INDEPENDENT AUDITORS REPORT. To the shareholders of Teva Pharmaceutical Industries Limited

Transcription

1 INDEPENDENT AUDITORS REPORT To the shareholders of Teva Pharmaceutical Industries Limited We have audited the consolidated balance sheets of Teva Pharmaceutical Industries Limited (hereafter - "the Company'') as of December 31, 1999 and 1998 and the consolidated statements of income, changes in shareholders' equity and cash flows for each of the three years in the period ended December 31, These financial statements are the responsibility of the Company's Board of Directors and management. Our responsibility is to express an opinion on these financial statements based on our audits. We did not audit the financial statements of certain subsidiaries whose assets constitute 9% and 18% of total consolidated assets at December 31, 1999 and 1998, respectively, and whose income constitutes 15%, 23% and 21% of total consolidated income for each of the years ended December 31, 1999, 1998, 1997, respectively. The financial statements of those subsidiaries were audited by other independent auditors, whose reports have been furnished to us, and our opinion, insofar as it relates to amounts included for those subsidiaries, is based on the reports of the other auditors. We conducted our audits in accordance with generally accepted auditing standards, including those prescribed by the Israeli Auditors (Mode of Performance) Regulations, Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by the Company's Board of Directors and management, as well as evaluating the overall financial statement presentation. We believe that our audits and the reports of the other auditors provide a fair basis for our opinion. In our opinion, based upon our audits and the reports of the other independent auditors referred to above, the aforementioned financial statements present fairly, in all material respects, the consolidated financial position of the Company at December 31, 1999 and 1998 and the consolidated results of operations, changes in shareholders' equity and cash flows for each of the three years in the period ended December 31, 1999, in conformity with accounting principles generally accepted ("GAAP'') in Israel and in the United States (as applicable to these financial statements, such accounting principles are practically identical in all material respects; reconciliation of the operating results and shareholders' equity presented under Israeli GAAP in these financial statements, and under U.S. GAAP is included in Brought to you by Global Reports (1 of 2) [6/5/ :11:12 PM]

2 note 12). Also, in our opinion, the abovementioned financial statements have been prepared in accordance with the Securities (Preparation of Annual Financial Statements) Regulations, Without qualifying our opinion as above, we draw attention to note 1g(1), which states that goodwill arising from acquisition of companies is amortized mainly over a period of 40 years. Under Opinion 57 of the Institute of Certified Public Accountants in Israel, the amortization period of goodwill is not to exceed 20 years. In the opinion of the Company's management, with which we concur, amortization of the goodwill over a longer period, not exceeding 40 years, which deviates from the provisions of Opinion 57, more fairly reflects the results of operations of the Teva Group, taking into account the unique characteristics of the companies acquired by the Group, as described in the abovementioned note. Tel-Aviv, Israel March 5, 2000 Kesselman & Kesselman Certified Public Accountants (Israel) Brought to you by Global Reports (2 of 2) [6/5/ :11:12 PM]

3 CONSOLIDATED STATEMENTS OF INCOME Teva Pharmaceutical Industries Limited Year ended December U.S. Dollars in Thousands* Sales 1,282,406 1,115,928 1,116,897 Cost of Sales 767, , ,882 Gross Profit 514, , ,015 Reserch and Development Expenses: Total Expenses 91,622 75,581 76,573 Less grants and participations 9,780 7,511 11,417 81,842 68,070 65,156 Selling and Marketing Expenses 118, , ,380 General and Administrative Expenses 115,152 92,321 82, , , ,907 Acquisition of Research and Development in Process 17,700 13,500 21,000 Restructuring Expenses - 15,030 - Operating Income 181, , ,907 Financial Expenses - net 30,165 23,328 24,569 Losses From Realization of Assets and Discontinuation of Activities - net** - 3,308 - Other Income - net 10,781 8,940 11,278 Income Before Taxes on Income 161,962 98, ,616 Taxes on Income (note 9) 44,335 30,888 38, ,627 67, ,889 Share in Profit (Losses) of Associated Companies (550) Minority Interests in Consolidated Subsidiaries - net 756 (30) 201 Brought to you by Global Reports (1 of 2) [6/5/ :11:20 PM]

4 Net Income 117,833 68, ,493 Earnings Per ADR **(note 10p) * Except earnings per ADR. ** ** After giving retroactive effect to the distribution of a 100% stock dividend subsequent to December 31, 1999 (see note 8a). As to details of certain income statement items - see note 10. The accompanying notes are an integral part of the financial statements. The accompanying notes are an integral part of the financial statements. Brought to you by Global Reports (2 of 2) [6/5/ :11:20 PM]

5 CONSOLIDATED BALANCE SHEETS Teva Pharmaceutical Industries Limited Assets Liabilities And Shareholders' Equity Assets (Note 6) December U.S. Dollars in thousands Current Assets (note 10) : Cash and cash equivalents 77,177 47,074 Short-term investments 17,226 2,148 Accounts receivable: Trade 361, ,592 Other 103,309 99,182 Inventories 351, ,249 Total current assets 910, ,245 Investments and Non-Current Receivabels (note 10) 31,681 32,566 Property, Plant and Equipment (note 3): Cost 856, ,638 Less accumulated depreciation 377, , , ,982 Intangible Assets, net (note 4) 293, ,205 1,714,019 1,435,998 Liabilities And Shareholders' Equity December U.S. dollars in thousands Current Liabilities (notes 6 and 10) : Short-term credit - mainly from banks 276, ,534 Accounts payable and accruals: Trade 114, ,743 Other 140,053 84,814 Brought to you by Global Reports (1 of 2) [6/5/ :11:29 PM]

