred to the Group.
 
    (iii) Measurement
 
    Financial instruments are measured initially at fair value including transaction costs for financial assets and liabilities not measured at fair value through profit or loss. Transaction costs directly attributable to financial assets classified at fair value through profit or loss are expensed immediately.
 
    Financial instruments classified as available-for-sale are subsequently measured at fair value (except for equity instruments which are not traded and for which it is not possible to determine fair value), with any resultant gain or loss recognised directly in equity, except for impairment losses and, in case of monetary items such as debt securities, foreign exchange gains and losses.
 
    The fair value of financial assets classified as at fair value through profit or loss and available-for-sale is their quoted bid price at the balance sheet date.

F-40

 

PLIVA D.D.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
2   Significant accounting policies (continued)
 
2.7   Investments (continued)
 
    (iii) Measurement (continued)
 
    Loans and receivables and held-to-maturity assets are subsequently measured at amortised cost less impairment (refer to accounting policy 2.10). Amortised cost is calculated using the effective interest rate method.
 
    Realised and unrealised gains and losses arising from changes in the fair value of financial assets at fair value through profit or loss are included in the income statement in the period in which they arise. When these investments are interest bearing, interest calculated using the effective interest method is recognised in the income statement.
 
    (iv) Derecognition
 
    A financial asset is derecognised when the Group loses the contractual rights that comprise that asset. This occurs when the rights are realised, expire or are surrendered. A financial liability is derecognised when it is extinguished.
 
    Financial assets at fair value through profit or loss, available-for-sale assets and held-to-maturity instruments that are sold are derecognised and corresponding receivables from the buyer for the payment are recognised as of the date the Group commits to sell the assets. The Group uses the specific identification method to determine the gain or loss on derecognition.
 
    Loans and receivables are derecognised on the day that they are transferred by the Group.
 
    When available-for-sale investments are derecognised, the cumulative gain or loss previously recognised in equity is recognised in the income statement.
 
2.8   Inventories
 
    Inventories are stated at the lower of cost and net realisable value. Net realisable value is the estimated selling price in the ordinary course of business less the estimated costs of completion and selling expenses. Raw materials and packaging materials are valued based on purchase price, using the weighted average cost principle. Cost of work in progress and finished goods includes materials, direct labour and an appropriate proportion of variable and fixed overhead costs.
 
2.9   Receivables
 
    Trade receivables are initially measured at fair value and subsequently stated at amortised cost less impairment losses (refer to accounting policy 2.10).
 
2.10   Impairment
 
    Accounting policy until 1 January 2005 was as follows:
 
    The carrying amounts of the Group’s assets, other than inventories (refer accounting policy 2.8) and deferred tax assets (refer accounting policy 2.21), are reviewed at each balance sheet date to determine whether there is any indication of impairment. If any such indication exists, the asset’s recoverable amount is estimated. For intangible assets that are not yet available for use, the recoverable amount is estimated at each balance sheet date. An impairment loss is recognised whenever the carrying amount of an asset or its cash generating unit exceeds its recoverable amount. Impairment losses are recognised in the income statement.
 
    The recoverable amount of the Group’s investments in held-to-maturity securities and receivables is calculated as the present value of expected future cash flows, discounted at the original effective interest rate inherent in the asset. Receivables with a short duration are not discounted.
 
    The recoverable amount of other assets is the greater of their net selling price and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. For an asset that does not generate largely independent cash inflows, the recoverable amount is determined for the cash-generating unit to which the asset belongs.

F-41

 

PLIVA D.D.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
2   Significant accounting policies (continued)
 
2.10   Impairment (continued)
 
    Accounting policy from 1 January 2005 is as follows:
 
    The carrying amounts of the Group’s assets, other than inventories (refer to accounting policy 2.8) and deferred tax assets (refer to accounting policy 2.21) are reviewed at each balance sheet date to determine whether there is any indication of impairment. If any such indication exists, the asset’s recoverable amount is estimated.
 
    Assets that are subject to amortisation are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.
 
    An impairment loss is recognised whenever the carrying amount of an asset or its cash-generating unit exceeds its recoverable amount. Impairment losses are recognised in the income statement.
 
    For goodwill, intangible assets that have an indefinite useful life and intangible assets that are not yet available for use, the recoverable amount is estimated at each balance sheet date.
 
    Impairment losses recognised in respect of cash-generating units are allocated first to reduce the carrying amount of any goodwill allocated to the cash-generating unit (or group of units) and then, to reduce the carrying amount of the other assets in the unit (or group of units) on a pro rata basis.
 
    When a decline in the fair value of an available-for-sale financial asset has been recognised directly in equity and there is objective evidence that the asset is impaired, the cumulative loss that is recognised in profit or loss is the difference between the acquisition cost and current fair value, less any impairment loss on that financial asset previously recognised in the income statement.
 
    (i) Calculation of recoverable amount
 
    The recoverable amount of the Group’s investment in held-to-maturity securities and receivables carried at amortised cost is calculated as the present value of estimated future cash flows, discounted at the original effective interest rate (that is, the effective interest rate computed at initial recognition of these financial assets). Receivables with a short duration are not discounted.
 
    The recoverable amount of other assets is the greater of their fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. For an asset that does not generate largely independent cash inflows, the recoverable amount is determined for the cash-generating unit to which the asset belongs.
 
    (ii) Reversal of impairment
 
    An impairment loss in respect of a held-to-maturity security or receivable carried at amortised cost is reversed if the subsequent increase in recoverable amount can be related objectively to an event occurring after the impairment loss was recognised.
 
    An impairment loss in respect of an investment in an equity instrument classified as available-for-sale is not reversed through the income statement. If the fair value of a debt instrument classified as available-for-sale increases and the increase can be related objectively to an event occurring after the impairment loss was recognised in the income statement, then the impairment loss is reversed, with the amount of the reversal recognised in the income statement.
 
    An impairment loss in respect of goodwill is not reversed.
 
    In respect of other assets, an impairment loss is reversed when there is an indication that the impairment loss may no longer exist and there has been a change in the estimates used to determine the recoverable amount.
 
    An impairment loss is reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortisation, if no impairment loss had been recognised.

F-42

 

PLIVA D.D.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
2   Significant accounting policies (continued)
 
2.11   Cash and cash equivalents
 
    Cash and cash equivalents, for the purpose of the balance sheet and the statement of cash flows, consist of cash in hand and balances with banks, and highly liquid investments with insignificant risk of changes in value and original maturities of three months or less from the date of acquisition.
 
2.12   Share capital
 
    Share capital consists of ordinary shares. External costs directly attributable to the issue of new shares, other than on a business combination, are shown as a deduction from the proceeds in equity. Share issue costs incurred directly in connection with a business combination are included in the cost of acquisition.
 
    Where the Company purchases its own equity share capital, the consideration paid including any attributable transaction costs (net of income taxes) is deducted from total equity as treasury shares until they are cancelled. Where such shares are subsequently sold or reissued, any consideration received, net of directly attributable transaction costs, is included in equity.
 
2.13   Interest bearing loans and borrowings
 
    Interest bearing loans and borrowings are recognised initially at fair value of the proceeds received, less attributable transaction costs. In subsequent periods, interest bearing loans and borrowings are stated at amortised cost using the effective interest method. Any difference between proceeds (net of transaction costs) and the redemption value is recognised in the income statement over the period of the borrowings on an effective interest basis.
 
2.14   Provisions
 
    A provision is recognised when the Group has a present legal or constructive obligation as a result of a past event, it is probable that an outflow of resources will be required to settle the obligation, and a reliable estimate of the amount can be made. Provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and, where appropriate, the risks specific to the liability. Where the Group expects a provision to be reimbursed, the reimbursement is recognised as a separate asset but only when the reimbursement is virtually certain.
 
    (i) Restructuring provision
 
    A restructuring provision is recognised when the Group has approved a detailed and formal restructuring plan, and the restructuring has either commenced or has been announced publicly. Future operating costs are not provided for.

F-43

 

PLIVA D.D.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
2   Significant accounting policies (continued)
 
2.15   Trade and other payables
 
    Trade and other payables are initially measured at fair value and then subsequently at amortised cost.
 
2.16   Employee benefits
 
    (i) Pension obligations and post-retirement benefits
 
    Some Group companies provide various defined benefit plans, defined contribution plans and other post-retirement benefits to employees.
 
    The Group’s net obligation in respect of defined benefit pension plans is calculated separately for each plan by estimating the amount of future benefit that employees have earned in return for their service in the current and prior periods. The benefit is discounted to determine its present value. Discount rates are based on the market yields of high-quality corporate bonds in the country concerned. The calculation is performed by a qualified actuary using the projected unit credit method. Differences between assumptions and actual experiences and the effects of changes in actuarial assumptions are allocated over the estimated average remaining working lives of employees, where these differences exceed a defined corridor. Past service costs are allocated over the average period until the benefits become vested. Expenses from defined benefit plans are charged to staff costs.
 
    For defined contribution plans, the company pays contributions to publicly or privately administered pension insurance plans on a mandatory, contractual or voluntary basis. Once the contributions have been paid, the company has no further payment obligations. The regular contributions constitute net periodic costs for the year in which they are due and are included in staff costs.
 
    (ii) Share-based payment transactions
 
    Share options are granted to the Management Board and key employees. Options are exercisable at varying dates from vesting, at prices determined at the grant date and are settled by the sale of treasury shares (for equity settled transactions) or payment in cash (for cash settled transactions).
      (a) Employee services settled in equity instruments
 
      The fair value of the employee services received in exchange for the grant of options or shares is recognised as an expense. The total amount to be expensed over the vesting period is determined by reference to the fair value of the options or shares determined at the grant date. Service vesting conditions are included in assumptions about the number of options that are expected to vest or the number of shares that the employee will ultimately receive. This estimate is revised at each balance sheet date and the difference is charged or credited to the income statement, with a corresponding adjustment to equity. The proceeds received on exercise of the options net of any directly attributable transaction costs are credited to equity, with the nominal value being credited to treasury shares and the balance to share premium.
 
      (b) Employee services settled in cash instruments
 
      Employee services received in exchange for cash-settled share based payments are recognised at the fair value of the amount payable to the employee. The liability is re-measured at each balance sheet date and the settlement date to its fair value, with all changes recognised immediately in the income statement as employee costs.

F-44

 

PLIVA D.D.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
2   Significant accounting policies (continued)
 
2.16   Employee benefits (continued)
 
    (iii) Termination benefits
 
    Termination benefits are payable whenever an employee’s employment is terminated before the normal retirement date or whenever an employee accepts voluntary redundancy in exchange for these benefits.
 
    (iv) Bonus plans
 
    A liability for employee benefits is recognised in provisions based on the Group’s formal plan and when past practice has created a valid expectation by the Management Board/key employees that they will receive a bonus and the amount can be reasonably determined before the time of issuing the financial statements.
 
    Liabilities for bonus plans, other than equity compensation benefits described above, are expected to be settled within 12 months of the balance sheet date and are measured at the amounts expected to be paid when they are settled.
 
    Shares are also granted from treasury shares to the Management Board and key employees instead of cash as part of bonus arrangements.
 
2.17.   Non-current assets held for sale and discontinued operations
 
    Immediately before classification as held for sale, the measurement of the assets (and all assets and liabilities in a disposal group) is brought up to date in accordance with applicable IFRS. Then, on initial classification as held for sale, non-current assets and disposal groups are recognised at the lower of carrying amount and fair value less costs to sell.
 
    Impairment losses on initial classification as held for sale are included in the income statement, even for assets measured at fair value, as are gains and losses on subsequent measurement.
 
    A discontinued operation is a component of the Group’s business that represents a separate major line of business or geographical area of operations or is a subsidiary acquired exclusively with a view to resale.
 
    Classification as a discontinued operation occurs upon disposal or when the operation meets the criteria to be classified as held for sale, if earlier.
 
2.18   Revenue recognition
 
    Revenue from the sale of goods is recognised in the income statement when the significant risks and rewards of ownership are transferred to the buyer. Revenues are stated net of taxes, discounts and volume rebates. Provisions for rebates to customers are recognised in the same period that the related sales are recorded, based on contract terms.
 
    Revenue arising from licence and royalty fees is recognised on an accrual basis in accordance with the substance of the relevant agreements.
 
    Revenue from services is recognised in the period in which services are provided in proportion to the stage of completion of the transaction at the balance sheet date.

F-45

 

PLIVA D.D.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
2   Significant accounting policies (continued)
 
2.19   Operating lease payments
 
    Payments made under operating leases are recognised in the income statement on a straight-line basis over the period of the lease.
 
2.20   Net financial expenses
 
    Net financial expenses comprise interest payable on borrowings calculated using the effective interest rate method, interest receivable on funds invested, dividend income, foreign exchange gains and losses and gains and losses on hedging instruments, derivatives and other financial instruments that are recognised in the income statement (refer to accounting policy 2.24).
 
    Interest income is recognised in the income statement as it accrues, taking into account the effective yield on the asset. Dividend income is recognised in the income statement on the date that the Group’s right to receive payments is established.
 
2.21   Income tax
 
    Corporate income taxes are computed on the basis of reported income under the laws and regulations of the country in which the respective Group company is registered.
 
    Income tax on the profit or loss for the year comprises current and deferred tax. Income tax is recognised in the income statement except to the extent that it relates to items recognised directly to equity, in which case it is recognised in equity.
 
    Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantially enacted at the balance sheet date, and any adjustment to tax payable in respect of previous years.
 
    Deferred tax is provided using the balance sheet liability method, providing for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. The following temporary differences are not provided for: the initial recognition of assets or liabilities that affect neither accounting nor taxable profit, and differences relating to investments in subsidiaries to the extent that they will probably not reverse in the foreseeable future. No temporary differences are recognised on the initial recognition of goodwill. The amount of deferred tax provided is based on the expected manner of realisation or settlement of the carrying amount of assets and liabilities, using tax rates enacted or substantially enacted at the balance sheet date.
 
    A deferred tax asset is recognised only to the extent that it is probable that future taxable profits will be available against which the asset can be utilised. Deferred tax assets are reduced to the extent that it is no longer probable that the related tax benefit will be realised.
 
2.22   Dividends
 
    Dividends are recognised in the statement of changes in equity and recorded as liabilities in the period in which they are approved by the Company’s shareholders.
 
2.23   Segment information
 
    A segment is a distinguishable component of the Group that is engaged either in providing products or services (business segment) or in providing products or services in a particular economic environment (geographical segment) which is subject to risks and rewards that are different from those of other segments.
 
    The Group’s primary format for segment reporting is business segments and the secondary format is geographical segments. The risks and returns of the Group’s operations are strongly affected by both differences in the products it produces and by differences in the geographical areas in which it operates. This is reflected by the Group’s divisional management and organisational structure and the Group’s internal financial reporting systems.
 
    Segment information for the years ended 31 December 2004 and 2003 and as at 31 December 2004 and 2003 differ from segment information originally published in the annual reports for respective years. They have been restated and reclassified to conform with segment information for the years ended 31 December 2005 and as at 31 December 2005.

F-46

 

PLIVA D.D.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
2   Significant accounting policies (continued)
 
2.24   Accounting for derivative financial instruments and hedging activities
 
    Derivative financial instruments are entered into for the purpose of hedging the Group’s exposure to foreign exchange and interest rate risk. The Group’s treasury policies currently do not allow holding of derivative instruments for trading purposes. However, derivatives that do not qualify for hedge accounting are accounted for as trading instruments.
 
    Derivative financial instruments are recognised initially at fair value. Gains or losses on subsequent remeasurement of fair value are recognised immediately in the income statement.
 
    Any resulting gain or loss on derivative financial instruments accounted for as trading instruments is recorded in the income statement. However, any resulting gain or loss on derivative financial instruments where hedge accounting is applied is recognised based on the nature of the item being hedged.
 
    On the date on which a derivative contract is entered into, the Group designates certain derivatives as either (1) a hedge of the fair value of a recognised asset or liability (fair value hedge); or (2) a hedge of a forecast transaction or of a firm commitment (cash flow hedge); or (3) a hedge of a net investment in a foreign entity.
 
    The fair value of interest rate swaps is the estimated amount that the Group would receive or pay to terminate the swap at the balance sheet date, taking into account current interest rates and the current creditworthiness of the swap counterparties. The fair value of forward exchange contracts and forward rate contracts is their quoted market price at the balance sheet date, being the present value of the quoted forward price.
 
    Changes in the fair value of derivatives that are designated and qualify as fair value hedges and that are highly effective, are recorded in the income statement, along with any changes in the fair value of the hedged asset or liability that is attributable to the hedged risk.
 
    Changes in the fair value of derivatives that are designated and qualify as cash flow hedges and that are highly effective, are recognised in equity. Where the forecast transaction or firm commitment results in the recognition of an asset or of a liability, the gains and losses previously deferred in equity are transferred from equity and included in the initial cost or carrying value of the asset or liability. Otherwise, amounts deferred in equity are transferred to the income statement and classified as revenue or expense in the same periods during which the hedged firm commitment or forecast transaction affects the income statement. The ineffective part of any gain or loss is recognised immediately in the income statement.
 
    The Group documents at the inception of the transaction the relationship between hedging instruments and hedged items, as well as its risk management objective and strategy for undertaking various hedge transactions. This process includes linking all derivatives designated as hedges to specific assets and liabilities or to specific firm commitments or forecast transactions. The Group also documents its assessment, both at the hedge inception and on an ongoing basis as to whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in fair values or cash flows of hedged items.
 
2.25   Change in accounting policies
 
    In late 2003 the International Accounting Standards Board (“IASB”) published a revised version of 15 existing standards applicable from 1 January 2005. In the first quarter of 2004 the IASB published IFRS 2 Share-based Payments (applicable from 1 January 2005), IFRS 3 Business Combinations (applicable in part from 31 March 2004 and in part form 1 January 2005), IFRS 5 Non-current Assets Held for Sale and Discontinued Operations (applicable from 1 January 2005) and further amendments to IAS 39 (applicable from 1 January 2005).
 
    The Group adopted these effective from 1 January 2005. A description of these changes and their effect on the consolidated financial statements is given below.
 
    Revised IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors, amongst other matters, requires that changes in accounting policies that arise from the application of new or revised standards and interpretations are applied retrospectively, unless otherwise specified in the transitional requirements of the particular standard or interpretation.

F-47

 

PLIVA D.D.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
2   Significant accounting policies (continued)
 
2.25   Change in accounting policies (continued)
 
    Share-based payment transactions
 
    IFRS 2 Share-based Payments, which became effective from 1 January 2005, requires the fair value of equity instruments granted to employees to be recognised as an expense. Under the Group’s previous accounting policy to 31 December 2004, no expenses were recorded, and therefore, no charge against operating income was recognised in the Group’s consolidated financial statements. From 1 January 2005, PLIVA calculates the fair value of granted options using the trinomial valuation model. As required by IFRS 2, PLIVA has restated the prior-period comparatives to reflect:
  •   the cost of grants awarded after 7 November 2002 and which remain unvested at 1 January 2005 (for equity settled share based payments),
 
  •   the cost of grants for which there is a liability outstanding as at 1 January 2005 (for cash settled share based payments).
    Impact of applying IFRS 2
                                                 
    2004     2003  
                                    Impact        
            Impact on                     on        
            restated                     restated        
    Previously     2004             Previously     2003        
    reported     result     Restated     reported     result     Restated  
    USD’000     USD’000     USD’000     USD’000     USD’000     USD’000  
General and administrative expenses
                                                
Continuing operations
     121,857       1,746       123,603       109,542       575       110,117  
Discontinued operations
     16,111       —       16,111       20,455       —       20,455  
 
                                                
Total general and administrative expenses
     137,968       1,746       139,714       129,997       575       130,572  
 
                                                
Earnings per share
                                                
- basic (USD)
     7.43       (0.10 )     7.33       8.47       (0.04 )     8.43  
- diluted (USD)
     7.37       (0.10 )     7.27       8.40       (0.04 )     8.36  
Earnings per GDR
                                                
- basic (USD)
     1.49       (0.02 )     1.47       1.69       (0.01 )     1.68  
- diluted (USD)
     1.47       (0.02 )     1.45       1.68       (0.01 )     1.67  
    Business Combinations
 
    IFRS 3, amongst other matters, requires that amortisation of goodwill cease from the date of implementation (in the Group’s case, 1 January 2005). Goodwill will continue to be tested for impairment. The standard requires prospective application. Had this standard been applied in 2004, then goodwill amortisation expenses of USD 13,368 thousand for continuing businesses (2003: USD 13,093 thousand) and USD 560 thousand for discontinued businesses (2003: USD 232 thousand) would not have been recorded. No additional impairment would have been necessary.

F-48

 

PLIVA D.D.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
2   Significant accounting policies (continued)
 
2.25   Change in accounting policies (continued)
 
    Financial Instruments
 
    Amongst other matters, IAS 39 requires that financial instruments classified as available-for-sale are stated at fair value (except for equity instruments which are not traded and for which it is not possible to determine fair value), with any resultant gain or loss recognised directly in equity. The standard requires retrospective application.
 
    Impact of applying IAS 39
                                                 
    2004     2003  
            Impact on                     Impact on        
            restated                     restated        
    Previously     2004             Previously     2003        
    reported     result     Restated     reported     result     Restated  
    USD’000     USD’000     USD’000     USD’000     USD’000     USD’000  
Net financial expenses
     (23,661 )     (35 )     (23,696 )     (21,911 )     (54 )     (21,965 )
Earnings per share
           none                     none          
    Presentation of financial statements
 
    Presentation of income statement
 
    The new and revised standards result in significant changes to the format and content of the income statement. In addition the Group has made certain presentational changes to improve further the comparability of its results to those of other companies as follows:
  •   cost of sales was aligned with industry practice and now includes amortisation of intangible assets directly related to goods sold. This amortisation was previously recorded in research and development expenses. The amount for the year ended 31 December 2004 and 2003 was USD 15,202 thousand and USD 11,856 thousand, respectively, and is presented in the presentation reclassification column.
 
