In August 2007 and December 2008, the Company made an aggregate investment of $7.5 million in kaléo, a privately held specialty pharmaceutical company. The mission of kaléo is to set a new standard in life-saving personal medical products designed to enable superior treatment outcomes, improved cost effectiveness and intuitive patient administration. Tredegar’s ownership interest on a fully diluted basis is approximately 20%, and the investment is accounted for under the fair value method. At the time of the initial investment, the Company elected the fair value option over the equity method of accounting since its investment objectives were similar to those of venture capitalists, which typically do not have controlling financial interests.

At September 30, 2014 and December 31, 2013, the estimated fair value of the investment in kaléo (also the carrying value, which is included in “Other assets and deferred charges” in the consolidated balance sheet) was $40.0 million and $37.1 million, respectively. The fair value estimates are based upon significant unobservable (Level 3) inputs since there is no secondary market for our ownership interest. Accordingly, until the next round of financing or other significant financial transaction, value estimates will primarily be based on assumptions relating to meeting product development and commercialization milestones, corresponding cash flow projections (projections of sales, costs, expenses, capital expenditures and working capital investment) and discounting of these factors for the high degree of risk. Adjustments to the estimated fair value of the Company’s investment in kaléo will be made in the period during which changes can be quantified.

The Company recognized unrealized gains on its investment in kaléo (included in “Other income (expense), net” in the consolidated statements of income) of $4.0 million in the third quarter of 2014 and $2.9 million in first nine months of 2014. The unrealized gain in the third quarter of 2014 can be primarily attributed to favorable adjustments for the passage of time as cash flows associated with achieving product development and commercialization milestones are discounted at 45% for their high degree of risk. In addition to the passage of time for discounted cash flows, the year-to-date change in the fair value of kaléo reflected the impact of a lower weighted average cost of capital used to discount cash flow projections and adjustments to the amount and timing of cash flows associated with achieving product development and commercialization milestones. The Company recognized an unrealized loss on its investment in kaléo (included in “Other income (expense), net” in the consolidated statements of income) of $3.1 million in the third quarter of 2013 and and unrealized gain of $0.1 million in the first nine months of 2013. The unrealized loss in the third quarter of 2013 was primarily related to adjustments in the fair value due to a reassessment of the amount and timing of the projected receipt of royalty and milestone payments from commercial sales of kaléo’s licensed epinephrine auto-injector, which launched in early 2013, and increased development and commercialization expenses related to its pipeline products, partially offset by the impact of the passage of time as anticipated cash flows associated with achieving product development and commercialization milestones were discounted at 55% for their high degree of risk. The net unrealized gain in the first nine months of 2013 was primarily related to adjustments in the fair value for the passage of time as anticipated cash flows associated with achieving product development and commercialization milestones were discounted at 55% for their high degree of risk, offset by adjustments in the fair value due to a reassessment of the amount and timing of projected royalty and milestone payments from commercial sales of kaléo’s licensed epinephrine auto-injector and increased commercialization expenses related to its pipeline products.

The fair market valuation of the Company’s interest in kaléo is sensitive to changes in the weighted average cost of capital used to discount cash flow projections for the high degree of risk associated with meeting development and commercialization milestones as anticipated. The weighted average cost of capital used in the fair market valuation of Tredegar’s interest in kaléo was 45% at September 30, 2014 and 55% at December 31, 2013. In 2014, the weighted average cost of capital used to discount cash flow projections was decreased to reflect lower product risk after the U.S. Food and Drug Administration’s approval of kaléo’s naloxone auto-injector for emergency treatment of known or suspected opioid overdoses and reduced funding risk subsequent to kaléo securing new debt financing, both of which occurred in April 2014. At September 30, 2014, the effect of a 500 basis point decrease in the weighted average cost of capital assumption would have further increased the fair value of the interest in kaléo by approximately $8 million, and a 500 basis point increase in the weighted average cost of capital assumption would have decreased the fair value of the interest by approximately $6 million.

Had the Company not elected to account for its investment under the fair value method, it would have been required to use the equity method of accounting. The condensed balance sheets for kaléo at September 30, 2014 and December 31, 2013 and condensed statement of operations for the three and nine months ended September 30, 2014 and 2013, as reported to the Company by kaléo, are provided below:



(In Thousands)	September 30, 2014		December 31, 2013			September 30, 2014			December 31, 2013
Assets:					Liabilities & Equity:
Cash & cash equivalents	$	110,999	$	33,560	Long-term debt, net of discount, current portion	$	—		$	5,414
Restricted cash	14,498		—		Other current liabilities	8,092			4,845
Other current assets	37,251		5,682		Non-current liabilities	2,951			3,098
Property & equipment	11,407		10,559		Long term debt, net of discount	150,000			9,372
Patents	2,617		2,433		Redeemable preferred stock	22,700			21,970
Other long-term assets	3,035		445		Equity	(3,936		)	7,980
Total assets	$	179,807	$	52,679	Total liabilities & equity	$	179,807		$	52,679



	Three Months Ended September 30,						Nine Months Ended September 30,
	2014			2013			2014			2013
Revenues & Expenses:
Sales & royalty revenues	$	11,560		$	7,904		$	18,528		$	12,420
Cost of goods sold	576			—			576			—
Expenses and other, net	13,832			5,604			36,806			12,515
Income tax benefit (expense)	1,074			(912		)	7,205			322
Net income (loss)	$	(1,774	)	$	1,388		$	(11,649	)	$	227

The Company’s investment in the Harbinger Fund had a carrying value (included in “Other assets and deferred charges”) of $1.8 million at September 30, 2014, compared with $2.8 million at December 31, 2013. The carrying value at September 30, 2014 reflected Tredegar’s cost basis in its investment in the Harbinger Fund, net of total withdrawal proceeds received and unrealized losses. The Company recorded unrealized losses of $0.2 million and $0.8 million in the third quarter and first nine months of 2014, respectively, on its investment in the Harbinger Fund (included in “Other income (expense), net” in the consolidated statements of income) as a result of a reduction in the value of the investment that is not expected to be temporary. The Company recorded an unrealized loss of $0.2 million in the third quarter and first nine months of 2013, respectively, on its investment in the Harbinger Fund (included in “Other income (expense), net” in the consolidated statements of income) as a result of a reduction in the value of the investment that is not expected to be temporary. Withdrawal proceeds were $0.2 million in the first nine months of 2014 and 2013, respectively. The timing and amount of future installments of withdrawal proceeds, which commenced in August 2010, were not known as of September 30, 2014. Gains on the Company’s investment in the Harbinger Fund will be recognized when the amounts expected to be collected from any withdrawal from the investment are known, which will likely be when cash in excess of the remaining carrying value is received. Losses will be recognized when management believes it is probable that future withdrawal proceeds will not exceed the remaining carrying value.

Tredegar has investment property in Alleghany and Bath Counties, Virginia. The Company realized a gain (included in “Other income (expense), net” in the consolidated statements of income) of $1.2 million ($0.8 million after taxes) on the sale of a portion of this investment property in the second quarter of 2014. An unrealized loss associated with the Company’s investment property in Alleghany and Bath Counties, Virginia (included in “Other income (expense), net” in the consolidated statements of income) of $1.0 million ($0.6 million after taxes) was recorded in the second quarter of 2013 as a result of a reduction in the estimated fair value of our investment that is not expected to be temporary. The carrying value in this investment property (included in “Other assets and deferred charges” on the consolidated balance sheets) was $2.6 million at September 30, 2014 and $5.9 million at December 31, 2013.