Case 1:07-cr-00029-JPJ Document 27-4 Filed 06/05/07 Page 1 of 27 Pageid#: 667 Audited Combined Financial Statements Purdue Pharma L.P. and Associated Companies, PRA Holdings, Inc. and Subsidiaries, Purdue Pharma Inc., AB Generics L.P., Purdue Associates Inc., Purdue Associates L.P., and Norwell Land Company Referred to Herein as The "Companies" Years ended December 31, 1997 and 1996 with Report of ndependent Auditors Case 1:07-cr-00029-JPJ Document 27-4 Filed 06/05/07 Page 2 of 27 Pageid#: 668 Audited Combined Financial Statements and Other Financial Information Purdue Pharma L.P. and Associated Companies, PRA Holdings, Inc. and Subsidiaries, Purdue Pharma Inc., AB Generics L.P., Purdue Associates Inc., Purdue Associates L.P., and Norwell Land Company Referred to Herein as The "Companies" Years ended December 31, 1997 and 1996 with Report of Independent Auditors Contents Report of Independent Auditors 1 The Companies' Audited Combined Financial Statements Combined Balance Sheet Combined Statement of Income Combined Statement of Equity Combined Statement of Cash Flows Notes to Combined Financial Statements 2 3 4 5 6 Report of Independent Auditors on Other Financial Information 16 The Companies' Combining Balance Sheet The Companies' Combining Statement of Income 17 21 Case 1:07-cr-00029-JPJ Document 27-4 Filed 06/05/07 Page 3 of 27 Pageid#: 669 1,11 ERNST & YOUNG LIP ■ 1"1"f Summer Street Stamford, Connecticut 06905 s Phone: 203 326 8200 Fax: 203 356 9644 Report of Independent Auditors To the Borrowers Under a Credit Agreement Dated as of October 20, 1997, with The Chase Manhattan Bank, The Bank of New York, Fleet National Bank, Morgan Guaranty Trust Company of New York, Bank Boston NA., Republic National Bank of New York and Bank Polska Kasa Opieki, SA We have audited the accompanying combined balance sheet of Purdue Pharma L.P. and Associated Companies, PRA Holdings, Inc. and Subsidiaries, Purdue Pharma Inc., AB Generics L.P., Purdue Associates Inc., Purdue Associates, L.P., and Norwell Land Company (the "Companies"), as of December 31, 1997 and 1996, and the related combined statements of income, equity, and cash flows for the years then ended. These financial statements are the responsibility of the Companies' managements. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion; the financial statements referred to above present fairly, in all material respects, the combined financial position of the Companies at December 31, 1997 and 1996, and the combined results of their operations and their cash flows for the years then ended in conformity with generally accepted accounting principles. f3.4.$4,t1 vouor a April 9, 1998 Ernst &Young Lit is a member of Ernst &Young International, Ltd. 1 Case 1:07-cr-00029-JPJ Document 27-4 Filed 06/05/07 Page 4 of 27 Pageid#: 670 The Companies' Combined Balance Sheet December 31, 1997 1996 (In thousands) Assets Current assets: Cash and cash equivalents Accounts receivable-trade (net of allowances of $1,386 and $631) Accounts receivable-associated companies Other receivables Inventories Prepaid expenses and other assets Deferred income taxes Total current assets $ 168 60,361 4,715 2,925 16,193 10,483 94,845 $ 7,657 37,249 2,538 579 16,774 7,728 494 73,019 Property and equipment, net Intangibles, net Other assets Deferred income taxes Total assets 88,990 35,743 3,586 677 $223,841 66,662 32,053 1,620 $173,354 Liabilities Current liabilities: Accounts payable Accrued expenses and income taxes payable Current portion of long-term debt Deferred income taxes Due to associated companies Total current liabilities $ 31,512 53,752 18,400 657 3,840 108,161 $ 19,682 39,008 10,033 3,200 8,153 38,872 21 4,106 1 1 1 1 Long-term debt, less current portion Deferred income taxes Other liabilities Equity Common stock, $1 par value - PRA Holdings, Inc.: Authorized shares - 500 Issued and outstanding shares - 500 in 1997 and 1996 Common stock, $1 par value - Purdue Pharma Inc.: Authorized shares - 1,000 Issued and outstanding shares - 1,000 in 1997 and 1996 Common stock, $1 par value - Purdue Associates Inc.: Authorized shares - 1,000 Issued and outstanding shares - 1,000 and 0 in 1997 and 1996 Additional paid-in capital Partners' capital Retained earnings Minimum pension liability adjustment Total equity Total liabilities and equity See accompanying notes. 2 1 844 47,822 57,319 (1,661) 104,327 $223,841 8,133 76,856 820 1,106 52,036 (465) 53,499 $173,354 Case 1:07-cr-00029-JPJ Document 27-4 Filed 06/05/07 Page 5 of 27 Pageid#: 671 The Companies' Combined Statement of Income For the years ended December 31, 1997 and 1996 1997 1996 (In thousands) $377,191 77,092 300,099 $287,712 71,769 215,943 113,668 66,951 88,376 53,108 77,335 257,954 52,437 193,921 Operating income 42,145 22,022 Other expenses (income): Interest Other Total other expenses 5,245 (1,037) 4,208 5,687 (1,015) 4,672 Income before income taxes 37,937 17,350 Provision for income taxes Net income 5,138 $32,799 5,799 $11,551 Net sales Cost of sales Gross profit Operating expenses: Selling and promotion General and administrative (includes impairment loss of $607 in 1997) Research and development Total operating expenses See accompanying notes. 