Teva Pharmaceutical Industries Ltd (TEVA) 2003 Q2 法說會逐字稿

At this time I would like to welcome everyone to the Bentley second quarter earnings results conference call. (CALLER INSTRUCTIONS) Mr. Price, you may begin your conference.

Good morning. This is Mike Price, and I'm the Vice President and CFO of Bentley Pharmaceuticals. I would like to welcome you to our second quarter 2003 conference call today. Jim Murphy, our Chairman, President and CEO, is here with me also.

Thanks for joining us this morning. If you have not already received a copy of this morning's press release, please call FD Morgen Walke at 212-850-5600 and they will make sure that you get one immediately. Again, the telephone number for FD Morgen Walke is 212-850-5600.

Before I begin, I would like to remind everyone that all of the statements made on his call today are subject to the Safe Harbor statements under the Private Securities Litigation Reform Act of 1995. Of course, all forward-looking statements involve risks and uncertainties, which we have explained in detail in our filings with the SEC.

We've also familiarize ourselves with the requirements of Regulation FD and we're confident with our disclosure and compliance with that regulation.

Our financial results for the quarter reflect the strength of our business model and are driven by strong performance Spain. We continued to expand our commercial presence, both in Spain and beyond the borders of Spain. We also continued to make progress in the US by leveraging our proprietary CPE-215 drug delivery platform technology. Our total revenues for the quarter increased 70 percent when compared to the second quarter of the prior year for a record $16.8 million. When expressed in constant currency, our revenues increased by 38 percent. Our total revenue for the quarter increased 70 percent, when compared to the second quarter of the prior year.

Second quarter revenue growth was primarily driven by a combination of strong product sales in Spain and export sales to other countries. Product sales increased by 69 percent, or 37 percent constant currency over the same period the prior year, totaling $16.6 million.

Our licensing and collaboration revenues totaled $158,000 during quarter, representing royalties from sales of our growing (indiscernible), which, as you know was launched in February.

With respect to licensing and collaboration revenues, I would like to repeat something I said in Q1 -- we continue to recognize revenue based on estimated sellthrough of pharmaceutical products and have deferred the recognition of royalty revenues associated with the initial sales made to wholesalers and pharmacies to fill the distribution channels. Pharmaceutical products are typically sold with limited shelf lives and wholesalers and pharmacies have the right to return unsold or expired products. As we've mentioned previously, our policy is to recognize royalty revenues based on an estimate of the prescriptions written by physicians and filled by patients until such time that returns from wholesalers and pharmacies can be reasonably estimated. We use available market information to determine the amount and timing of royalty revenues we recognize.

As of June 30, 2003, we had $586,000 of customer royalties from Auxilium recorded as deferred income on our balance sheet. As (indiscernible) matures and we obtain enough reliable historical data to predict future product returns, we will recognize royalty revenues based on product sales by Auxilium, estimated returns, charge backs and other sales allowances. Custom prescriptions now count for five percent of new scripts written.

Gross margins on second quarter products sold in Spain improved to 59 percent, compared to 57 percent in the same quarter of the prior year. There are no cost of sales associated (technical difficulty) 77 percent -- that's 45 percent in constant currency -- from 5.6 million in the second quarter of 2002 to 9.9 million in the second quarter of 2003.

Selling and marketing expenses as a percentage of product sales improved to 22 percent in the second quarter of 2003, compared to 27 percent in the second quarter of 2002. Selling and marketing expenses totaled $3.6 million when translated into US dollars, which is an increase of 39 percent. However, two-thirds (technical difficulty) selling and marketing expenses increased by only $327,000, plus 13 percent over the same quarter of the prior year to $2.9 million when expressed in constant currency.

D&A expenses as a percentage of revenue (indiscernible) 11 percent of second quarter 2003 revenues compared to more than 13 percent in the second quarter of 2002. D&A expenses increased by 36 percent, or 20 percent in constant currency, from $1.3 million in the first quarter of 2002 to $1.8 million in the first quarter of 2003.

