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Lannett Co: Kremers Urban Pharmaceuticals Inc

The following excerpt is from the company's SEC filing.

(A Business of UCB S.A.)

Consolidated Financial Statements

December 31, 2014, 2013 and 2012

Kremers Urban Pharmaceuticals Inc.

Report of Independent Auditors

Consolidated Financial Statements

Balance Sheets

December 31, 2014 and 2013

Statements of Income and Comprehensive Income

Years Ended December 31, 2014, 2013 and 2012

Statements of Changes in Stockholders Equity

Statements of Cash Flows

Notes to Financial Statements

To the Board of Directors

Kremers Urban Pharmaceuticals Inc.

We have audite d the accompanying consolidated financial statements of Kremers Urban Pharmaceuticals Inc. and its Subsidiary (the Company), which comprise the consolidated balance sheets as of December 31, 2014, and 2013, and the related consolidated statements of income and comprehensive income, of changes in stockholders equity and of cash flows for each of the three years in the period ended December 31, 2014.

Managements Responsibility for the Consolidated Financial Statements

Management is responsible for the preparation and fair presentation of the consolidated financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.

Auditors Responsibility

Our responsibility is to express an opinion on the consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on our judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, we consider internal control relevant to the Companys preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Companys internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Opinion

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Kremers Urban Pharmaceuticals Inc. and its Subsidiary at December 31, 2014 and 2013, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2014 in accordance with accounting principles generally accepted in the United States of America.

Emphasis of Matters

As discussed in Notes 2 and 14 to the consolidated financial statements, the Company has significant transactions with its parent, UCB S.A., and affiliates. In addition, the Company has prepared these financial statements on a carve-out basis, from the consolidated financial statements of its parent. The historical results of operations, financial position, and cash flows of the Company may not be indicative of what they actually would have been had the Company been a separate stand-alone entity, nor are they indicative of what the Companys results of operations, financial position and cash flows may be in the future. Our opinion is not modified in respect to these matters.

/s/ PricewaterhouseCoopers LLP

Atlanta, Georgia

February 25, 2015

Consolidated Balance Sheets

(Amounts in thousands, except share and per share data)

Assets

Current assets:

Cash and cash equivalents

Accounts receivable, net

223,430

257,709

Due from affiliates

Inventory, net

69,432

57,001

Prepaids and other current assets

Deferred income taxes

59,081

40,651

Total current assets

361,913

363,581

Property and equipment, net

93,849

88,832

Intangible assets, net

Goodwill

177,957

Total assets

640,054

644,889

Liabilities and Stockholders Equity

Current liabilities:

Accounts payable and accrued expenses

65,973

71,393

Total current liabilities

Liabilities for unrecognized tax benefits

38,084

41,987

Other long-term liabilities

Total liabilities

106,216

115,697

Commitments and contingencies (Note 11)

Stockholders equity:

Common stock (par value $0.01, 2 authorized, 1 issued and outstanding at December 31, 2014 and 2013)

Additional paid-in capital

402,389

401,451

Retained earnings

230,392

112,318

Payable to (receivable from) Parent

(100,590

13,776

Accumulated other comprehensive income

Total stockholders equity

533,838

529,192

Total liabilities and stockholders equity

The accompanying notes are an integral part of these consolidated financial statements.

Consolidated Statements of Income and Comprehensive Income

(Amounts in thousands)

Net sales

411,097

330,446

272,772

Net sales to related party

18,841

10,714

Contract manufacturing revenue

33,082

35,673

37,698

Total net revenues

463,020

376,833

320,079

Cost of goods sold

217,341

196,766

163,768

Cost of goods sold to related party

Contract manufacturing costs

17,790

19,589

23,315

Total cost of goods sold

242,285

220,744

190,678

Gross profit

220,735

156,089

129,401

Selling, general and administrative expenses

25,830

24,076

22,241

Selling, general and administrative expenses to related party

Research and product development costs

22,913

24,455

20,007

Other expenses, net

Total operating expenses

59,184

53,465

46,208

Income before provision for income taxes

161,551

102,624

83,193

Provision for income taxes

43,477

21,006

16,538

Net income

118,074

81,618

66,655

Other comprehensive income:

Foreign currency translation adjustment

Comprehensive income

82,459

66,757

Consolidated Statements of Changes in Stockholders Equity

Payable to

Paid in

(Receivable

Capital

Earnings

from) Parent

Balance at December 31, 2011

399,056

19,132

(105,499

313,393

Comprehensive income:

Transfer from Parent

Dividends

(55,087

Net decrease in payable to (receivable from) Parent

62,208

Balance at December 31, 2012

400,986

30,700

(43,291

389,201

57,067

Balance at December 31, 2013

Net increase in payable to (receivable from) Parent

(114,366

Balance at December 31, 2014

Consolidated Statements of Cash Flows

Cash flows from operating activities

Adjustments to reconcile net income to net cash (used in) provided by operating activities:

Depreciation and amortization

10,947

(Gain) loss on disposal of property and equipment

Loss on write-off of inventory

Unrealized foreign exchange loss (gain)