  •   the restatement of the income statement for the years ended 31 December 2004 and 2003 for these changes is summarised below,
 
  •   these changes have been applied retrospectively.
                                         
    Previously                     Presentation        
    reported     IFRS 2     IAS 39     Reclassification     Restated  
Year ended 31 December 2004   USD’000     USD’000     USD’000     USD’000     USD’000  
Continuing operations
                                        
Total revenue
     1,105,770       —       —       —       1,105,770  
Gross profit
     645,676       —       —       (15,202 )     630,474  
Operating profit
     246,409       (1,746 )     —       —       244,663  
Profit before tax
     222,528       (1,746 )     (35 )     —       220,747  
Profit after tax
     209,558       (1,746 )     (35 )     —       207,777  
Discontinued operations
                                        
Loss from discontinued operations
     (80,154 )     —       —       —       (80,154 )
 
                                        
Attributable to
                                        
PLIVA d.d. shareholders
     129,285       (1,746 )     (35 )     —       127,504  
Minority interest
     (119 )     —       —       —       (119 )
 
                                        
Earnings per share
                                        
- basic (USD)
     7.43       (0.10 )     —       —       7.33  
- diluted (USD)
     7.37       (0.10 )     —       —       7.27  
Earnings per GDR
                                        
- basic (USD)
     1.49       (0.02 )     —       —       1.47  
- diluted (USD)
     1.47       (0.02 )     —       —       1.45  

F-49

 

PLIVA D.D.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
2   Significant accounting policies (continued)
 
2.25   Change in accounting policies (continued)
 
    Presentation of financial statements (continued)
 
    Presentation of income statement (continued)
                                         
    Previously                     Presentation        
    reported     IFRS 2     IAS 39     Reclassification     Restated  
Year ended 31 December 2003   USD’000     USD’000     USD’000     USD’000     USD’000  
Continuing operations
                                        
Total revenue
     1,060,856       —       —       (5,061 )     1,055,795  
Gross profit
     645,458       —       —       (12,269 )     633,189  
Operating profit
     220,539       (575 )     —       10,084       230,048  
Net financial expenses
     (11,827 )     —       (54 )     (10,084 )     (21,965 )
 
                                
Profit before tax
     208,712       (575 )     (54 )             208,083  
Profit after tax
     187,891       (575 )     (54 )     —       187,262  
Discontinued operations
                                        
Loss from discontinued operations
     (41,403 )     —       —       —       (41,403 )
 
                                        
Attributable to
                                        
PLIVA d.d. shareholders
     146,843       (575 )     (54 )     —       146,214  
Minority interest
     355       —       —       —       355  
 
                                        
Earnings per share
                                        
- basic (USD)
     8.47       (0.04 )     —       —       8.43  
- diluted (USD)
     8.40       (0.04 )     —       —       8.36  
Earnings per GDR
                                        
- basic (USD)
     1.69       (0.01 )     —       —       1.68  
- diluted (USD)
     1.68       (0.01 )     —       —       1.67  
    Presentation of balance sheet
 
    The new and revised standards result in significant changes to the format and the content of the balance sheet. In addition the Group has made certain presentational changes to present certain balances more appropriately.
  •   Certain accruals that were previously reported as deductions to Trade and Other Receivables are now reported within Trade and Other Payables. There was no impact on net income or equity from this reclassification.
 
  •   These changes have been applied retrospectively. The restatement of the balance sheet at 31 December 2004 and 2003 for these changes is summarised below.
                                         
    Previously     Minority             Presentation        
    reported     interest     IFRS 2     Reclassification     Restated  
Year ended 31 December 2004   USD’000     USD’000     USD’000     USD’000     USD’000  
Non-current assets
     1,123,692       —       —       —       1,123,692  
Current assets
     786,654       —       —       57,065       843,719  
Total assets
     1,910,346       —       —       57,065       1,967,411  
 
                                        
Non-current liabilities
     285,663       —       146       (3,874 )     281,935  
Current liabilities
     381,387       —       —       60,939       442,326  
Total liabilities
     667,050       —       146       57,065       724,261  
 
                                        
Total equity
     1,237,620       5,676       (146 )     —       1,243,150  
Minority interest
     5,676       (5,676 )     —       —       —  

F-50

 

PLIVA D.D.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
2   Significant accounting policies (continued)
 
2.25   Change in accounting policies (continued)
 
    Presentation of financial statements (continued)
 
    Presentation of statement of changes in equity
 
    The effect of the retrospective application of the changes described above on the statement of changes in equity for the years ended 31 December 2003 and 2004 is summarised below.
                                         
    Previously     Minority                    
    reported     interest     IFRS 2     IAS 39     Restated  
Year ended 31 December 2004   USD’000     USD’000     USD’000     USD’000     USD’000  
Share capital
     359,862       —       —       —       359,862  
Share premium
     9,406       —       —       —       9,406  
Treasury shares
     (15,988 )     —       —       —       (15,988 )
Legal and other reserves
     18,578       —       —       —       18,578  
Translation reserve
     98,678       —       (9 )     (1 )     98,668  
Equity share options issued
     —       —       2,201       —       2,201  
Fair value reserve: AFS financial assets
     —       —       —       89       89  
Retained earnings
     767,084       —       (2,338 )     (88 )     764,658  
 
                                
Equity attributable to PLIVA d.d. shareholders
     1,237,620       —       (146 )     —       1,237,474  
Minority interest
     —       5,676       —       —       5,676  
 
                                
Total equity
     1,237,620       5,676       (146 )     —       1,243,150  
                                         
    Previously     Minority                    
    reported     interest     IFRS 2     IAS 39     Restated  
Year ended 31 December 2003   USD’000     USD’000     USD’000     USD’000     USD’000  
Share capital
     359,862       —       —       —       359,862  
Share premium
     8,490       —       —       —       8,490  
Treasury shares
     (17,005 )     —       —       —       (17,005 )
Legal and other reserves
     19,013       —       —       —       19,013  
Translation reserve
     12,305       —       —       —       12,305  
Equity share options issued
     —       —       580       —       580  
Fair value reserve: AFS financial assets
     —       —       —       54       54  
Retained earnings
     684,442       —       (591 )     (54 )     683,797  
 
                                
Equity attributable to PLIVA d.d. shareholders
     1,067,107       —       (11 )     —       1,067,096  
Minority interest
     —       4,488       —       —       4,488  
 
                                
Total equity
     1,067,107       4,488       (11 )     —       1,071,584  

F-51

 

PLIVA D.D.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
2   Significant accounting policies (continued)
 
2.25   Change in accounting policies (continued)
 
    Presentation of statement of cash flows
 
    The Company restated previously reported cash flow statements to present the effects of the restatements discussed in this note. These resulted in reclassifications within cash flow captions, with no effect resulting in the overall cash flow captions.
 
    The cash flow includes a restatement to reclassify impacts of foreign currency fluctuations from the effects of foreign exchange rate changes on cash and cash equivalents to the correct cash flow captions. This resulted in the reclassification to the caption “Net cash flow from operating activities” of USD (6,096) thousand, USD 35,102 thousand and USD (28,303) thousand for the 2005, 2004 and 2003 years, respectively; reclassification to the caption “Net cash from investing activities” of USD 271 thousand and USD 233 thousand for the 2004 and 2003 years respectively; and reclassification to the cash flow caption “Net cash from financing activities” of USD 22 thousand in 2004.
 
    A reclassification due to a correction of USD 4,832 thousand was made to “Proceeds from sale of property, plant and equipment” and “intangible assets in the “cash flows from operating activities” caption.
 
    The total cash flow from operating, investing and financial activities are as follows:
                         
            Impact on        
    Previously     restated        
    reported     2005 cash flow     Restated  
Year ended 31 December 2005   USD’000     USD’000     USD’000  
Net cash from operating activities
     224,565       (1,264 )     223,301  
Net cash from investing activities
     29,132       (4,832 )     24,300  
Net cash used in financing activities
     (107,248 )     —       (107,248 )
Effects of foreign exchange rate changes on cash and cash equivalents
     (17,405 )     6,096       (11,309 )
                         
            Impact on        
    Previously     restated        
    reported     2004 cash flow     Restated  
Year ended 31 December 2004   USD’000     USD’000     USD’000  
Net cash from operating activities
     199,750       35,102       234,852  
Net cash from investing activities
     (214,633 )     271       (214,362 )
Net cash used in financing activities
     10,731       (22 )     10,709  
Effects of foreign exchange rate changes on cash and cash equivalents
     45,313       (35,351 )     9,962  
                         
            Impact on        
    Previously     restated        
    reported     2003 cash flow     Restated  
Year ended 31 December 2003   USD’000     USD’000     USD’000  
Net cash from operating activities
     228,028       (28,303 )     199,725  
Net cash from investing activities
     (60,345 )     233       (60,112 )
Net cash used in financing activities
     (75,184 )     —       (75,184 )
Effects of foreign exchange rate changes on cash and cash equivalents
     (21,456 )     28,070       6,614  

F-52

 

PLIVA D.D.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
2   Significant accounting policies (continued)
 
2.25   Change in accounting policies (continued)
 
    Standards, interpretations and amendments to published standards that are not yet effective
 
    The Group is currently assessing the potential impact of the new and revised standards in issue that will be effective from 1 January 2006 or later periods.
 
    Effective from 1 January 2006 the Group will apply the Amendment to IAS 21 The Effects of Changes in Foreign Exchange Rates – Net Investment in a Foreign Operation. The Amendment clarifies in which circumstances a loan may form part of a reporting entity’s net investment in a foreign operation, and the currency in which such an item may be denominated. The Amendment requires retrospective application. The Group does not expect that this Amendment will result in a material restatement of the 2005 figures as the amount of loans which would be affected by the Amendment is not significant.
 
    The Group will also apply the Amendment to IAS 19 Employee Benefits effective from 1 January 2006. This amendment introduces the option of an alternative recognition approach for actuarial gains and losses. It may impose additional recognition requirements for multi-employer plans where insufficient information is available to apply defined benefit accounting. It also adds new disclosure requirements. As the Group does not intend to change the accounting policy adopted for recognition of actuarial gains and losses and does not participate in any multi-employer plans, adoption of this amendment will only impact the format and extent of disclosures presented in the accounts. The Group will apply this amendment from annual periods beginning 1 January 2006.
 
    The Group does not expect that the other new and revised standards and interpretations will have a significant effect on the Group’s results and financial position, although they will expand the disclosures in certain areas.
 
2.26   Correction of error
 
    During 2006, management identified that one of the Company’s subsidiaries had incorrectly recognised revenue for certain customer arrangements and omitted certain expenses from its financial results reported to the Company. Collectively, the incorrect revenue recognition and expense omission issues resulted in excessive revenue being reported by the Company and an understatement of the amounts due to the subsidiary’s suppliers and customers. Consequently, the management concluded that the previously reported financial results should be restated to reflect the correction of these errors. The impact on the originally published consolidated financial statements for the year ended 31 December 2005 is provided on the following page.
 
    As explained in Note 2.25, the statement of cash flows was corrected to ensure proper classification in accordance with IAS 7 Cash flows.

F-53

 

PLIVA D.D.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
2   Significant accounting policies (continued)
 
2.26   Correction of error (continued)
                 
            2005  
            USD’000  
Income statement
                
Sales
             (3,158 )
Other revenue
             (222 )
Cost of sales
             (5,513 )
General and administrative expenses
             (335 )
Sales and distribution expenses
             (7,579 )
 
              
 
                
Loss for the period
             (16,807 )
 
              
 
                
Balance sheet
                
Intangible assets
             (2,266 )
Inventories
             (2,230 )
Trade and other receivables
             (3,334 )
Trade and other payables
             (7,240 )
Provisions
             (1,708 )
 
              
 
                
Equity
             (16,778 )
 
              
 
                
 
   Share     GDR  
 
   USD     USD  
Earnings per share/GDR
                
Total
                
(Decrease) in basic earnings per
     (0.96 )     (0.19 )
(Decrease) in diluted earnings per
     (0.96 )     (0.19 )
 
                
 
   Share     GDR  
 
   USD     USD  
Continuing operations
            
(Decrease) in basic earnings per
     (0.96 )     (0.19 )
(Decrease) in diluted earnings per
     (0.96 )     (0.19 )
    The restatement had no impact on the Company’s net assets at 31 December 2003 and 2004 and on the income statement for the years ended 31 December 2003 and 2004.

F-54

 

PLIVA D.D.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
2   Significant accounting policies (continued)
 
2.26   Correction of error (continued)
 
    The following items in the consolidated income statement and the consolidated balance sheet have been restated as follows.
                         
    2005     2005     2005  
    USD’000     USD’000     USD’000  
    Previously reported     Impact     Restated  
Total revenue
     1,174,084       (3,380 )     1,170,704  
Cost of sales
     (514,003 )     (5,513 )     (519,516 )
Gross profit
     660,081       (8,893 )     651,188  
Operating profit
     207,077       (16,807 )     190,270  
Profit before tax
     188,747       (16,807 )     171,940  
Income tax
     (5,091 )     —       (5,091 )
Loss from discontinued operations
     (258,812 )     —       (258,812 )
Profit for the year
     (75,156 )     (16,807 )     (91,963 )
 
                        
Non-current assets
     775,224       (2,266 )     772,958  
Current assets
     900,418       (5,564 )     894,854  
Total assets
     1,675,642       (7,830 )     1,667,812  
Non-current liabilities
     250,189       —       250,189  
Current liabilities
     374,360       8,948       383,308  
Total equity
     1,051,093       (16,778 )     1,034,315  
Total liabilities and equity
     1,675,642       (7,830 )     1,667,812  
    In relation to the consolidated statement of cash flows, the restatement had no effect on the amounts of net cash provided by operating activities.

F-55

 

PLIVA D.D.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
3   Segment information
 
    Business segments are Generics, Pharma Chemicals which includes sales of Azithromycin and other active pharmaceutical ingredients, and non-core (which includes DDDI (diagnostics, disinfectants, dialysis, and infusions) and Animal Health and Agrochemicals).
 
    Segment information for the years ended 31 December 2004 and 2003 and as at 31 December 2004 and 2003 differ from segment information originally published in the annual reports for the respective years. They have been restated and reclassified to conform with segment information for the year ended 31 December 2005 and as at 31 December 2005.
 
    The segments are managed separately due to the differences in marketing strategies and in production technologies. Segment information is based on internal management accounts. Inter-segment sales from Pharma Chemicals to Generics of USD 12,231 thousand (2004: USD 7,454 thousand, 2003: USD 7,450 thousand) has been excluded from Pharma Chemicals’ revenue. These sales are made at standard cost price, which reflects direct costs and manufacturing overheads allocated at normal levels of production.
 
    The segmental operating result does not include corporate overheads (administrative expenses of corporate support functions), goodwill impairment, or certain items of income, which are not directly attributable to the reported business segments. Information about interest income and expense, and income taxes is not provided on a segment level as the segments are reviewed based on operating profit.
 
    Geographical reporting segments are secondary to business segments. Geographical revenue information is based on the geographical location of customers.
 
    Discontinued operations is discussed in Note 4.
 
      For the year ended 31 December 2005 — Restated — Note 2
                                                 
            Proprietary     Pharma     Non-     Non-        
    Generics     (a)     Chemicals     core     allocated     Group  
    USD’000     USD’000     USD’000     USD’000     USD’000     USD’000  
Gross segment sales
     792,314       208,059       138,893       57,392       9,290       1,205,948  
Intersegment sales
     —       —       (12,231 )     —       —       (12,231 )
Total revenue
     792,314       208,059       126,662       57,392       9,290       1,193,717  
Gross profit
     390,049       170,761       63,480       19,959       5,284       649,533  
Operating profit/(loss)
     5,578       (11,310 )     47,873       606       (34,747 )     8,000  
Net financing expenses
     —       —       —       —       —       (19,084 )
Share of profit of associate
     —       —       —       —       —       754  
Profit before tax
     —       —       —       —       —       (10,330 )
Income tax expense
     —       —       —       —       —       (5,091 )
Profit after tax before loss from sale of discontinued operations
     —       —       —       —       —       (15,421 )
Loss from sale of discontinued operations
     —       —       —       —       —       (76,542 )
Loss for the year
     —       —       —       —       —       (91,963 )
 
                                                
Other segment information
                                                
Depreciation (Note 11)
     50,551       2,284       11,710       2,941       536       68,022  
Amortisation (Note 12)
     14,864       20,774       —       23       180       35,841  
Impairment – restructuring (Note 6)
     21,018       38,823       2,354       —       —       62,195  

F-56

 

PLIVA D.D.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
3   Segment information (continued)
 
      For the year ended 31 December 2004 — Restated — Note 2
                                                 
                  Pharma             Non-        
    Generics     Proprietary(a)     Chemicals     Non-core     allocated     Group  
    USD’000     USD’000     USD’000     USD’000     USD’000     USD’000  
Gross segment sales
     704,126       225,322       131,014       55,311       21,814       1,137,587  
Intersegment sales
     —       —       (7,454 )     —       —       (7,454 )
Total revenue
     704,126       225,322       123,560       55,311       21,814       1,130,133  
Gross profit
     346,793       208,330       59,007       18,997       16,190       649,317  
Operating profit/(loss)
     37,674       100,832       49,664       (1,438 )     (22,223 )     164,509  
Net financing expenses
     —       —       —       —       —       (23,696 )
Share of loss of associate
     —       —       —       —       —       (220 )
Profit before tax
     —       —       —       —       —       140,593  
Income tax expense
     —       —       —       —       —       (12,970 )
Profit for the year
     —       —       —       —       —       127,623  
 
                                                
Other segment information
                                                
Depreciation (Note 11)
     47,155       4,085       11,013       2,998       1,537       66,788  
Amortisation (Note 12)
     14,457       8,376       —       16       14,033       36,882  
      For the year ended 31 December 2003 — Restated — Note 2
                                                 
                  Pharma             Non-        
    Generics     Proprietary(a)     Chemicals     Non-core     allocated     Group  
    USD’000     USD’000     USD’000     USD’000     USD’000     USD’000  
Gross segment sales
     635,458       259,730       124,137       53,252       7,476       1,080,053  
Intersegment sales
     —       —       (7,450 )     —       —       (7,450 )
Total revenue
     635,458       259,730       116,687       53,252       7,476       1,072,603  
Gross profit
     342,041       238,208       42,897       19,563       4,384       647,093  
Operating profit/(loss)
     42,816       155,318       16,754       (1,281 )     (24,962 )     188,645  
Net financing expenses
     —       —       —       —       —       (21,965 )
Share of loss of associate
     —       —       —       —       —       —  
Profit before tax
     —       —       —       —       —       166,680  
Income tax expense
     —       —       —       —       —       (20,821 )
Profit for the year
     —       —       —       —       —       145,859  
 
                                                
Other segment information
                                                
Depreciation
     38,613       6,503       10,723       1,953       287       58,079  
Amortisation
     11,666       6,533       —       11       13,337       31,547  

F-57

 

PLIVA D.D.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
3   Segment information (continued)
 
(a)   Proprietary business segment – continuing and discontinued operations
                                                                         
For the year ended   31 December 2005 - Restated - Note 2     31 December 2004 - Restated - Note 2     31 December 2003 - Restated - Note 2  
    Continuing     Discontinued     Total     Continuing     Discontinued     Total     Continuing     Discontinued     Total  
    USD’000     USD’000     USD’000     USD’000     USD’000     USD’000     USD’000     USD’000     USD’000  
Total revenue
     185,046       23,013       208,059       200,959       24,363       225,322       242,922       16,808       259,730  
Gross profit
     172,416       (1,655 )     170,761       189,487       18,843       208,330       224,304       13,904       238,208  
Operating profit/(loss)
     170,960       (182,270 )     (11,310 )     180,426       (79,594 )     100,832       196,489       (41,171 )     155,318  
    Continuing operations include:
  •   royalty income from Pfizer for the sale of Zithromax (Azithromycin) on the US and international markets in the amount of USD 160,257 thousand (2004: USD 169,798 thousand, 2003: USD 182,457 thousand). PLIVA was entitled to receive royalty income from the sale of Zithromax in the US market until November 2005. The royalty rights on other markets expire between 2006 and 2009. Royalty income from the sale of Zithromax (Azithromycin) on the US market represented 84% (31 December 2004: 82%, 31 December 2003: 86%) of the total royalty revenue, and
 
  •   revenue from a small number of remaining proprietary products that will not be divested.
    Discontinued operations are discussed in Note 4.
                                                 
    2005 - Restated - Note 2     2004     2003  
Revenue by geographical destination   USD ’000     %     USD ’000     %     USD ’000     %  
Croatia
     181,211       15.2       191,342       16.9       164,203       15.3  
 
                                    
 
                                                
International
                                                
North America
     473,359       39.6       467,315       41.3       467,971       43.6  
Western Europe
     239,529       20.1       206,392       18.3       186,590       17.4  
Central and Eastern Europe
     289,124       24.2       251,586       22.3       240,362       22.4  
Other
     10,494       0.9       13,498       1.2       13,477       1.3  
 
                                    
 
                                                
Total International
     1,012,506       84.8       938,791       83.1       908,400       84.7  
 
                                    
 
                                                
Total revenue
     1,193,717       100.0       1,130,133       100.0       1,072,603       100.0  

F-58

 

PLIVA D.D.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
3   Segment information (continued)
 
    Segment assets and liabilities
 
    For the year ended 31 December 2005 — Restated — Note 2
                                         
                    Pharma              
    Generics     Proprietary     Chemicals     Non-core     Group  
    USD ’000     USD ’000     USD ’000     USD ’000     USD ’000  
Total segment assets
     972,080       143,473       96,481       64,602       1,276,636  
Non-segment assets
                                     391,176  
 
                                      
 
                                        
Total assets
                                     1,667,812  
 
                                        
Total segment liabilities
     102,363       20,732       5,370       10,433       138,898  
Non-segment liabilities
                                     494,599  
 
                                      
 
                                        
Total liabilities
                                     633,497  
 
                                      
    For the year ended 31 December 2004 — Restated — Note 2
                                         
                    Pharma              
    Generics     Proprietary     Chemicals     Non-core     Group  
    USD ’000     USD ’000     USD ’000     USD ’000     USD ’000  
Total segment assets
     1,082,673       443,899       165,193       64,644       1,756,409  
Non-segment assets
                                     211,002  
 
                                      
 
                                        
Total assets
                                     1,967,411  
 
                                        
Total segment liabilities
     146,349       55,408       11,242       11,535       224,534  
Non-segment liabilities
                                     499,727  
 
                                      
 
                                        
Total liabilities
                                     724,261  
 
                                      
    Segment assets consist primarily of property, plant and equipment, receivables and inventories.
 