Research and development expenses totaled $879,000 for the quarter ended June 30, 2003, compared to $583,000 from the same period of the prior year. The 51 percent increase in our costs for research and development reflects our focus on projects that are necessary for expansion of our portfolio of marketed products and clinical trials involving our drug delivery technology.

Income from operations more than doubled to $3.3 million in the second quarter of 2003, compared to $1.4 million in the second quarter of 2002. This improvement is even more significant when you consider that the prior year numbers included a non-recurring $520,000 gain on the sale of a drug license, whereas this year's numbers do not include any non-recurring items.

Pretax income totaled $3.3 million in the second quarter of 2003, compared to $1.4 million in the same quarter of the prior year.

Income tax expense totaled $1.8 million in the second quarter of 2003, which represents 42 percent of pretax income earned in Spain. Unfortunately, we are not able to offset operating losses in the US against income earned in Spain as Spain and the US are separate tax districts. While we recognized profits in Spain this quarter, we incurred an operating loss in the US. Since we cannot be assured of future profitable US operations, US Generally Accepted Accounting Principles require us to record a valuation allowance for any future tax benefit of our losses in the US. As in the the past, we have not recorded a tax benefit for US losses this quarter. As we continue to grow in the US marketplace and begin to recognize US profit we will benefit from a significantly more favorable effective tax rate as we utilize our tax NOLs to offset future taxable income.

Net income for the second quarter of 2003 improved by $1 million; that's three times compared to the second quarter of the prior year. (indiscernible) net income totaled $1.5 million, or 9 cents per basic common share -- that is 7 cents per diluted common share.

Our revenues for the six months ended June 30, 2003 increased 67 percent as compared to the first six months of the prior year to a record $31.7 million. Expressed in constant currency, our year-to-date revenues increased by 40 percent.

Product sales in Spain for the six months were 63 percent, or 37 percent in constant currency, over the same period of the prior year, totaling $30.8 million.

Our licensing and collaboration revenues totaled $911,000 during the first half of 2003. This growth is attributable to a milestone payments from our licensee Auxilium Pharmaceuticals, revenues from the licensing of product (indiscernible) and royalties from sales of Auxilium (indiscernible).

Gross margin from product sales in Spain for the first half of the year improved to 58 percent compared to 57 percent in the same period of the prior year. Gross profit increased 71 percent -- that's 44 percent in constant currency -- from 11 million in the first six months of 2002 to $18.8 million in the first half of 2003.

Selling and marketing expenses as a percentage of product sales improved to 23 percent in the first half to first of 2003, compared to 28 percent in the first half of 2002. Selling and marketing expenses totaled $7 million when translated into US dollars, which is an increase of 34 percent. However two-thirds of this increase was due to currency fluctuation. Selling and marketing expenses increased by only $630,000, or 12 percent, over the same period of the prior year to $5.8 million when expressed in constant currency.

D&A expenses as a percentage of revenues improved to less than 11 percent of year-to-date 2003 revenues, compared to almost 13 percent in the first half of 2002. D&A expenses increased by 39 percent -- or 27 percent in constant currency -- from $2.4 million in the first half of 2002 to $3.3 million in the first six months of 2003.

Research and development expenses totaled $1.9 million for the six months ended June 30, 2003, compared to $1.3 million for the same period of the prior year, representing a 41 percent increase, again for the same reasons I mentioned earlier.

Income from operations almost tripled to $5.9 million in the first six months of 2003, compared to $2.1 million in the first half of 2002.

Pretax income totaled $6 million in the first half of 2003, compared to $2.1 million in the same period of the prior year and income tax expense totaled 3 million in the first six months of 2003, representing 40 percent of pretax income earned in Spain.

Year-to-date net income improved by $2.4 million, or almost four times, compared to times compared to the same period of the prior year. Year-to-date net income totaled $3 million, or 17 cents per basic common share -- that's 15 cents per diluted common share.

