INVESTMENTS

In August 2007 and December 2008, Tredegar made an aggregate investment of $7.5 million in kaleo, Inc. (“kaléo”), a privately held specialty pharmaceutical company formerly known as Intelliject, Inc. 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. The Company’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. The Company recognized a net unrealized gain of $2.0 million ($1.0 million after taxes) in 2014 that primarily related to favorable 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 45% for their high degree of risk and the impact of reducing the weighted average cost of capital used to discount cash flow projections after kaléo commercialized a second product, partially offset by unfavorable adjustments in the fair value due to a reassessment of the amount and timing of estimated cash flows associated with kaléo’s commercialized products.

The Company recognized an unrealized gain of $3.4 million ($2.2 million after taxes) in 2013 related to favorable 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, partially offset by unfavorable adjustments in the fair value due to a reassessment of the amount and timing of projected receipt of royalty and milestone payments from commercial sales of kaléo’s licensed product, which launched in early 2013, and unfavorable adjustments for higher development and commercialization expenses related to its product pipeline.

In 2012, the Company recognized an unrealized gain of $16.1 million ($10.2 million after taxes) attributed to various factors, most notably a favorable adjustment to the timing and amount of anticipated cash flows derived from updated marketing research; the passage of time as anticipated cash flows associated with achieving product development commercialization milestones are discounted at 55% for their high degree of risk; and a reduction in the weighted average cost of capital used to discount cash flows in the first-quarter valuation to reflect the completion of certain process testing and a reassessment of the risk associated with the timing for obtaining final marketing approval from the U.S. Food and Drug Administration (“FDA”) for the company’s first product. Unrealized gains (losses) associated with this investment are included in “Other income (expense), net” in the consolidated statements of income and separately stated in the segment operating profit table in Note 5.

At December 31, 2014 and 2013, the estimated fair value of the Company’s investment (included in “Other assets and deferred charges” in the consolidated balance sheets) was $39.1 million and $37.1 million, respectively. Subsequent to its most recent investment (December 15, 2008), and until the next round of financing, the Company believes fair value estimates are based upon Level 3 inputs since there is no secondary market for its ownership interest. Accordingly, until the next round of financing or any other significant financial transaction, value estimates will primarily be based on assumptions relating to meeting product development and commercialization milestones, cash flow projections (projections of development and commercialization milestone payments, sales, costs, expenses, capital expenditures and working capital investment) and discounting of these factors for their high degree of risk. If kaléo does not meet its development and commercialization milestones and there are indications that the amount or timing of its projected cash flows or related risks are unfavorable versus the most recent valuation, or a new round of financing or other significant financial transaction indicates a lower enterprise value, then the Company’s estimate of the fair value of its ownership interest in kaléo is likely to decline. Adjustments to the estimated fair value of this investment will be made in the period upon which such changes can be quantified.

The fair market valuation of Tredegar’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 the Company’s interest in kaléo was 45% and 55% at December 31, 2014 and 2013, respectively. 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 December 31, 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 Tredegar’s interest in kaléo by approximately $6 million, and a 500 basis point increase in the weighted average cost of capital assumption would have decreased the fair value of the Company’s 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 December 31, 2014 and 2013 and related condensed statements of operations for the last three years ended December 31, 2014, that were reported by kaléo, are provided below:



	December 31,					December 31,
(In Thousands)	2014		2013			2014			2013
Assets:					Liabilities & Equity:
Cash & short-term investments	$	117,589	$	33,560	Long-term debt, net of discount, current portion	$	—		$	5,414
Restricted cash	14,498		—		Other current liabilities	8,123			4,845
Other current assets	17,916		5,682		Other noncurrent liabilities	1,247			3,098
Property & equipment	10,824		10,559		Long-term debt, net of discount	149,471			9,372
Patents	2,702		2,433		Redeemable preferred stock	22,946			21,970
Other long-term assets	2,857		445		Equity	(15,401		)	7,980
Total assets	$	166,386	$	52,679	Total liabilities & equity	$	166,386		$	52,679



	2014			2013			2012
Revenues & Expenses:
Revenues	$	21,156		$	15,305		$	38,179
Cost of goods sold	(3,801		)	—			—
Expenses and other, net (a)	(48,447		)	(18,631		)	(13,073		)
Income tax (expense) benefit	8,100			1,586			(9,642		)
Net income (loss)	$	(22,992	)	$	(1,740	)	$	15,464

(a) “Expenses and other, net” includes selling, general and administrative expense, research and development expense, interest expense and other income (expense), net.

The audited financial statements and accompanying footnotes of kaléo as of December 31, 2014 and 2013 and for the years ended December 31, 2014, 2013 and 2012 have been included as an exhibit to the Company’s Annual Report on Form 10-K for the year ended December 31, 2014 filed with the Securities and Exchange Commission.

On April 2, 2007, Tredegar invested $10.0 million in Harbinger Capital Partners Special Situations Fund, L.P. (the “Harbinger Fund”), a private investment fund that is subject to limitations on withdrawal. There is no secondary market for interests in the fund. The Company’s investment in the Harbinger Fund, which represents less than 2% of its total partnership capital, is accounted for under the cost method. Unrealized losses on the Company’s investment in the Harbinger Fund (included in “Other income (expense), net” in the consolidated statements of income) were $0.8 million ($0.4 million after taxes), $0.4 million ($0.3 million after taxes) and $1.1 million ($0.7 million after taxes) in 2014, 2013 and 2012, respectively, as a result of a reduction in the estimated fair value of the investment that is not expected to be temporary. The December 31, 2014 and 2013 carrying value in the consolidated balance sheets (included in “Other assets and deferred charges”) was $1.8 million and $2.8 million, respectively. The carrying value at December 31, 2014 reflected Tredegar’s cost basis in its investment in Harbinger, net of total withdrawal proceeds received and unrealized losses. Withdrawal proceeds were $0.2 million in 2014, $0.4 million in 2013 and $0.5 million in 2012. The timing and amount of future installments of withdrawal proceeds was not known as of December 31, 2014. There were no realized gains or losses associated with the investment in the Harbinger Fund in 2014, 2013 and 2012. Gains on the Company’s investment in the Harbinger Fund, if any, will be recognized when the amounts expected to be collected from 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 if management believes it is probable that future withdrawal proceeds will not exceed the remaining carrying value.

Tredegar has investment property in Alleghany and Bath County, 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 a sale of a portion of this investment property in 2014. The Company recorded an unrealized loss on its investment property in Alleghany and Bath County, Virginia of $1.0 million ($0.6 million after taxes) in 2013 as a result of a reduction in the estimated fair value of the investment that is not expected to be temporary. The Company’s carrying value in this investment property (included in “Other assets and deferred charges” on the consolidated balance sheets) was $2.6 million at December 31, 2014 and $5.9 million at December 31, 2013.