The oral pharmaceuticals business of F H Faulding & Co Limited (the "Faulding Oral Pharmaceuticals Business" or the "Company") discovers, develops, manufactures and markets oral dose generic and proprietary pharmaceuticals for human consumption. The Company conducts the majority of its business within the United States of America ("US") with a small interest in China. The Company sells its products primarily through chains, wholesalers and distributors. The Company operates under one segment, oral pharmaceuticals.

Basis of Presentation - During the second quarter of fiscal 2001, Mayne Nickless Ltd. ("Mayne") issued a bid to acquire F H Faulding & Co Limited ("Faulding"). One of the conditions of the bid involved the subsequent sale of the Faulding Oral Pharmaceuticals Business by Mayne to Alpharma Inc. ("Alpharma"). As defined in the "Put and Call Option Agreement" between Mayne and Alpharma, the Faulding Oral Pharmaceuticals Business means the business of research, development, manufacturing, sales and marketing of generic and proprietary oral pharmaceuticals in the USA and China. The companies comprising the Faulding Oral Pharmaceuticals Business are: Faulding Laboratories, Inc., Purepac Pharmaceutical Co., Faulding Inc., Faulding Holdings, Inc., Faulding Pharmaceutical Inc., Faulding Services Inc., Point Holdings Inc., Whitney Pharmaceuticals Inc., Excel Pharmaceuticals, and Purepac Pharmaceuticals Holding, Inc. in the US, and Foshan Faulding Pharmaceutical Co. Ltd. and Faulding China Limited in China. With the exception of Purepac Pharmaceutical Co. (generic pharmaceuticals), Faulding Laboratories Inc. (proprietary pharmaceuticals) and Foshan Faulding Pharmaceutical Co. Ltd. (generic pharmaceuticals), which operate as manufacturing and distribution facilities, all other entities identified above function as holding companies. As part of its purchase requirements, Alpharma requested that Faulding prepare audited combined financial statements of the Faulding Oral Pharmaceuticals Business for the two years ended June 30, 2001 and 2000. The combined financial statements are presented based upon accounting principles generally accepted in the United States of America ("US GAAP").

The accompanying financial statements present the Faulding Oral Pharmaceuticals Business on a combined basis, excluding any assets, liabilities and operations of the Faulding injectables business and the Faulding global pharmaceuticals headquarters business. They consist of the balance sheets as of June 30, 2001 and 2000, and the related statements of operations, stockholders' equity, and cash flows for the years then ended.

The combined financial statements of the Faulding Oral Pharmaceuticals Business ("combined financial statements") have been derived from the financial statements and accounting records of F H Faulding & Co Limited. All significant inter-affiliate balances, transactions and profits relating to those entities which are included in the combination have been eliminated in the combined financial statements. Further, the 10% third-party interest in the Foshan joint venture has been accounted for as a minority interest. Management believes that the assumptions underlying the combined financial statements are reasonable. However, the combined financial statements included herein may not necessarily reflect the financial position, results of operations and cash flows of the Faulding Oral Pharmaceuticals Business in the future or what its financial position, results of operations and cash flows would have been had the Faulding Oral Pharmaceuticals Business been a stand-alone company during the periods presented.

Parent and Affiliates - For purposes of the Faulding Oral Pharmaceuticals Business, "Parent" refers to F H Faulding & Co Limited and "affiliates" refers to all subsidiaries owned wholly or in part by the Parent, except for those entities included within the Faulding Oral Pharmaceuticals Business as defined above.

Foreign Currency Translation - The functional currency of the Company's foreign entities is the applicable local currency. The translation of the applicable foreign currencies into US dollars is performed for asset and liability accounts using current exchange rates in effect at the balance sheet date. The China RMB rate was $.1208 as of June 30, 2001 and 2000. Revenues, expense accounts and cash flows are translated at the average rates of exchange prevailing during the year. The average China RMB rate was $.1208 for both fiscal years ended June 30, 2001 and 2000.

Cash and Cash Equivalents - Cash equivalents are comprised of certain highly liquid investments with original maturities of three months or less.