3 Case 1:07-cr-00029-JPJ Document 27-4 Filed 06/05/07 Page 6 of 27 Pageid#: 672 The Companies' Combined Statement of Equity (In thousands) Common Stock Balance at December 31, 1995 $2 Additional Paid-in Capital Partners' Capital Retained Earnings $820 $(351) $44,486 Net income for 1996 4,001 Partners' capital distributions: Norwell Land Company Purdue Pharma L.P. Minimum Pension Liability Adjustment $(192) 7,550 To $44, 11, (300) (2,244) (2, Minimum pension liability adjustment — — — — (273) ( Balance at December 31, 1996 2 820 1,106 52,036 (465) 53, Net income for 1997 — — 27,516 5,283 Issuance of common stock Purdue Associates Inc. 1 24 Capital contribution Purdue Pharma L.P. — — 30,000 Partners' capital distributions: Norwell Land Company Purdue Pharma L.P. — — — — (360) (10,440) — 32, — — 30,1 — — — — (. (10,. (1,196) (1,1 $(1,661) $104; Minimum pension liability adjustment Balance at December 31, 1997 See accompanying notes. 4 $3 $844 $47,822 $57,319 Case 1:07-cr-00029-JPJ Document 27-4 Filed 06/05/07 Page 7 of 27 Pageid#: 673 The Companies' Combined Statement of Cash Flows For the years ended December 31, 1997 and 1996 1997 1996 (In thousands) Operating activities Net income Adjustments to reconcile net income to net cash provided by operating activities: Depreciation Amortization Impairment charge Deferred income taxes Pension intangible Realized gain on sale of investments Changes in operating assets and liabilities: Accounts receivable Other receivables Inventories Prepaid expenses and other assets Accounts payable Accrued expenses and other liabilities Total cash provided by operating activities $32,799 $11,551 9,156 1,481 607 453 (5,171) — 6,101 1,485 — 221 (23,112) (2,339) 581 (4,728) 11,830 17,595 39,152 (6,015) 499 (230) (3,528) 7,081 8,662 25,764 Investing activities Capital expenditures Proceeds from sale of investments Purchase of product rights Total cash used in investing activities (32,091) — — (32,091) (28,441) 1,084 (500) (27,857) Financing activities Payments — associated companies, net Line of credit advances Line of credit payments Proceeds from issuance of notes Payment of long-term debt Capital contribution Issuance of common stock Distributions to partners Total cash (used in) provided by financing activities (6,470) 47,000. (34,400) 20,000 (59,905) 30,000 25 (10,800) (14,550) 256 48,100 (44,100) — (1,226) — — (2,544) 486 (7,489) 7,657 $168 (1,607) 9,264 $7,657 Decrease in cash and cash equivalents Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year (63) Supplemental cash flow information: Income taxes paid Interest paid $3,001 $8,957 $5,463 $7,444 See accompanying notes. 5 Case 1:07-cr-00029-JPJ Document 27-4 Filed 06/05/07 Page 8 of 27 Pageid#: 674 The Companies' Notes to Combined Financial Statements 1. Organization and Significant Accounting Policies The accompanying combined financial statements include Purdue Pharma L.P. ("PPLP") and Associat Companies, all of which are wholly owned or 99% owned, PRA Holdings, Inc. and Subsidiaries, all which are wholly owned, Purdue Pharma Inc., AB Generics L.P., Purdue Associates Inc., Purd Associates L.P., and Norwell Land Company (a New York general partnership, "Norwell") (combin as the "Companies"), which are combined as required by their credit agreement. All significl intercompany transactions and accounts have been eliminated. The Companies develop, manufacu and sell pharmaceutical products, which products are marketed primarily to the medical and healthc2 industries in the United States. Summary of Significant Accounting Policies Inventories are stated at the lower of cost or market, as computed using the first-in, first-out (FIF1 method. Property and equipment are stated at cost. Depreciation is provided principally using the straight-li method over the estimated useful lives of the related assets, as follows: Buildings Machinery and equipment Furniture and fixtures Computer equipment Leasehold improvements 20 to 40 years 5 to 12 years 12 years 5 years 10 to 20 years Leasehold improvements are depreciated over the lesser of the assets' useful lives or the term of t lease. Intangible assets consist principally of goodwill, which is amortized on a straight-line basis principal over 30 years and product rights and purchased patents, which are amortized on a straight-line ba: principally over 5 years. Revenue from sales of products is recognized at the time products are shipped. Research and development costs are charged to expense as incurred. Advertising costs are charged to operations in the year incurred and totaled $15.5 million and $12 million in 1997 and 1996, respectively. 