    Segment liabilities consist of trade accounts payable.
 
    Non-segment assets and liabilities consist of assets and liabilities which cannot be reasonably attributed to the reported business segment such as deferred tax, financial assets and liabilities, cash, marketable securities, other investments and debt.

F-59

 

PLIVA D.D.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
3   Segment information (continued)
 
    The table below shows the carrying amount of segment assets and additions to property, plant and equipment and intangible assets by geographical area in which the assets are located.
                                 
    2005 – Restated - Note 2     2004 – Restated - Note 2  
    Total assets     Additions     Total assets     Additions  
    USD ’000     USD ’000     USD ’000     USD ’000  
Croatia
     765,673       37,981       878,309       37,955  
North America
     318,593       6,056       548,195       162,215  
Western Europe
     320,585       17,344       250,542       13,525  
Central and Eastern Europe
     262,241       18,874       289,448       16,636  
Other
     720       1,050       917       567  
 
                        
 
                                
Total
     1,667,812       81,305       1,967,411       230,898  
 
                        

F-60

 

PLIVA D.D.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
4   Non-current assets classified as held for sale and discontinued operations
 
    Discontinued operations
 
    Following an in-depth strategic review and evaluation of its core activities PLIVA’s management decided to exit the Proprietary business segment and focus operations on its generic business and production of Active Pharmaceutical Ingredients (“API”). The related assets and liabilities were either reflected in the calculation of the gain or loss on disposal (for the transactions that were completed during 2005) or classified as held for sale at 31 December 2005 (for the transaction that is expected to be completed in 2006).
 
    The first step in exiting the Proprietary business was divestment of the exclusive licence for the sale of SANCTURA (trospium chloride) in the USA. This was completed in June 2005, resulting in a loss of USD 99,979 thousand recognised in the income statement for the six month ended 30 June 2005 (reported as loss on sale of discontinued operations). The loss was calculated based on proceeds in the amount of USD 45,000 thousand received in July 2005. Of that amount, USD 6,750 thousand was paid to an escrow account and will be available after a twelve month period provided that all indemnification obligations are met. Management believes that the Group will meet all indemnification requirements and, accordingly, the total USD 45,000 thousand was recognised in net proceeds from the disposal. The Group may be entitled to a further maximum of USD 95,000 thousand in future periods as part of a royalty/licence arrangement based on the achievement of certain sales milestones.
 
    The next important milestone in exiting the Proprietary business was the sale of VoSpire that was completed in November 2005, resulting in a gain of USD 23,438 thousand (reported within loss on sale of discontinued operations). The gain was calculated based on proceeds of USD 32,000 thousand received in November 2005. The Group may be entitled to a further maximum of USD 35,500 thousand in future periods conditional on the occurrence of certain events and based on the achievement of certain sales milestones.
 
    Given the uncertainty in occurrence of the events and sales milestones that would entitle PLIVA to the conditional proceeds related to SANCTURA and VoSpire, management has not recognised any of these amounts in the net proceeds. Please refer to Note 33 for events after the balance sheet date.
 
    Consequently, these transactions generated a pre-tax loss of USD 76,542 thousand (reported as loss on sale of discontinued operations). Due to uncertainty of the recoverability of the related deferred tax asset of USD 26,789 thousand, this asset has not been recognised resulting in the after-tax loss being equal to the pre-tax loss.

F-61

 

PLIVA D.D.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
4   Non-current assets classified as held for sale and discontinued operations (continued)
 
    Discontinued operations (continued)
 
    The sale of PLIVA’s Research Institute represented the last step in exiting the Proprietary business. See Note 33 for details of this transaction, which occurred in May of 2006. Since the transaction was realised in 2006, no gain or loss on sale has been reported in 2005. However, transactions related to the Research Institute’s activities have been presented as discontinued operations in PLIVA’s consolidated profit and loss account (see “Assets held for sale” below).
 
    Discontinued operations are classified in the business segment “Proprietary”.
 
    Results of discontinued operations for year ended 31 December:
                         
    2005     2004     2003  
    USD’000     USD’000     USD’000  
Sales
     23,013       24,363       16,516  
Other revenue
     —       —       292  
Cost of sales
     (24,668 )     (5,520 )     (2,904 )
 
                  
Gross profit
     (1,655 )     18,843       13,904  
General and administrative expenses
     (10,164 )     (16,111 )     (20,455 )
Research and development expenses
     (23,897 )     (33,746 )     (26,815 )
Selling and distribution expenses
     (64,757 )     (49,140 )     (7,617 )
Restructuring costs
     (81,797 )     —       (420 )
 
                  
Results from operating activities
     (182,270 )     (80,154 )     (41,403 )
Income tax expense
     —       —       —  
 
                  
Loss after tax but before gain/(loss) on sale of discontinued operations
     (182,270 )     (80,154 )     (41,403 )
 
                  
Gain/(loss) on sale of discontinued operations
     (76,542 )     —       —  
Tax on gain/(loss) on sale of discontinued operations
     —       —       —  
 
                  
Profit/(loss) for the period
     (258,812 )     (80,154 )     (41,403 )
 
                  
    Effect of the disposal on individual assets and liabilities of the Group:
         
    2005  
    USD ´000  
Property, plant and equipment
     3,413  
Intangible assets
     147,846  
Inventories
     2,283  
 
      
Net identifiable assets and liabilities
     153,542  
 
      
Consideration received, satisfied in cash
     77,000  
Cash disposed of
     —  
 
      
Net cash inflow
     77,000  
 
      

F-62

 

PLIVA D.D.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
4   Non-current assets classified as held for sale and discontinued operations (continued)
 
    Assets held for sale
 
    As at 31 December 2005, assets held for sale comprise Research Institute related assets (discontinued operations) and production related assets in AWD.pharma GmbH & Co. KG, PLIVA’s subsidiary in Germany (continuing operations). See Note 33 - Subsequent events.
 
    An impairment loss of USD 17,012 thousand on the measurement of the assets held for sale (in relation to the divestment of production related assets) to fair value less cost to sell has been recognised and is included in restructuring expenses in the continuing operations column of the income statement.
 
    No gain or loss on the measurement to fair value less costs to sell of the Research Institute’s related assets has been recognised, as the carrying value does not exceed fair value less costs to sell.
 
    The disposal groups comprised the following assets and liabilities (net of loss recognised on measurement of the assets held for sale to fair value less cost to sell):
                         
    2005     2005     2005  
    USD’000     USD’000     USD’000  
    Continuing     Discontinued     Total  
Asset classified as held for sale
                       
Disposal groups classified as held for sale
                        
Property, plant and equipment (Note 11)
     4,739       9,204       13,943  
Intangible assets (Note 12)
     112       1,837       1,949  
Receivables (Note 15)
     —       1,385       1,385  
Current assets (Notes 17 and 18)
     —       1,079       1,079  
 
                  
Total carrying amount
     4,851       13,505       18,356  
 
                  
Liabilities classified as held for sale
                        
Current liabilities (Note 25)
     —       2,598       2,598  
 
                  
Total carrying amount
     —       2,598       2,598  
 
                  
    The total net carrying amount, net of impairment, of the disposal group at 31 December 2005 is USD 15,758 thousand. Assets held for sale relating to the continuing business are reported in the Generics segment and the disposal group held for sale relating to discontinuing business is reported in Proprietary segment.

F-63

 

PLIVA D.D.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
5   Other revenue
                         
    2005     2004     2003  
    USD’000     USD’000     USD’000  
Profit from sale of subsidiary (Note 30)
     4,277       —       —  
Commitment fee for CNS products
     5,000       —       —  
Non-refundable upfront payment (Note 32)
     5,000       —       —  
Down payments from out-licensing
     2,062       2,474       —  
Profit from sale of assets
     1,646       1,903       399  
Proceeds from litigations
     —       13,986       —  
Other revenue
     19,307       23,898       27,359  
 
                  
Total
     37,292       42,261       27,758  
 
                  
6   Restructuring costs
 
    During 2003, the Group incurred certain one off costs in respect of the re-organisation of the Group structure (“New PLIVA”), which was implemented on 1 January 2004.
 
    As partly explained in Note 4, during 2005 PLIVA continued its efforts to streamline its operations and to concentrate on its generics business and Active Pharmaceutical Ingredients (“API”) production. These efforts included two major transactions, namely exit from the Proprietary business segment (see Notes 33 and 4 for more details) and divestment of the manufacturing plant in Germany (see Note 33 for more details). However, they also included several smaller projects such as the streamlining of PLIVA’s Pharma Chemicals operations (API production), Generics manufacturing operations and other operations in the Czech Republic.
 
    Restructuring costs caused by the exit from the Proprietary business segment amounted to USD 81,797 thousand. Out of that, USD 32,121 thousand related to the sale of the exclusive licence for the sale of SANCTURA and included severance payments in the amount of USD 8,425 thousand and other expenses in relation to the sale of SANCTURA in the amount of USD 23,696 thousand. A further USD 36,945 thousand related to impairments caused by the termination of various proprietary development projects and USD 12,731 thousand related to severance payments, consulting fees, impairment of equipment used in proprietary projects and accruals for already committed costs related to the terminated projects.
 
    Divestment of the manufacturing plant in Germany resulted in USD 22,237 thousand of restructuring costs, primarily related to the asset impairments.
 
    Streamlining of Pharma Chemicals operations in Croatia and other operations in the Czech Republic will result in the delisting of a number of smaller products and closure of part of the production plant producing those products. Related restructuring costs amounted to USD 8,948 thousand, out of which USD 4,534 thousand relates to asset impairments and USD 4,414 thousand to various cash charges for severance payments and site restoration.
 
    Streamlining of Generics manufacturing operations resulted in downsizing causing severance payments of about USD 5,218 thousand.
 
    Various other projects resulted in restructuring costs of USD 4,411 thousand bringing the total restructuring costs for 2005 to the amount of USD 122,611 thousand.

F-64

 

PLIVA D.D.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
6   Restructuring costs (continued)
                                                         
    2005     2005     2005     2004     2003     2003     2003  
    USD’000     USD’000     USD’000     USD’000     USD’000     USD’000     USD’000  
    Continuing     Discontinued     Total     Total     Continuing     Discontinued     Total  
Severance payments
     13,001       9,980       22,981       —       17,962       —       17,962  
Asset impairment
     23,421       38,774       62,195       —       7,776       —       7,776  
Other restructuring expenses
     4,392       33,043       37,435       —       7,853       420       8,273  
 
                                          
Total
     40,814       81,797       122,611       —       33,591       420       34,011  
 
                                          
    Out of the total restructuring costs, USD 24,928 thousand is included in the restructuring provisions as at 31 December 2005 (2004: USD 5,289 thousand; 2003: USD 5,728 thousand) (Note 24).

F-65

 

PLIVA D.D.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
7   Net financial expenses
                         
    2005     2004     2003  
            Restated - Note 2     Restated- Note 2  
    USD’000     USD’000     USD’000  
Interest:
                        
Income
     7,029       4,270       3,011  
Expense
     (17,190 )     (13,791 )     (10,960 )
 
                        
Other financial expenses (net)
     (11,030 )     (12,647 )     (9,776 )
Net foreign exchange gains/(losses)
     2,107       (1,528 )     (4,240 )
 
                  
Total
     (19,084 )     (23,696 )     (21,965 )
 
                  
8   Staff costs
                         
    2005     2004     2003  
            Restated - Note 2     Restated - Note 2  
    USD’000     USD’000     USD’000  
Wages and salaries
     268,965       246,813       209,498  
Severance
     907       2,388       18,910  
Equity settled transactions (Note 27)
     1,242       1,621       564  
Cash settled transactions (Note 27)
     518       125       11  
Other
     4,620       3,800       12,571  
 
                  
Total
     276,252       254,747       241,554  
 
                  
    As at 31 December 2005 the number of employees in the Group was 6,137 (2004: 6,654, 2003: 6,780).

F-66

 

PLIVA D.D.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
9   Income tax expense
                         
    2005     2004     2003  
    Restated - Note 2     Restated - Note 2     Restated - Note 2  
    USD’000     USD’000     USD’000  
 
                        
Current tax expense
     790       15,836       37,942  
 
                        
Deferred tax expense
                        
 
                        
Origination and reversal of temporal differences
     (1,067 )      (6,214 )      (17,121 ) 
Utilisation of previously recognised deferred tax assets
     —       3,348       —  
Reversal of previously recognised deferred tax assets
     5,368       —       —  
 
                  
 
     4,301       (2,866 )      (17,121 ) 
 
                  
 
                        
Total income tax expense in income statement
     5,091       12,970       20,821  
 
                  
A reconciliation of tax expense as reported in the income statement and taxation at the statutory rate is detailed in the table below:
                         
    2005     2004     2003  
    Restated - Note 2     Restated - Note 2     Restated - Note 2  
    USD’000     USD’000     USD’000  
 
                        
Profit before tax from continuing operations
     171,940       220,747       208,083  
 
                        
Tax calculated at Croatian statutory rate of 20%
     34,388       44,149       41,617  
 
                        
Expenses not allowable for income tax purposes
     6,540       11,882       13,323  
Income not subject to tax
     (1,664 )      (2,311 )      (3,349 ) 
R&D and education — double deduction
     (12,777 )      (13,421 )      (18,921 ) 
Temporary difference previously not recognised
     (4,881 )      (4,217 )      (1,235 ) 
 
                        
Tax losses utilised (previously not recognised)
     (4,290 )      (1,013 )      —  
 
                        
Tax losses not recognised as deferred tax assets
     9,646       12,171       5,766  
 
                        
Reversal of previously recognised deferred tax assets
     5,368       —       —  
(Profit) loss incurred by companies exempt from income tax
     (3,192 )      (6,496 )      —  
Under (over) provision from prior years
     739       (834 )      55  
Effects of different tax rates in other countries
     (24,786 )      (26,940 )      (16,435 ) 
 
                  
 
                        
Total income tax expense
     5,091       12,970       20,821  
 
                  
 
                        
Effective tax rate
     2.96 %     5.88 %     10.01 %

F-67

 

PLIVA D.D.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
10   Earnings per share and GDR
                                                                         
    2005     2004     2003  
    Restated -     Restated -     Restated -     Restated -     Restated -     Restated -     Restated -     Restated -     Restated -  
    Note 2     Note 2     Note 2     Note 2     Note 2     Note 2     Note 2     Note 2     Note 2  
    Continuing     Discontinued     Total     Continuing     Discontinued     Total     Continuing     Discontinued     Total  
    USD     USD     USD     USD     USD     USD     USD     USD     USD  
Earnings per share
                                                                        
Basic
     9.58       (14.85 )     (5.27 )     11.94       (4.61 )     7.33       10.82       (2.39 )     8.43  
Diluted
     9.50       (14.70 )     (5.20 )     11.83       (4.56 )     7.27       10.72       (2.36 )     8.36  
 
                                                                        
Earnings per GDR
                                                                        
Basic
     1.92       (2.97 )     (1.05 )     2.39       (0.92 )     1.47       2.16       (0.48 )     1.68  
Diluted
     1.90       (2.94 )     (1.04 )     2.36       (0.91 )     1.45       2.14       (0.47 )     1.67  
    Basic earnings per share are calculated by dividing the net profit of the Group for the year by the weighted average number of shares outstanding, calculated as set out below.
 
    Diluted earnings per share are calculated by dividing the adjusted net profit of the Group for the year by the adjusted weighted average number of shares outstanding, calculated as set out below.
 
    The Company’s shares are traded on the Zagreb Stock Exchange, and on the London Stock Exchange in the form of Global Depositary Receipts (“GDR’s”). Five GDR’s are equivalent to one share; accordingly the earnings per GDR are calculated by dividing earnings per share by five.

F-68

 

PLIVA D.D.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
10   Earnings per share and GDR (continued)
 
    Adjusted net profit is arrived at as follows:
                                                                         
    2005     2004     2003  
    Restated -             Restated -     Restated -     Restated -             Restated -     Restated -     Restated -  
    Note 2             Note 2     Note 2     Note 2             Note 2     Note 2     Note 2  
    Continuing     Discontinued     Total     Continuing     Discontinued     Total     Continuing     Discontinued     Total  
    USD’000     USD’000     USD’000     USD’000     USD’000     USD’000     USD’000     USD’000     USD’000  
Profit for the year (basic)
     166,941       (258,812 )     (91,871 )     207,658       (80,154 )     127,504       187,617       (41,403 )     146,214  
After tax effects of interest on convertible bank loan
     390       —       390       200       —       200       175       —       175  
 
                                                      
Adjusted profit for the year (diluted)
     167,331       (258,812 )     (91,481 )     207,858       (80,154 )     127,704       187,792       (41,403 )     146,389  
 
                                                      

F-69

 

PLIVA D.D.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
10   Earnings per share and GDR (continued)
 
    Weighted average number of shares is arrived at as follows:
                         
    2005     2004     2003  
    number of shares     number of shares     number of shares  
Shares outstanding excluding treasury shares at 1 January
     17,420,768       17,358,110       17,296,480  
Effect of treasury shares purchased, sold or granted in year
     3,971       42,827       31,417  
 
                        
Weighted average number of shares (basic)
     17,424,739       17,400,937       17,327,897  
 
                  
Effect of conversion of loan notes
     135,593       135,593       135,593  
Effect of share options on issue
     51,694       36,888       48,380  
 
                  
Weighted average number of shares (diluted)
     17,612,026       17,573,418       17,511,870  
 
                  

F-70

 

PLIVA D.D.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
11   Property, plant and equipment
                                 
    Land and             Assets in course        
    buildings     Equipment     of construction     Total  
    USD’000     USD’000     USD’000     USD’000  
Cost
                                
At 1 January 2004
     544,896       557,878       36,998       1,139,772  
Additions
     31       2,343       51,424       53,798  
Transfer from assets in course of construction
     12,318       44,779       (57,097 )     —  
Disposals
     (25,843 )     (49,735 )     (1,379 )     (76,957 )
Other movements
     (1,013 )     —       —       (1,013 )
Effects of foreign exchange movements
     51,001       54,274       3,523       108,798  
 
                        
At 31 December 2004
     581,390       609,539       33,469       1,224,398  
 
                        
At 1 January 2005
     581,390       609,539       33,469       1,224,398  
Additions
     564       5,698       37,952       44,214  
Transfer from assets in course of construction
     16,400       20,392       (36,792 )     —  
Disposals
     (1,767 )     (14,617 )     (1,363 )     (17,747 )
Disposal of subsidiary (Note 30)
     (5,381 )     (627 )     —       (6,008 )
Transfer to assets held for sale (Note 4)
     (15,861 )     (38,800 )     (98 )     (54,759 )
Effects of foreign exchange movements
     (50,927 )     (56,072 )     (2,820 )     (109,819 )
 
                        
At 31 December 2005
     524,418       525,513       30,348       1,080,279  
 
                        
Accumulated depreciation and impairment losses
                                
At 1 January 2004
     181,195       358,569       959       540,723  
Charge for the year
     17,760       49,028       —       66,788  
Disposals
     (23,257 )     (47,596 )     (846 )     (71,699 )
Effects of foreign exchange movements
     15,675       34,558       172       50,405  
 
                        
At 31 December 2004
     191,373       394,559       285       586,217  
 
                        
At 1 January 2005
     191,373       394,559       285       586,217  
Charge for the year
     17,762       50,260       —       68,022  
Disposals
     (1,058 )     (10,999 )     —       (12,057 )
Disposal of subsidiary (Note 30)
     (2,301 )     (502 )     —       (2,803 )
Transfer to assets held for sale (Note 4)
     (13,115 )     (27,660 )     (41 )     (40,816 )
Impairment
     2,818       2,680       3,740       9,238  
Measurement to fair value less costs to sell (asset held for sale)
     9,608       6,967       42       16,617  
Effects of foreign exchange movements
     (15,970 )     (38,530 )     (198 )     (54,698 )
 
                        
At 31 December 2005
     189,117       376,775       3,828       569,720  
 
                        
Carrying amount
                                
At 1 January 2004
     363,701       199,309       36,039       599,049  
At 31 December 2004
     390,017       214,980       33,184       638,181  
 
                        
At 1 January 2005
     390,017       214,980       33,184       638,181  
At 31 December 2005
     335,301       148,738       26,520       510,559  
 
                        

F-71

 

PLIVA D.D.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
11   Property, plant and equipment (continued)
 
    Borrowing costs
 
    No borrowing costs have been capitalised during 2005, 2004 or 2003.
 
    Transfer from property, plant and equipment to assets held for sale
 
    In January 2006 PLIVA signed the agreement for the divestment of a manufacturing plant in Germany. Consequently, relevant assets were classified as assets held for sale and measured at the lower of fair value (less costs to sell) and carrying amount. This resulted in an impairment charge of USD 16,617 thousand that was recorded within restructuring expense in the continuing business. The assets are held for sale and not depreciated. As explained in Note 33, the transaction was completed in May 2006.
 
    Asset in course of construction
 
    Assets in course of construction include works on existing production facilities in the amount of USD 4,684 thousand (2004: USD 15,095 thousand) and on new production facilities in the amount of USD 6,607 thousand.