Inventories - Inventories are stated at the lower of cost or market. Cost is determined on a first-in, first-out basis.

Revenue Recognition - Revenue is recognized when title and risk of loss transfers to customers. Provisions for rebates, returns and allowances and other price adjustments are estimated at the time of the sale and are deducted from gross revenues.

Income Taxes - The Company recognizes deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax liabilities and assets are determined based on the difference between the financial statement and tax basis of assets and liabilities using enacted tax rates expected to apply to taxable income in the periods in which the differences are expected to reverse.

Foshan Faulding Pharmaceutical Co. Ltd. is subject to Chinese, state and local income tax policy.

Property, Plant and Equipment - Property, plant and equipment is stated at cost, less accumulated depreciation and amortization. Depreciation is calculated utilizing the straight-line method over the estimated useful lives of the assets, which range primarily from 20-30 years for buildings and improvements, and 4-10 years for machinery and equipment and furniture and fixtures. Leasehold improvements are amortized utilizing the straight-line method over the terms of their applicable leases or their useful lives, whichever is less. Land held in China is leased from the Chinese government via a Land Right Use Fee for 50 years as Chinese law dictates that land cannot be owned. This fee was paid at the inception of the Foshan Joint Venture in 1994 and is included as a component of Land in the notes to the combined financial statements.

In the event that facts and circumstances indicate that the cost of long-lived assets may be impaired, an evaluation of recoverability would be performed. If an evaluation is required, the estimated future undiscounted cash flows associated with the asset would be compared to the asset's carrying amount to determine if a write-down to market value or discounted cash flows is required.

Intangibles - Intangible assets are amortized on a straight-line basis over their estimated useful lives, not to exceed 40 years. Management assesses the recoverability of goodwill, patents and brand names by comparing the Company's forecasted cash flows from operating results, on an undiscounted basis, to the unamortized balance of goodwill, patents and brand names at each semi-annual balance sheet date. If the results of such comparison indicate that an impairment may be likely, the Company will recognize a charge to operations at that time based upon the difference of the present value of the expected cash flows from future operating results (utilizing a discount rate equal to the Company's average cost of funds at the time), and the then balance sheet value. The recoverability of goodwill, patents and brand names is at risk to the extent the Company is unable to achieve its forecast assumptions regarding cash flows from operating results. Management believes, at this time, that the carrying values and useful lives of goodwill, patents and brand names continue to be appropriate.

Comprehensive Income - The only component of accumulated other comprehensive income for the Company is foreign exchange adjustments. Total comprehensive income for the years ended June 30, 2001 and 2000 is $9,637,824 and $7,039,767, respectively.

Use of Estimates - The preparation of these financial statements in accordance with accounting principles generally accepted in the United States of America 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 date of the financial statements and the reported amounts of revenues and expenses during the reported period. Actual results could differ from those estimates.

Fair Value of Financial Instruments - For financial instruments including cash, accounts receivable and payable, accrued expenses and current portion of long-term debt, it was assumed that the carrying amount approximated fair value because of their short maturity.

Concentration of Credit Risk - Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of overnight cash investments and accounts receivable. The Company invests its cash primarily in an overnight Eurodollar investment. Approximately 53% of the gross accounts receivable balance before allowances at June 30, 2001 was represented by four customers. The Company performs detailed ongoing credit evaluations of customers and establishes credit limits as required. The Company estimates an allowance for doubtful accounts based on the credit worthiness of its customers as well as general economic conditions. As a consequence, management believes that credit risk is limited.

Faulding's 90% ownership of the Foshan JV is held through Faulding China Limited ("FCL"), a Hong Kong incorporated company. Faulding owns 100% of FCL. The annual net revenues of the entity are $14,533,201 and $14,416,428 for the years ended June 30, 2001 and 2000, respectively.

The Foshan JV develops, manufactures and markets human oral pharmaceutical products throughout China including both western generic pharmaceuticals and some traditional Chinese medicines ("TCMs"). The manufacturing facility attained Chinese current Good Manufacturing Practices ("cGMP") certification in November 2000 for hard capsule and tablet products and all penicillin products.