(9,540

Corporate overhead allocated from Parent

Changes in operating assets and liabilities:

(2,034

(1,831

(2,147

Accounts receivables, net

33,999

(111,511

(41,387

(20,231

(3,775

(32,209

Prepaid expense and other current assets

(3,818

10,686

(3,560

(18,958

(17,456

(4,274

Net cash provided by (used in) operating activities

131,893

(30,187

Cash flows from investing activities

Purchases of property and equipment, net

(13,874

(26,037

(9,014

Proceeds from sale of property and equipment, net

Purchases of intangible assets, net

(4,109

(1,088

(4,463

Net cash used in investing activities

(17,819

(26,625

(13,476

Cash flows from financing activities

Net changes in payable to (receivable from) Parent

Dividends paid

Net cash provided by (used in) financing activities

Effect of exchange rate changes on cash and cash equivalents

Net increase (decrease) in cash and cash equivalents

Cash and cash equivalents

Beginning of year

End of year

Supplemental schedule of cash flow information

Cash paid for income taxes

55,630

38,953

32,571

Supplemental schedule of noncash investing activities

Accounts payable for property and equipment

Supplemental schedule of noncash financing activities

Corporate overhead allocated directly to the Company and treated as additional paid-in capital

Notes to Consolidated Financial Statements

(Amounts in thousands, except share and per share data)

Description of Business

Kremers Urban Pharmaceuticals Inc. (herein referred to as KUPI), a subsidiary of UCB S.A. (UCB or the Parent, which also includes all of the subsidiaries of UCB, unless otherwise stated), is a specialty generic pharmaceutical company focused on difficult-to-formulate products as well as products using different specialized delivery technologies that are commonly called high barrier to entry generic products. These consolidated financial statements include the consolidated results of KUPI and its wholly owned subsidiary, KUDCO Ireland, Ltd., based in Ireland (KUDCO) (collectively, the Company). The Company is headquartered in Princeton, New Jersey, and has business operations located in Seymour, Indiana.

On January 1, 2014, the Company migrated management and control of KUDCO to the United States. On November 1, 2014, KUPI began dissolution of KUDCO and KUDCO transferred substantially all of its assets to KUPI. Dissolution is expected to be completed in 2015.

Summary of Significant Accounting Policies

Basis of Presentation and Principles of Consolidation

The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP). The financial statements have been prepared on a carve-out basis from the consolidated financial statements and accounting records of UCB using the historical results of operations and historical cost basis of the assets and liabilities that comprise the Company. The Company eliminates from its financial results all intercompany transactions between entities included in the Companys consolidation. All significant transactions between the Company and other entities of the Parent are included in these consolidated financial statements and are disclosed as related party transactions. Refer to Note 14 for further information.

The historical results of operations, financial position, and cash flows of the Company may not be indicative of what they actually would have been had the Company been a separate stand-alone entity, nor are they indicative of what the Companys results of operations, financial position and cash flows may be in the future. The consolidated financial statements have been prepared to demonstrate the historical results of operations, financial position, and cash flows of the Company for the indicated years under UCBs management. Accordingly, the consolidated financial statements do not reflect the presentation and classification of the Companys operations in the same manner as UCB.

The accompanying consolidated financial statements include the assets, liabilities, revenues, and expenses specifically related to the Companys operations, including KUDCO. Costs directly related to the Company are recorded in the accompanying consolidated financial statements. The Company also receives services and support from various functions performed by UCB. Costs for information technology are allocated based on the Companys headcount as a percentage of UCBs total headcount. All other costs are generally allocated using specific identification and include corporate administrative expenses, finance, legal, tax, treasury and other corporate services. These allocated costs are recorded in Selling, general and administrative expense to related party in the accompanying Consolidated Statements of Income and Comprehensive Income. Allocated costs that are not billed to the Company are deemed contributions from UCB and are reflected in Additional paid-in capital in the accompanying Consolidated Balance Sheets. Refer to Note 14 for further information.

UCB uses a centralized approach to cash management and financing of its operations. As such, the Company maintains cash pool agreements with UCB under which the Companys cash is available for use and is regularly swept by UCB. Under these arrangements, the Company pays or receives interest, at a rate commensurate with market pricing for short-term borrowings or deposits, based on accounts payable to or receivable from UCB. Since these amounts and related interest are a function of the overall centralized nature of the cash and financing functions of UCB and are funding the operations of the Company and UCB, such amounts and the related interest are presented as a Payable to (receivable from) Parent within Stockholders equity. In addition, all UCB funding to the Company since inception has been accounted for as a capital contribution from UCB and all net cash remittances from the Company to UCB have been accounted for as distributions to UCB, including allocation of UCB expenses and settlement of transactions with UCB. As a result, the net amounts for such activities are reflected in the financing section of the Statement of Cash Flows. Refer to Note 14 for further information.

Cash and cash equivalents, UCB debt, including interest thereon, and hedging positions established through derivatives and other financial contracts used at the UCB corporate level are not reflected in these financial statements, unless such positions and balances relate specifically to the Company.