F-72

 

PLIVA D.D.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
12   Intangible assets
                                 
                    Development        
    Patents, licences             costs and        
    and similar rights (1)     Goodwill     advances     Total  
    USD’000     USD’000     USD’000     USD’000  
Cost
                                
At 1 January 2004
     164,080       195,229       15,544       374,853  
Additions
     162,861       —       14,239       177,100  
Transfer from development
     4,613       —       (4,613 )     —  
Disposals
     (14,705 )     —       (51 )     (14,756 )
Effects of foreign exchange movements
     6,440       13,696       2,074       22,210  
 
                        
At 31 December 2004
     323,289       208,925       27,193       559,407  
 
                        
At 1 January 2005
     323,289       136,064       27,193       486,546  
Additions
     13,697       —       23,394       37,091  
Transfer from development
     9,138       —       (9,138 )     —  
Disposals
     (158,605 )     (7,004 )     (391 )     (166,000 )
Transfer to assets held for sale (Note 4)
     (1,810 )     (1,683 )     —       (3,493 )
Effects of foreign exchange movements
     (9,996 )     (8,997 )     (3,361 )     (22,354 )
 
                        
At 31 December 2005
     175,713       118,380       37,697       331,790  
 
                        
Accumulated amortisation and impairment losses
                                
At 1 January 2004
     47,731       53,467       —       101,198  
Charge for the year
     22,954       13,928       —       36,882  
Disposals
     (10,246 )     —       —       (10,246 )
Effects of foreign exchange movements
     3,139       5,466       —       8,605  
 
                        
At 31 December 2004
     63,578       72,861       —       136,439  
 
                        
At 1 January 2005
     63,578       —       —       63,578  
Charge for the year
     35,841       —       —       35,841  
Disposals
     (15,692 )     —       —       (15,692 )
Transfer to assets held for sale (Note 4)
     (1,544 )     —       —       (1,544 )
Impairment
     15,612       —       26,782       42,394  
Measurement to fair value less costs to sell (asset held for sale)
     395       —       —       395  
Effects of foreign exchange movements
     (5,004 )     —       (3 )     (5,007 )
 
                        
At 31 December 2005
     93,186       —       26,779       119,965  
 
                        
Carrying amount
                                
At 1 January 2004
     116,349       141,762       15,544       273,655  
At 31 December 2004
     259,711       136,064       27,193       422,968  
 
                        
At 1 January 2005
     259,711       136,064       27,193       422,968  
At 31 December 2005
     82,527       118,380       10,918       211,825  
 
                        
 
(1)   Patents, licences and similar rights relate primarily to externally purchased product rights (or product rights acquired through business combinations) related to approved or marketed products

F-73

 

PLIVA D.D.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
12   Intangible assets (continued)
 
    Disposals
 
    Of the total disposals in 2005, USD 140,842 thousand relates to divestment of previously capitalised proprietary products. See Note 4 for details. The majority of this amount related to the carrying amount of SANCTURA at the time of its divestment (USD 137,500 thousand).
 
    Impairment
 
    Of the total impairment in 2005, USD 36,945 thousand relates to the impairment of previously capitalised proprietary products, as explained in Note 6.
 
    Goodwill
 
    Goodwill has been allocated to cash-generating units. Pursuant to the discontinuance of the Proprietary business segment, a portion of goodwill that relates to the discontinued operations was calculated on the basis of the relative values of the operations disposed of and the portion of the cash-generating unit retained.
 
    A portion of goodwill relating to Proprietary business attributable to the divestment of the exclusive licence for the sale of SANCTURA (trospium chloride) in the USA and VoSpire (USD 7,004 thousand) was included in the calculation of loss on sale. For additional details, refer to Note 4.
 
    A portion of goodwill attributable to assets held for sale was reclassified from intangible assets to assets held for sale.
 
    Amortisation charge and impairment
 
    The amortisation charge for patents, licences and similar rights was recorded in following positions in the income statement:
                         
    2005     2004     2003  
            Restated - Note 2     Restated - Note 2  
    USD’000     USD’000     USD’000  
Cost of sales
     30,343       16,610       12,181  
General and administrative expenses
     3,173       4,147       3,251  
Research and development expenses
     1,301       1,070       2,069  
Selling and distribution expenses
     1,024       1,127       721  
 
                  
Total
     35,841       22,954       18,222  
 
                  
    In accordance with IFRS 3 Business Combinations goodwill is no longer amortised from 1 January 2005. The amortisation charge for goodwill for the previous period was recorded in the following position in the income statement:
                         
    2005     2004     2003  
    USD’000     USD’000     USD’000  
General and administrative expenses
     —       13,928       13,325  
 
                  

F-74

 

PLIVA D.D.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
12   Intangible assets (continued)
 
    Amortisation charge and impairment (continued)
 
    Impairment was recorded in following positions in the income statement:
                         
    2005     2004     2003  
    USD’000     USD’000     USD’000  
Cost of goods sold
     2,270       —       —  
Research and development expenses
     3,179       —       —  
Restructuring expenses
     36,945       —       —  
 
                  
Total
     42,394       —       —  
 
                  
    Impairment test for cash-generating units containing goodwill
 
    The following units have significant carrying amounts of goodwill:
                 
    2005     2004  
    USD’000     USD’000  
Generics
     89,494       96,397  
Pharma Chemicals
     24,840       26,756  
Proprietary
     4,046       12,911  
 
            
Total
     118,380       136,064  
 
            
    The recoverable amount of all three units is based on value in use calculations.
 
    Generics and Pharma Chemicals units
 
    The value in use calculations use cash flow projections based on a three-year business plan approved by senior management. A pre-tax discount rate of 9% was used in discounting the projected cash flows. The recoverable amount of cash-generating units exceeds their carrying amount.
 
    The movement in goodwill between 31 December 2004 and 31 December 2005 relates solely to foreign exchange movements.
 
    Proprietary unit
 
    The value in use calculations use cash flow projections based on a three-year business plan and terminal value calculated using a negative 10% growth rate, in line with PLIVA’s decision to exit Proprietary business. A pre-tax discount rate of 15%, reflecting the higher risk related to proprietary products, was used in discounting the projected cash flows. The recoverable amount of the cash-generating unit exceeds its carrying amount.
 
    The movement in goodwill between 31 December 2004 and 31 December 2005 relates to:
  •   portions of goodwill related to SANCTURA and VoSpire that were divested during 2005 (see Note 4),
 
  •   classification of goodwill in the amount of USD 1,683 thousand as part of a disposal group held for sale, and
 
  •   foreign exchange movements.

F-75

 

PLIVA D.D.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
12   Intangible assets (continued)
 
    Key assumptions used in value in use calculation of Generics unit are:
     
Assumption   How determined
Launches of new products generating significant sales and profit
  Based on patent expiry data for individual products and development status of these products in PLIVA’s development
 
    
Significant sales
from newly launched
products
  Current market value for proprietary products, estimated number of generic competitors, price drop after patent expiry based on previous experience
 
    
Low single digit drop
in existing product
sales
  Based on historical experience
 
    
Lower production costs
  Based on successful rationalization of manufacturing sites
    Key assumptions used in value in use calculation of Pharma Chemicals unit are:
     
Assumption   How determined
Significant drop in sales due to Azithromycin (the most important product) patent expiry
  Based on the fact that the US patent expired in November 2005 and that, even though the previous patent owner continued to purchase Azithromycin from PLIVA, due to the entrance of generic competition both volumes and prices are expected to drop significantly compared to 2005 and previous years
 
    
Significant internal sales to Generics unit
  Since PLIVA launched generic Azithromycin in the USA, together with a small number of other generic competitors, it is expected that the Pharma Chemicals unit will compensate part of the above-stated sales drop with growth in internal sales
 
    
Continuation of sales of the remaining Pharma Chemicals product portfolio (non-azithromycin)
  Based on management assessment of future market for these products
 
    
Drop in gross margins in 2006 with
slow recovery from 2007
  Based on the above stated drop in sales followed by successful rationalisation of manufacturing sites
    Key assumptions used in value in use calculation of Proprietary unit are:
     
Assumption   How determined
Sales of remaining proprietary products
  Based on historical experience and assessment of future market potential of these products, that will from 2006 be integrated into Generics division

F-76

 

PLIVA D.D.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
13   Investment in associate
                 
    2005     2004  
    USD ’000     USD ’000  
At 1 January
     11,386       10,709  
Share of profit of associate
     754       (220 )
Elimination of unrealised profit on sale of inventories
     (1,226 )     —  
Foreign exchange movements
     (1,090 )     897  
 
            
At 31 December
     9,824       11,386  
 
            
On 31 December 2005, PLIVA d.d. had a 24.71% ownership interest in Medika d.d. (2004: 24.71%). Medika d.d. is a wholesaler that supplies pharmacies, hospitals and other health institutions with a wide range of medical merchandise. The fair value of the investment was USD 10,112 thousand (based on the closing bid price quoted on the Zagreb Stock Exchange on 30 December 2005).
Share of profit of associate is not reported in any segment, while elimination of unrealised profit on sale of goods is reported in segment “Generics”.
14   Other investments
                 
    2005     2004  
    USD ’000     USD ’000  
Non-current portion:
                
Other investments
     70       1,208  
Available-for-sale investments (i)
     423       312  
Held-to-maturity investments
     410       587  
 
            
Total non-current portion
     903       2,107  
 
            
 
                
Current portion:
                
Fair value through profit or loss
     3,392       —  
Available-for-sale investments (i)
     —       321  
Other investments
     —       —  
 
            
Total current portion
     3,392       321  
 
            
 
(i)   Available-for-sale investments are carried at fair value except for those which are not traded in active markets which are measured at amortised cost less impairment.

F-77

 

PLIVA D.D.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
15   Receivables
                 
    2005     2004  
    USD ’000     USD ’000  
Secured housing loans to employees (i)
     2,817       3,017  
Other loans and advances (ii)
     1,552       5,285  
 
            
 
                
Total
     4,369       8,302  
 
            
 
(i)   Secured housing loans to employees are granted for the purchase of housing. These loans bear interest at favourable rates and have an original maturity of up to 30 years and are carried at amortised cost using market rates for discounting. At 31 December 2005, USD 498 thousand relating to secured housing loans for employees of the Research Institute were classified as part of a disposal group held for sale (refer to note 4).
 
(ii)   Loans bear interest at rates of 0% to 6% per annum and are measured at amortised cost using market rates for discounting. At 31 December 2005, USD 887 thousand of such loans was classified as part of a disposal group held for sale (refer to Note 4).

F-78

 

PLIVA D.D.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
16   Deferred tax assets and liabilities
 
    The movement in deferred tax assets and liabilities (prior to offsetting of balances within the same jurisdiction) during the year relates to the temporary differences as follows:
                                 
    Provisions                    
    and                    
    accruals     Depreciation     Other     Total  
Deferred tax assets   USD ’000     USD ’000     USD ’000     USD ’000  
At 1 January 2004
     31,616       1,093       6,691       39,400  
Credited to net profit
     2,683       530       465       3,678  
Exchange differences
     529       119       855       1,503  
 
                        
At 31 December 2004
     34,828       1,742       8,011       44,581  
 
                        
 
                                
At 1 January 2005
     34,828       1,742       8,011       44,581  
(Charged)/credited to net profit
     (7,240 )     (701 )     7,544       (397 )
Write off of previously recognised deferred tax assets
     (1,161 )     (554 )     (3,653 )     (5,368 )
Exchange differences
     (94 )     (69 )     (640 )     (803 )
 
                        
At 31 December 2005
     26,333       418       11,262       38,013  
 
                        
                                 
    Provisions                    
    And                    
    accruals     Depreciation     Other     Total  
Deferred tax liabilities   USD ’000     USD ’000     USD ’000     USD ’000  
At 1 January 2004
     (318 )     (1,321 )     (1,538 )     (3,177 )
Charged to net profit
     (1,038 )     (99 )     325       (812 )
Exchange differences
     (128 )     (355 )     (120 )     (603 )
 
                        
At 31 December 2004
     (1,484 )     (1,775 )     (1,333 )     (4,592 )
 
                        
 
                                
At 1 January 2005
     (1,484 )     (1,775 )     (1,333 )     (4,592 )
(Charged)/credited to net profit
     1,345       221       (102 )     1,464  
Exchange differences
     149       155       96       400  
 
                        
At 31 December 2005
     10       (1,399 )     (1,339 )     (2,728 )
 
                        

F-79

 

PLIVA D.D.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
16   Deferred tax assets and liabilities (continued)
 
    Deferred income tax assets and liabilities are offset when there is a legally enforceable right to set off current tax assets against current tax liabilities and when the deferred income taxes relate to the same tax authority. The following amounts, determined after appropriate offsetting, are shown in the consolidated balance sheet:
                 
    2005     2004  
    USD’000     USD’000  
Deferred tax assets
     35,478       40,748  
Deferred tax liabilities
     (193 )     (759 )
 
            
 
     35,285       39,989  
 
            
Deferred tax assets resulting from tax losses in the amount of USD 76,664 thousand (2004: USD 26,365 thousand, 2003: USD 13,311 thousand) have not been recognised as it is not probable that future taxable profit will be available against which the Group can utilise the benefits therefrom. Unrecognised tax losses are available as follows:
                         
    2005     2004     2003  
    USD’000     USD’000     USD’000  
 
                        
31 December 2004
     —       —       13,311  
31 December 2005
     —       26,365       13,311  
31 December 2006
     76,664       26,365       13,311  
31 December 2007
     76,664       26,228       13,184  
31 December 2008
     76,656       26,070       13,039  
31 December 2009
     74,851       23,332       9,715  
31 December 2010
     69,204       17,947       8,755  
31 December 2011 to 31 December 2015
     63,096       13,920       8,518  
 
                        
31 December 2016 to 31 December 2025
     61,842       12,309       7,290  
 
                        
Thereafter
     2,587       3,034       2,786  

F-80

 

PLIVA D.D.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
17   Inventories
                 
    2005     2004  
    Restated - Note 2        
    USD ’000     USD ’000  
Raw materials
     57,299       74,433  
Work in progress
     37,665       32,842  
Finished products and trading goods
     113,176       136,368  
Inventory payments on account
     349       1,249  
Inventories in transit
     930       2,542  
Other
     2,575       3,893  
 
            
Total
     211,994       251,327  
 
            
At 31 December 2005, USD 459 thousand relating to inventories in the Research Institute was classified as part of a disposal group held for sale (refer to Note 4).
18   Trade and other receivables
                 
    2005     2004  
    Restated - Note 2     Restated - Note 2  
    USD ’000     USD ’000  
Trade receivables — gross
     337,589       389,339  
Trade receivables — impairment
     (20,949 )     (24,698 )
 
            
Trade receivables — net
     316,640       364,641  
Receivables from employees
     1,484       1,312  
Receivables from state
     25,459       20,739  
Prepaid expenses
     6,434       8,280  
Current portion of long-term receivables
     1,047       1,964  
Fair value of derivative instruments (Note 26)
     577       2,134  
Other receivables
     9,729       8,544  
 
            
Total
     361,370       407,614  
 
            
At 31 December 2005, USD 620 thousand of trade and other receivables were classified as part of a disposal group held for sale (refer to Note 4). Trade receivables impairment is recorded under selling and distribution expenses.
19   Cash and cash equivalents
                 
    2005     2004  
    USD ’000     USD ’000  
Cash with banks
     72,682       64,352  
Bills of exchange
     203       —  
Deposits
     224,012       103,501  
 
            
Total
     296,897       167,853  
 
            

F-81

 

PLIVA D.D.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
20   Equity
  (i)   At 31 December 2005 the authorised, issued and paid-up share capital comprised 18,592,648 ordinary shares (2004: 18,592,648, 2003: 18,592,648). All shares have a par (nominal) value of HRK 100. The nominal value of shares in the remaining part of this note has been expressed in USD and has been computed based on the HRK/USD exchange rates in effect for the relevant transaction.
 
      The holders of ordinary shares are entitled to receive dividends as declared from time to time and are entitled to one vote per share at meetings of the Company.
 
  (ii)   The treasury shares comprise the nominal value of the Company’s own shares held by the Group. At 31 December 2005 the Group held 1,149,493 (2004: 1,171,880, 2003: 1,234,535) of the Company’s shares.
 
  (iii)   At 31 December 2005 the amount of legal reserves included within legal and other reserves was USD 21,937 thousand (2004: USD 18,340 thousand, 2003: 17,840 thousand). The transfer to legal reserves in the year of USD 3,322 thousand (2004: USD 500 thousand, 2003: 793 thousand) was based on local company law requirements. Legal reserves are generally not distributable.
 
      The remaining balance of legal and other reserves consists of capital reserves totaling USD 2,614 thousand (2004: USD 238 thousand, 2003: USD 1,173 thousand).
 
  (iv)   The translation reserve comprises all foreign exchange differences arising from the translation of the financial statements of foreign operations whose functional currency differs from USD, the presentation currency.
 
  (v)   During 2005, PLIVA d.d. sold or granted 22,387 (2004: 62,655, 2003: 61,633) treasury shares, with a total nominal value of USD 362 thousand (2004: USD 1,017 thousand, 2003: 920 thousand) for USD 1,107 thousand (2004: USD 1,933 thousand, 2003: 1,313 thousand). The difference between the sale price and nominal values of these shares is recorded in the share premium reserve. All of these shares (2004: 42,230, 2003: 30,873) were sold under the option plan (Note 27 – Share based payments).
 
  (vi)   On 5 May 2004 the General Assembly approved a dividend in respect of 2003 of HRK 16.00 (USD 2.62) per share totaling USD 46,092 thousand after adjusting to exclude treasury shares (2003: HRK 17.00 per share (USD 2.54), totaling USD 43,899 thousand for 2002).
 
      On 14 June 2005 the General Assembly approved a dividend in respect of 2004 of HRK 12.00 (USD 2.10) per share totaling USD 36,661 thousand, after adjusting to exclude treasury shares.
 
      On 28 February 2006 the Management Board proposed a dividend in respect of 2005 of HRK 12.00 per share, which amounts to USD 1.95 according to the Croatian National Bank mid-exchange rate effective on 28 February 2006. The dividend was paid out from retained earnings after approval by the General Assembly.
 
      Until 1 January 2005 (foreign individuals) and 2 August 2005 (for foreign entities) dividends paid out of profits realised in the years preceding 2001 were generally not subject to withholding tax or dividend tax. Dividends paid out of profits realised in the years 2001 to 2004 were generally subject to withholding tax. Dividend payments to foreign individuals and foreign entities were generally subject to 15% withholding tax (subject to double tax treaties) whilst dividend payments to domestic individuals were subject to 15% dividend tax.
 
      From 1 January 2005 dividends paid to foreign individuals (and from 2 August 2005 to foreign entities) are not subject to withholding tax.
 
  (vii)   As at 31 December 2005 distributable reserves of the Company were HRK 5,830,826 thousand (USD 935,386 thousand using HRK/USD exchange rate applicable at 31 December 2005).

F-82

 

PLIVA D.D.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
21   Minority interest
                 
    2005     2004  
    USD ’000     USD ’000  
At 1 January
     5,676       4,488  
Share of (loss)/profit for the year in PLIVA Krakow and Lachema
     (92 )     119  
Foreign exchange movements
     (455 )     1,069  
 
            
At 31 December
     5,129       5,676  
 
            
22   Interest bearing loans and borrowings
                 
    2005     2004  
    USD ’000     USD ’000  
Long-term interest bearing loans and borrowings
                
Secured bank loans (ii)
     1,909       5,000  
Unsecured bank loans (iii)
     133,571       156,404  
Bonds issued
     87,538       100,487  
Finance lease liabilities
     —       —  
Due on flats sold by installment (iv)
     518       598  
 
            
 
     223,536       262,489  
 
            
 
                
Current interest bearing loans and borrowings
                
Unsecured bank loans (iii)
     —       1,345  
Commercial paper
     —       115,833  
Current portion of long-term interest bearing loans and borrowings
                
Secured bank loans (ii)
     5,674       20,000  
Unsecured bank loans (iii)
     97,948       35,037  
Finance lease liabilities
     —       2  
Due on flats sold by installment (iv)
     162       355  
 
            
 
     103,784       172,572  
 
            
Total interest bearing loans and borrowings
     327,320       435,061  
 
            

F-83

 

PLIVA D.D.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
22   Interest bearing loans and borrowings (continued)
Interest rates and terms of repayment as at 31 December 2005 were as follows:
                                                 
    Interest rate             Less than     1-2     2-5     More than 5  
    (i)     Total     1 year     years     years     years  
    %     USD ’000     USD ’000     USD ’000     USD ’000     USD ’000  
Secured bank loans
                                                
USD 5,000 (ii)
     2.96 – 4.98       5,000       5,000       —       —       —  
HRK 16,100
     4.6       2,583       674       1,909       —       —  
 
                                                
Unsecured bank loans
                                                
USD 145,636 (iii)
     2.96 – 5.17       145,636       36,349       63,991       45,296       —  
EUR 72,295
     2.84 – 3.57       85,539       61,515       20,086       3,938       —  
CZK 2,427
   nil       99       82       17       —       —  
Other
     —       245       2       —       243       —  
 
                                                
Bonds issued (vi)
                                                
EUR 75,000
     5.75       87,538       —       —       —       87,538  
 
                                                
Due on flats sold by installment (iv)
     —       680       162       162       356       —  
 
                                      
At 31 December 2005
             327,320       103,784       86,165       49,833       87,538  
 
                                      
 
(i)   The majority of long-term loans have variable interest rates based on LIBOR and EURIBOR. The interest rates included in the table above represent range of interest rates for 2005. The effect of certain variable to fixed interest rate swaps is disclosed in Note 26 – Financial instruments.
 
(ii)   Loan is secured by the Azithromycin royalty revenue stream.
 
(iii)   Unsecured bank loans include a loan of USD 10,000 thousand, which contains the right to convert into shares of PLIVA d.d. at an effective rate of USD 73.75 per share until 1 December 2006 (2004: USD 73.75 per share) at the option of the lender.
 
(iv)   Amounts due on flats sold by installment include loans granted to employees for the purchase of flats and other funds, representing 65% of the value of flats and receivables arising from loans granted for flats sold by installment under applicable regulations.
 
(v)   Under the terms of loan agreements concluded between PLIVA d.d. and its various bankers, the Group is obliged to maintain specific financial covenants, which have been complied with.
 
(vi)   In May 2004, PLIVA d.d. launched a EUR 75 million fixed rate bond issue from which proceeds of EUR 73.69 million were received. The bonds will mature in 2011. The bonds carry a fixed interest rate of 5.75% p.a. payable every six months. The fair value of the bond is EUR 84,821 thousand.