6 Proposed dividend 6,806 4,554 Total current liabilities 537, ,645 Long - Term Liabilities: Deferred income taxes (note 9) 31,687 33,172 Accrued employee rights upon retirement, net of amount funded (note 5) 11,041 3,895 Loans and other liabilities (note 6) 391, ,699 Total long-term liabilities 434, ,766 Commitments and Contingencies (note 7) Total Liabilities 971, ,411 Minority Interests Shareholders' Equity (note 8): 183, ,432 Share capital and additional paid-in capital - Ordinary Shares of NIS 0.1 par value: Authorized - December 31, 1999 and ,586,000 shares; issued and outstanding - December 31, 1999 and ,027,000 shares and 124,554,000 shares, respectively Other capital surplus (19,696) (3,655) Retained earnings 603, ,149 Cost of Company shares held by subsidiaries (25,609) (19,120) Total Shareholders' Equity 742, ,806 1,714,019 1,435,998 The accompanying notes are an integral part of the financial statements. Brought to you by Global Reports (2 of 2) [6/5/ :11:29 PM]

7 Consolidated Statements Of Changes In Shareholders Equity Teva Pharmaceutical Industries Limited Ordinary & Ordinary "A" Shares Share capital and additional paid-in capital Other capital surplus Retained earnings Cost of Company shares held by subsidiaries Total Number of shares* U.S. Dollars in thousands Balance At January 1, , ,219 3, ,433 (15,860) 534,189 Changes During 1997: Net income 101, ,493 Benefit arising from employee 1,841 1,841 stock option plans Exercise of options allotted to 264 2,926 (935) 1,991 employees Differences from translation of non-dollar currency Financial statements of (5,831) (5,831) subsidiaries and associated companies Dividends declared (21,271) (21,271) Company shares held by subsidiaries - cost of acquisition, net (898) 468 (430) of proceeds from sale Balance At December 31, , ,145 (2,426) 456,655 (15,392) 611,982 Brought to you by Global Reports (1 of 3) [6/5/ :11:38 PM]

8 Changes During 1998: Net income 68,830 68,830 Benefit arising from employee 1,626 1,626 stock option plans Exercise of options allotted to 156 2,287 (553) 1,734 employees Differences from translation of non-dollar currency financial statements of (1,980) (1,980) subsidiaries and associated companies Dividends declared (19,336) (19,336) Company shares held by subsidiaries cost of acquisition, net (322) (3,728) (4,050) of proceeds from sale Balance At December 31, 1998forward 125, ,432 (3,655) 506,149 (19,120) 658,806 Changes During 1999: Net income 117, ,833 Benefit arising from employee stock option plans Exercise of options allotted to 404 6,375 (887) 5,488 employees Differences from translation of non-dollar currency financial statements of subsidiaries and associated companies (16,395) (16,395) Dividends declared (20,018) (20,018) Issuance of shares (note 8b) Distribution of bonus shares 1,522 (1,522) Brought to you by Global Reports (2 of 3) [6/5/ :11:38 PM]

9 Company shares held by subsidiaries - cost of acquisition, net of proceeds from sale Balance At December 31, ,815 (6,489) (4,674) 126, ,624 (19,696) 603,964 (25,609) 742,283 * After giving retroactive effect to the distribution of a 100% stock dividend subsequent to December 31, 1999 (see note 8a). The accompanying notes are an integral part of the financial statements. Brought to you by Global Reports (3 of 3) [6/5/ :11:38 PM]

10 CONSOLIDATED STATEMENTS OF CASH FLOWS Teva Pharmaceutical Industries Limited Year ended December Cash Flows from Operating Activities: U.S. Dollars in thousands Net income 117,833 68, ,493 Income and expenses not involving cash flows (1) * 88,326 62,330 69,429 Changes in certain assets and liabilities (1) * (52,552) (60,944) 22,642 Net cash provided by operating activities (2) * 153,607 70, ,564 Cash Flows from Investing Activities: Purchase of fixed assets Investment grant relating to fixed assets (67,072) (54,978) (63,422) ,565 Acquisition of companies (3) * (212,230) (80,610) Acquisition of know-how, patents and product rights (8,499) (4,750) (4,801) Proceeds from sale of fixed assets and tangible assets 3,212 11,601 2,924 Proceeds from sale of investment in associated company Loan granted to an associated company Acquisition of long-term investments 7,395 (571) (1,229) (7,742) (1,721) Net decrease in short-term investments 8,052 5, Brought to you by Global Reports (1 of 4) [6/5/ :11:44 PM]