6 Case 1:07-cr-00029-JPJ Document 27-4 Filed 06/05/07 Page 9 of 27 Pageid#: 675 The Companies' Notes to Combined Financial Statements (continued) 1. Organization and Significant Accounting Policies (continued) Income Taxes PRA Holdings, Inc. files a consolidated federal income tax return with its subsidiaries. State income tax returns are filed individually by each corporation with the exception of New York State, where a combined return is filed by The Purdue Frederick Company, The P.F. Laboratories, Inc., Blair Laboratories, Inc. and The Purdue Frederick Company International, Inc.. Earnings and losses of the partnerships flow through to the partners' tax returns. The partnerships are not liable for any federal or state income taxes, nor are they entitled to any tax benefits resulting from operating losses. Income taxes, which may be payable by the partners based upon their share of taxable income, have not been reflected in the accompanying financial statements. Deferred taxes for PRA Holdings, Inc. are recognized for the future tax effects of temporary differences between financial and income tax reporting based on enacted tax laws and rates. Cash Flows For purposes of the statement of cash flows, the Companies consider all highly liquid money market instruments, with a maturity of less than 90 days when acquired, to be cash equivalents. Credit Concentrations There is no single geographic concentration of sales or related accounts receivable in the United States. The Companies sell a significant portion of their products through third-party resellers and, as a result, maintain individually significant receivable balances with major distributors. The Companies perform periodic credit evaluations of their customers' financial condition and generally do not require collateral. The three largest customers accounted for approximately 47% of 1997 and 42% of 1996 net sales and 44% and 51% of accounts receivable-trade as of December 31, 1997 and 1996, respectively. Receivables generally are due within 31 days. Credit losses are provided for in the financial statements and credit insurance is maintained. Use of Estimates The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Fair Value Cash and cash equivalents: The carrying amount reported in the b_ alance sheet for cash and cash equivalents approximates its fair value. Accounts receivable and accounts payable: The carrying amounts reported in the balance sheet for accounts receivable and accounts payable approximates their fair value. Debt: The $21,600,000 carrying amount of the Companies' borrowings under its revolving credit and letter of credit facility approximates its fair value. 7 Case 1:07-cr-00029-JPJ Document 27-4 Filed 06/05/07 Page 10 of 27 Pageid#: 676 The Companies' Notes to Combined Financial Statements (continued) 2. Inventories December 31, 1997 1996 (In thousands) Raw materials Work in process Finished goods Obsolescence reserve $ 6,382 2,558 8,389 (1,136) $ 16,193 $ 6,006 1,949 10,153 (1,334) $ 16,774 3. Property and Equipment December 31, 1997 1996 (In thousands) Land and buildings Machinery and equipment Furniture and fixtures Computer equipment Leasehold improvements Construction in progress Accumulated depreciation $ 29,340 51,605 5,062 17,699 29,496 547 133,749 (44,759) $ 88,990 $ 27,431 36,894 3,623 12,794 11,620 9,903 102,265 (35,603) $ 66662 As of December 31, 1997, the Companies have commitments for capital expenditures aggregati approximately $ 4.1 million. During 1997, the Companies incurred interest costs aggregating $1.4 million in connection wconstruction projects. Such interest was capitalized as part of the cost of the projects. In 1995, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounti Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets be Disposed Of." The Statement, which was adopted in 1996, requires companies to investigate potent impairments of long-lived assets on an exception basis, when there is evidence that events or changes circumstances have made recovery of an asset's carrying value unlikely. In January 1997, the Companies purchased a new research and development facility in Ardsley, N( York. The move to this building is expected to be completed by the end of July 1998. In 1997, impairment reserve of $607,000 was recorded against the old research and developments facility locat in Yonkers, New York reducing the carrying value of these assets to approximately $981,000. The 11 value of the land, buildings and leasehold improvements was determined based upon estimates of the fair market values. 4. Investments In May 1996, the Companies sold all of their stock in Interferon Sciences, Inc. ("ISI") for approximate $1,084,000 and entered into an agreement with ISI, whereby the Companies would continue to distribu Alferon N Injection for an annual fee of $240,000 through May 1997 and at ISI's sole option throui May 1998 for a fee up to $450,000. 8 Case 1:07-cr-00029-JPJ Document 27-4 Filed 06/05/07 Page 11 of 27 Pageid#: 677 The Companies' Notes to Combined Financial Statements (continued) 4. Investments (continued) In May 1997, ISI did not exercise the option to continue to have the Companies distribute Alferon N Injection . The Companies have recorded $80,000 of income for services provided to ISI in 1997. 