F-84

 

PLIVA D.D.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
22   Interest bearing loans and borrowings (continued)
 
    Interest rates and terms of repayment as at 31 December 2004 were as follows:
                                                 
    Interest rate             Less than     1-2     2-5     More than 5  
    (i)     Total     1 year     years     years     years  
    %     USD ’000     USD ’000     USD ’000     USD ’000     USD ’000  
Secured bank loans
                                                
USD 25,000
     1.61 – 2.36       25,000       20,000       5,000       —       —  
HRK 20,300
     4.8       3,601       1,605       —       —       1,996  
 
                                                
Unsecured bank loans
                                                
USD 80,000
     1.75 – 3.12       78,294       8,195       19,561       50,538       —  
EUR 78,833
     3.15 – 5.30       107,283       23,362       83,921       —       —  
SIT 117,000
     6.50       664       664       —       —       —  
CZK 59,707
   Nil – 4.96     2,664       2,556       89       19          
Other
     —       280       —       —       280       —  
 
                                                
Commercial papers
                                                
EUR 86,000
     2.95 – 3.40       115,833       115,833       —       —       —  
 
                                                
Bonds issued
                                                
EUR 75,000
     5.75       100,487       —       —       —       100,487  
 
Finance lease
     —       2       2       —       —       —  
 
                                                
Due on flats sold by installment (iv)
     —       953       355       355       243       —  
 
                                      
At 31 December 2004
             435,061       172,572       108,926       51,080       102,483  
 
                                      

F-85

 

PLIVA D.D.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
23   Employee benefits
                 
    2005     2004  
    USD ’000     USD ’000  
            Restated - Note 2  
Long-term employee benefits (i)
     5,965       6,918  
Defined pension plan benefits (ii)
     8,949       9,417  
Cash settled transaction liability (Note 27)
     638       146  
 
            
Total
     15,552       16,481  
 
            
 
(i)   Long-term employee benefits comprise early retirement and post-retirement benefits, accruals for estimated bonuses, and the long-term portion of management incentive plans.
 
(ii)   The defined benefit pension plan mainly relates to one subsidiary, AWD.pharma GmbH & Co. KG.
Movement in net liability for defined benefit obligations recognised in the balance sheet:
                 
    2005     2004  
    USD ’000     USD ’000  
Net liability for defined benefit obligations at 1 January
     9,417       7,759  
 
                
Expense recognised in the income statement
     800       884  
Effect of foreign exchange rate changes
     (1,268 )     774  
 
            
Net liability for defined benefit obligations at 31 December
     8,949       9,417  
 
            
The amounts recognised in the income statement relating to the defined benefit pension plan are as follows:
                 
    2005     2004  
    USD ’000     USD ’000  
Current service cost
     264       273  
Interest cost
     476       457  
Deferred compensation
     60       154  
 
            
Total
     800       884  
 
            
The principal actuarial assumptions used were as follows:
                 
    2005     2004  
    %     %  
Discount rate
     5.25       5.75  
Future salary increase
     2.75       2.75  
Future pension increase
     1.25       1.25  

F-86

 

PLIVA D.D.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
24   Provisions
                                 
    Environmental                    
    and legal matters     Restructuring     Other     Total  
    USD ’000     USD ’000     USD ’000     USD ’000  
Long term
                                
At 1 January 2004
     4,492       —       —       4,492  
Increase made during the year
     81       —       296       377  
Transfer to current provision
     (704 )     —       —       (704 )
Reversal of provisions
     (2,014 )     —       —       (2,014 )
Foreign exchange movements
     (80 )     —       46       (34 )
 
                                
At 31 December 2004
     1,775       —       342       2,117  
 
                                
At 1 January 2005
     1,775       —       342       2,117  
Increase made during the year
     2,858       511       864       4,233  
Reversal of provisions
     (93 )     —       (247 )     (340 )
Foreign exchange movements
     (42 )     (21 )     (56 )     (119 )
 
                                
At 31 December 2005
     4,498       490       903       5,891  
 
                                
Current
                                
At 1 January 2004
     —       5,728       2,126       7,854  
Increase made during the year
     197       477       2,136       2,810  
Transfer from long-term provisions
     704       —       —       704  
Provisions used during the year
     —       (1,105 )     (2,155 )     (3,260 )
Foreign exchange movements
     122       189       593       904  
 
                                
At 31 December 2004
     1,023       5,289       2,700       9,012  
 
                                
At 1 January 2005
     1,023       5,289       2,700       9,012  
Increase made during the year
     1,755       59,970       1,603       63,328  
Provisions used during the year
     (954 )     (40,329 )     (2,559 )     (43,842 )
Foreign exchange movements
     (156 )     (492 )     (157 )     (805 )
 
                                
At 31 December 2005
     1,668       24,438       1,587       27,693  
Environmental and legal
This provision includes USD 3,784 thousand for environmental matters and USD 2,382 thousand for legal matters (2004: USD 1,675 thousand for environmental matters and USD 1,123 thousand for legal matters).
Restructuring
As described in Note 4, programmes started during the year with the intention to streamline operations of the Group and to concentrate on generics business and API production will materially change the scope of business undertaken by the Group or the manner in which business is conducted. Provision includes only the costs necessarily entailed by the restructuring which are not associated with the recurring activities of the Group.

F-87

 

PLIVA D.D.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
25   Trade and other payables
                 
    2005     2004  
    USD ’000     USD ’000  
    Restated - Note 2     Restated - Note 2  
Trade payables
     76,199       92,083  
Amounts due to employees
     24,083       22,660  
Contributions and taxes
     8,208       9,494  
Fair value of derivative instruments (Note 26)
     1,701       1,138  
Advances received
     782       431  
Provision for sales returns, chargebacks and other
    89,904       81,744  
Deferred revenue
     666       20,149  
Other liabilities and accrued charges
     39,937       26,636  
 
            
Total
     241,480       254,335  
 
            
As at 31 December 2005, USD 2,598 thousand of trade and other payables were classified as part of disposal group held for sale (refer to Note 4).

F-88

 

PLIVA D.D.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
26   Financial instruments
 
    Financial risk management
  (i)   Financial risk factors
The Group’s activities expose it to a variety of financial risks, including the effects of: changes in market prices, foreign currency exchange rates and interest rates. The Group’s overall risk management programme focuses on the unpredictability of financial markets and seeks to minimise potential adverse effects on the financial performance of the Group. Risk management is carried out by a central treasury department (Group Treasury) under policies approved by the Management Board.
  (ii)   Foreign exchange risk
The Group operates internationally and is exposed to foreign exchange risk arising from various currencies. Additionally, the Company has a number of investments in foreign subsidiaries, whose net assets are exposed to currency translation risk. Current Group policies do not include active hedging, but the Group has used some forward and option contracts to hedge its exposure to foreign currency risk.
  (iii)   Interest rate risk
The Group’s income and operating cash flows are dependent on changes in market interest rates. The majority of the Group’s borrowings are stated at variable rates. Group treasury policies include use of interest rate swaps and forward rate agreements for hedging of future interest payments.
  (iv)   Liquidity and credit risk
The Group’s liquidity risk management includes maintaining sufficient cash and working capital, and availability of funding through an adequate amount of committed credit facilities.
Credit risk with respect to loan receivables is limited due to their dispersion among various customers. The Group has no significant concentrations of credit risk.
Derivative instruments
Operating cash flows denominated in a foreign currency are in part economically hedged using foreign currency forward contracts. As at 31 December 2005, the Group’s exposure to interest rate risk attributable to certain borrowings bearing variable interest rate were partially economically hedged using interest rate swap contracts and forward rate agreements. These derivatives are accounted for as trading instruments.
Additionally, the Group entered into an interest swap agreement to hedge its interest rate risk arising from fixed interest bonds issued during 2004. This transaction is accounted for as a fair value hedge of interest rate risk.

F-89

 

PLIVA D.D.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
26   Financial instruments (continued)
 
    Derivative instruments (continued)
 
    Derivatives accounted for as trading instruments (OTC products)
 
    Gains and losses on the fair value of derivative instruments accounted for as trading instruments are recognised in the income statement. The table below summarises the contractual amount of these derivative instruments, their fair values at 31 December 2003, 2004 and 2005 and remaining periods to maturity:
                                                 
    Notional amount, remaining life     Fair values  
    Up to 3     3-12     1-5                    
    months     months     years     Total     Assets     Liabilities  
2005   USD ’000     USD ’000     USD ’000     USD ’000     USD ’000     USD ’000  
Derivative instruments accounted for as trading instruments (OTC products):                                
Foreign exchange forward contracts
     349,478       2,434       —       351,912       —       1,630  
Interest rate swaps
     —       —       49,580       49,580       20       —  
Forward rate agreement
     —       441,220       —       441,220       557       71  
 
                                    
Total
     349,478       443,654       49,580       842,712       577       1,701  
 
                                    
                                                 
    Notional amount, remaining life     Fair values  
    Up to 3     3-12     1-5                    
    months     months     years     Total     Assets     Liabilities  
2004   USD ’000     USD ’000     USD ’000     USD ’000     USD ’000     USD ’000  
Derivative instruments accounted for as trading instruments (OTC products):                                
Foreign exchange forward contracts
     171,165       6,682       —       177,847       1,997       519  
Interest rate swaps
     8,044       17,425       20,000       45,469       32       611  
Forward rate agreement
     —       93,044       75,000       168,044       105       8  
 
                                    
Total
     179,209       117,151       95,000       391,360       2,134       1,138  
 
                                    

F-90

 

PLIVA D.D.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
26   Financial instruments (continued)
 
    Derivative instruments (continued)
 
    Fair value hedge of interest rate risk
 
    In May 2004, PLIVA d.d. launched a EUR 75 million fixed rate bond bearing a fixed interest rate of 5.75% per annum payable every six months. In order to hedge its exposure to interest rate risk, PLIVA d.d. entered into an interest rate swap under which it pays a floating rate and receives a fixed rate. As hedge accounting is applied, interest from the interest rate swap is presented together with interest payable on the bonds. The fair value of the interest rate swap is netted against fair value of the interest part of the bonds. Any net effect is included in the income statement as gains and losses from non-trading instruments.
                                                         
    Notional amount, remaining life     Fair values  
    Up to 3     3-12     1-5                          
    months     months     years     More than 5 years     Total     Assets     Liabilities  
    USD ’000     USD ’000     USD ’000     USD ’000     USD ’000     USD ’000     USD ’000  
2005
                                                        
Derivative instruments accounted for as fair value hedges of interest rate risk                                        
Interest rate swaps
     —       —       —       88,740       88,740       3,502       —  
 
                                          
 
                                                        
2004
                                                        
Interest rate swaps
     —       —       —       102,067       102,067       3,638       —  
 
                                          
Floating rates are based on rates implied in the yield curve at 31 December 2004 and 2005.
These may change significantly, affecting future cash flows.
                 
    2005     2004  
Pay-floating swap – notional amount (USD ’000)
     88,740       102,067  
Average pay rate (%)
     3.80 %     3.81 %
Average receive rate (%)
     5.75 %     5.75 %

F-91

 

PLIVA D.D.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
26   Financial instruments (continued)
 
    Derivative instruments (continued)
 
    Estimation of fair values
 
    Investments
 
    Fair value is based on quoted market prices at the balance sheet date.
 
    Derivatives
 
    Forward exchange contracts are marked to market using listed market prices. For interest rate swaps market quotes are used. Those quotes are back tested using pricing models or discounted cash flow techniques. Where discounted cash flow techniques are used, estimated future cash flows are based on management’s best estimates and the discount rate is a market related rate for a similar instrument at a balance sheet date. Where other pricing models are used, inputs are based on market related data at the balance sheet date.
 
    Interest bearing loans and borrowings
 
    Fair value is calculated based on discounted expected future principal and interest cash flows.
 
    Trade and other receivables/payables
 
    For receivables/payables with a remaining life of less than one year, the notional amount is deemed to reflect the fair value. All other receivables/payables are discounted to determine the fair value.

F-92

 

PLIVA D.D.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
27   Share based payments
 
    Share option scheme
 
    PLIVA d.d. has four share-based payment arrangements with Group employees including non-board executives (“Directors”) and Management Board members. Details of the arrangements are described below:
                     
    Share options   Share options   Share appreciation rights   Share appreciation rights
Arrangement   Management Board   Directors   Management Board   Directors
Nature of the arrangement Vesting conditions
  Grant of share options Employment at date of vesting There are no market conditions associated with the share options granted   Grant of share options Employment at date of vesting There are no market conditions associated with the share options granted   Share appreciation rights Employment at date of vesting There are no market conditions associated with the share appreciation rights granted   Share appreciation rights Employment at date of vesting There are no market conditions associated with the share appreciation rights granted
Vesting period
  Three years   The first upcoming 1st of January following two full years after the Date of Grant or such other date specified by the Management Board at the Date of Grant   Three years   The first upcoming 1st of January following two full years after the Date of Grant or such other date specified by the Management Board at the Date of Grant
Exercise period
  Seven years   From March 2005: four years Previously: two to three years   Seven years   From March 2005: four years Previously: two to three years
Settlement
  Shares   Shares   Cash   Cash
 
                   
 
                    
Valuation model
                    
Volatility (%) – based
on historic volatility
    23.519% — 49.371 %            
Risk free interest rate
(%) – government bonds
with similar maturity
    3.524% - 6.157 %            
Dividend yield
  Up to 4.10%            
Departures – based on
historic data on options
forfeited
    4 %            
Valuation model
  Trinomial            
 
                   

F-93

 

PLIVA D.D.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
27   Share based payments (continued)
 
    Reconciliation of movement in the number of options:
                                 
    Share options     Share options          
    Management Board     Directors     Share appreciation rights     Share appreciation rights  
    granted after 7 November 2002     granted after 7 November 2002     Management Board     Directors  
Number of options
                               
At 1 January 2003
     13,000       23,000       —       876  
Granted during the year
     17,335       52,488       —       1,804  
Forfeited during the year
     —       —       —       —  
 
                        
At 31 December 2003
     30,335       75,488       —       2,680  
 
                        
 
 
   Share options     Share options                  
    Management Board     Directors                  
    granted before 7 November 2002     granted before 7 November 2002                  
Number of options
                            
At 1 January 2003
     29,919       102,047                  
Forfeited during the year
     —       (7,565 )                
Exercised during the year
     (7,200 )     (23,673 )                
 
                            
At 31 December 2003
     22,719       70,809                  
 
                            

F-94

 

PLIVA D.D.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
27   Share based payments (continued)
 
    Reconciliation of movement in the number of options:
                                 
    Share options     Share options          
    Management Board     Directors     Share appreciation rights     Share appreciation rights  
    granted after 7 November 2002     granted after 7 November 2002     Management Board     Directors  
Number of options
                                
At 1 January 2004
     30,335       75,488       —       2,680  
Granted during the year
     20,400       32,585       —       12,807  
Forfeited during the year
     —       (11,880 )     —       —  
Expired during the year
     —       (14,386 )     —       —  
 
                        
At 31 December 2004
     50,735       81,807       —       15,487  
 
                        
 
                                
Number of options (in GDRs)
                     —       —  
Outstanding at 1 January 2004
                     15,000       30,000  
 
                            
 
                                
At 31 December 2004
                     15,000       30,000  
 
                            
 
                                
 
 
   Share options     Share options                  
    Management Board     Directors                  
    granted before 7 November 2002     granted before 7 November 2002                  
Number of options
                                
At 1 January 2004
     22,719       70,809                  
Forfeited during the year
     —       (5,100 )                
Exercised during the year
     (2,050 )     (25,794 )                
Expired during the period
     —       (250 )                
 
                            
At 31 December 2004
     20,669       39,665                  
 
                            

F-95

 

PLIVA D.D.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
27   Share based payments (continued)
 
    Reconciliation of movement in the number of options:
                                 
    Share options     Share options              
    Management Board     Directors     Share appreciation rights     Share appreciation rights  
    granted after 7 November 2002     granted after 7 November 2002     Management Board     Directors  
Number of options
                                
At 1 January 2005
     50,735       81,807       —       15,487  
Granted during the year
     22,400       9,290       —       14,450  
Forfeited during the year
     —       (563 )     —       (235 )
 
                        
At 31 December 2005
     73,135       90,534       —       29,702  
 
                        
Exercisable at 31 December 2005
     13,000       26,200       —       1,476  
 
                        
 
                                
Number of options (in GDRs)
                                
Outstanding at 1 January 2005
                     15,000       30,000  
Granted during the year
                     93,150       270,000  
 
                            
At 31 December 2005
                     108,150       300,000  
 
                            
Exercisable at 31 December 2005
                     —       —  
 
                            
 
 
   Share options     Share options                  
    Management Board     Directors                  
    granted before 7 November 2002     granted before 7 November 2002                  
Number of options
                                
At 1 January 2005
     20,669       39,665                  
Exercised during the year
     (8,669 )     (13,718 )                
 
                            
At 31 December 2005
     12,000       25,947                  
 
                            
Exercisable at 31 December 2005
     12,000       25,947                  
 
                            

F-96

 

PLIVA D.D.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
27   Share based payments (continued)
 
    According to the Principles of Corporate Governance of the Company, the Remuneration and Nomination Committee makes recommendations to the Supervisory Board on the Company’s framework for Management Board remuneration. The elements of remuneration should ensure that the interests of the Management Board members correspond to shareholders’ interests. In this way significant part of management’s remuneration is linked to the results of the Group.
 
    Therefore, the Group grants options and share appreciation rights to members of the Management Board and other senior management. The options and share appreciation rights are issued for no consideration.
 
    Under the current plan, options and share appreciation rights vest at earliest on the first upcoming 1st of January following two full years after the Date of Grant and expire after two to seven years from the vesting date.
 
    Rights to receive options or share appreciation rights are defined in contracts. Options and share appreciation rights are granted annually. Number of options and share appreciation rights granted depends on the performance of individuals and/or Group. Each option entitles them to acquire PLIVA d.d. shares (one share per option) at a predetermined exercise price and share appreciation rights give right to receive cash in the gross amount of the difference in prices at the exercise date.
 
    The weighted average share price at the date of exercise for share options exercised during the year was USD 70.34.
 
    Terms of options outstanding at 31 December:
                 
    Exercise price     2005  
Expiry date - options   (USD)     number of options  
3 May 2006
     55.65 – 64.86       28,560  
31 December 2006
     42.41 – 65.45       16,063  
31 December 2007
     51.87 – 65.45       31,889  
31 December 2008
     56.94 – 63.14       41,113  
8 December 2011
     57.46       18,000  
31 December 2011
     42.99 – 58.37       17,838  
8 December 2012
     64.86       15,800  
8 December 2013
     60.38 – 61.06       19,255  
8 December 2014
     59.52       20,400  
8 December 2015
     47.92       22,400  
 
              
 
             231,318  
 
              
                 
    Exercise price     2005  
Expiry date - GDRs   (USD)     number of GDRs  
31 December 2010
     14.23 – 14.29       45,000  
31 December 2011
     9.12 – 12.48       270,000  
8 December 2014
     13.45       8,150  
8 December 2015
     12.56       85,000  
 
              
 
             408,150  
 
              
    Exercise prices on outstanding options have been translated at the closing HRK/USD rate at 31 December 2005 (except for the options that are defined in USD, that are included in the above table at the contracted amount).

F-97

 

PLIVA D.D.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
27   Share based payments (continued)
 
    The amount recognised in the financial statements (before taxes) for share based payment transactions with Group employees can be summarised as follows:
                         
    2005     2004     2003  
            Restated - Note 2     Restated - Note 2  
    USD ’000     USD ’000     USD ’000  
Expense
                        
Equity settled arrangements
                        
Share options granted to members of Management Board
     560       427       178  
Share options granted to directors
     682       1,194       386  
Cash settled arrangements
                        
Share appreciation rights granted to members of Management Board
     33       10       —  
Share appreciation rights granted to directors
     485       115       11  
 
                  
Total expense
     1,760       1,746       575  
 
                  
 
                        
Liability for cash settled arrangements
                        
Share appreciation rights granted to members of Management Board
     43       10          
Share appreciation rights granted to directors
     595       136          
 
                  
Total liability
     638       146          
 
                  

F-98

 

PLIVA D.D.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
28   Commitments and contingencies
 
    Capital commitments
 
    The purchase costs of property, plant and equipment and intangible assets as contracted with suppliers but not settled at 31 December are as follows:
                 
    2005     2004  
    USD ’000     USD ’000  
Property, plant and equipment
     12,054       1,658  
Intangible assets
     454       12,789  
 
            
Total
     12,508       14,447  
 
            
    Operating lease commitments – where a Group company is the lessee
 
    The future aggregate minimum lease payments under non-cancellable operating leases are as follows:
                         
    2005     2004     2003  
    USD ’000     USD ’000     USD ’000  
Not later than 1 year
     5,780       7,287       5,246  
Later than 1 year and not later than 5 years
     16,096       19,835       13,432  
Later than 5 years
     8,145       16,682       9,563  
 
                  
Total
     30,021       43,804       28,241  
 
                  
    During 2005, USD 12,655 thousand was recognised as an expense in the income statement in respect of operating leases (2004: USD 10,408 thousand; 2003: USD 7,032 thousand).
 
    Contingencies
 
    A United States subsidiary of PLIVA d.d., PLIVA Inc., along with a number of other companies, is a defendant in a number of lawsuits pending in the United States in which the plaintiffs claim to have sustained personal injuries as a result of using products containing phenylpropanolamine (“PPA”). PLIVA Inc., which was acquired by a subsidiary of PLIVA d.d. in 2002, terminated its manufacture of PPA products in the first quarter of 2001. PLIVA Inc. was a contract manufacturer of products containing PPA and two of such customers have sought indemnification from PLIVA Inc. with respect to PPA-related personal injury claims that have been asserted against them. PLIVA Inc. has insurance available and the insurer has been funding the defence costs incurred by PLIVA Inc. and the settlement costs of those litigation cases which have been settled. PLIVA Inc. also has certain contractual indemnification rights against the former owner of PLIVA Inc. PLIVA Inc. intends to defend the actions vigorously. PLIVA d.d. also has been named as a defendant in several of these actions, and believes that it has meritorious defences to the claims that have been asserted.