The minority interest as shown on the combined balance sheets represents the 10% interest in the joint venture by Foshan General Pharmaceutical Corporation, a third party.

Derivative Instruments - SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, is effective for all fiscal years beginning after June 15, 2000. SFAS No. 133, as amended, establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities. Under SFAS No. 133, certain contracts that were not formerly considered derivatives may now meet the definition of a derivative. The Company adopted SFAS No. 133 effective July 1, 2000. The adoption of SFAS No. 133 did not have a significant impact on the financial position, results of operations or cash flows of the Company.

Revenue Recognition - In December 1999, the Securities and Exchange Commission ("SEC") staff issued Staff Accounting Bulletin ("SAB") 101, Revenue Recognition in Financial Statements, which summarizes certain of the SEC staff's views in applying generally accepted accounting principles to revenue recognition in financial statements. The Company implemented SAB 101 on April 1, 2001 and its adoption did not have a material impact on the Company's combined financial statements.

Business Combinations/Goodwill and Other Intangible Assets - In July 2001, the FASB issued SFAS No. 141, Business Combinations, and No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 supercedes APB opinion No. 16, Business Combinations, and amends or supercedes a number of related interpretations of APB 16. SFAS No. 141 eliminates the pooling-of-interests method of accounting for business combinations, and changes the criteria to recognize intangible assets apart from goodwill. SFAS No. 142 supercedes APB opinion No. 17, Intangible Assets. Under SFAS No. 142, goodwill and indefinite lived intangible assets are no longer amortized but are reviewed annually, or more frequently if impairment indicators arise, for impairment. The Company plans to adopt the provisions of SFAS No. 141 for any business combination that is initiated after June 30, 2001. The provisions of SFAS No. 142 are effective for fiscal years beginning after December 15, 2001. The Company will adopt SFAS No. 142 beginning in the first fiscal quarter of fiscal 2003. The Company has not yet completed an assessment of the impact of adoption of this standard.

Asset Retirement Obligations - In August 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations. SFAS No. 143 requires entities to record the fair value of a liability for an asset retirement obligation in the period in which it is incurred. The provisions of SFAS No. 143 are effective for fiscal years beginning after June 15, 2002. The Company will adopt SFAS No. 143 beginning in the first fiscal quarter of fiscal 2003. The Company believes that the adoption of SFAS No. 143 will not have a material impact on its results of operations or financial position.

Impairment or Disposal of Long-Lived Assets - In October 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. SFAS No. 144 supercedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. The primary objectives of SFAS No. 144 were to develop one accounting model based on the framework established in SFAS No. 121, and to address significant implementation issues. The provisions of SFAS No. 144 are effective for fiscal years beginning after December 15, 2001. The Company will adopt SFAS No. 144 beginning in the first fiscal quarter of fiscal 2003. The Company believes that the adoption of SFAS No. 144 will not have a material impact on its results of operations or financial position.

Inventories consist of the following:

In China, the Foshan JV's production capability has been consolidated to a main site. One of the manufacturing sites is, therefore, no longer required and is presently part of negotiations for sale to the Foshan government. Accordingly, the applicable building and land have been reclassified as assets held for sale. The net book value of these assets is $1,247,697.

Included in construction in progress is $1,216,533 and $297,798 of capitalized interest as of June 30, 2001 and 2000, respectively.

Goodwill and other intangibles, net consists of the following:

In 1990, the Company, excluding the Foshan JV, was purchased by the Parent. In November 1994, the Parent acquired a 90% ownership interest in the Foshan JV. In January 1998, Faulding Inc. gained approval from its minority shareholders for the buy back of the remaining 27% of its stock. The excess of the purchase price over the market value of the net assets acquired amounted to $2.3 million for the Foshan JV, $66.5 million for the buy back and $20.9 million for the purchase by the Parent. The goodwill is being amortized over 20 years for each transaction.

On November 22, 1999, the Company purchased SeraxÒ , an anxiolytic, from Wyeth Ayerst. The Company paid $10.0 million in cash at closing and an additional $5.0 million one year later. The intangible asset is being amortized over 15 years.