5. Intangibles Goodwill Unrecognized prior service cost - pension Priaduct rights and patents Organization expense Accumulated amortization December 31, 1997 1996 (In thousands) $45,676 5,171 1,245 30 (16,379) $35,743 $45,676 — 1,245 30 (14,898) $32,053 6. Debt December 31, 1997 1996 (In thousands) 8.93% Prornissory note payable 11.75% to 14% Note payable to Estate of A.M. Sackler, MD Subordinated debt 14.27% in 1997 Revolver 8.50%-in 1997 and 8.25% in 1996 Tcnn , payable to banks 7.1% in 1997 . notes 9% to 10.3% Notes payable to associated companies Industrial Revenue Bonds (IRB) 5.5% in 1996 Less current portion — — — 21,600 — 21,600 (18,400) $ 3,200 465 19,654 10,000 9,000 3,400 6,254 132 48,905 (10,033) $38,872 $ The promissory note payable represented the discounted present value of required $500,000 annual payments due through 1997. This obligation was discounted, at its inception, at an effective interest rate of 8.93% per annum, and Mortimer D. Sackler, MD and Raymond R. Sackler, MD each guaranteed onehalf of the amount due. The balance of the note was paid off on October 24, 1997. The note payable to the Estate of A.M. Sackler, MD bore interest at approximately 14% per annum, payable quarterly through November 13, 1996, at which time the interest rate decreased to 11.75% per annum through November 13, 1997. The note was secured by 250 shares of PRA Holdings, Inc.'s common stock, and Mortimer D. Sackler, MD and Raymond R. Sackler, MD each guaranteed one-half of all amounts due. The balance of the note was paid off on November 14, 1997. 9 Case 1:07-cr-00029-JPJ Document 27-4 Filed 06/05/07 Page 12 of 27 Pageid#: 678 The Companies' Notes to Combined Financial Statements (continued) 6. Debt (continued) On September 29, 1995, certain entities included in the combined financial statements entered into a $ million ($9 million borrowed by The Purdue Frederick Company, and $1 million by PPLP) subordinat loan agreement with certain Trusts and members of the Sackler family. This debt was subordinate right and payment to borrowings under the 1995 credit facility with a group of banks, described belo The subordinated debt was due to mature on September 28, 2005, and interest of approximately 14% annum was to be payable quarterly over the life of the loan. On both April 22, 1997, and May 27, 19! PPLP entered into $10 million subordinated loan agreements with certain Trusts, companies a members of the Sackler family. These agreements had substantially the same terms and maturity as I agreement dated September 29, 1995. On September 30, 1997, The Purdue Frederick Company rep( its $9 million of outstanding subordinated debt to the lenders, who in turn lent the $9 million to PPLP. addition, during 1997, Purdue Pharma GmbH withdrew as a general partner of PPLP, leaving Purd Pharma Inc. as the sole general partner, and the limited partners of PPLP contributed their limit partnership interests to Purdue Pharma LLC. Purdue Pharma LLC is entitled to 100% of the profits a losses of PPLP. Purdue Pharma LLC is not a party to the 1997 credit agreement and is therefore r included in the combined financial statements. Additionally, on September 30, 1997, the balance of t subordinated debt ($30 million) was assumed by Purdue Pharma LLC, and Purdue Pharma LLC mad( $30 million capital contribution to PPLP. On September 29, 1995, certain entities included in the combined financial statements entered into credit agreement with a group of banks to replace the Companies' prior credit agreement. The 19 credit agreement provided for a $4 million term loan facility and a $31 million revolving credit and lets of credit facility. The 1995 credit agreement was replaced on October 20, 1997 with a $110 minis revolving credit and letter of credit facility (the "1997 revolving credit and letter of credit facility' Borrowings under the 1997 revolving credit and letter of credit facility expire on September 30, 20C Principal payments are made entirely at the Companies' discretion prior to expiration. The 19 revolving credit and letter of credit facility provides the Companies a choice of paying interest at LIBC plus the applicable margin based on the Companies financial ratios or at the ABR, as defined. Inter( on loans outstanding at December 31, 1997 was based on the ABR (8.5% at December 31, 1997). The 1997 revolving credit and letter of credit facility contains various restrictive covenants, includii limitations on other indebtedness, dividends, and capital expenditures, plus the requirement to mainta certain minimum levels of net worth and other financial ratios, and is unsecured. The notes payable to associated companies were due monthly ($55,000 including interest at 9% 10.3% per annum) through 2026. The balances of these notes were paid off on December 31, 199 Principal on the IRB notes was due quarterly ($67,000 per quarter through June 30, 1997). The not bore interest at 65% of the prime rate (approximately 5.5% at December 31, 1996 and June 30, 1994 and were collateralized by real property owned by Norwell with a net carrying amount at December 3 1996 of $15.2 million. The IRB notes matured on June 30, 1997 at which time the final quarter payment of $67,000 plus accrued interest was paid. The Companies had $1.2 million and $2.4 million, respectively, of standby letters of credit outstandir as of December 31, 1997 and 1996 which collateralize various trade activities. 