Our balance sheet at June 30, 2003 reflects a very healthy financial position. We have approximately $25 million in cash, cash equivalents and short-term liquidity investments, a current ratio of 2.5 to 1 and essentially no long-term debt. Assets now total more than $77 million and stockholders' equity was in excess of $55 million.

I'd like to provide some detail on the foreign currency impact for the quarter. The weighted average exchange rate for the second quarter of 2003 was EUR.88 to the dollar, compared to EUR1.09 to the dollar in the second quarter of the prior year. This weakening of the US dollar against the euro had a positive impact on our financial statements because it resulted in higher sales of about $3.2 million during the second quarter, and also resulted in a stronger balance sheet when the euros were translated into US dollars. It had the effect of adding about $1.5 million to the balance sheet during the quarter. Of course, this (indiscernible) an exchange rate cuts both ways; not only does it result in higher revenues and higher asset value, as you can see it also results in higher expense and higher liabilities. For example, it increased cost of sales by about $1.4 million, operating expenses were increased by about $1 million and income taxes expense by $400,000 as a result. The net impact on the bottom-line, however, was positive by about $500,000.

Before turning the call over to Jim, I'd like to cover one more thing and that's the sale of stock by management. As is the case with most publicly traded company's, members of management have been granted options to purchase shares of the Company's common stock as a component of their compensation. This includes Jim as Chairman and CEO, and myself as CFO. I hope you can appreciate that in order for members of management to exercise stock options and convert them from derivatives to direct ownership, we will be forced to sell a portion of the shares to generate proceed with which to buy the shares and pay the related income taxes. In particular, Jim and I have stock options that are scheduled to expire over the next two to three years. We want to convert these derivatives into direct ownership of shares in an efficient and orderly fashion that will protect shareholder value. Consequently, we cannot wait until the options near expiration and then exercise them all at once.

As many of you know, Jim and I have recently exercised some of our options and sold some of the shares in the process. Both Jim and I now own more shares now than we owned before these transactions. For example, I've increased my direct ownership by 65 percent from 34,000 shares to 56,000 shares. In order to avoid these misconceptions in the future, we're looking into the possibility of putting a 10B5 plan (ph) into effect in the near future, similar to what other companies have done, that will help us do this in an orderly manner, minimizing disruption and hopefully mitigating these concerns.

As we continue to exercise our options and add to our direct ownership, you'll never hear us complain that we exercised and sold shares when the stock price was too low. As (indiscernible) direction share ownership positions will be the beneficiaries of future stock price increases. We're increasing the number of shares that we own because we believe in Bentley and we believe in our strategy. I'm very confident that we're doing all the right things to increase long-term shareholder value.

We hope it is now apparent to you that we have a clearly defined strategy, a business model that is working and improving each quarter and are assembling a management team that is capable of executing our business plan and positioning Bentley for continued success in in the future. I hope that you can tell that we are excited about the progress we're making. We believe 2003 is shaping up to be an excellent year and we're looking forward to 2004.

That wraps up my presentation today and now I would like to turn it over to Jim Murphy, Chairman, President and CEO.

Good morning, everybody. What an exciting quarter.

Let me begin with an update of our European operations. We currently have 59 product registrations pending approval at the Ministry of Health (technical difficulty). We anticipate adding to that by 40 new registrations by year-end. These filings are a blend of tevit (ph) products, as well as our own new development. The tevit products now represents approximately 40 percent of these new filings.

We have also filed registrations in other EU countries, including Portugal, France, France, Germany and the UK. Five of our licensees in Portugal already received regulatory approval, using our regulatory documents, and have launched generic versions of simvastatin and omeprazole into the Portuguese market. We are already receiving fees and royalties through supply agreements that have a duration of five years or more. Our sales are growing rapidly in this market and we expect this market to expand significantly over the balance of this year and beyond.