Accrued expenses consists of the following:

Long-term debt consists of the following:

The Company has credit facilities in both the United States (the "US facility") and China (the "China facilities"). The US facility was established with Australian New Zealand Bank ("ANZ Bank") on May 24, 1990 with a line of credit of $5 million and amended on June 14, 1994 to $15 million. The terms of the amended facility were LIBOR + 0.55% with a commitment fee on the unused portion of 0.30% per annum. The US facility was repaid on February 18, 2000 and the facility was closed. The weighted-average interest rate in the year 2000 was 5.67%. No borrowings were made under the US facility during 2001.

The China facilities are a line of credit with availabilities of RMB 24 million (USD $2.9 million) and RMB 9 million (USD $1.1 million), of which RMB 0 and RMB 5.0 million (USD $0.6 million) were outstanding as of June 30, 2001 and 2000, respectively. These facilities are established through the Bank of China and the Industrial and Commercial Bank of China and are secured with guarantees from the Parent through ANZ Bank. The 2000 weighted-average interest rate was 6.732%. The undrawn borrowing availability under these facilities as of June 30, 2001 and 2000 were RMB 24 million (USD $2.9 million) and RMB 4 million (USD $0.5 million), respectively.

The Company entered into a credit agreement with National Australia Bank ("NAB") in 1998 as part of the purchase of the remaining 27% of US operations by Faulding in the amount of $67.5 million. The loan was guaranteed by the Parent and bears interest at LIBOR plus a funding fee. The loan rolls over every 90 days at the prevailing LIBOR rate at that time plus the funding fee. In 1999, $20.0 million was borrowed from Bank One and used to pay back NAB. The weighted-average interest rate in 2000 for the $47.5 million and $20 million loans was 6.29% and 6.23%, respectively. The loans were paid off on February 26, 2001. The weighted-average interest rates in 2001 for the $47.5 million and $20 million loans were 7.08% and 7.0%, respectively.

The Company borrowed $10.0 million from Bank One for the purchase of the SERAXÒ product line on November 22, 1999. The loan was guaranteed by the Parent and bears interest at LIBOR plus a funding fee and rolls over every 90 days. The weighted-average interest rate in 2000 was 6.58%. The Company borrowed an additional $5 million on December 5, 2000 to pay the balance of the purchase price of SERAXÒ with the same terms. Both of these loans were repaid on February 26, 2001. The weighted-average interest rates paid for both loans in 2001 were 7% and 6.96%, respectively.

The Company borrowed $6.5 million from Bank One for the purchase of an additional manufacturing facility in Piscataway, New Jersey on December 14, 2000. The loan was guaranteed by the Parent and bears interest at LIBOR plus a funding fee with a quarterly rollover. The loan was repaid on February 26, 2001. The weighted-average interest rate was 6.86% during 2001.

The Company utilized a $96 million capital investment from its Parent to repay all of its long-term debt outstanding. The Company then paid a $96 million dividend to its Parent out of combined equity.

The Company is part of Faulding's Negative Pledge and Cross Guarantee with several banks, including ANZ Bank, Commonwealth Bank of Australia, NAB, Westpac, Bank One and Citibank. Faulding's bank loans are unsecured. The loan agreement contains various restrictive covenants to be met on the consolidated F H Faulding & Co Limited group level. As of June 30, 2001 and 2000, the Parent was in compliance with the covenants.

The Company is 100% owned by the Parent. In the ordinary course of business, certain transactions occur between the Company, the Parent and its affiliates. There are also transactions that occur between the Company, the Parent and its affiliates that eliminate in consolidation with the Parent. These transactions include interest charges on intercompany balances with both the Parent and affiliates, royalty payments to the Parent and funding fees for bank loans, all of which are recognized in the results of operations for each of the years ended June 30, 2001 and 2000. Significant transactions are as follows:

The rights to sell two of the Company's products are held by the Parent. Accordingly, royalties are paid to the Parent based on sales volumes of those products in the US. Intercompany interest expense and income is charged based on the outstanding balances with the Parent and affiliates at the prevailing 1-month bankers acceptance index rate plus 150 basis points. Bank funding fees represent expenses charged by the Parent as a fee for their guarantee on outstanding bank loans.