11 Net cash used in investing activities Cash Flows from Financing Activities: Proceeds from exercise of options Cost of acquisition and proceeds from sale (net) of Company shares held by subsidiaries (270,424) (130,615) (65,233) 7,606 1,973 2,810 (6,489) (3,728) 468 Issue of shares Long-term loans received and other long-term liabilities assumed 237, ,060 91,778 Discharge of long-term loans and other liabilities Net increase (decrease) in short-term credit Dividends paid (52,797) (78,738) (71,306) (17,133) 44,730 (136,503) (17,766) (21,743) Net cash provided by (used in) financing activities 151,480 55,161 (134,496) Translation Differences on Cash Balances of European Subsidiaries (4,560) 1,370 (4,071) Net Increase (Decrease) in Cash and Cash Equivalents 30,103 (3,868) (10,236) Cash and Cash Equivalents at Beginning of year 47,074 50,942 61,178 Cash and Cash Equivalents at End of Year 77,177 47,074 50,942 DETAILS TO CONSOLIDATED STATEMENTS OF CASH FLOWS Teva Pharmaceutical Industries Limited (1) Adjustments to reconcile net income to net cash provided by operating activities: Income and expenses not involving cash flows: Depreciation and amortization: Property, plant and equipment Intangible assets Deferred income taxes - net Acquisition of research and development in process Increase (decrease) in accrued employee rights upon retirement - net 57,398 53,205 48,040 11,026 5,536 3,917 3,285 3,239 20,752 17,700 1,785 (652) (3,611) Brought to you by Global Reports (2 of 4) [6/5/ :11:44 PM]

12 Capital gains, net of loss from realization of assets and discontinuation of activities (3,324) (5,803) (701) Provision for restructuring expenses 6,705 Linkage differences on (erosion of) principal of long-term loans 147 (706) (62) Share in profits of associated companies 550 (903) (403) Minority interests in losses of subsidiaries - net (756) 30 (201) Amounts carried to capital surplus in respect of options granted to employees 948 1,626 1,841 Decrease (increase) in value of short-term investments (433) 53 (143) 88,326 62,330 69,429 Changes in certain assets and liabilities: Increase in accounts receivable Decrease (increase) in inventories Increase (decrease) in accounts payable and accruals (82,024) (14,998) (13,456) 16,568 (4,760) 17,023 12,904 (41,186) 19,075 (52,552) (60,944) 22,642 (2) Supplemental disclosure of cash flow information: Interest paid 37,373 29,759 26,110 Income taxes paid (net of refunds in respect of previous years) 22,002 24,736 21,204 (3) Acquisition of subsidiaries: Assets and liabilities of the subsidiaries upon acquisition: Working capital (net of cash and cash equivalents) Fixed assets Long-term liabilities Minority interests in investee companies upon acquisition Research and development in process Goodwill arising from acquisition 53,014 (28,729) 39,287 35,797 (9,485) (11,862) 32 17, ,714 85, ,230 80,610 Brought to you by Global Reports (3 of 4) [6/5/ :11:44 PM]

13 The accompanying notes are an integral part of the financial statements. Brought to you by Global Reports (4 of 4) [6/5/ :11:44 PM]

14 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Teva Pharmaceutical Industries Limited page 1 Note 1 - Significant Accounting Policies: The significant accounting policies, applied on a consistent basis, are as follows: A. General: 1) Operations Teva Pharmaceutical Industries Limited (the "Company" or "Teva") is an Israeli corporation which, together with its subsidiaries and associated companies ("The Teva Group"), is engaged in development, production, marketing and distribution in the two segments of pharmaceuticals and Active Pharmaceutical Ingredients ("A.P.I. "). 2) Functional currency The currency of the primary economic environment in which the operations of the Company and its subsidiaries in Israel and in the United States are conducted is the U.S. dollar ("dollar" or "$"), this in view of the overall trend of increasing dollar sales of the Company. Operating expenses (including purchase of materials) incurred in non-israeli currencies, mainly the dollar, constitute approximately one half of total operating expenses of each of those companies. Most purchases of materials are also made in non-israeli currencies (mainly the dollar). Thus, the functional currency of these companies is the dollar. The functional currency of the other subsidiaries and associated companies, mainly European companies, is their local currency. The financial statements of those companies are included in the consolidation based on translation into dollars in accordance with Statement No. 52 of the Financial Accounting Standards Board of the United States ("FASB"): assets and liabilities are translated at year end exchange rates, while operating results items are translated at average exchange rates during the year. Differences resulting from translation are presented under shareholders' equity, in the item "other capital surplus." 3) Use of estimates in the preparation of financial statements The preparation of financial statements in conformity with generally accepted accounting principles ("GAAP") requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. B. Principles of Consolidation: 1) The consolidated financial statements include the accounts of Teva and all subsidiary companies. In these financial statements, "subsidiaries" are companies controlled to the extent of over 50% the financial statements of which are consolidated with those of the Company, while "associated companies" are companies controlled to the extent of 20% or more but are not subsidiaries, the investment in which is accounted for by the Brought to you by Global Reports (1 of 6) [6/5/ :11:55 PM]