10 Case 1:07-cr-00029-JPJ Document 27-4 Filed 06/05/07 Page 13 of 27 Pageid#: 679 The Companies' Notes to Combined Financial Statements (continued) 7. Income Taxes Significant components of the provision for income taxes are as follows: 1997 1996 (In thousands) Current: Federal State Deferred: Federal State $3,628 1,057 4,685 $4,329 1,249 5,578 351 102 453 $5,138 171 50 221 $5,799 Significant components of the Companies' deferred tax assets and liabilities as of December 31, 1997 and 1996 are as follows: 1997 1996 (In thousands) Deferred tax assets: Employee benefit programs Accrued liabilities and reserves Other Total deferred tax assets $1,696 848 623 3,167 $1,104 1,609 626 3,339 Deferred tax liabilities: Property and equipment Pension Other Total deferred tax liabilities Net deferred tax assets 1,523 964 660 3,147 $ 20 1,464 717 685 2,866 $ 473 Total income tax expense in 1997 and 1996 differs from the amount computed at the statutory U.S. federal income tax rate principally due to state income taxes, partnership income or losses which increased during 1997 and which are not included in the combined entities' tax returns and nondeductible goodwill amortization. 8. Pension and Other Benefit Plans In February 1998, the FASB issued Statement of Financial Accounting Standards No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits." The Companies adopted the disclosure provisions in their 1997 financial statements. 11 Case 1:07-cr-00029-JPJ Document 27-4 Filed 06/05/07 Page 14 of 27 Pageid#: 680 The Companies' Notes to Combined Financial Statements (continued) 8. Pension and Other Benefit Plans (continued) Certain entities included in the combined financial statements provide retirement benefits substantially all U.S. non-union employees through a noncontributory defined benefit pension pl Additionally, such plan includes certain employees of an associated company, which amounts are . significant. A separate defined benefit plan is maintained for employees covered under a collect bargaining agreement that is based on negotiated benefits and years of service. Certain entities included in the combined financial statements also have benefit plans that prov medical, dental, and life insurance for retirees and eligible dependents. Additionally, such plans inch certain employees of an associated company, which amounts are not significant. Benefit obligation at beginning of year Service cost Interest cost Amendments Actuarial (gain)/loss Benefits paid Benefit obligation at end of year Other Benefits Pension Benefits 1997 1996 1997 1996 ( In thousands) S 8,456 $ 9,013 $ 27,895 $ 32,761 371 443 2,312 1,874 454 518 2,081 2,526 3,457 (1,228) (1,691) 2,673 4,839 (209) (290) (1,762) (1,433) $ 7,381 $ 8,456 $ 32,761 $ 44,462 Change in plan assets Fair value of plan assets at beginning of year Actual return on plan assets Employer contribution Benefits paid Fair value of plan assets at end of year $ 27,127 5,265 3,051 (1,433) 34,010 $ 23,913 2,356 2,620 (1,762) 27,127 (10,452) 9,097 5,530 Reconciliation of funded status Funded status of plan - (underfunded) Unrecognized actuarial (gain)/loss Unrecognized prior service cost Unrecognized net (asset)/obligation existing at January 1987 being recognized over 15 years (pension benefits) and 20 years (other benefits) Accumulated other comprehensive income (expense) Prepaid (accrued) benefit costs 12 $ - $ - 209 (209) 290 (290) (5,634) 7,486 2,266 (7,381) (2,915) (300) (8,456) (1,382) (321) (760) (931) 5,467 5,832 (1,673) $ 1,742 (465) $ 2,722 $ (5,129) $ (4,327) Case 1:07-cr-00029-JPJ Document 27-4 Filed 06/05/07 Page 15 of 27 Pageid#: 681 The Companies' Notes to Combined Financial Statements (continued) 8. Pension and Other Benefit Plans (continued) Set forth below is a summary of the amounts reflected in the Company's statement of financial position for pensions at the end of the last two fiscal years: Prepaid Pension Cost Accrued Benefit Liability Intangible Asset (Unrecognized Prior Service Cost) Net Amount Recognized Weight-average assumptions as of December 31: Discount rate Expected return on plan assets — non Union pension Expected return on plan assets — Union pension Rate of compensation increase December 31, 1997 December 31, 1996 (In thousands) $ 3,415 $ 3,417 (7,203) (695) 5,530 $ 1,742 $ 2,722 Pension Benefits 1997 1996 Other Benefits 1997 1996 7.0% 7.5% 9.0% 9.0% 7.7% 5.5% 5.5% 7.0% 7.5% 7.0% For measurement purposes, an 8 percent annual rate of increase in the per capita cost of covered health