Commitments - The Company has operating leases expiring on various dates through fiscal year 2006. The leases are primarily for office and laboratory equipment and vehicles. At June 30, 2001, future minimum commitments under non-cancelable operating lease arrangements were as follows:

Total rent expense charged to operations was $1,562,735 and $1,401,072 for the years ended June 30, 2001 and 2000, respectively.

The Company also has various commitments in China for the upgrade of its manufacturing facility to attain full Chinese cGMP approval. Commitments as of June 30, 2001 amount to RMB 2.9 million (USD $352,216). Further commitments totaling RMB 7.6 million (USD $940,667) for this upgrade were signed in July 2001.

Land held in China is leased from the Chinese government via a Land Right Use fee for 50 years as Chinese law dictates that land cannot be owned. This fee was initiated at the inception of the Foshan JV in 1994 and is included as a component of Land in the notes to the special purpose combined financial statements.

Contingencies - The Company is subject to legal proceedings and claims which arise in the ordinary course of its business. In the opinion of management, the ultimate outcome of these actions will not materially affect the financial position or results of operations of the Company.

The combined equity as presented on the combined balance sheets represents balances as incorporated into the consolidated financial position of Faulding. Accordingly, certain transactions occurred that have impacted these balances that would have eliminated in consolidation with Faulding.

On November 29, 2000, Purepac made a dividend payment of $96.0 million to its Parent, F H Faulding & Co Limited, in exchange for issued capital of $96 million. This was classified as a nontaxable share dividend as a result of the immediate recapitalization into the Company.

The Company administers the 1998 Faulding Inc. Share Appreciation Rights Plan (the "Plan"). Share appreciation rights granted under the Plan are redeemable only for cash. The value of each right shall be the excess of the fair market value at the exercise date over the base value on the grant date. These rights generally vest equally over three years and expire five years after the date of the grant, subject to 100% vesting acceleration in the event of a change in control. A change in control shall mean the occurrence of any of the following: (a) the acquisition directly or indirectly (in one or more related transactions) by any person or group, of beneficial ownership of more than 50% of the outstanding capital shares of the Parent entitled to vote for the election of directors ("Voting Shares"); (b) the merger or consolidation of the Parent with one or more other corporations as a result of which the holders of the outstanding Voting Shares of the Parent immediately before the merger hold less than 50% of the Voting Shares of the surviving or resulting corporation; (c) the sale of all or substantially all of the assets of the Parent; or (d) the Parent or any of its shareholders enters into any agreement providing for any of the foregoing and the transaction contemplated thereby is ultimately consummated. All rights not exercised at the date of employee termination are forfeited.

Summarized information relative to the Plan is as follows:

As of June 30, 2001 and 2000, there were 884,533 and 620,371 rights exercisable, respectively. The Company has recorded a liability of $3,968,624 and $356,333 within the special purpose combined balance sheets to reflect all vested and pro rata portion of unvested rights as of June 30, 2001 and 2000, respectively. The rights exercisable at June 30, 2001 can be exercised at strike prices ranging from $6.68 to $10.24 over periods extending through June 2005.

Certain key employees of the Foshan JV are eligible to participate in the F H Faulding & Co Limited stock option plan. As of June 30, 2001, 13,500 options were outstanding. There were no options outstanding as of June 30, 2000. No amounts have been recorded at June 30, 2001 with respect to these options.

The Company has retention and termination arrangements in place with certain key executives. The arrangements consist of termination benefits and/or retention benefits payable to the executives upon the occurrence of certain events. In addition to salary payments, the termination benefits trigger the immediate vesting of all stock appreciation rights previously issued to the respective individual. The retention benefits will be paid upon the individual's continuous employment during the three-year period from April 1, 2000 through April 1, 2003. The Company has recorded a liability of $416,666 and $83,333 within the combined balance sheets to reflect the accrual for service performed applicable to the retention benefits portion of the executive compensation arrangements for the years ended June 30, 2001 and 2000, respectively.