15 equity method. A listing of subsidiaries and associated companies is given in the appendix. 2) Consolidation was made based on the financial statements of the subsidiaries, after such adjustments as were necessary due to application of uniform accounting principles by the Teva Group. Significant intercompany transactions and balances were eliminated in consolidation; profits from intercompany sales, not yet realized outside the Group, have also been eliminated. C. Inventories These are valued at the lower of cost or market. Cost is determined as follows: Raw and packaging materials and purchased products - mainly on the "first-in, first-out" basis. Finished products and products in process: raw material and packaging component - mainly on the "first-in, first-out" basis; labor and overhead - on the average basis over the production period. D. Non-current investments: Investments in associated companies are accounted for by the equity method. Other investments are carried at cost. E. Marketable securities: These securities are mainly included under "short-term investments" and stated at market value. The changes in value of these securities are carried to financial income or expenses. F. Property, plant and equipment: 1) These assets are stated at cost, after deduction of the related investment grant. 2) Interest expenses in respect of loans and credit applied to finance the construction or acquisition of fixed assets - incurred until construction of the fixed assets is completed - are charged to cost of such assets. 3) Depreciation is computed by the straight-line method on the basis of the estimated useful life of the assets, at the following annual rates: Buildings Mainly 4% Machinery and equipment 8.33%-12.5% Motor vehicles, computer equipment, furniture and other assets Mainly 15% 4) Fixed assets leased under capital leases are classified as the companies' assets and included at the present value of lease payments as determined by the lease agreement. G. Intangible assets: 1) Goodwill Goodwill, representing the excess of cost of investments in subsidiaries acquired over fair value at acquisition, is Brought to you by Global Reports (2 of 6) [6/5/ :11:55 PM]

16 amortized in equal annual installments, mainly over a period of 40 years. Under Opinion 57 of the Institute of Certified Public Accountants in Israel (the "Israeli Institute"), the period of amortization of goodwill should not exceed 20 years. In the opinion of the Company's management, a longer goodwill amortization period, not exceeding 40 years, which deviates from Opinion 57, more appropriately reflects the operating results of the Teva Group, due to the special circumstances and characteristics of the companies acquired by the group, as follows: The companies, acquisition of which gave rise to goodwill, are companies of long standing, having a relatively wide range of products which are marketed to a relatively large number of customers. In some cases, the companies have been marketing certain products for decades. The companies acquired by the Teva Group have a substantial market share in the countries in which they operate. The markets in which these companies operate are characterized, inter alia, by rather strict registration procedures and consolidation of suppliers. 2) Know-how, patents and product rights These items are stated at cost and amortized on the straight-line method over their period of use (mainly 5-8 years). H. Impairment in value of fixed assets: The Company adopted Statement of Financial Accounting Standards FAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of". This Statement refers to fixed assets and identifiable intangible assets (hereafter - long-lived assets). Under the provisions of FAS 121 the Company reviews its long-lived assets for impairment on an exception basis whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable through future cash flows. If it is determined that an impairment loss has occurred based on expected future cash flows, then the loss will be recognized in the statements of income. I. Deferred taxes on income: 1) Deferred taxes are computed in respect of differences between the amounts in these statements and for tax purposes. As to the main factors in respect of which deferred taxes have been provided - see note 9b. Taxes which would apply in the event of disposal of investments in investee companies have not been taken into account in computing the deferred taxes, as it is the Company's intention to hold these investments, not to realize them. Deferred tax balances are computed at the tax rate expected to apply to income of the companies in the Teva Group at time of release to income from the deferred tax accounts. The amounts presented in the income statements represent changes in the above balances during the reported years. 2) As stated in note 9a(1), upon distribution of dividends from tax-exempt income of "approved enterprises", dividends distributed will be subject to tax at the rate that would have been applicable had the companies in the Teva Group not been exempted from payment thereof. The Company intends to permanently reinvest the amounts of tax exempt income and does not intend to cause dividend distribution from such income. Therefore, no deferred income taxes have been provided in respect of such tax-exempt income. 3) The Teva Group might incur additional taxes, not provided for in these financial statements, if dividends are distributed out of the income of non-israeli companies in the Group. Brought to you by Global Reports (3 of 6) [6/5/ :11:55 PM]

17 J. Company shares held by subsidiaries: These shares are presented as a reduction of "shareholders' equity", at their cost to the subsidiaries, under "cost of Company shares held by subsidiaries". Gains and losses, net of related tax, on sale of these shares are carried to "other capital surplus". K. Revenue recognition: Revenue from sale of products is recognized upon shipment. L. Research and development expenses: These expenses, net of related grants and participations, are charged to income as incurred. M. Advertising: These costs are expensed as incurred. N. Concentrations of credit risks - allowance for doubtful accounts: Most of the Group's cash and cash equivalents and short-term investments at December 31, 1999 and 1998 are deposited with Israeli, U.S. and European banks. Most of the Group's sales are made in North America, Europe and Israel, to a large number of customers. The Group has three customers the sales to each of which constitute approximately 6% of total Group sales. In general, the exposure to concentration of credit risks relating to trade receivables is limited, due to the relatively large number of customers and their wide geographic distribution. The Group performs ongoing credit evaluations of its debtors and generally does not require collateral. Certain trade receivables are insured under foreign trade risk insurance. An appropriate allowance for doubtful accounts is included in the accounts. The allowance in respect of trade receivables has been determined for specific debts doubtful of collection. O. Derivatives Gains and losses on derivatives that are hedging existing assets or liabilities in currencies other than the functional currency are recognized in income commensurate with the results from those assets or liabilities. Balances receivable or payable in respect of foreign exchange derivatives are included in the balance sheets among other accounts receivable or payable, as appropriate. Cash flows from foreign exchange derivatives are recognized in the statements of cash flows under cash flows provided by operating activities. The net premiums paid or received in respect of currency options are presented in the balance sheets among other accounts receivable or payable, as appropriate, and carried to financial expenses. P. Cash equivalents The Group considers all highly liquid investments, which include short-term (up to 3 months) bank deposits that are not restricted as to withdrawal or use and short-term government bonds, the period to maturity of which did not exceed 3 months at time of investment, to be cash equivalents. Q. Earnings per ADR Per ADR data have been determined on the basis of the weighted average number of ADRs outstanding during the year, after giving retroactive effect to the distribution of a 100% stock dividend subsequent to December 31, 1999, Brought to you by Global Reports (4 of 6) [6/5/ :11:55 PM]