care benefits was assumed for 1998, declining to 7% by 2004, declining to 5% by 2011 and remaining at that level thereafter. Pension Benefits 1997 Components of net periodic benefit cost Service cost Interest cost Expected return on plan assets Amortization of unrecognized obligation at transition date Amortization of prior service cost Amortization of prior experience gains Benefit cost Other Benefits 1996 1997 1996 (In thousands) $ 2,312 2,526 (2,368) $ 1,874 2,081 (2,080) $ 371 454 — $ 443 518 — (171) 193 331 $ 2,823 (171) 183 166 $ 2,053 365 365 (21) (72) $ 1,233 (21) (158) $ 1,011 13 Case 1:07-cr-00029-JPJ Document 27-4 Filed 06/05/07 Page 16 of 27 Pageid#: 682 The Companies' Notes to Combined Financial Statements (continued) 8. Pension and Other Benefit Plans (continued) The assumed health care cost trend rate has a significant effect on the amounts reported. A a percentage-point change in the assumed health care cost trend rate would have the following effects: 1-Percentage 1-Percentage Point Point Increase Decrease (In thousands) Effect on total of service and interest cost components in 1997 $ 164 $ (126) Effect on accumulated postretirement benefit obligation as of 12-31-97 $ 944 $ (741) Certain entities included in the combined financial statements also sponsor a defined contribution 401 , requirements. Additionally, such plan includes certain employees of an associated company, win amounts are not significant. Contributions and cost are determined as 50% of each employe contributions to the Plan, to a maximum of 6% of each employee's covered earnings. A separate plan maintained for employees covered by a collective bargaining agreement. Contributions and costs determined as 50% of each employee's contributions to the Plan, to a maximum of 6% of ea employee's covered earnings. The net cost of these plans totaled $2.2 million and $1.8 million in 19 and 1996, respectively. 9. Related Party Transactions Certain entities included in the combined financial statements are parties to license/roya arrangements, for the manufacture and sale of various products, with entities owned directly or indirec by the families of certain officers of the Companies. Such royalty expense (included in cost of sail approximated $8.9 million and $14.7 million in 1997 and 1996, respectively. On September 30, Purdue Pharma LLC assumed PPLP' s MS Contin royalty obligations to an associated company a granted PPLP the right to distribute MS Contin without a royalty payment. Had the royalty not be assumed by Purdue Pharma LLC, the Companies royalty expense for 1997 would have increased approximately $5.5 million. Inventory purchaied from associated companies in 1997 and 1996 aggregated approximately $305,0 and $622,000, respectively. 14 savingpl betodmsicn-u ployewhmtcrainugedsry Case 1:07-cr-00029-JPJ Document 27-4 Filed 06/05/07 Page 17 of 27 Pageid#: 683 The Companies' Notes to Combined Financial Statements (continued) 10. Commitments and Contingencies Certain entities included in the combined financial statements lease automobiles and office equipment under operating leases, expiring on various dates through 2002. Aggregate future lease payments of $13.7 million at December 31, 1997 are payable as follows: Year ending December 31, 1998 1999 2000 2001 2002 (In thousands) $ 4,142 3,841 3,143 1,988 589 $ 13,703 Lease expense for the years ended December 31, 1997 and 1996 was approximately $3,400,000 and $2,741,000, respectively. The Companies are parties to certain legal actions, which in the opinion of management, including in-house counsel, will not have a material adverse effect on the Companies' financial condition. 11. Year 2000 Issue — Unaudited The Companies have developed a plan to modify its Information Technology to be ready for the Year 2000 and has begun converting critical data processing systems. The Companies currently expect the project to be substantially complete by mid 1999 and to cost between $1.9 million and $6.1 million. This estimate includes internal costs, but excludes the costs to upgrade and replace systems in the normal course of business. As of December 31, 1997, less than $1 million had been expended. The Companies will continue to implement systems with strategic value though some projects may be delayed due to resource constraints. 