We could also obtain our first generic regulatory approval of simvastatin in the UK as early as the fourth quarter of this year and contracts from several UK licensees are in the process of being finalized.

Additional products could be approved in other EU countries in the first half of next year and again supply agreements are being finalized. Various companies in Germany, France and other European territories (technical difficulty).

We have also made progress in advancing our strategy for entering the US market where we intend to bring product from Europe for registration with the FDA. Yesterday we announced the hiring of two professionals -- Janet Rae, who will head up our Regulatory Affairs department; and Dr. Jim Hand, who will lead our business development and licensing efforts. These professionals will be instrumental in carrying out our US strategy. Our intentions are to obtain licenses in the US and supply finished product from our European manufacturing operation. I look forward to updating your with the progress we've made in these efforts.

Testim, our topical testosterone gel licensed to Auxilium has sales that continue to grow, especially since the end of May when opinion leaders in publications in peer review journals saw visibility to the product (ph). The current prescription level now approaches 1200 new scripts per week. We're confident that sales will continue to grow.

With respect to our antifungal nail lacquers product, our recent acquisition of a patent that overlapped our own patent filings for topical lacquers has allowed us to advance discussions to potential licensees. (indiscernible) final agreement.

With respect to our intranasal insulin program, it's also progressing. We will be assessing new formulations in healthy human volunteers in a clinical research organization located in the UK. The program is scheduled to begin during the third quarter and results could be available as early as the fourth quarter of this year.

Having said that, I would like to now open the conference call for any questions.

(CALLER INSTRUCTIONS)

Mark Taylor (ph), Roth Capital.

Can you give me the gross margin in the second quarter on your export sales?

I appreciate your question. We've never broken out the -- and differentiated the gross margins on export sales versus our manufacturing versus sales of domestic product in Spain. I would hesitate to share that information on this call. It's something we might consider doing in the future if we break these out in a segment-like fashion, but we have always presented our sales, our manufacturing as one segment.

Margins would be similar in nature to those that are currently marketed (ph).

Secondly, what was the percentage of generic sales of your overall sales in Spain for the second quarter?

About 43 percent -- 43 percent generic.

Jack Brayard (ph), Dominic & Dominic (ph).

You have warrants expiring at the end of this year. Approximately how many do you have left and how much cash will that generate for you?

We have warrants that are outstanding, I think they are about 5.4 million of those warrants still outstanding. It would results in about 2.7 million shares, and I think the cash proceeds would be about out 13.5 to $14 million if they're all exercised.

(CALLER INSTRUCTIONS)

Mike Krensavage.

Good morning. What were the sales from omeprazole in the quarter?

Sales of omeprazole represented about 40 percent of our product sales in Spain for the quarter.

That's decreasing a little bit then?

It is decreasing, and that's what we told people to expect because with the launch of all of our new products, such as simvastatin and paroxetine and trematzodine (ph), we would expect to see the continuing growth of omeprazole, but not growth that could keep up with the launch of all of the new products. Consequently, omeprazole sales last year accounted for approximately 50 percent of our total product sales revenue and now it is down to about 40 percent for this quarter and about 43 to percent year-to-date.

What is the status of any kind of pricing actions by the Spanish government? When would we get the next decision from them?

I just came back from Spain last week. It was on the table at the time that I arrived there on Monday, but the decision within a week (ph) was made to defer any further discussions until the end of the year, possibly January or February. It appears as though the up to date information as it stands not today there will be no alteration until next year. That could change, but that's what was said this past week.

Do you have any -- can you give us any sense of how much the Spanish drug market is growing, as far as the percentage of penetration of generic drugs at this point?

The penetration is still below 5 percent. Last I heard it was about 3.5 to 4 percent of the market, but yet the Ministry has targeted 15 to 20 percent of generic penetration would be ideal. So they have got quite a way to go in growth there.

Last question is on the Pfizer collaboration. I believe we were approaching the two year anniversary of that. What's the status?