18 and ADRs issuable upon the exercise of options granted under employee stock option plans, net of Company shares held by subsidiaries. The earnings used in the computation include the reported earnings, with the addition of an increment in respect of the present value of the exercise price of warrants, the shares arising upon exercise of which were included in the weighted average number of shares. As regards the amount of net income and the number of ADRs used in computing earnings per ADR, see note 10s Note 2 - Certain Transactions: A. Acquisition of Copley Pharmaceutical Inc.: In September 1999, the subsidiary Teva Pharmaceuticals USA, Inc. ("Teva USA") acquired full control and ownership of Copley Pharmaceutical, Inc. ("Copley") for $ 220 million (including acquisition costs), under a tender offer. Copley is an American generic pharmaceutical company, which had sales of approximately $ 70 million in the nine-month period ended September 30, The acquisition of Copley is accounted for by the purchase method. The consideration for the acquisition is attributed to net assets, on the basis of fair value of the assets and liabilities acquired on acquisition date. Copely was first consolidated in the September 30, 1999 consolidated balance sheet; the results of operations of Copley are included in the consolidated financial statements of Teva commencing October 1, $ 17.7 million of the acquisition price was attributed to acquisition of in-process research and development, which was expensed upon acquisition, in accordance with generally accepted accounting principles. The amount attributed to in-process research and development was based on an independent opinion obtained by management. The excess of cost of acquisition over the fair value of net assets on acquisition date, not attributed to in-process research and development - approximately $ 112 million - is presented as goodwill. The amount of goodwill is subject to adjustment, mainly as a result of completion of the integration plan and discontinuation of activities, which may involve additional liabilities. Moreover, the goodwill could be influenced by resolution of the uncertainty regarding contingent liabilities that existed on acquisition date. B. Event subsequent to December 31, acquisition of Novopharm Ltd.: After December 31, 1999, the Company entered into an agreement for acquisition of full control and ownership of Novopharm Ltd. ("Novopharm") - a generic company in Canada, which also has operations in the United States and Hungary, the sales of which for the nine-month period ended September 30, 1999 aggregated approximately $ 297 million. The Company also acquired rights in shareholders' loans of approximately $ 70 million, which were granted by the vendor (Dan Family Holdings Ltd.) to Novopharm, as well as other rights of the vendor. In consideration, the vendor will be issued Ordinary Teva Shares and special shares that are exchangeable into Ordinary Teva Shares at a one-to-one ratio. The total number of Ordinary and Exchangeable Shares is approximately 8.4 million, which is approximately 6.3% of the issued and paid share capital of Teva shortly after the allotment. In accordance with generally accepted accounting principles, the value of the transaction (not including related expenses) was determined - based on the market price of the shares in proximity to the date of announcement of the transaction - to be approximately $ 300 million (including the owners' loans of approximately $ 70 million). The closing of the transaction is subject to receipt of all the necessary approvals required by law in Canada, the United States and Israel. After December 31, 1999, the Company reached an agreement with the privatization authorities in Hungary with regard to acquisition of 25.5% of a 54.5% subsidiary of Novopharm in that country, the shares of which are listed on the stock exchange in Budapest. C. Cooperation agreements: Brought to you by Global Reports (5 of 6) [6/5/ :11:55 PM]

19 1) The Company entered into an agreement with an American company, Bio Technology General Corp. (" BTG"), in effect as from September 30, The agreement relates to development and distribution of biotechnological products and calls for Teva to make payments to BTG of up to $ 20 million. In accordance with the agreement, part of that amount is included among intangible assets and the balance is to be paid on fulfillment of certain conditions, as per the agreement. 2) In November 1999, the Company entered into a cooperation agreement with a Danish company, H. Lundbeck A/S ("Lundbeck"), for the joint global development and for the marketing in Europe of two original products for the treatment of Parkinson's Disease. The exclusive marketing rights for the rest of the world will remain in the hands of the Company. Under the agreement, commencing in 1999, Lundbeck participates in the research and development expenses of Teva at varying rates, subject to maximum amounts stipulated in the agreement. 3) In 1997, the marketing of Copaxone, an innovative product of the Company for the treatment of multiple sclerosis, in the United States and Canada commenced. The sale and distribution of Copaxone in North America is carried out by Aventis (formerly - Hoechst Marion Roussel, Inc.). Copaxone is jointly marketed in North America by Teva USA and Aventis, through partnerships established for that purpose. Under a separate agreement between the Company and the German parent company of Aventis, Aventis will distribute and sell Copaxone in Europe and certain other countries. In the core European countries, Copaxone is to be jointly marketed by Teva and Aventis. Upon receipt of approvals for Copaxone in certain European countries, as stipulated by the agreement, amounts of up to $ 15 million (in addition to the $ 35 million received through December 31, 1996) will become due from Aventis. D. Acquisition of the Pharmachemie N.V. group: On July 1, 1998, the Company acquired full ownership and control of Pharmachemie N.V., a Dutch generic pharmaceuticals company, and companies related thereto ("Pharmachemie") for approximately $ 83 million. The goodwill arising upon acquisition, after adjustment in 1999, aggregates $ 89.7 million. The acquisition of Pharmachemie was accounted for by the purchase method. The results of operations of Pharmachemie were included in the consolidated income statements from the date of acquisition. Click here for the next page Brought to you by Global Reports (6 of 6) [6/5/ :11:55 PM]