The Company maintains the "Faulding Inc. Pension Plan" (the "Plan"), a U.S. defined benefit plan for all eligible non-union salaried U.S. employees. Benefits for the eligible employees are based on salary and years of service. Investments are maintained by a single custodian and are held in pooled separate accounts.

A reconciliation of the changes in the Plan's benefit obligations, fair value of assets and statement of funded status for the years ended June 30, 2001 and 2000 are as follows:

The amounts recognized in the accompanying combined balance sheets are $1,803,008 and $1,906,824 as of June 30, 2001 and 2000, respectively.

The aggregate benefits obligation for the Plan where the accumulated benefits obligation exceeded the fair value of plan assets was $5.1 million at June 30, 2001. At June 30, 2000, the fair value of plan assets exceeded the accumulated benefits obligation. There are no plan assets in nonqualified plans.

The weighted-average assumptions used in accounting for the Company's funded status at June 30 are as follows:

Components of the net periodic benefit cost for the Plan are as follows:

The weighted-average assumptions used in accounting for the Company's pension cost at June 30 are as follows:

The Company also maintains a noncontributory Deferred Compensation Trust (the "Deferred Plan") for certain key U.S. employees. Under the Deferred Plan, employees may elect to defer all or any portion of their annual base salary and/or annual bonus. Included within other noncurrent liabilities at June 30, 2001 and 2000 are balances of $998,254 and $987,195, respectively, representing the Company's obligation under the Deferred Plan. To assist in the funding of this obligation, the Company invests in certain mutual funds and as such, included within other noncurrent assets at June 30, 2001 and 2000 are balances of $998,254 and $987,195, respectively, representing the fair value of these funds.

The Company also has a defined contribution plan allowing eligible employees to withhold a fixed percentage of their salary which is matched, in part, by the Company. The cost of this plan amounted to $760,442 and $567,801 in 2001 and 2000, respectively.

The Foshan JV pays employee benefits as required under Chinese government requirements. Such payments include components for pension, medical, unemployment insurance and workers' compensation for industrial injuries and was approximately $132,000 for each of the years ended June 30, 2001 and 2000. No additional pension payments have been provided for employees of the Foshan JV as at June 30, 2001 and 2000. The Foshan JV does, however, contribute to the refunding of additional outpatient costs, particularly medicines for amounts not 100% covered by the government's insurance program.

Other income, net consists of the following:

Royalty income primarily includes royalties received, under a 12-month agreement, from the sale of the rights of one product to a third party. The royalty agreement existed from September 1999 through September 2000. The contract termination fee represents the settlement received from a third party as a result of the early termination of its contract with the Company. Bank funding fees represent expenses charged by the Parent as a fee for their guarantee on outstanding bank loans.

The Faulding Oral Pharmaceuticals Business discovers, develops, manufactures and markets oral dose generic and proprietary pharmaceuticals for human consumption. The Company conducts the majority of its business within the United States with a small interest in China. The Company sells its products primarily through chains, wholesalers and distributors. The Company operates under one segment, oral pharmaceuticals.

Net revenues are represented in the geographic area in which the Company's customers are located. Sales to two of the Company's largest customers accounted for 17% and 13% in 2001 and 24% and 10% in 2000 of combined net revenues. No other single customer accounted for 10% or more of the Company's net revenues in 2001 or 2000.

There were no export sales for the years ended June 30, 2001 and 2000.

Income taxes are summarized as follows:

A reconciliation of the Federal income tax to the U.S. statutory rate follows:

The tax effect of the temporary differences that give rise to the Company's net deferred U.S. federal and state taxes as of June 30, 2001 and 2000 are as follows:

The Company has approximately $8.3 million and $7.0 million of net operating loss carryforwards in certain foreign and state jurisdictions which expire beginning in 2003. Since it is management's opinion that it is not likely that the Company will realize these losses, a full valuation allowance has been established.