The Pfizer collaboration has been extended. Due to the integration of Pfizer with Pharmacia, Upjohn, Park Davis (ph ) (indiscernible) it has been relatively silent. Team members that we were interacting with -- there's only 2 of about the 12 that we were interacting with still remaining in their present function. Other team members have moved on to other areas of -- therapeutic areas or have left the Company. So we're trying to keep in touch with Pfizer to reconstitute that team and pick up the ball and continue that research program. As you know, we have had quite a degree a success with Pfizer. It's just disheartening to have a disruption of the working group through this integration process.

Mike Yeats (ph).

I think we must have lost Mike. We can't hear him.

Mike withdrew his question.

Kirk Lang (ph), West Broadway Partners.

I was wondering if you guys have had any further discussion on pursuing an foreign exchange hedging program to kind of insulate the Company from relatively the purchase (ph) swings that we've seen in dollar-euro (ph)?

That's a great question and I would like to respond to that. We don't move significant amounts of currency from one country to the other. If we did we would be subject to both exchange rate gains and losses as a result of a transfer. The money that we have earned in Spain we of re-invested into the Company there to grow it, to finance receivables, inventory increases; the manufacturing facility has been improved, and so we've re-invested the amount that has been earned there in that same currency and have not actually realized any gains or losses there.

Consequently, when we speak about currency effects, we're talking about essentially a paper effect. It's the translation of those foreign currencies into US$ that gives you a gain or loss on paper; but until you actually transfer those monies, you don't really incur the gain or loss. Consequently, since we're not moving funds, we have not felt the need to enter into any hedging transactions.

Have you considered at some point in the future to give top or bottom-line guidance?

We had considered that, but we hesitated. We've recently turned the quarter of profitability, and I think as our business model develops and changes because of those dynamics, we have hesitated to give guidance. We've been relying on the analysts to put together their financial models, and come out with expectations. As a company, we've not actually given guidance.

Finally, with respect to Auxilium, do you know where -- I guess they had some sort of dispute with the detailing agency when you initially had launched Testim. Do you know whether -- where that stands at this point?

I can at least give you my perspective on that. And probably the people from Auxilium have more details. They have entered into an exclusive arrangement with a company called PDI (ph) to detail Testim. And after they entered into the arrangement, it's my understanding that PDI backed out of the contract, and then signed an exclusive arrangement with a company called Selegy (ph) to market their product. And I think at least my understanding was that PDI paid to Selegy monies to be able to share in the marketing of that product. And if you kept track of that product it was rejected by the FDA about a month ago, and Selegy and PDI came out with a statement, press release indicating they were very disappointed in the FDA's rejection of their product, and we're going to try to figure out how to proceed. I understand that Auxilium did pursue legal remedies against PDI, and that they reached an out-of-court settlement, but the terms of the settlement I don't think have been made public.

Do you know whether they have a detailing organization for their employ at this point?

Auxilium has hired its own internal sales force, and I saw in an interview that Jerry Hinwood (ph), President and CEO of Auxilium, had conducted that she started with a total of 80 sales reps, and it's my understanding that she now has increased the number of those reps to gather additional market penetration for Testim up to somewhere near the 100 total number, I think.

Mike Gate (ph).

Jim, on your comments about the nail lacquer negotiations, have we now narrowed it down to one company where you're drafting final agreements?

Yes, there is certainly one company that is on the forefront. We are drafting those final papers. There are other companies that have expressed interest, continue to express interest interest, so there are backups possibilities in the event of a potential hiccup in these final documents.

Can you give us any idea how long you think these final negotiations will take?

I would love to, but our crystal ball is all cloudy. It could be very quickly -- we could come to terms very quickly with the wording, or we could encounter something that could cause a delay for a month, two months, three months -- you never know, so I hesitate to come out with a specific date.

Could do give us the status on the Tylenol look alike in Spain, as to the approval there?