20 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Teva Pharmaceutical Industries Limited page 2 Note 3 - Property, Plant And Equipment: A. Composition of assets, grouped by major classifications, and changes therein during 1999, are as follows: Cost Accumulated depreciation Balance at beginning of year Additions during the year Retirements during the year Other changes (see c) Balance at end of year Balance at beginning of year Depreciation charged during the year Depreciation in respect of retirements during the year Other changes (see c) Balance at end of year Depreciated Balance - December U.S.$ in thousands U.S.$ in thousands Land - including leasehold land 20,461 1,195 (206) 3,128 24,578 24,578 20,461 Buildings* 214,000 9,941 (3,642) 13, ,762 50,600 8,253 (2,085 6,499 63, , ,400 Machinery and equipment* 401,984 38,956 (6,391) 26, , ,722 34,570 (5,924) 21, , , ,262 Motor vehicles, computer equipment, furniture and other assets 108,304 11,539 (3,619) 5, ,918 54,334 14,575 (2,904) 4,209 70,214 51,704 53,970 Payments on account of fixed assets 9,889 4, ,089 15,089 9, ,638 66,554 (13,858) 49, , ,656 57,398 (10,913) 31, , , ,982 Net of investment grant received, see b. below 9, ,620 4, ,970 4,650 4,600 Brought to you by Global Reports (1 of 3) [6/5/ :12:01 PM]

21 * Includes financial expenses capitalized 12, ,823 2,309 1,011 3,320 9,503 9,845 Rights to leasehold land extend over original periods of 49 years ending in the years B. Investment grants have been received from the State of Israel by Teva and certain of its subsidiaries under the terms of the Law for the Encouragement of Capital Investments, 1959 (see also note 9a(1)). As security for implementation of the approved projects and compliance with the conditions of the approvals, floating charges have been registered on the above companies' assets in favor of the State of Israel. C. These changes relate to assets of a subsidiary consolidated for the first time and to differences resulting from translation of the financial statements of subsidiaries drawn up in non-dollar currencies. Note 4 - Intangible Assets: Original amount Accumulated amortization December 31 December U. S. $ in thousands Goodwill - in subsidiaries 283, ,793 27,639 22,324 Know-how, patents and product rights and other assets 42,836 14,485 5,352 3, , ,278 32,991 26,073 Note 5 - Employee Rights Upon Retirement: a. Israeli law generally requires payment of severance pay upon dismissal of an employee or upon termination of employment in certain other circumstances. The following principal plans relate to employee rights upon retirement, as applicable to the Group's Israeli companies. 1) Pension plans for the majority of the Company's employees. Under collective labor agreements, these external pension plans provide 72% of the severance pay liability. The pension and severance pay liabilities covered by these plans are not reflected in the financial statements as the pension and severance pay risks have been irrevocably transferred to the pension funds. 2) Insurance policies for employees in managerial positions. These policies provide coverage for severance pay and pension liabilities of managerial personnel. The policies are Company assets and under labor agreements, subject to certain limitations, they may be transferred to the ownership of the beneficiary employees. 3) Pension and severance pay liabilities not covered as above are fully provided for in the Company's financial statements. The Company deposits monies in funds managed by major Israeli banks which are earmarked as cover for these liabilities. Employees dismissed before attaining retirement age are entitled to severance pay, computed on the basis of the most recent salary. In the event that the amounts accumulated in the pension and severance pay funds are insufficient to cover severance pay computed as above, Teva and its subsidiaries are obligated to supplement the deficiency. Past experience indicates that the vast majority of employees continue in service until retirement age. Accordingly, management is of the Brought to you by Global Reports (2 of 3) [6/5/ :12:01 PM]