F-99

 

PLIVA D.D.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
29   Subsidiaries
 
    All subsidiaries are wholly owned unless otherwise stated below:
         
PLIVA HRVATSKA d.o.o. , Croatia
        
PLIVA Slovakia s.r.o., Slovakia
        
PLIVA — ISTRAZIVACKI INSTITUT d.o.o., Croatia
        
Mixis Genetics Ltd., Great Britain
        
Mixis France S.A., France - 99.92%
        
PLIVA — ISTRAZIVANJE I RAZVOJ d.o.o., Croatia
        
Globalni Poslovni Servisi — IT d.o.o., Croatia
        
Pharmaing d.o.o., Croatia
        
PLIVA ESOP d.o.o., Croatia
        
PLIVA ZDRAVLJE d.o.o., Croatia
        
Punctum studio d.o.o., Croatia
        
PLIVA RUS Ltd, Russia
        
VETERINA d.o.o., Croatia
        
VETERINA POLSKA d.o.o., Poland
        
PLIVA LJUBLJANA d.o.o., Slovenia
        
PLIVA SARAJEVO d.o.o., Bosnia and Herzegovina
        
PLIVA SKOPJE d.o.o.e.l., Macedonia
        
Pharmazug AG, Switzerland
        
PLIVA International AG, Switzerland
        
Europharma d.o.o., Croatia
        
 
        
PLIVA Pharma UK Ltd, Great Britain
        
 
        
PLIVA Pharma Ltd., Great Britain
        
PLIVA USA, Inc., USA
        
PLIVA London Ltd., Great Britain
        
PLIVA Global Finance AG, Switzerland
        
PAM Property Management Kft., Hungary
        
PAM USA Inc., USA
        
PLIVA Inc., USA
        
Odyssey Pharmaceuticals Inc, USA
        
PLIVA Pharma Holding B.V., Netherlands
        
PLIVA Finance B.V., Netherlands
        
 
        
PAM Hungary Kft, Hungary
        
 
        
AWD.pharma GmbH&Co.KG, Germany
        
ACCEDDO Arzneimittel GmbH, Germany
        
 
        
AWD.pharma Sp.z.o.o., Poland
        
 
        
ASTA Medica spol.S.r.o., Slovakia
        
AWD.pharma GmbH&Co.KG, Armenia
        
PLIVA Pharma S.p.a., Italy
        
PLIVA Pharma SAS, France
        
PLIVA Pharma Iberia S.A., Spain
        
Laboratories Edigen S.A., Spain
        
AWD.pharma Beteiligungs-GmbH, Germany
        
PLIVA Pharma GmbH, Germany
        
SIA AWD.pharma, Latvia
        
 
        
UAB Vokišku vaistu didmena, Lithuania
        
 
        
PLIVA Hungaria Kft., Hungary
        
PLIVA-Lachema a.s., Czech Republic - 96.92%
        
PLIVA CZ s.r.o., Czech Republic
        
Lachema s.r.o., Czech Republic
        
PLIVA-LACHEMA diagnostika s.r.o., Czech Republic
        
Lachema International, Russia
        
PLIVA KRAKOW SA, Poland - 96.79%
        
PLIVA Research India Private Ltd., India
        

F-100

 

PLIVA D.D.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
30   Acquisition/Disposal of subsidiary
 
    Acquisitions
 
    On 31 January 2003, the Group acquired all the shares of Edigen SA, a Spanish pharmaceutical company based in Madrid, for a total cash consideration of USD 10.4 million (EUR 9.3 million). The acquisition has been accounted for using the purchase method of accounting.
 
    Disposals
 
    In January 2003, the Company sold its subsidiary Adria Servis d.o.o. for consideration of USD 1,373 thousand payable by cash of USD 671 thousand, with the balance being settled by offset against payables during 2003.
 
    In July 2003, the company sold its subsidiary Media Log d.o.o. for a consideration of USD 401 thousand of which USD 75 thousand was paid in cash during 2003. The balance of USD 326 thousand remains outstanding as an interest free loan receivable, repayable in equal monthly installments from 15 January 2004 to 15 June 2007.
 
    Effective from 31 December 2003, the Company’s subsidiary PLIVA Pharma Holding B.V. sold its subsidiary PLIVA Pharma Nordic A/S for nil consideration.
 
    In June 2005, the company sold its subsidiary Velaris d.o.o. for a consideration of USD 7,917 thousand, which was received in cash during 2005.
 
    Effects of disposal
 
    The disposal had the following effect on the Group’s assets and liabilities:
                                                 
    Acquisition     Disposal     Acquisition     Disposal     Acquisition     Disposal  
    2005     2005     2004     2004     2003     2003  
    USD ’000     USD ’000     USD ’000     USD ’000     USD ’000     USD ’000  
Non-current assets (Note 11)
     —       (3,205 )     —       —       2,869       (6,302 )
Current assets
     —       (134 )     —       —       4,231       (3,967 )
Cash and cash equivalents
     —       (301 )     —       —       567       (902 )
Current liabilities
     —       —       —       —       (2,158 )     4,355  
Non-current liabilities
     —       —       —       —       (1,607 )     500  
 
                                    
Net identifiable assets
     —       (3,640 )     —       —       3,902       (6,316 )
 
                                    
 
                                                
Goodwill on acquisition
                                     4,992       —  
 
                                                
Consideration (paid)/received, satisfied in cash
     —       7,917       —       —       (8,894 )     746  
Re-payment of debt
     —       —       —       —       (2,033 )     —  
Cash acquired/(disposed of)
     —       (301 )     —       —       567       (233 )
 
                                    
Net cash outflow/(inflow)
     —       7,616       —       —       (10,360 )     513  
 
                                    

F-101

 

PLIVA D.D.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
31   Related party transactions
 
    Associate
 
    The following transactions were carried out with Medika d.d.:
                         
    2005     2004     2003  
    USD ’000     USD ’000     USD ’000  
Sales of goods and services:
     47,557       50,284       43,967  
 
                  
Year-end receivables:
     23,245       25,661       23,540  
 
                  
Purchases of goods and services:
     10       16       —  
 
                  
Year-end liabilities:
     —       12       —  
 
                  
    Transactions with Medika d.d. are carried out on an arm’s length basis.
 
    Management Board
 
    Short-term employee benefits
 
    During 2005, remuneration in the amount of USD 1,446 thousand (2004: USD 2,617 thousand, 2003: USD 2,262 thousand) was paid to the Management Board.
 
    Equity compensation benefits
 
    During 2005, the Management Board members exercised 8,669 share options at USD 415 thousand representing shares with market value of USD 589 thousand (2004: 9,510 share options at USD 486 thousand representing shares with a market value of USD 806 thousand, 2003: 13,200 share options at USD 608 thousand representing shares with market value of USD 961 thousand).
 
    Details on share based payments are given in Note 27.
 
    Supervisory Board
 
    During 2005, remuneration in the amount of USD 513 thousand (2004: USD 519 thousand, 2003: USD 351 thousand) was paid to the Supervisory Board.

F-102

 

PLIVA D.D.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
32   Significant accounting estimates and judgments
 
    Critical accounting judgments in applying the Group’s accounting policies
 
    In the process of applying the Group’s accounting policies, management has made the following judgments, apart from those involving estimations, which have the most significant effect on the amounts recognised in the financial statements:
 
    Provision for committed costs related to project in development
 
    In 2005 PLIVA decided to terminate all the activities related to several proprietary products in development and to recognize a full impairment loss of USD 36,945 thousand on all such products where development costs were previously capitalised. It also recognised a provision of USD 5,490 thousand for committed development costs. However, for one particular product, there was an indication that PLIVA might be able to sign a deal with an independent third party for the purchase of this product in exchange for future royalties based on sales. This party would also potentially accept to cover all committed development costs as well as any additional costs that would be required to complete the development. At the time of preparation of the 2005 annual report, management was of the opinion that it was reasonably uncertain that the deal would be signed and, consequently, decided to record the provision for committed costs.
 
    Critical accounting estimates and sources
 
    Estimation uncertainty
 
    The key assumptions concerning the future and other key sources of estimation uncertainty at the balance sheet date, that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below:
 
    Impairment of goodwill, other intangible assets and property, plant and equipment
 
    The Group determines whether goodwill is impaired at least on an annual basis. This requires an estimation of the value in use of the cash-generating units to which the goodwill is allocated. Estimating the value in use requires the Group to make an estimate of the expected future cash flows from the cash-generating unit and also to choose a suitable discount rate in order to calculate the present value of those cash flows. The carrying amount of goodwill at 31 December 2005 was USD 118,380 thousands (2004: USD 136,064 thousands). More details are given in Note 12.
 
    As disclosed in the Notes 11 and 12, the Group has significant carrying values of property, plant and equipment (USD 510,559 thousand) and intangible assets (USD 93,445 thousand), other than goodwill, that are also reviewed annually for impairment.
 
    These impairment reviews are based on the expected future cash flows that are estimated by the Group and actual outcomes could vary significantly from such estimates. Factors such as closure of facilities or changes in their utilisation or lower than projected sales of products with capitalised rights could result in impairment.

F-103

 

PLIVA D.D.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
32   Significant accounting estimates and judgments (continued)
 
    Revenue recognition
 
    At 31 December 2005 Group has accrued for expected sales returns, chargebacks and other sales deductions in the amount of USD 89,904 thousand (refer to Note 25). Such estimates are based on analyses of existing contractual obligations, historical trends and the Group’s experience. Management believes that the accruals for sales deductions are adequate, based upon currently available information. As these deductions are based on management estimates, they may be subject to change as better information becomes available. Such changes could impact accruals recognised in the balance sheet in future periods and consequently the level of sales recognised in the income statement in future periods.
 
    In addition to this, other income includes USD 5 million of non-refundable upfront payment received from Barr Pharmaceuticals Inc. when PLIVA entered into a development, supply and marketing agreement for the generic biopharmaceutical Granulocyte Colony Stimulating Factor (G-CSF). Management believes that it is appropriate to recognise the total amount as income in 2005.
 
    Deferred tax asset
 
    The Group is subject to income taxes in numerous jurisdictions. Significant judgment is required in determining the worldwide provision for income taxes. As at 31 December 2005, the Group has recognised USD 35,478 thousands of deferred tax assets based on projected profitability of PLIVA’s subsidiaries in various jurisdictions. This projected profitability is dependant on a number of internal and external factors such as, but not limited to, the success of new product launches or changes in the local regulatory framework. If the projected profitability of PLIVA’s subsidiaries is not met, this may result in the impairment of part of the deferred tax assets.
 
    Future milestones/royalties
 
    As explained in the Note 4, PLIVA is entitled to a significant amount of proceeds related to the divestment of SANCTURA and VoSpire which is conditional on certain future events and achievement of sales milestones. These conditional proceeds have not been taken into account in calculating loss on sale of the discontinued business as management believes there is not sufficient certainty in realising relevant conditions.

F-104

 

PLIVA D.D.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
33   Subsequent events
 
    Acquisition of USO Racional S.L. (“UR”)
 
    On 14 February 2006, the Group acquired 100% of interest in USO Rational SA, a company incorporated in Spain, for USD 26,340 thousand (EUR 21,900 thousand) in cash consideration (which includes EUR 21,400 thousand paid for the assignment of loans). The company distributes generics products. In the period from 14 February 2006 to 30 June 2006 the company contributed a loss of USD 1,937 thousand to the condensed consolidated profit for the interim period.
 
    If the acquisition had occurred on 1 January 2006, the estimated Group revenue from continuing operations would have been USD 542,417 thousand and profit before tax USD 51,721 thousand for the six month period ended 30 June 2006. These amounts have been calculated using the Group’s accounting policies and by adjusting the results of the subsidiary to reflect the additional amortization that would have been charged assuming the fair value adjustments to intangible assets had applied from 1 January 2006.
 
    Effect of acquisition
 
    The acquisition had the following effect on the Group’s assets and liabilities:
                         
    Recognised              
    value on     Fair value     Pre-acquisition  
    acquisition     adjustments     carrying amounts  
    USD’000     USD’000     USD’000  
Property, plant and equipment
     38       —       38  
Intangible assets
     15,287       7,099       8,188  
Inventories
     3,986       —       3,986  
Trade and other receivables
     2,710       —       2,710  
Cash and cash equivalents
     795       —       795  
Trade and other payables
     (1,570 )     —       (1,570 )
 
                  
Net identifiable assets and liabilities
     21,246       7,099       14,147  
 
                  
Goodwill on acquisition
     5,094                  
 
                  
Consideration paid, satisfied in cash
     26,340                  
Cash acquired
     (795 )                
 
                  
Net cash outflow
     25,545                  
 
                  
    The goodwill recognized on acquisition is attributable mainly to the significant synergies expected to be achieved from integrating the company into the Group’s existing Generics business and will be tested for impairment as part of the annual impairment testing carried out by the Group.

F-105

 

PLIVA D.D.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
33   Subsequent events (continued)
 
    Reversal of the provision for committed costs related to project in development
 
    In 2005 PLIVA decided to terminate all the activities related to several proprietary products in development and to recognize full impairment loss of USD 36,945 thousand on all such products where development costs were previously capitalized. It has also recognized a provision of USD 5,490 thousand for committed development costs. This provision related to one particular product, for which there was an indication that PLIVA might be able to sign a deal with an independent third party for the purchase of this product in exchange for future royalties based on sales. This party would also potentially accept to cover all committed development costs as well as any additional costs that would be required to complete the development. As explained in Note 32, at the time of preparation of the 2005 annual report, management was of the opinion that it was reasonably uncertain that the deal would be signed and, consequently, decided to record the provision for committed costs. By the time of the issuance of this report, this deal was signed and PLIVA was able to recover USD 4,597 thousand out of the USD 5,490 thousand.
 
    Divestment of Research Institute
 
    In May 2006, the Group disposed of all the shares in PLIVA – Research Institute Ltd. for total consideration of USD 35 million. In the period from 1 January 2006 to 30 April 2006 the subsidiary contributed a loss of USD 5,897 thousand to the consolidated profit for the interim period (USD 34,011 thousand in the period from 1 January 2005 to 31 December 2005).
         
    2004  
    USD ’000  
Disposal group held for sale
        
Property, plant and equipment
     (10,115 )
Intangible assets
     (201 )
Goodwill on acquisition
     (1,841 )
Inventories
     (355 )
Trade and other receivables
     (3,553 )
Cash and cash equivalents
     (2,043 )
Trade and other payables
     2,541  
 
      
Total disposal group held for sale
     (15,567 )
 
      
Consideration received, satisfied in cash
     34,158  
Consideration receivable (*)
     810  
 
      
Total consideration
     34,968  
 
      
 
(*)   Amount receivable based on the provisions of share purchase agreement (calculated based on changes in working capital and closing cash)
    Divestment of manufacturing plant in Germany
 
    On 4 May 2006 PLIVA announced that its German subsidiary AWD.pharma GmbH & Co. KG (“AWD”) completed the divestment of its manufacturing plant in Dresden, Germany. The sale of the German facility reflects a key step in the process of optimizing PLIVA’s manufacturing asset base and consolidation of production.
 
    The closing of the transaction will not have a material impact on PLIVA Group results for 2006 given that associated restructuring charges of USD 22 million, mainly related to asset impairment, were reflected in its 2005 results. The transfer of production to more cost-efficient sites is ongoing and should be completed by 2008. Following divestment of the manufacturing plant, AWD will continue its sales and marketing activities in Germany.

F-106

 

PLIVA D.D.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
33   Subsequent events (continued)
 
    Future milestones/royalties
 
    As explained in the Note 4, PLIVA is entitled to a significant amount of proceeds related to the divestment of SANCTURA and VoSpire which is conditional on certain future events and achievement of sales milestones. These conditional proceeds have not been taken into account in calculating loss on sale of the discontinued business as management believed there was not sufficient certainty in realizing relevant conditions. As of 30 June 2006, PLIVA successfully collected USD 1,000 thousand of these conditional proceeds.
 
    Dividend
 
    On 29 August 2006 the General Assembly approved a dividend in respect of 2005 of HRK 12.00 (USD 2.11) per share totaling USD 37,173 thousand, after adjusting to exclude treasury shares (2005: HRK 12.00 (USD 2.10) per share totaling USD 36,661 thousand in respect of 2004). The dividend was paid on 31 August 2006.
 
    Change of Control
 
    On 24 October 2006, Barr’s European subsidiary has finalized the legal and regulatory requirements to acquire PLIVA.
 
    Under the terms of Barr’s formal USD 2.5 billion cash tender offer, Barr made a payment of HRK 820 per share for all shares tendered during the offer period. The transaction has closed with 17,056,977 shares being tendered as part of the process, representing 92% of PLIVA’s total share capital being tendered to Barr. With the addition of the Treasury Shares held by PLIVA, Barr at that date owned or controlled in excess of 95% of PLIVA’s voting share capital.
 
    Barr has indicated its intention to utilize the provisions provided for under Croatian law to acquire the remaining outstanding shares from minority shareholder interests and will undertake the necessary steps to initiate the purchase of these shares at HRK 820 per share, the same price offered to shareholders during the formal tender period. The duration of this process and the subsequent pay out to remaining shareholders is expected to be completed during the first quarter of 2007.
 
    Stock Options
 
    In accordance with PLIVA’s internal by-laws, the vesting date of stock options granted to its current and previous employees was accelerated at the Change in Control date. The Option Holders were entitled to exercise any existing options held from the date of the Change of Control to the expiry of a period ending three months from the Change of Control date. At the end of this period any unexercised portions of such option holder shall lapse. As a result of this accelerated vesting date, an additional USD 24.4 million of expenses related to share based payments was expensed in October 2006.

F-107

 

PLIVA D.D.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
33   Subsequent events (continued)
 
    Management Board and Supervisory Board changes
 
    On 31 October 2006 PLIVA announced changes to the Management Board of PLIVA d.d ., which resulted from the meeting of PLIVA’s Supervisory Board that was held on 30 October 2006 in Zagreb, Croatia.
 
    PLIVA’s Management Board continues to be led by Zeljko Covic as President and Chief Operating Officer. Ivan Mijatovic remained as Member of the Board and Chief Financial Officer. PLIVA’s Executive Director of Global Research and Development Zdravka Knezevic has also been appointed as Member of the Board. Joining the Management Board from Barr are Paul M. Bisaro, President and Chief Operating Officer of Barr Pharmaceuticals, Inc. and Tim Sawyer, Vice President, Sales for Generic Products in Barr Laboratories, Inc.
 
    At an extraordinary General Assembly held on 19 December 2006, a new Supervisory Board was elected and PLIVA’s Articles of Association were amended to reflect Barr’s legal and regulatory reporting requirements in the United States.
 
    Resignations of Supervisory Board members: Massimo Armanini, Franjo Lukovic, Branko Jeren, Zdenko Adrovic, Slobodan Vukicevic, Ivan Vidakovic, Ettore del’Isolla, Ronald Freeman and Michael Unsworth were accepted, and the following new members were elected: Jack Kay , President & Chief Operating Officer of Apotex Inc.; George Peter Stephan, member of the Board of Directors of Barr Pharmaceuticals Inc.; Frederick Jay Killion, Senior Vice President and General Counsel of Barr Pharmaceuticals, Inc.; George Frederick Wilkinson, President & Chief Operating Officer of Duramed Pharmaceuticals Inc; Martin Zeiger, partner of the investment bank Life Sciences Funds of Sanders Morris Harris and consultant in the pharmaceutical industry area.

F-108

 

PLIVA D.D.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
34   Significant differences between International Financial Reporting Standards (“IFRS”) and United States of America Generally Accepted Accounting Principles (“US GAAP”)
 
    The Company’s consolidated financial statements are prepared in accordance with International Financial Reporting Standards (“IFRS”), which differ in certain respects from accounting principles generally accepted in the United States of America (“US GAAP”). The principal differences between IFRS and US GAAP are presented below together with explanations of certain adjustments that affect consolidated net income and total shareholders’ equity under US GAAP as of and for the years ended 31 December (in thousands of US Dollars):
                 
    2005     2004  
Net income (loss) reported under IFRS
     (91,963 )     127,623  
   
US GAAP adjustments:
                
- Revenue recognition (a)
     (5,452 )     (1,413 )
- In-process research and development (b)
     11,400       —  
- Goodwill (c)
     (14,196 )     13,928  
- Deferred income on disposal of VoSpire (d)
     (30,667 )     —  
- Licenses and similar rights (e)
     49,985       (50,290 )
- Restructuring (f)
     8,194       (761 )
- Pension expense and other post-employment benefits (g)
     —       —  
- Share-based compensation (h)
     393       (730 )
- Early retirement program (i)
     (84 )     (70 )
- Derivatives (j)
     212       3,634  
- Minority interest (k)
     92       (119 )
- Other (l)
     (21 )     24  
- Deferred taxes (m)
     (4,144 )     468  
 
            
Total US GAAP adjustments
     15,712       (35,329 )
 
                
Net income (loss) under US GAAP
     (76,251 )     92,294  
 
            
 
                
Earnings per share from continuing operations:
                
– Basic under US GAAP
     8.79       12.70  
– Diluted under US GAAP
     8.74       12.60  
Earnings per GDR from continuing operations:
                
– Basic under US GAAP
     1.75       2.54  
– Diluted under US GAAP
     1.75       2.52  
 
                
Earnings (loss) per share from discontinuing operations:
                
– Basic under US GAAP
     (13.17 )     (7.40 )
– Diluted under US GAAP
     (13.06 )     (7.33 )
Earnings (loss) per GDR from discontinuing operations:
                
– Basic under US GAAP
     (2.63 )     (1.48 )
– Diluted under US GAAP
     (2.61 )     (1.47 )
 
                
Earnings (loss) per share
                
– Basic under US GAAP (USD)
     (4.38 )     5.30  
– Diluted under US GAAP (USD)
     (4.32 )     5.27  
Earnings (loss) per GDR
                
– Basic under US GAAP (USD)
     (0.88 )     1.06  
– Diluted under US GAAP (USD)
     (0.86 )     1.05  

F-109

 

PLIVA D.D.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
34   Significant differences between International Financial Reporting Standards (“IFRS”) and United States of America Generally Accepted Accounting Principles (“US GAAP”) (continued)
 
    The effect of the application of US GAAP on equity, as reported under IFRS, is set out in the table below (in thousands of US Dollars):
                 
    2005     2004  
Equity reported under IFRS
     1,034,315       1,243,150  
 
                
US GAAP adjustments:
                
- Revenue recognition (a)
     (7,667 )     (2,450 )
- In-process research and development (b)
     (3,000 )     (14,400 )
- Goodwill (c)
     21,109       38,001  
- Deferred income on disposal of VoSpire (d)
     (30,667 )     —  
- License and similar rights (e)
     (17,971 )     (71,393 )
- Restructuring (f)
     8,791       650  
- Pension expense and other post-employment benefits (g)
     (946 )     (271 )
- Share-based compensation (h)
     527       134  
- Early retirement program (i)
     561       742  
- Derivatives (j)
     3,502       3,638  
- Minority interest (k)
     (5,129 )     (5,676 )
- Other (l)
     32       56  
- Deferred taxes (m)
     (3,415 )     469  
 
            
Equity under US GAAP
     1,000,042       1,192,650  
 
            
 
                
Changes in equity under US GAAP are set out in the table below (in thousands of US Dollars):
 
                
Equity under US GAAP at 31 December 2003
             1,056,382  
 
                
Net income under US GAAP
             92,294  
Other comprehensive income (loss):
                
- Unrealized gain or loss on marketable securities, net of tax
             34  
- Foreign currency translation
             85,592  
Stock compensation
             2,507  
Sale of treasury shares
             1,933  
Dividends
             (46,092 )
 
              
Equity under US GAAP at 31 December 2004
             1,192,650  
 
                
Net loss under US GAAP
             (76,251 )
Other comprehensive income (loss):
                
- Unrealized gain or loss on marketable securities, net of tax
             43  
- Additional minimum pension liability, net of tax
             (433 )
- Foreign currency translation
             (81,655 )
Stock compensation
             1,242  
Sale of treasury shares
             1,107  
Dividends
             (36,661 )
 
              
Equity under US GAAP at 31 December 2005
             1,000,042  

F-110

 

PLIVA D.D.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
34   Significant differences between International Financial Reporting Standards (“IFRS”) and United States of America Generally Accepted Accounting Principles (“US GAAP”) (continued)
 
    Explanatory notes
 
    The following statements summarise adjustments that reconcile net income and equity from that reported under IFRS to that which would have been reported had US GAAP been applied.
 