We submitted that July 15 of 2002. It normally takes about 9 to 12 months for a product to be reviewed through the Spanish Ministry of Health. The Spanish Ministry of health has fallen behind in their review process. I have found recently that it is running somewhere between 13 and 15 months as an average now. Since we didn't get it approved in the month of July, which would have been the end of the 12 months after the submission, and now the The ministry of Health is closing as of tomorrow for the month of August, I would expect that we will hear something in September or October. I don't think they could go too much beyond that.

In your presentation right after the nail lacquer, you mentioned one other item. What was that? I missed it.

That was our internasal insulin program. I mentioned that we are progressing. We're assessing our formulation in clinical settings utilizing healthy human volunteers, and that study is being conducted in the UK.

Eric Trilling (ph), Smith Barney.

The market capitalization of Bentley as -- and the trading volume have picked up very nicely over the last few months. I was wondering if you have given any consideration to Bentley moving either to the New York Stock Exchange or the NASDAQ to enhance your visibility and stature in the investment community?

That's something that the Board of Directors addresses periodically, as they assess where our shoulders would benefit the most. We looked carefully at the NASDAQ for a number of months. We also, of course, review our position in the AMEX. I think that as we grow, the New York Stock Exchange will probably be the best location for us to be. But that is an issue for the Board to discuss and make a determination and to set a timing for.

Jeffrey Benison (ph), Benjamin Partners (ph).

Good quarter. It's kind of masked by -- you mentioned briefly the tax rate. Again, it's because you have to pay the tax on the Spanish operation and you can't take losses that you had in the United States, so it ends up being 50-something (ph) present of your -- 50 percent (ph) of your income?

That's exactly right. Unless you see separate financial statements for Spain and the US it's very difficult to understand because when you group them together and add them up, it does look like we're paying an effective tax rate of more than 50 percent. If you saw stand-alone financial statements for Spain you'd see that the effective tax rate is about 40 percent year-to-date and about 42 percent of the quarter. And unfortunately, you would see the US lost with no tax loss benefit -- with zero taxes in the US and zero tax benefit. As we approach profitability in the US, you're going to see a much more typical effective tax rate going forward, as we begin to use those NOLs to shelter income that we earn here in the US.

How do -- what is your plans now to get income in the US to bring over like the omeprazole over from Europe and sell it here? I noticed the government just passed this law where they are expecting to allow shipping or importing from Europe into the United States. Is that your main plan or are the Testim sales what you think most of the income from the US --

We don't how this proposed rule change is going to actually ultimately end up. We have identified a number of products where we clearly have an economic advantage attention, primarily due to our own manufacturing processes and high-speed equipment and yields and low labor rates. So we've targeted specific products where we know we would have a specific advantage, or an economic advantage. We have also targeted products that may or may not become (indiscernible). We have a whole list of products in our strategic plan, which I don't want to list one at a time -- I don't want to tilt our hand to competition -- but we think we've got a good plan in place (indiscernible).

Is that where you think the biggest growth in the US will be?

I think we have drug licenses and solid assets that can be leveraged over the short-term for the US market. And of course, in a longer-term situation, you have to look to the drug delivery based products in onocomicosic (ph) and insulin and in other teaming relationships with Pfizer and other multinational companies. But I do believe the US market could be very interesting, especially with the manufacturing and lower cost settings in Spain.

Was the patent issue with MacroChem the thing that held up a deal on the nail fungus, because we've been talking about that nail fungus deal, or a prospective deal on the nail fungus for 2.5 to 3 years?

It will -- it did impede negotiations because the purpose (ph) to the cautionary flag in the due diligence process by several companies it really had to be resolved before we could go back to the negotiation table. Unfortunately, it took quite a few months and we were under confidentiality agreement so we couldn't disclose it. We did have a setback of months while we negotiated the acquisition of that patent because our alternative was to go into legal proceedings to qualify what would be an interference (multiple speakers) with our own patent problems (indiscernible).

That would have held up things?