22 opinion that the liability for supplemental severance pay is insignificant; consequently, no provisions were made. b. The employees of Pharmachemie in the Netherlands and APS/Berk in the U.K. can participate in the following pension schemes: a defined benefits scheme providing benefits based on final pensionable pay and a defined contribution scheme. c. Teva USA has various defined contribution plans for the benefit of its employees. Teva USA's contributions under these plans are based on specified percentages of pay. d. The employees of a Hungarian subsidiary are entitled to a retirement grant when they leave the company. In the consolidated accounts, an accrual of the Company's liability is made based on length of service and remuneration of each employee at the balance sheet date. e. The balance sheet liability for employee rights upon retirement, and the amount funded, are composed as follows: December U.S. $ in thousands Liability 30,352 *20,449 L e s s amount funded 19,311 *16,554 Unfunded balance 11,041 3,895 * Reclassified. Under Israeli GAAP, amounts funded, as above, are deducted from the related severance pay liability. Under U.S. GAAP, the amounts funded should be presented as a long-term investment among the Company's assets. f. The net amounts of pension and severance pay charged to income in the years 1999, 1998 and 1997 were approximately $ 6.8 million, $ 4.7 million (excluding amounts relating to termination of employment which were charged to restructuring expenses) and $ 3.8 million, respectively. Click here for the next page Brought to you by Global Reports (3 of 3) [6/5/ :12:01 PM]

23 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Teva Pharmaceutical Industries Limited page 3 Note 6 - Long-Term Loans and other Long-Term Liabilities: a. Composed as follows: Interest rate at December 31 December % U.S. $ in thousands Loans from banks: In dollars (1) , In other non-israeli currencies (2) ,728 64,839 In Israeli currency - linked to the Israeli consumer price ,877 index ("Israeli CPI") Loans from financial institutions and others - mainly in dollars: Missouri Economic Development Bond (3) ,400 20,600 Others 3,608 3,643 Debentures - in dollars (4) , , , ,475 Current maturities - maturing the following year (8,503) (17,776) 391, ,699 (1) The interest on these loans is determined on the basis of dollar Libor plus a margin that is included in the interest rates listed above. (2) Interest in respect of most of this debt is determined on the basis of the Euro, plus a margin that is included in the interest rates listed above. (3) Bearing interest at a variable or fixed rate determined according to a certain formula, due September 1, The Bond is secured by a letter of credit which provides for a mortgage on the Mexico, Missouri facility. (4) The balance as of December 31, 1999 is composed mainly of debentures in a total amount of $ 110 million, which were issued in 1998 in a private placement to institutional investors in the United States. The debentures were issued for periods of 7, 10 (mainly) and 20 years at a fixed annual interest rate, the weighted average of which is 6.9%. Brought to you by Global Reports (1 of 4) [6/5/ :12:07 PM]

24 b. At December 31, 1999, the long-term debt, classified by maturity as from 2001, is as follows: $ million; $ 3.7 million; $ 21.8 million; $ 7.9 million; 2005 and thereafter - $ million. c. The Company and certain subsidiaries entered into negative pledge agreements with certain banks and institutional investors. Under the agreements, the Company and said subsidiaries have undertaken not to register floating charges on assets in favor of any third parties without the prior consent of the banks, to maintain certain financial ratios and to fulfill other restrictions, as stipulated by the agreements. At December 31, 1999, the secured liabilities of subsidiaries not included in the negative pledge agreement amount to $ 18.4 million; these liabilities are secured by fixed charges on property, plant and equipment (including leasehold rights), insurance rights, share capital and goodwill and floating charges on all the subsidiaries' assets. Also, certain loan agreements contain restrictive covenants, mainly the requirement to maintain certain financial ratios. Note 7 - Commitments and Contingencies: a. Commitments: 1) Lease commitments Minimum future rentals under operating leases of buildings, machinery and equipment for periods in excess of one year - in effect at December 31, will be scaled down gradually over the years 2000 to 2004 from $ 5.6 million to $ 3.3 million. In the period from 2005 to the end of the lease periods, the cumulative minimum annual rentals amount to $ 10.1 million. The lease fees for each of the years 1999, 1998 and 1997 were $ 7.4 million, $ 5.3 million and $ 4.2 million, respectively. 2) Royalty commitments: a) The Company is committed to pay royalties to owners of know-how and to parties that financed research and development at declining rates ranging from 10% to 1% of net sales of certain products, as defined in the agreements. In some cases, the royalty period is not defined; in other cases, the royalties will be paid for a period of years, commencing on the date of the first royalty payment. In addition, the Company is committed to the payment of amounts ranging from 25% to 50% of certain proceeds, as stipulated in the agreements. b) The Company has also undertaken to pay royalties to the Government of Israel. The royalties are at the rates of 2%-5% of gross sales relating to a product or a development resulting from the funded research, up to the amount of the participation, in dollar terms (in respect of research grants for with the addition of Libor interest). The maximum amount of the contingent liability in respect of royalties to those entities at December 31, 1999 amounts to $ 39.3 million. c) The royalty expense - mainly in respect of production rights - for the years 1999, 1998, and 1997 was $ 16.1 million, $ 14.7 million, and $ 18.1 million respectively. 3) Commitments for the purchase of property, plant and equipment at December 31, 1999 approximate $ 2.6 million. b. Contingent liabilities: 1) In July 1997, the Company received a "best judgement" value added tax assessment whereby it is Brought to you by Global Reports (2 of 4) [6/5/ :12:07 PM]