15 Case 1:07-cr-00029-JPJ Document 27-4 Filed 06/05/07 Page 18 of 27 Pageid#: 684 Other Financial Information Case 1:07-cr-00029-JPJ Document 27-4 Filed 06/05/07 Page 19 of 27 Pageid#: 685 ill ERNST & YOUNG UP ■ 1111 Summer Street Stamford, Connecticut 06905 a Phone: 203 326 8200 Fax: 203 358 9644 Report of Independent Auditors on Other Financial Information To the Borrowers Under a Credit Agreement Dated as of October 20, 1997, with The Chase Manhattan Bank, The Bank of New York, Fleet National Bank, Morgan Guaranty Trust Company of New York, Bank Boston N.A., Republic National Bank of New York and Bank Polska Kasa Opieki, SA Our audit was conducted for the purpose of forming an opinion on the 1997 basic combined financial statements taken as a whole. The accompanying combining financial information is presented for purposes of additional analysis and is not a required part of the basic combined financial statements. Such information has been subjected to the auditing procedures applied in our audit of the 1997 combined financial statements and, in our opinion, is fairly stated in all material respects in relation to the 1997 basic combined financial statements of the Companies taken as a whole. oite)sdat April 9, 1998 Ernst & Young LLP is a member of Ernst &Young International, Ltd. 16 Case 1:07-cr-00029-JPJ Document 27-4 Filed 06/05/07 Page 20 of 27 Pageid#: 686 The Companies' Combining Balance Sheet December 31, 1997 (In thousands) CT Ave. Realty Assets Current assets: Cash and cash equivalents Accounts receivable - trade Accounts receivable - associated companies Other receivables Inventories Prepaid expenses Deferred income taxes Total current assets 2 - 20 22 2,861 19 10 2,894 2 1,653 - 2,033 $3.708 Property and equipment, net Liabilities and equity Current liabilities: Accounts payable Accrued expenses and income taxes payable Current portion of long-term debt Deferred income taxes Due to associated companies Total current liabilities Long-term debt, less current portion Other liabilities Total 1 iabi I ities Equity: Capital stock - common Capital stock - preferred Additional paid-in capital Partners' capital (deficiency) Retained earnings Minimum pension liability adjustment Total equity Total liabilities and equity $ $ CBC Diagnostics 4 - 5 Investments in associated companies Intangibles, net Other assets Deferred income taxes Total assets Gray Pharmaceutical 2 - - S Blair Laboratories The Purdue Frederick Company S - 110 14,039 P.F. ABG Laboratories Laboratories S (40) 94 $ 9,654 110 8,909 1,169 7 133,552 510 4,631 4,847 157,689 19,896 1,656 10 1,679 - - 363 1 - - - - 11,844 21,114 $2.894 $ 2 $ 7 3,764 2,956 677 $177,293 1,070 216 $42,297 $1,679 18 S - $ 1 S 10,762 S 6,738 $ 2.123 2.123 1 1,127 1,129 17,190 18,400 657 30,382 77,391 2,388 28,955 38,081 1,222 1,232 3,200 5,900 86,491 1,157 39,238 1,232 3 10 3 ' 4,933 4,936 .14 890 922 4,936 922 2.123 1,129 10 (1,238) 1.972 - 1 (2,122) 1 49 (1,172) 195 163 32 90,431 10 4,057 1 446 (1.228) $3,708 1.972 $2,894 (2,121) S 2 (1,122) S 7 (19) 90,802 5177,293 (1,008) 3.059 542,297 447 $1,679 For purposes of this combining balance sheet, the cost method of accounting for investments in certain associated companies has been used by PRA Holdings, Inc. 17 13 - Case 1:07-cr-00029-JPJ Document 27-4 Filed 06/05/07 Page 21 of 27 Pageid#: 687 EDLA Purdue Frederick Laboratories International S 2 S 247 1 PRA PRA Holdings Consol. Eliminations Holdings Inc. Companies 43 147 S 2,319 2,509 250 Inactive Total PRA Holdings, Adjustments Inc. and and Subsidiaries Consol. 9 S - (1 ) 21 29 275 275 150,563 620 13,562 6,078 185,252 (107,979) 154 (107,825) 42,584 620 13,716 6,078 77,427 369 4,812 (3,144) 1,668 2,426 27,292 $ 149 14,280 $ $ 149 14,280 32,958 32,958 $(110,969) 34,159 3,172 677 $150,061 $ - $ 17,679 (1 ) (107.979) (107,980) 19,597 18,400 657 24,280 80,613 3,200 7,057 90,870 - - $250 $2,509 $ 29,747 S 644 34,159 3,172 677 3261.030 $127 $ $ $ - $ 17.679 210 210 19.598 18.400 657 132.259 188.593 59,815 210 3.200 7.057 198.850 (107,980) 324 430 740 1.972 59.741 (322) (430) (419) (1,972) 154 59,895 (1.027) 62.180 $261.030 (2,989) 5(110,969) (1,027) 59,191 $150,061 106 233 233 3 1 2,517 2,521 2.521 20 1 59,794 59,815 1 1 1 - - - (4) 315 103 267 348 16 (9) (30,384) (284) - (12) 32.509 (30,068) $ 29.747 17 $250 434 $ 644 2 321 18 Case 1:07-cr-00029-JPJ Document 27-4 Filed 06/05/07 Page 22 of 27 Pageid#: 688 The Companies' Combining Balance Sheet (continued) December 31, 1997 (In thousands) Assets Current assets: Cash and cash equivalents Accounts receivable - trade Accounts receivable - associated companies Other receivables Inventories Prepaid expenses Deferred income taxes Total current assets Investments in associated companies Property and equipment, net Intangibles, net Other assets Deferred income taxes Total assets Liabilities and equity Current liabilities: Accounts payable Accrued expenses and income taxes payable Current portion of long-term debt Deferred income taxes Due to associated companies Total current liabilities Long-term debt, less current portion Other liabilities Total liabilities Equity: Capital stock - common Capital stock - preferred Additional paid-in capital Partners' capital (deficiency) Retained earnings Minimum pension liability adjustment Total equity Total liabilities and equity Total PRA Holdings, Inc. and Subsidiaries Consol. $ 149 14,280 Purdue The Purdue Pharma Purdue Norwell Land Mundipharma Other Pharma L.P. Company Phamia Inc. Company LLC Companies 283 5 54 S 51 850 36 49 $ (553) 21,443 $ 76 23,444 21,147 175 1,786 2,527 49,155 42,584 620 13,716 6,078 77,427 30,467 2,096 923 1,867 56,243 1,668 6,010 32,958 39,971 19 34,159 3,172 677 $150,061 1,584 414 