That would have been even longer -- potential two or three years.

Okay, because that would be a major milestone to finally get that done. We've been waiting for it a long time. And the intranasal insulin, you feel by the end of the year you'll have some kind of data on the efficacy or on just healthy individuals?

We are using healthy human volunteers. We will be able to characterize the performance of the -- and the consistency and the variation, or lack of variation, from subject to subject (indiscernible).

Jack Breyard (ph), Dominic & Dominic.

The patent situation that you got cleared up with MacroChem, does that affect your CPE-215 use in insulin and in other products? Or is that strictly for the nail fungus?

It's very highly focused on topical lacquers. And as it pertains to anti-infectives (ph), of which antifungal in there in that class. It does not affect any of our other patents.

Are you making progress on getting your patent life extended on the CPE-215 for other uses?

Yes. We have patents filed with a number of different areas. The base molecule patent, or CPE, not really to extend it out to itself, unless we have got new applications, new formulations, new medical uses. And that's really the avenues we're looking at.

A quick question on Auxilium. I don't know if you would be able to say anything, but they are working with a couple other of your products. Do you know what sort of progress they're making on those?

I believe they're making good progress with the second androgenic steroid product. And I think that's probably even almost than the intranasal pain management. But progress is being made in both regards.

Mike Krensavage, Raymond James.

Just wondering about the manufacturing capacity in Spain. When I was over there you were in the process of expanding. And the question I have is what percentage of your capacity are you using now and do you see any room for market expansion as use more of that capacity?

We've made some major adjustments to capacity. We have brought in micro-granulation (ph) and micro-capsulation (ph) equipment. For example, we've bought an additional two 600 kg pieces of equipment and several 300 kg pieces of equipment, all for products such as amiprozil (ph), onsoprazil (ph) and any other products that would result in a pellet. We've also increased any specialized equipment for producing products in the high vacuum to eliminate the multiple steps that are so essential for that sensitive type of molecule. We've brought in -- and I believe you saw that during the due diligence tour of a year ago -- one massive piece of equipment. That has been so successful that we have gone and purchased another one of the same size and one of a little bit smaller size. We have renovated three different areas of the facility since we have been over there. Our capacity has more than doubled already, and we have a very refined plan to make sure that we can maintain (indiscernible).

Do you have an idea about what percentage of capacity you are using at this point?

It's probably about 65 percent. Of course, that changes whether you are using one shift, two shifts or three.

A question for Mike -- could you just remind us what the amount of tax loss carryforwards you have in the US?

Tax loss carryforwards are almost $40 million.

Mark Taylor, Roth Capital.

Just looking ahead, as we face the summer shutdown over there in Europe, have you noticed some buying patterns from wholesalers, maybe stocking up in July? Or do they typically do it in September? Any idea on how the third quarter might look?

Let me shed some light on that. Essentially we see stocking up in July and we see a re-stocking in September. And sales in August are typically slower than the other two months. If you take a look at all three months combined, it doesn't drop that dramatically. But it is typically lower than in the second quarter, and lower than in the fourth. Take a look at 2002 results, you'll see it's probably a pretty typical pattern for that third quarter and I would expect third quarter revenues to be slightly lower than they were in the second quarter. We do have orders such that we plan to continue to manufacture through the month of August and not shut the factory down this August.

(inaudible) a difference this year from previous years would be the fact that our export sales from the manufacturing perspective and supply agreement agreement perspective will continue all the way through August.

Ladies and gentlemen, we have reached the end of the allotted time for questions and answers. Mr. Price, are there any closing remarks?

I would just like to say thanks for joining us today. We're excited about the results for the quarter and we hope you are as well. If you have any follow-up questions please feel free to give us a call here in the office and thanks very much. Have a nice day.

Thank you, gentleman. Have a good day.

Thank you for participating in today's Bentley second quarter earnings results conference call. You may all disconnect.

(CONFERENCE CALL CONCLUDED)