25 required to pay an amount of $ 4.9 million (including linkage differences, interest and fines) in respect of sales to certain health funds. The Company contested this demand and the value added tax authorities rejected the Company's arguments. Therefore, the Company has appealed the assessment in Court. Based on the opinion of legal counsel, management is of the opinion that the Company has reasonable chances to prevail, both in view of its arguments and as it acted based on a written certificate from the VAT authorities. Accordingly, no provision for this matter has been included in the accounts. 2) In 1999, the arbitration between the Company and a third party that claimed entitlement to 33% of the amounts Teva received following the signing of the Copaxone agreements, as well as royalties at a rate higher than that paid by the Company came to an end. As of the date of issue of these financial statements, the parties are holding negotiations regarding practical implementation of the arbitrator's award. The Company's management, based on the opinion of its legal advisors, is of the opinion that the Company is not required to pay any additional amounts to the third party in excess of those currently paid. Therefore, no provision has been made in the accounts for this matter. 3) In 1995, Copley and its insurers have reached a compromise agreement with regard to a class action, which was lodged against Copley in the United States, in respect of damages caused as a result of use of the product known as "Albuterol". Under that agreement, the amount payable to the claimants to settle the claim will be no less than $ 65 million and no more than $ 150 million. The final amount of the compensation will be determined based on the number and seriousness of individual claims eventually filed. In accordance with the agreement, Copley deposited approximately $ 7.4 million as its share in claims of up to $ 65 million. Copley has also provided securities of $ 11.7 million for its share up to the maximum amount of the claim. 4) Teva USA is a party to numerous claims, including class actions, alleging negative health effects due to use, in the course of a weight control plan known as "Fen-Phen", of one of the subsidiary's products in conjunction with two products of other pharmaceutical companies. The Company is vigorously defending itself against these claims, with the assistance of experts, inter alia. The Company and its legal counsel believe that this matter will not have a material adverse effect on the results of the Company's operations and its financial position. No provision for this matter has been included in the accounts 5) Teva USA is a party to another legal proceeding involving claims by purchasers of a certain by-product of Biocraft, which they improperly utilized as a gasoline additive. The Company and its legal counsel are of the opinion that the Company has meritorious defenses against these claims and that no losses in significant amounts relative to the Company's operating results and financial position are expected to result from these claims. No provision for this matter has been included in the accounts. 6) Teva USA is also involved in certain litigation and other claims related to its operations. Among these are various environmental claims relating to several sites and landfills. In management's opinion, after consulting legal counsel, it is unlikely that the ultimate resolution of such matters discussed above will have a material adverse effect on the results of operations or financial position of the Company. 7) The Company is involved in legal proceedings with respect to development of generic products prior to patent expiration. These legal proceedings relate to the validity of the originator's patent or the extent to which alternate process techniques may infringe such patents. 8) The Company and its subsidiaries are occasionally subject to litigation and claims arising in the ordinary course of their business. The Company believes it has meritorious defenses to the claims and legal proceedings pending as of December 31, In cases where the Group is involved in litigation relating to its products, management believes it maintains adequate product liability insurance to cover the related damages. In the opinion of the Company, the outcome of the litigation in which the Company and its subsidiaries are presently involved will not have a material adverse effect on the results of the operations or the financial position of the Company. Brought to you by Global Reports (3 of 4) [6/5/ :12:07 PM]

26 Click here for the next page Brought to you by Global Reports (4 of 4) [6/5/ :12:07 PM]

27 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Teva Pharmaceutical Industries Limited page 4 Note 8 - Shareholders' Equity: a. Share capital: Composed as follows (after giving retroactive effect to the stock dividend distributed after December 31, 1999, see (4) below): Authorized Issued and outstanding December 31 December Number of shares in thousands Ordinary Shares (1)(2) 198, , , ,554 Other shares (3) 1,414 1,414 1,414 1, , , , ,968 (1) These shares are traded on the Tel-Aviv Stock Exchange ("TASE") and, in the form of American Depository Receipts ("ADRs"), each of which represents one Ordinary Share, on the U.S. over-the-counter market (NASDAQ - NMS). The closing price of an ADR on December 31, 1999, was $ 7111/16; closing price of the shares on the TASE earlier on that date was NIS 286 ($ 68.87) before the distribution of the stock dividend as per (4) below. (2) Ordinary Shares of the Company held by subsidiaries are included above and constitute approximately 1.7% and 1.6% of the outstanding and paid-in Ordinary Shares at December 31, 1999 and 1998, respectively. (3) These include: (a) 424,200 Ordinary "A" Shares allotted to a subsidiary, which do not confer on their holder voting rights or rights to appoint directors (other rights are identical to those of the Ordinary Shares); (b) 989,800 Ordinary Shares issued in 2000 and 1993 as bonus shares to the subsidiary which holds Ordinary "A" Shares of the Company; these shares do not confer on their holder voting rights and are not listed for trade; (c) 60 Deferred Shares held by subsidiaries, which entitle their holder only to receive the par value of such shares upon liquidation of the Company. (4) Subsequent to December 31, 1999, the Company's Board of Directors resolved to distribute 100% stock dividend to all holders of Ordinary Shares. The effective date was set at February 22, 2000 and the date of distribution was set at February 24, All the data relating to number of shares and options in these financial statements take this stock dividend into account, with retroactive effect. b. Share issuance under compromise agreement for class action: Brought to you by Global Reports (1 of 5) [6/5/ :12:12 PM]