    (a)     Revenue recognition
 
    In 2004, the United States Securities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin 104 which amended SAB 101. Under this guidance, revenue earned from non-refundable upfront charges and milestone payments related to license and supply arrangements is recognized over the estimated remaining life of the contract. Under IFRS, this revenue is recognised immediately upon receipt when no uncertainty as to collectibility exists.
 
    (b)    In-process research and development (“IPR&D”)
 
    Under IFRS, the Group recognises IPR&D acquired as part of a business combination as a separate identifiable intangible asset apart from goodwill. The Group capitalises the related amount and amortises it over its estimated useful life beginning when the asset is available for use (upon completion of the IPR&D). Further, until the asset is available for use, the Group tests it for impairment on an annual basis by comparing its carrying amount to its estimated recoverable amount.
 
    Under US GAAP, IPR&D is considered to be a separate asset that needs to be written-off immediately following an acquisition when the feasibility of the acquired research and development has not been fully tested and the technology has no alternative future use.
 
    In 2004 and 2005 there was no amortisation of IPR&D under IFRS since the assets were not yet completed. In 2005 the Group recorded an impairment of IPR&D of USD 11,400 thousand under IFRS. The impairment related to Urecholine Buccal (USD 5,300 thousand) and Disulfiram (USD 6,100 thousand). This impairment was reversed under US GAAP since the IPR&D had already been written off at the date of acquisition.
 
    (c)    Goodwill
 
    Under IFRS, the Group adopted the provisions of IFRS 3 on 1 January 2005. At that date, goodwill was assigned to cash generating units based on a combination of the source of the previously recognised goodwill and the relative fair values of the cash generating units at that date. Subsequent to 1 January 2005 goodwill is no longer subject to amortisation, but is tested for impairment on an annual basis, or more frequently if events or changes in circumstances indicate that it might be impaired. When such indicators are identified, the impairment is determined by comparing the carrying value of goodwill with the recoverable amount of the cash-generating unit that contains the goodwill. If the recoverable amount of the cash-generating unit is less than the carrying value of the goodwill, an impairment charge is recorded for the difference. Under the transitional provisions of IFRS 3, this change in accounting policy was effective immediately for acquisitions made after 31 March 2004.
 
    Under US GAAP, the Group records goodwill in accordance with FAS 142, Goodwill and Other Intangible Assets. The Group adopted the provisions of FAS 142 on 1 January 2002 and as a result, goodwill relating to purchase acquisitions and acquisitions of associated companies is no longer subject to amortisation subsequent to the date of adoption. At the date of adoption of FAS 142 the Group assigned goodwill to its US GAAP determined reporting units existing at 1 January 2002 taking into consideration a combination of the source of the previously recognised goodwill and the relative fair values of the relevant reporting units. At the date of adoption the Group also performed its transitional goodwill impairment test. On an annual basis thereafter the Group tests goodwill for impairment. At transition and for the years 2002 through 2005 there was no goodwill impairment under US GAAP.

F-111

 

PLIVA D.D.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
34   Significant differences between International Financial Reporting Standards (“IFRS”) and United States of America Generally Accepted Accounting Principles (“US GAAP”) (continued)
 
(c) Goodwill (continued)
    In 2004 under IFRS, the Group reversed amortization expense of USD 13,928 thousand, recognized under IFRS prior to the adoption of IFRS 3 on the Group’s IFRS goodwill. In 2005 the adjustment relates to US GAAP goodwill of USD 21,200 thousand that was assigned to the disposal of a portion of the Proprietary business. Under IFRS the goodwill that was assigned to the disposition was USD 7,004 thousand. The difference in goodwill amounts assigned under IFRS and US GAAP is due to the difference in fair values of reporting units (US GAAP) and cash generating units (IFRS), and therefore the amount of goodwill assigned, between the date of adoption of FAS 142 under US GAAP at 1 January 2002 and the date of adoption of IAS 36 at 1 January 2005.
(d) Deferred income on disposal of VoSpire
    In October of 2005 the Group disposed of VoSpire to a third party in return for a payment of USD 32,000 thousand at the date of disposal. The Group may be entitled to a further maximum of USD 35,500 thousand in future periods conditional on the achievement of various milestones. As part of the disposal the Group also entered into a transitional supply arrangement for a period of four years during which time PLIVA will continue to supply VoSpire product to the third party until the third party arranges for another supplier.
 
    Under IFRS the USD 32,000 thousand payment was recognized immediately since no uncertainty as to collectibility exists. Under US GAAP the Group deferred the USD 32,000 thousand payment and will also defer any milestone payments due under the arrangement and recognize them ratably over the remaining period of the arrangement (four years).
(e) License and similar rights
Under IFRS, the costs of the acquisition of licenses and similar rights through in-licensing agreements or from third parties were capitalised as intangible assets to the extent that future economic benefits were probable and will flow to the Group. Internal development costs are capitalised as intangible assets when the criteria specified in IAS 38 Intangibles Assets are satisfied and when it is probable that future economic benefit will flow to the Group. Under IFRS intangible assets are stated at cost less accumulated amortisation. Under US GAAP, all non-refundable costs incurred prior to obtaining regulatory approval are expensed.
For the years ended 31 December 2005 and 2004 the Group expensed USD 4,408 thousand and USD 11,360 thousand, respectively, for intangibles for license and similar rights under US GAAP that were capitalized under IFRS. For the years ended 31 December 2005 and 2004 under US GAAP the Group reversed USD 3,085 thousand and USD 1,840 thousand of related amortisation expense, respectively.
In 2005 under IFRS the Group recorded an impairment charge of USD 25,558 thousand related to a product in development. Under US GAAP the impairment charge was reversed as the asset did not qualify for capitalisation in prior periods and was expensed as incurred. Costs capitalised under IFRS related to this product in 2005 totaled USD 15,020 thousand. These costs had been expensed under US GAAP.
Also included in the adjustment for the twelve months ended 31 December 2004 is a USD 40,770 thousand write-off under US GAAP for payments made in 2004 related to SANCTURA prior to FDA approval being received. Under IFRS these amounts were capitalized since it was deemed probable that future economic benefits would flow to the Group. For the 12 months ended 31 December 2005 the adjustment includes the reversal of USD 40,770 of the loss recorded under IFRS upon disposal of SANCTURA. Under US GAAP the carrying value of SANCTURA was lower by USD 40,770 at the date of disposal.

F-112

 

PLIVA D.D.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
34   Significant differences between International Financial Reporting Standards (“IFRS”) and United States of America Generally Accepted Accounting Principles (“US GAAP”) (continued)
(f) Restructuring
Under IFRS, a restructuring provision is recognised when the Group has approved a detailed formal plan, and the restructuring has either commenced or has been publicly announced. In addition, under IFRS a liability is recorded for an onerous contract in which the unavoidable costs of meeting the obligations under the contracts exceed the economic benefits expected to be received from the contract.
Under US GAAP, a restructuring charge is recorded when a detailed plan for exit costs has been developed and those costs relating to employee termination benefits have been developed in sufficient detail so that employees who may be subject to termination would be aware of the benefit they were to receive upon involuntary termination. US GAAP requires that significant changes in the plan are unlikely.
Furthermore, under US GAAP a liability associated with an exit activity is recognised when an event has occurred that creates a present obligation to transfer assets or provide services in the future that meets the definition of a liability. Under US GAAP, a restructuring provision is recognised and measured at its fair value at the communication date.
In addition, under US GAAP a liability for costs that will continue to be incurred under a contract for its remaining term without economic benefit to the entity shall be recognised and measured at its fair value when the entity ceases using the right conveyed by the contract.
In 2005 and 2004 certain provisions of the restructuring accruals recorded under IFRS related to workforce reduction, certain other exit costs and onerous contracts did not meet the US GAAP requirements. Accordingly, these restructuring accruals were reversed and instead recognised as incurred upon the communication date or the date that the Group ceased using the asset under contract. Under US GAAP at 31 December 2005 and 2004 the Group has reversed restructuring accruals of USD 8,791 thousand and USD 650 thousand, respectively. The US GAAP adjustments that impact the balance sheet and income statement consist of the following:
                         
    Provision for           Provision for
    restructuring           restructuring
    accruals under           accruals under US
    IFRS   Adjustments   GAAP
Balance at 31 December 2003
     5,728       (1,147 )     4,581  
Increase made during the year
     477       761       1,238  
Provisions used during the year
     (1,105 )     —       (1,105 )
Foreign exchange movements
     189       (264 )     (75 )
 
                        
 
                        
Balance at 31 December 2004
     5,289       (650 )     4,639  
Increase made during the year
     60,481       (8,194 )     52,287  
Provisions used during the year
     (40,329 )     —       (40,329 )
Foreign exchange movements
     (513 )     53       (460 )
 
                        
 
                        
Balance at 31 December 2005
     24,928       (8,791 )     16,137  
(g) Pension expense and other post-employment benefits
Under IFRS, defined benefit pension liabilities and pension expense are determined in a similar manner to US GAAP. However, under IFRS the Group adopted IAS 19, Employee Benefits from the year ended 31 December 2001.

F-113

 

PLIVA D.D.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
34   Significant differences between International Financial Reporting Standards (“IFRS”) and United States of America Generally Accepted Accounting Principles (“US GAAP”) (continued)
(g) Pension expense and other post-employment benefits (continued)
Under US GAAP the Group adopted FAS 87, Employers’ Accounting for Pensions from the year ended 31 December 2003 since it was not feasible to apply FAS 87 on the effective date specified by the standard (the inception date of the plan was 1993). The different adoption dates gave rise to a different unrecognized actuarial loss as of 31 December 2004 and 2005 under IFRS versus US GAAP. However since this unrecognised amount is below the 10% corridor under both IFRS and US GAAP there is no difference in pension expense for the years ended 31 December 2004 and 2005.
Furthermore, under US GAAP and unlike IFRS, when the accumulated benefit obligation (“ABO”) exceeds the fair value of plan assets, a liability at least equal to the unfunded ABO must be recognised in the balance sheet. If an additional minimum liability (“AML”) is recognised, a contra amount is recognized first as an intangible asset up to the amount of unrecognised prior service costs, with any excess being reported in other comprehensive income. If the unfunded ABO is less than the liability already recognised, no further liability is recognised. The Group recorded an accumulated AML of USD 710 thousand, for the year ended 31 December 2005.
(h) Share-based compensation
The Group maintains several share-based employee compensation plans, which are described more fully in Note 27. As of 1 January 2005 the Group adopted IFRS 2. Prior to the adoption of IFRS 2, the Group did not record an expense related to the share-based payments in the income statement until such payments were settled. In accordance with the transitional provisions of IFRS 2, the standard has been applied retrospectively to all grants of share appreciation rights and share options that were granted after 7 November 2002 and that were not yet vested at 1 January 2005.
Under US GAAP, the Group has elected to apply FAS 123 Accounting for Stock-Based Compensation to all share-based awards since inception. Under FAS 123 employee stock option grants are expensed on a straight-line basis over the related option vesting period based on the fair value at the date the options were granted. Share appreciation rights are expensed based on intrinsic value at each reporting date. As a result under US GAAP the Group recorded less compensation expense for share-based compensation of USD 393 thousand in 2005 due to the difference between accounting for SARS under the intrinsic value method under US GAAP versus the fair value method under IFRS. In 2004 the additional share based compensation expense of USD 730 thousand under US GAAP consists of USD 886 more compensation expense for stock options granted prior to 7 November 2002 that were not yet vested at 31 December 2004 under US GAAP offset by USD 156 thousand less expense related to accounting for the SARS under the intrinsic value method under US GAAP.
(i) Early retirement program
In Germany the Group offers an early retirement program to its employees that provides an employee with the opportunity to work fulltime for a period of up to three years and receive fifty percent of his or her base salary for up to six years (i.e., including a period of up to three years of non-work), plus additional bonus payments during each of those six years. Under IFRS, the Group immediately accrued and expensed the full additional bonus payments for certain qualified employees who participate or are expected to participate in this program in future periods. Under US GAAP, the additional bonus payments are accrued over the employees’ remaining service lives for participating employees that signed an early retirement agreement. As a result, there was an increase to net equity of USD 561 thousand, USD 742 thousand and USD 746 thousand on 31 December 2005, 2004 and 2003, respectively.

F-114

 

PLIVA D.D.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
34   Significant differences between International Financial Reporting Standards (“IFRS”) and United States of America Generally Accepted Accounting Principles (“US GAAP”) (continued)
(j) Derivatives
Under IFRS the Group designates its interest rate swap as a fair value hedge at the inception of the arrangement. Since the Group did not apply US GAAP at the time of inception of the arrangement, it did not designate the swap as a hedge for purposes of US GAAP. Accordingly, under US GAAP, the interest rate swap does not qualify for hedge accounting.
(k) Minority interest
Under IFRS minority interest is included in the determination of the Group’s net income (loss) and total equity. Under US GAAP, minority interest is included in the determination of US GAAP net income (loss) and excluded from total equity.
(l) Other
Other adjustments include impairment reversals not allowed under US GAAP.
(m) Deferred taxes
Under IAS 12 (revised) Income Taxes and under US GAAP, unrealized profits resulting from intercompany transactions are eliminated from the carrying amount of assets, such as inventory. In accordance with IAS 12 (revised) the Group calculates the tax effect with reference to the local tax rate of the company that holds the inventory (the buyer) at period-end. However, US GAAP requires that the tax effect is calculated with reference to the local tax rate in the seller’s or manufacturer’s jurisdiction. The effect of this difference decreased US GAAP income in 2005 by USD 4,744 thousand and USD 172 thousand in 2004 and reduced equity by USD 4,824 thousand in 2005, USD 148 thousand in 2004 and increased equity by USD 23 thousand in 2003.
The deferred tax effect on US GAAP adjustments represents the tax effect for the temporary differences, resulting from US GAAP adjustments. The deferred tax effect on other US GAAP adjustments for 2005 resulted in additional income of USD 600 thousand and USD 640 thousand in 2004 and increased equity by USD 1,409 thousand in 2005, USD 617 thousand in 2004 and decreased equity by USD 23 thousand in 2003.
Discontinued Operations
Under IFRS, the Group classified the divestiture of VoSpire as a discontinued operation in all periods presented. Under US GAAP, since the Group will continue to supply VoSpire to the buyer for a period of four years, and the continuing cash flows are deemed to be significant, VoSpire would not be treated as a discontinued operation.
For US GAAP purposes, sales from discontinued operations are USD 17,087, and USD 0, in 2005 and 2004, respectively. The operating results of discontinued operations include loss on disposals of USD 88,213 thousand in 2005.
Under US GAAP, profit from sale of subsidiary, sale of assets and proceeds from litigation, amounting to USD 5,923 thousand and USD 15,889 for the periods ended 31 December 2005 and 2004, respectively, would be recorded under general and administrative expenses rather than other revenue under IFRS. Furthermore, under US GAAP rebates and discounts amounting to USD 24,682 thousand and USD 20,693 thousand for the periods ended 31 December 2005 and 2004, respectively, would be recorded under sales rather than as operating expenses under IFRS.

F-115

EX-99.3 3 y28523exv99w3.htm EX-99.3: UNAUDITED PRO FORMA CONDENSED FINANCIAL INFORMATION EX-99.3
 

Exhibit 99.3
BARR PHARMACEUTICALS, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
As of and for the Twelve-Month Period Ended June 30, 2006
(in thousands, except per share data, unless otherwise noted)
The following unaudited pro forma condensed combined balance sheet and unaudited pro forma condensed combined statement of operations have been derived by applying pro forma adjustments to the combined historical US GAAP financial statements of Barr Pharmaceuticals, Inc. (“Barr” or the “Company”) and PLIVA d.d. (“PLIVA”). The unaudited pro forma condensed combined financial statements give effect to the following transactions as if they occurred on July 1, 2005 for the pro forma statement of operations and as if they occurred on June 30, 2006 for the pro forma balance sheet:
  •   the acquisition by Barr of approximately 96.7% of the outstanding common shares of PLIVA (the “Acquisition”) for aggregate cash consideration of $2,480,426, including estimated direct transaction related expenses of approximately $21,922; and
 
  •   the financing of the Acquisition with the aggregate proceeds received from borrowings under a five-year term credit facility ($2,000,000) and borrowings under the 364-day term facility ($416,000) (the “Financing”).
The Acquisition will be accounted for using the purchase method of accounting. Under this method, the purchase price for the 96.7% ownership in PLIVA was allocated to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values as of the Acquisition date. Any excess of the purchase price over the estimated fair value of the net assets acquired (including both tangible and identifiable intangible assets) is allocated to goodwill.
The allocation of purchase price for acquisitions requires extensive use of accounting estimates and judgments to allocate the purchase price to the identifiable tangible and intangible assets acquired and liabilities assumed based on their respective fair values. The Company’s process for estimating the fair values of in-process research and development, identifiable intangible assets and certain tangible assets is very complex and requires significant estimates and assumptions including, but not limited to: determining the timing and estimated costs to complete the in-process projects, projecting regulatory approvals, estimating future cash flows, and developing appropriate discount rates. Accordingly, the purchase price allocation in the unaudited pro forma condensed combined financial statements is preliminary and will be adjusted upon completion of the final valuation. Such adjustments could be significant. The final valuation is expected to be completed as soon as practicable but no later than 12 months after the consummation of the acquisition.
The historical US GAAP PLIVA statement of operations and balance sheet information included in the unaudited pro forma condensed combined financial statements reflects PLIVA’s unaudited International Financial Reporting Standards (“IFRS”) results of operations and balance sheet converted to US GAAP as of and for the twelve-month period ended June 30, 2006. The results of operations were derived by combining the results of operations of PLIVA for the six-month period ended June 30, 2006 with the results of operations of PLIVA for the year ended December 31, 2005 and subtracting the results of operations of PLIVA for the six-month period ended June 30, 2005. A reconciliation of consolidated net income and consolidated shareholders equity between US GAAP and IFRS as of and for the six months ended June 30, 2006 and the year ended December 31, 2005 has been included in a note to the PLIVA historical financial statements included elsewhere in this Current Report on Form 8-K/A.
The unaudited pro forma condensed combined financial statements are presented for informational purposes only. They do not purport to present what our results of operations or financial condition would have been had these transactions actually occurred on the dates indicated, nor do they purport to represent our results of operations for any future period or our financial condition for any future date. Furthermore, no effect has been given in the unaudited pro forma condensed combined statement of operations for synergistic benefits that may be realized through the combination of the two companies or the costs that may be incurred in integrating their operations.
The unaudited pro forma condensed combined financial statements should be read in conjunction with the Company’s historical consolidated financial statements and related notes thereto, Management’s Discussion and Analysis of Financial Condition and Results of Operations included in the Company’s Annual Report on Form 10-K for the year ended June 30, 2006 and the PLIVA d.d. audited IFRS financial statements included elsewhere in this Current Report on Form 8-K/A.