5104.222 $ 49.168 $ 17,679 $ 9,480 19,597 18,400 657 24,280 80,613 3,200 7,057 90,870 2 321 59,895 (1,027) 59,191 5150,061 (6) $ 4 - $ 73 18 11 106 (62) 8 878 291 (18) 22 16,026 16 $128 $16,317 S 894 $ 82 S 4.275 $ 12 S 16 5 - 21,689 27.061 58.230 11,528 31.578 47.381 36 134 182 42 14,271 14,328 1,435 1,508 1,096 59,326 47,381 182 14,328 1,508 - - 45.530 (634) 44.896 $104,222 15 $ 57 72 72 - 72 1,787 - 1 499 (554) 1,989 - (614) - 10 1,787 $49,168 (54) $128 1,989 $16,317 (614) S 894 10 For purposes of this combining balance sheet, the cost method of accounting for investments in certain associated companies has been used by PRA Holdings, Inc. 19 100 - S82 Case 1:07-cr-00029-JPJ Document 27-4 Filed 06/05/07 Page 23 of 27 Pageid#: 689 Purdue Associates Inc. Purdue Associates L.P. $25 $1 — — — — 25 AB Generics L.P. $ Adjustments And Eliminations Total Combined Companies $ — — — — 4,863 (20) 96 54 (95,318) — (328) — 4,715 2,925 16,193 10,483 1 6,265 (95,646) 94,845 — $ 168 60,361 78 1,194 (7,676) — — $25 88,990 — — — — — — — $6,265 $(103,322) 35,743 3,586 677 $223.841 $ $ S 31.512 — $1 $— 35 — — — — — — — — — — 800 — — 327 1,162 3 — — (95.318) (95,315) 53.752 18,400 657 3.840 108.161 — — — — — — — — 1,162 — — (95.315) 3.200 8.153 119.514 1 — 24 — — — _ — 1 — — — — 5,103 — (1) — — (5.984) (2,022) 3 — 844 47.822 57,319 — 25 $25 — 1 SI — 5,103 56.265 — (8.007) 5( I 03.322) (1.661) 104.327 5223.841 20 Case 1:07-cr-00029-JPJ Document 27-4 Filed 06/05/07 Page 24 of 27 Pageid#: 690 The Companies' Combining Statement of Income Year ended December 31, 1997 (In thousands) CT Ave. Realty Gray Pharmaceutical CBC Diagnostics Blair Laboratories The Purdue Frederick Company $2,105 — 2,105 $— — — $ 52 — 52 $108,513 229 108,742 — 493 — 16 Gross profit 130 1,612 — Selling and promotion General and administrative Research and development Total operating expenses — 131 — 131 128 162 — 290 — — — — Net sales Partnership/investment income Total income Cost of sales S— 130' 130 1,322 Operating income (loss) Interest expense (income) Other expense (income) 24 Net income before taxes (25) 1,322 Provision for Income tax Net income (loss) $ (25) $1322 — 5- P.F. Laboratories $ ABG Laboratories — — $— — — 39,573 (1,381) (268) 36 69,169 1,381 268 — 56 — 56 34,063 20,764 4,261 59,088 (20) 10,081 1,381 268 — (223) (862) (20) 11,166 1,381 268 $(20) 5,097 $ 6,069 $ 1.381 $ 268 For purposes of this combining statement of income, the cost method of accounting for investments in certain associated companies has been used by PRA Holdings, Inc. 21 Case 1:07-cr-00029-JPJ Document 27-4 Filed 06/05/07 Page 25 of 27 Pageid#: 691 Purdue Frederick EDLA PRA Laboratories International Holdings Inc. S— $ Inactive Companies Eliminations Consol. $110,886 1,667 112,553 $ — (1,321) (1,321) $110,886 346 111,232 — 38,556 (129) 38,427 73,997 (1,192) 72,805 (16) 139 — 77 1,308 — — — — 18 57 — 75 — 1,413 — 1,413 16 2 (105) — — — — 1,992 $ Consol. $— — — — $16 Adjustments and — 1,308 1,308 $216 — 216 16 PRA Holdings Total PRA Holdings, Inc. and Subsidiaries 2 (2,097) 2 5(2,097) 34,209 22,583 4,261 61.053 — — — — 34,209 22,583 4,261 61,053 12,944 (1,192) 11,752 1.793 (862) 5— S 1,793 (862) 12.013 (1,192) 5.097 6.916 5(1.192) 10,821 $ 5,097 5,724 22 Case 1:07-cr-00029-JPJ Document 27-4 Filed 06/05/07 Page 26 of 27 Pageid#: 692 The Companies' Combining Statement of Income (continued) Year ended December 31, 1997 Total PRA Holdings, Inc. and Subsidiaries Consol. Purdue Pharma L.P. The Purdue Pharma Company $110,886 346 111,232 $128,391 24,406 152,797 $132,259 (7) 132,252 Cost of sales 38,427 19,764 17,447 Gross profit 72,805 133,033 114,805 206 Selling and promotion General and administrative Research and development Total operating expenses 34,209 22,583 4,261 61,053 13,531 29,945 61,581 105,057 65,526 13,645 13,010 92,181 34 34 1,375 1,375 662 65 727 Operating income (loss) 11,752 27,976 22,624 172 (1,375) (727) (2) 1,305 (163) 1,054 342 (727) (2) 342 5(727) $(2) Net sales Partnershipfinvestment income Total income Interest expense (income) Other expense (income) 1,793 (862) Income before taxes Provision for income tax Net income (loss) $ Purdue Pharma Inc. $ 206 206 Norwell Land Company $ - Mundipharma LLC $ - Other Companies $(2) (2) (2) 1,085 (2,802) 10,821 26,834 21,570 172 5,097 5,724 $ 26,834 $ 21,570 41 $131 $ For purposes of this combining statement of income, the cost method of accounting for investments in certain associated companies has been used by PRA Holdings, Inc. 23 Case 1:07-cr-00029-JPJ Document 27-4 Filed 06/05/07 Page 27 of 27 Pageid#: 693 Purdue Associates Inc. Purdue Associates L.P. — — - S— — $5,655 — 5,655 $ — (24,949) (24,949) $377,191 377,191 — — 1,530 (76) 77,092 4,125 (24,873) 300,099 AB Generics L.P. Adjustments And Eliminations Total Combined Companies — — — — — — — — 210 156 — 366 (470) (852) (1,517) (2,839) 113,668 66,951 77,335 257,954 — — 3,759 (22,034) 42,145 — — — — 8 (165) — 2,955 5,245 (1,037) — — 3,916 (24,989) 37.937 5— S— $3,916 5(24,989) 5.138 $ 32.799 24