Management believes that the assumptions and allocations underlying the consolidated financial statements are reasonable and appropriate under the circumstances. The expenses and cost allocations have been determined on a basis considered by UCB and the Company to be a reasonable reflection of the utilization of services provided to or the benefit received by the Company during the years presented. However, these assumptions and allocations are not necessarily indicative of the costs the Company would have incurred if it had operated on a stand-alone basis or as an entity independent of UCB, nor are the costs necessarily indicative of what they may be in the future.

Use of Estimates

The consolidated financial statements have been prepared in conformity with U.S. GAAP and require management to make estimates and assumptions. These assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Significant estimates and assumptions are used for, but not limited to: provisions for chargebacks, sales returns, allowances and rebates, inventory valuation, other asset valuations, impairment and recoverability assessments, depreciable lives of property and equipment, useful lives of intangible assets, income taxes and valuation allowances, litigation costs and allocation of corporate overhead costs. These estimates are based on experience and other information available prior to issuance of the consolidated financial statements. Actual results could materially differ from those estimates.

Cash and Cash Equivalents

The Company considers cash in banks and highly liquid investments with an original maturity of three months or less to be cash and cash equivalents. Management considers the carrying value of cash and cash equivalents to be a reasonable approximation of fair value given the short-term nature of these financial instruments. Book overdrafts reflect outstanding checks in excess of bank balances and are classified as current liabilities.

Goodwill and Intangible Assets, Net

Goodwill represents costs in excess of fair values assigned to the underlying net assets of acquired businesses. The Company tests goodwill for impairment on an annual basis each December by comparing the fair value of the Companys single reporting unit to the respective carrying value of the reporting unit. Additionally, the Company performs impairment testing on goodwill and intangible assets when events occur that could potentially reduce the fair value of a reporting unit or related assets below its carrying amount. The carrying value of the reporting unit is determined by assigning the assets and liabilities, including the existing goodwill and intangible assets, to the reporting unit.

Goodwill is considered impaired if the carrying amount of the net assets exceeds the fair value of the reporting unit. Impairment, if any, could result in a material reduction in net income. No impairment associated with goodwill was recognized for the years ended December 31, 2014, 2013 or 2012. Refer to Note 9 for further information.

Intangibles assets are stated at cost if acquired separately or at estimated fair value based on third-party appraisals if acquired as part of a business combination. Intangible assets are amortized over the estimated useful lives ranging from 2 to 18 years. No significant residual values are estimated for the amortizable intangible assets. The Company records amortization either based on the estimated pattern in which the assets economic benefits are consumed or on a straight line basis if the pattern of consumption closely approximates straight line. The Company periodically reviews the original estimated useful lives of intangible assets and makes adjustments when circumstances and events indicate that a shorter life is appropriate or the asset is impaired. Refer to Note 9 for further information.

Property and Equipment, Net

Property and equipment is stated at cost if acquired separately or at estimated fair value based on third party appraisals if acquired as part of a business combination, and depreciated using the straight-line depreciation method over the estimated useful lives of the respective assets. Estimated useful lives for major classes of depreciable assets are as follows:

Useful Life

Asset class

Buildings and improvements

Plant and machinery

Furniture and fixtures

Major renewals and improvements are capitalized, while routine maintenance and repairs are expensed as incurred. Gains and losses on disposals are determined by comparing the proceeds from disposal with the carrying amount and are recognized under Other expense, net in the accompanying Consolidated Statement of Income and Comprehensive Income. The Company assesses property and equipment for impairment whenever events or changes in circumstances indicate that an assets carrying amount may not be recoverable. Refer to Note 8 for further information.

Inventory, Net

Inventory consists of finished goods held for sale, raw materials, work in process, semi-finished goods, pre-launch products and goods purchased for resale. Pre-launch products include pharmaceutical products that management believes have a high probability of regulatory approval or products that have already received regulatory approval and are awaiting a contractual triggering event to enter the marketplace. Costs included in inventory include raw materials, direct and indirect labor, employee benefits, depreciation, general manufacturing overhead and various other costs of manufacturing. Inventories are stated at the lower of cost or estimated realizable value and are primarily based on standard cost which approximates the first-in, first-out (FIFO) or average cost methods. The Company recognizes a charge to cost of goods sold for the amount required to reduce the carrying value of inventory to estimated net realizable value. Provisions for potentially obsolete or slow-moving inventory, including pre-launch inventory, are made based on the analysis of inventory levels, historical obsolescence and future sales forecasts. If actual conditions are less favorable than estimated, additional charges may be required. Refer to Note 5 for further information.

Revenue Recognition

The Company recognizes revenue for product sales, contract manufacturing and other services when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the sellers price to the buyer is fixed and determinable, and collectability is reasonably assured. The Company records revenue from product sales and contract manufacturing when title and risk of ownership have been transferred to the customer, which is typically upon delivery to the customer. Upon recognizing revenue from a sale, the Company records an estimate for certain sales returns and allowances that reduce gross sales in arriving at its reported Net sales for each year. These items include chargebacks, rebates, sales returns, cash discounts and others as needed. Provisions for chargebacks and rebates represent the most significant of these...


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