P-1

 

BARR PHARMACEUTICALS, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
As of June 30, 2006
                                         
            US GAAP                      
            Historical     Pro Forma             Condensed  
    Historical     PLIVA     Adjustments             Combined  
(in thousands of US Dollars)   Barr     (Note 2)     (Note 3)             Pro Forma  
ASSETS
                                        
 
                                        
Current assets:
                                        
Cash and cash equivalents
   $ 24,422     $ 211,314     $ (30,615 )     (a )   $ 205,121  
Marketable securities
     577,482       1,973       (64,426 )     (a )     515,029  
Accounts receivable, net
     226,026       337,496       —               563,522  
Other receivables
     50,235       36,832       —               87,067  
Inventories, net
     134,266       227,637       60,896       (b )     422,799  
Assets held for sale
     —       —       4,869       (c )     4,869  
Deferred income taxes
     25,680       (343 )     10,759       (e )     36,096  
Prepaid expenses and other
     70,871       8,114       —               78,985  
 
                                
Total current assets
     1,108,982       823,023       (18,517 )             1,913,488  
 
                                
 
                                        
Property, plant and equipment
     275,960       531,139       305,161       (d )     1,112,260  
Deferred income taxes
     30,204       35,314       87,393       (e )     152,911  
Marketable securities
     18,132       11,221       —               29,353  
Other intangible assets
     417,258       75,205       1,001,355       (f )     1,493,818  
Goodwill
     47,920       154,180       (126,481 )     (g )     75,619  
Other assets
     22,963       4,454       43,186       (h )     70,603  
In-process research & development
     —       —       424,532       (i )     —  
 
                     (424,532 )     (i )        
 
                                
Total assets
   $ 1,921,419     $ 1,634,536     $ 1,292,097             $ 4,848,052  
 
                                
 
                                        
LIABILITIES, MINORITY INTEREST AND SHAREHOLDERS’ EQUITY
                                        
 
                                        
Current liabilities:
                                        
Accounts payable
   $ 69,954     $ 66,935     $ —             $ 136,889  
Accrued liabilities
     99,213       168,340       63,602       (j )     331,155  
Current portion of long-term debt
     8,816       40,958       416,000       (k )     465,774  
Income taxes payable
     9,336       6,055       —               15,391  
 
                                
Total current liabilities
     187,319       282,288       479,602               949,209  
 
                                
 
                                        
Long-term debt and capital leases
     7,431       172,749       2,000,000       (k )     2,180,180  
Deferred tax liabilities
     —       1,698       350,004       (e )     351,702  
Other non-current liabilities
     35,713       50,266       (25,775 )     (l )     60,204  
 
                                
Total liabilities
     230,463       507,001       2,803,831               3,541,295  
 
                                
 
                                        
Minority interest
     —       5,093       35,240       (m )     40,333  
 
                                        
Shareholders’ equity:
                                        
Common stock
     1,092       359,862       (359,862 )     (n )     1,092  
Additional paid-in capital
     574,785       38,202       (38,202 )     (n )     574,785  
Retained earnings
     1,216,146       650,276       (650,276 )     (n )     791,614  
 
                                        
 
                     (424,532 )     (i )        
Accumulated other comprehensive income / (loss)
     (377 )     62,554       (62,554 )     (n )     (377 )
Legal and other reserves
     —       23,816       (23,816 )     (n )     —  
Less: treasury shares at cost
     (100,690 )     (12,268 )     12,268       (n )     (100,690 )
 
                                
Total shareholders’ equity
     1,690,956       1,122,442       (1,546,974 )             1,266,424  
 
                                
 
                                        
 
                                
Total liabilities, minority interest and shareholders’ equity
   $ 1,921,419     $ 1,634,536     $ 1,292,097             $ 4,848,052  
 
                                

P-2

 

BARR PHARMACEUTICALS, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
For the Twelve-Month Period Ended June 30, 2006
                                         
            US GAAP                      
            Historical     Pro Forma             Condensed  
    Historical     PLIVA     Adjustments             Combined Pro  
(in thousands of US Dollars, except share and per share data)   Barr (Note 1)     (Note 2)     (Note 3)             Forma  
Revenues:
                                        
Product sales
   $ 1,168,678     $ 961,816     $ (18,051 )     (o )   $ 2,112,443  
Alliance, development and other revenue
     145,787       95,553       (1,105 )     (p )     240,235  
 
                                
Total revenues
     1,314,465       1,057,369       (19,156 )             2,352,678  
 
                                        
Costs and expenses:
                                        
Cost of sales
     352,118       514,206       8,149       (q )     866,352  
 
                                        
 
                     (8,121 )     (o )        
Selling, general and administrative
     334,771       356,782       80,754       (r )     777,731  
 
                                        
 
                     5,424       (s )        
Research and development
     140,158       107,767       —       (i )     247,925  
 
                                
Operating income
     487,418       78,614       (105,362 )             460,670  
 
                                        
Interest income
     18,851       8,873       (5,417 )     (t )     22,307  
Interest expense
     489       18,202       158,418       (u )     177,109  
Other income (expense), net
     17,168       (5,642 )     —               11,526  
 
                                
Earnings from continuing operations before income taxes and minority interest
     522,948       63,643       (269,197 )             317,394  
 
                                        
Income tax expense (benefit)
     186,471       (3,091 )     (86,520 )     (v )     96,860  
 
                                        
Minority interest in earnings from continuing operations
     —       86       1,576       (w )     1,662  
 
                                        
 
                                
Earnings from continuing operations
   $ 336,477     $ 66,648     $ (184,253 )           $ 218,872  
 
                                
 
                                        
Earnings from continuing operations per share:
                                        
Basic
   $ 3.20                             $ 2.08  
Diluted
   $ 3.12                             $ 2.03  
 
                                        
Weighted average shares outstanding (in thousands):
                                        
Basic
     105,129                               105,129  
Diluted
     107,798                               107,798  

P-3

 

BARR PHARMACEUTICALS, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
(in thousands, except per share data, unless otherwise noted)
NOTE 1– DESCRIPTION OF THE ACQUISITION AND BASIS OF PRESENTATION
On October 24, 2006, Barr Pharmaceuticals, Inc. (“Barr”) completed its acquisition of 96.4% of the outstanding common shares of PLIVA d.d., a company incorporated and domiciled in Croatia, pursuant to a cash tender offer with an offer price of HRK 820 per share for all shares tendered during the period. Since October 24, 2006, Barr has acquired an additional 0.3% of PLIVA common shares. Barr expects to purchase the remaining 3.3% of outstanding common shares of PLIVA at a price of no more than HRK 820 per share, under the provisions of Croatian law, within six months of the date of the Acquisition. The unaudited pro forma combined financial statements reflect Barr’s current ownership percentage of 96.7% as of December 31, 2006, which includes the shares purchased subsequent to October 24, 2006. The total purchase price of approximately $2,480,426 includes transaction costs of approximately $21,922. Of the total purchase price, $2,000,000 was financed with proceeds received from borrowings under a five-year term credit facility and $416,000 from borrowings under a 364-day term facility. The remaining $64,000 was paid with cash on-hand.
The Acquisition will be accounted for under US GAAP using the purchase method of accounting. Under this method, the purchase price is allocated to the tangible and identifiable intangible assets acquired and liabilities assumed based on their estimated fair values as of the Acquisition date. A pro rata allocation of the fair values of the assets acquired and liabilities assumed was made to the 96.7% ownership of PLIVA, by Barr. The remaining minority interest portion of PLIVA not acquired by Barr of approximately 3.3%, has been recorded in the unaudited pro forma condensed combined balance sheet based on the historical carrying amounts of PLIVA. Any excess of the purchase price over the estimated fair value of the net assets acquired (including both tangible and identifiable intangible assets) is allocated to goodwill.
The allocation of purchase price for acquisitions requires extensive use of accounting estimates and judgments to allocate the purchase price to the identifiable tangible and intangible assets acquired and liabilities assumed based on their respective fair values. The purchase price for the 96.7% ownership in PLIVA was allocated to tangible and intangible assets acquired and liabilities assumed based on their estimated fair values at the Acquisition date. The Company’s process for estimating the fair values of in-process research and development, identifiable intangible assets and certain tangible assets is very complex and requires significant estimates and assumptions including but not limited to: determining the timing and estimated costs to complete the in-process projects, projecting regulatory approvals, estimating future cash flows, and developing appropriate discount rates. Accordingly, the fair value estimates are preliminary and will be adjusted upon final valuation. Such adjustments could be significant. The final valuation is expected to be completed as soon as practicable but no later than 12 months after the consummation of the Acquisition.
In connection with the Acquisition, Barr and PLIVA divested certain products subsequent to the consummation of the Acquisition. The estimated fair value of the PLIVA products divested, Custodiol and Nimodipine, of $5,000 has been reflected as an asset held for sale on the unaudited pro forma condensed combined balance sheet at 96.7% of its fair value plus the 3.3% minority interest share of the existing carrying value of the products, or $4,869. Barr also divested two products, Trazadone Hydrocholride and Tramterene, subsequent to the Acquisition. The sales and direct costs related to the divested Barr and PLIVA products have been excluded from the pro forma condensed combined statement of operations. Furthermore, in connection with the Acquisition, Barr is in the process of evaluating for disposal PLIVA’s non-core businesses and loss making operations in certain geographic regions.
The purchase price of the Acquisition was approximately $2,480,426.
Estimated purchase price:
         
(in thousands of US Dollars)        
Cash consideration for 96.7% of common shares
   $ 2,458,504  
Estimated transaction costs
     21,922  
 
      
Estimated purchase price for 96.7% of common shares
   $ 2,480,426  
 
      

P-4

 

BARR PHARMACEUTICALS, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS (continued)
(in thousands, except per share data, unless otherwise noted)
NOTE 1– DESCRIPTION OF THE ACQUISITION AND BASIS OF PRESENTATION (continued)
The allocation of the purchase price as of June 30, 2006 is summarized below:
                         
    Allocation of     Add: 3.3%     PLIVA  
    Purchase Price to     Minority     Adjusted Book  
    Net Assets     Interest at book     Value of Net  
(in thousands of US Dollars)   Acquired     value     Assets  
Preliminary purchase price allocation as of June 30, 2006:
                        
Current assets, excluding inventories and assets held for sale
   $ 586,497     $ 19,648     $ 606,145  
Inventories
     281,021       7,512       288,533  
Property, plant & equipment
     818,772       17,528       836,300  
Assets held for sale
     4,835       34       4,869  
In-process research & development (1)
     424,532       —       424,532  
Identifiable intangible assets (2)
     1,074,113       2,448       1,076,561  
Other non-current assets, including deferred tax assets
     149,271       1,681       150,952  
Goodwill
     22,611       5,088       27,699  
Current liabilities, excluding restructuring
     (304,097 )     (10,069 )     (314,166 )
Restructuring costs (3)
     (30,677 )     (1,047 )     (31,724 )
Deferred tax liabilities (4)
     (351,646 )     (56 )     (351,702 )
Other non-current liabilities, including long-term debt
     (189,881 )     (7,359 )     (197,240 )
Existing minority interest
     (4,925 )     4,925       —  
 
                  
 
   $ 2,480,426     $ 40,333     $ 2,520,759  
 
                  
 
(1)   The estimated fair value of the IPR&D was based on the use of a discounted cash flow model (based on an estimate of future sales, costs to complete, and expected profit margins for each project in development). For each project, the estimated after-tax cash flows (using applicable statutory tax rates ranging from 15-38% depending on the relevant jurisdiction) were then probability weighted to take account of the stage of completion and the risks surrounding the achievement of technological feasibility (which is measured by regulatory approval). The assumed tax rate is our estimate of the effective statutory tax rate for an acquisition of similar types of assets. These cash flows were then discounted to a present value using discount rates ranging from 14% to 25%. The amounts allocated to in-process research and development will be charged to the statement of operations in the period the acquisition is consummated. This amount is excluded from the pro forma condensed combined statement of operations as it is not expected to have a continuing impact on operations.
 
(2)   The allocation of the purchase price to intangible assets represents approximately 96.7% of the estimated fair value of the identifiable intangible assets and includes trade names, products and product rights, and other identifiable intangibles, with estimated useful lives approximating 10 years for the products and product rights and ranging from 5 to 7 years for the other identifiable intangible assets. The trade names have an indefinite life and are therefore not amortized, but are subject to impairment testing upon a triggering event. See pro forma adjustments note 3 (f) and (r) herein.
 
(3)   In connection with the Acquisition, Barr has identified certain restructuring costs relating to the restructuring of PLIVA’s US operations and the termination of certain PLIVA employees. The estimated costs have been recorded as an assumed liability in accordance with EITF 95-3, “Recognition of Liabilities in a Purchase Business Combination.”
 
(4)   The deferred income tax liability related to the purchase price basis adjustments (excluding in-process research and development, and goodwill) is calculated using statutory tax rates ranging from 15-38%, depending on the relevant tax jurisdiction, resulting in a blended tax rate of 24%.

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BARR PHARMACEUTICALS, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS (continued)
(in thousands, except per share data, unless otherwise noted)
NOTE 2 – HISTORICAL FINANCIAL STATEMENTS OF PLIVA D.D.
The historical financial statements of PLIVA d.d. as of December 31, 2005 and 2004 and for each of the three years in the period ended December 31, 2005, prepared in accordance with IFRS, are included elsewhere in this Current Report on Form 8-K/A. A reconciliation of consolidated net income and consolidated shareholders’ equity between US GAAP and IFRS as of and for each of the years ended December 31, 2005 and 2004 has been included as a note thereto.
The unaudited condensed consolidated financial statements of PLIVA d.d. for the six-month periods ended June 30, 2006 and 2005, prepared in accordance with IFRS, are included elsewhere in this Current Report on Form 8-K/A. A reconciliation of consolidated net income and consolidated shareholders’ equity between US GAAP and IFRS as of June 30, 2006 and for each of the six-month periods ended June 30, 2006 and 2005 has been included as a note thereto.
The US GAAP Historical PLIVA column in the unaudited condensed pro forma combined balance sheet is derived from the unaudited PLIVA IFRS balance sheet as of June 30, 2006 included elsewhere in this Current Report on Form 8-K/A, and adjusted for the following:
     US GAAP adjustments applied to the June 30, 2006 IFRS balance sheet
 
     Reclassification of certain accrued expenses allocated to accounts receivable, net
The US GAAP Historical PLIVA column in the unaudited condensed pro forma combined statement of operations reflects the unaudited IFRS results of operations of PLIVA for the twelve-month period ended June 30, 2006, which were derived by combining the results of operations of PLIVA for the six-month period ended June 30, 2006 with the results of operations of PLIVA for the year ended December 31, 2005 and subtracting the results of operations of PLIVA for the six-month period ended June 30, 2005 and adjusted for the following:
     US GAAP adjustments applied to the twelve months ended June 30, 2006 IFRS statement of operations
 
     Reclassifications related primarily to:
  §   Rebates and discounts reclassified from SG&A to net sales
 
  §   Certain other amounts reclassified to SG&A
 
  §   Intangible asset amortization reclassified from cost of sales to SG&A expense
 
  §   Certain business development expense reclassified from R&D to SG&A
 
  §   Certain costs included within SG&A reclassified to cost of sales
Barr is in the process of reviewing PLIVA’s accounting policies and financial statement classifications. As a result of that review, it may become necessary to make additional reclassifications to the consolidated financial statements on a prospective basis.
NOTE 3 – PRO FORMA ADJUSTMENTS
PRO FORMA BALANCE SHEET ADJUSTMENTS
(a) Reflects the following adjustment to cash and marketable securities:
         
    As of June 30,  
(in thousands of US Dollars)   2006  
Proceeds from Financing
   $ 2,416,000  
Cash paid for PLIVA shares
     (2,458,504 )
Financing costs
     (30,615 )
Transaction costs
     (21,922 )
 
      
Total pro forma adjustment
   $ (95,041 )
 
      

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BARR PHARMACEUTICALS, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS (continued)
(in thousands, except per share data, unless otherwise noted)
NOTE 3 – PRO FORMA ADJUSTMENTS (continued)
(b)   Reflects the adjustment of the historical PLIVA inventories to 96.7% of its estimated fair value, plus the 3.3% minority interest at its existing carrying value. Because this adjustment is directly attributed to the transaction and will not have a continuing impact, it is not reflected in the unaudited pro forma combined condensed statement of operations. However, this inventory adjustment will result in a charge included in cost of sales in the periods subsequent to the consummation of the transaction during which the related inventories are sold.
(c)   Reflects 96.7% of the allocated fair value of PLIVA’s exclusive rights of Custodiol and Nimodipine of $5,000, or $4,835, plus 3.3% of the existing carrying value, or $34, which has been reclassified from other intangible assets. These products were divested subsequent to the consummation of the Acquisition to meet regulatory approval requirements.
(d)   Reflects the adjustment to step-up the carrying values of the PLIVA property, plant and equipment to 96.7% of its estimated fair value, plus the remaining 3.3% minority interest at the existing carrying value of the PLIVA property, plant and equipment.
(e)   Reflects the recognition of the deferred income tax liability related to the purchase price basis adjustments (excluding goodwill and IPR&D) calculated using statutory tax rates ranging from 15-38%, depending on the relevant tax jurisdiction, resulting in a blended tax rate of 24% and a related recognition of historical deferred tax assets against this amount.
(f)   Reflects the portion of the purchase price allocated to PLIVA’s acquired intangible assets, less existing carrying value, as follows:
         
    As of June 30,  
(in thousands of US Dollars)   2006  
Fair value of 96.7% of intangible assets:
        
Trade names
   $ 83,075  
Products and product rights
     981,176  
Other intangibles
     9,862  
 
      
 
     1,074,113  
 
        
Less reclass of minority interest share of the carrying value of assets held for sale (see note c)
     (34 )
Less 96.7% of carrying value of existing intangibles
     (72,724 )
 
      
Pro forma adjustment, net
   $ 1,001,355  
 
      
(g)   Reflects the elimination of historical PLIVA goodwill of $154,180 and the addition of goodwill from the purchase price allocation of $22,611, plus the $5,088 relating to the 3.3% minority interest at the existing carrying value of goodwill. Goodwill will be tested annually for impairment at the reporting unit level.
(h)   Reflects the capitalization of deferred financing costs of $30,615 associated with the Financing, plus 96.7% of the fair value of a milestone payment due from a third party under an out-license agreement.
(i)   Reflects the portion of the purchase price allocated to acquired in-process research and development projects that, as of the closing date of the Acquisition, will not have reached technological feasibility and have no alternative future use. The preliminary estimate of the fair value of acquired in-process research and development is $439,020 of which 96.7%, or $424,532, was allocated to the purchase price. Because this expense is directly attributable to the Acquisition and will not have a continuing impact, it is not reflected in the unaudited pro forma combined condensed statement of operations. However, this item will be recorded as an expense in the period that the Acquisition is completed.
(j)   Reflects the following liabilities recorded in connection with the Acquisition:

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BARR PHARMACEUTICALS, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS (continued)
(in thousands, except per share data, unless otherwise noted)
NOTE 3 – PRO FORMA ADJUSTMENTS (continued)
         
    As of June 30,  
(in thousands of US Dollars)   2006  
Costs incurred in connection with the restructuring of PLIVA’s US operations and termination of certain employees in accordance with EITF 95-3 “Recognition of Liabilities in a Purchase Business Combination”
   $ 31,724  
Acceleration of PLIVA stock appreciation rights (SARs) in connection with the Acquisition, net of existing liability
     22,836  
Recognition of deferred tax liabilities related to asset step-up (see note e)
     17,042  
Reduction of the current portion of deferred revenues recording it at its fair value (see note l)
     (8,000 )
 
      
Pro forma adjustment, net
   $ 63,602  
 
      
(k)   Reflects the receipt and use of the proceeds from the Financing to finance the Acquisition. Reflects the net increase in long-term debt resulting from the new borrowings under the five-year term facility and the 364-day term facility of $2,000,000 and $416,000, respectively.
(l)   Reflects the reduction of 96.7% of deferred revenues or $26,424 related to recording this liability at fair value in accordance with EITF 01-03, “Accounting in a Purchase Business Combination for Deferred Revenue of an Acquiree,” less an increase of $649 to the pension obligation to adjust it to fair value. Included within the $26,424 deferred revenues is $3,868 of deferred revenues related to an upfront payment made to PLIVA from Barr in March 2005.
(m)   Reflects the following:
         
    As of June 30,  
(in thousands of US Dollars)   2006  
Record 3.3% of the existing historical PLIVA net assets
   $ 37,041  
Minority interest share of restructuring liabilities (see note j)
     (1,047 )
Minority interest share of SARs acceleration (see note j)
     (754 )
 
      
Pro forma adjustment, net
   $ 35,240  
 
      
(n)   Reflects the elimination of all components of the historical equity of PLIVA.
PRO FORMA STATEMENT OF OPERATIONS ADJUSTMENTS
(o)   Reflects the elimination of revenues and direct costs related to Barr and PLIVA products divested in connection with the Acquisition to meet regulatory approval requirements.
(p)   Reflects the following:

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BARR PHARMACEUTICALS, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS (continued)
(in thousands, except per share data, unless otherwise noted)
NOTE 3 – PRO FORMA ADJUSTMENTS (continued)
         
    Twelve Months Ended  
(in thousands of US Dollars)   June 30, 2006  
Elimination of PLIVA revenues from Barr license agreement (1)
   $ (800 )
Reduction of revenue associated with recording deferred revenues at fair value under EITF 01-03
     (305 )
 
      
Pro forma adjustment
   $ (1,105 )
 
      
 
(1)   In March 2005, Barr and PLIVA entered into a licensing agreement whereby Barr made a $5,000 upfront payment to PLIVA. The amount received was recorded as deferred revenues in the PLIVA US GAAP financial statements. The $800 reflects the revenue recognized by PLIVA that will be eliminated in consolidation.
(q)   Reflects additional depreciation related to the fair value adjustment to depreciable property, plant and equipment ($162,989) depreciated over a weighted average useful life of approximately 20 years. The weighted average useful lives for buildings and equipment are approximately 28 years and 8 years, respectively. Included in cost of sales within the US GAAP Historical PLIVA column of the unaudited pro forma condensed combined statement of operations are impairment charges of $28,256 related to various PLIVA assets.
(r)   Reflects the amortization expense for identifiable intangible assets in connection with the Acquisition other than acquired IPR&D at their estimated fair values and the elimination of the existing intangible amortization of PLIVA. Barr’s policy is to amortize intangible assets based on sales over the expected life of the asset. For purposes of the unaudited pro forma adjustments, Barr has calculated amortization on the PLIVA intangible assets on a straight-line basis. The table below summarizes the fair values of identifiable intangible assets, which are amortized as follows:
                                 
    As of June 30, 2006        
                    Wtd Avg.     Estimated  
    96.7% of             Useful     First Year  
(in thousands of US Dollars)   Fair Value     Useful Life     Life     Amortization  
Trade Names
   $ 83,075     Indefinite           $ —  
Products and Product Rights
     981,176     10 yrs   10 yrs     98,118  
Other Intangibles
     9,862     5 - 7 yrs   6 yrs     1,644  
 
                            
 
   $ 1,074,113                     $ 99,762  
 
                                
Less 96.7% of historical amortization of intangibles
                             (19,008 )
 
                              
Pro forma adjustment, net
                           $ 80,754  
 
                              
(s)   Reflects the reduction of other income associated with recording the PLIVA liability for deferred income at its fair value in accordance with EITF 01-3, “Accounting in a Purchase Business Combination for Deferred Revenue of an Acquiree.”
(t)   Adjustment reflects the lower interest income due to the use of $95,041 of cash to fund the Acquisition. An interest rate of 5.7%, which represents Barr’s current weighted average interest rate, was used to estimate the reduction in interest income.

P-9

 

BARR PHARMACEUTICALS, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS (continued)
(in thousands, except per share data, unless otherwise noted)
NOTE 3 – PRO FORMA ADJUSTMENTS (continued)
(u)   Reflects the increase in interest expense, including the amortization of financing fees of $10,438 from the aggregate proceeds received from borrowings under the five-year term facility ($2,000,000) and borrowings under the 364-day term facility ($416,000). The interest rate on the borrowings is 6.125% and is estimated based upon LIBOR + .75%. A change of 1/8% to the interest rate would impact interest expense and net income by $3,020 and $1,902 on a pre-tax and after-tax basis. The financing fees are being amortized using the effective interest method over the life of the related loan.
(v)   Reflects the recognition of the income tax consequences of the pro forma adjustments identified above. The adjustments have been tax effected at the appropriate local statutory tax rates.
(w)   Reflects the 3.3% minority interest share of the pro forma adjustments excluding those related to the fair value purchase accounting adjustments. The adjustment also includes the minority interest share of the historical earnings of PLIVA.

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