Patheon 8-K Statements of shareholder’s equity

Financial Statements

Years Ended December 31, 2011 and 2010

Independent Auditors’ Report	3
Financial Statements
Balance sheets	5
Statements of income	6
Statements of shareholder’s equity	7
Statements of cash flows	8
Notes to financial statements	9-20

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Independent Auditors’ Report

To: the Management of Banner Pharmacaps Europe B.V.

We have audited the accompanying financial statements of Banner Pharmacaps Europe B.V. which comprise the balance sheet as at December 31, 2011 and 2010 and the related statements of income, shareholder’s equity and cash flows for the years then ended and the notes, comprising a summary of significant accounting policies and other explanatory information.

Management’s responsibility

Management is responsible for the preparation and fair presentation of the financial statements in accordance with accounting principles generally accepted in the United States of America. Furthermore, management is responsible for such internal control as it determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.

Auditor’s responsibility

Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with Dutch Law, including the Dutch Standards on Auditing. This requires that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the 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 entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

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Opinion with respect to the financial statements

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Banner Pharmacaps Europe B.V. as at December 31, 2011 and 2010 and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

Eindhoven, April 4, 2012

BDO Audit & Assurance B.V.

on its behalf,

/s/ P.P.J.G. Saasen RA

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December 31,	2011			2010
Assets
Current
Cash and cash equivalents	$	1,818,996		$	1,690,411
Accounts receivable:
Trade, net of allowance for doubtful accounts of $136,144 and $104,496 (Note 8)		4,717,463			5,025,718
Related parties (Note 7)		10,225			—
Inventories (Note 2)		4,939,171			3,935,837
Prepaid expenses and other		683,753			496,981
Total current assets		12,169,608			11,148,947
Property and equipment, net(Note 3)		11,145,883			11,227,963
Other assets (Note 9)		473,000			1,094,348
Total assets	$	23,788,491		$	23,471,258
Liabilities and Shareholder’s Equity
Current
Accounts payable	$	2,611,838		$	2,661,712
Due to related parties (Note 7)		646,849			486,093
Other accrued expenses (Note 4)		2,461,808			2,583,031
Total current liabilities		5,720,495			5,730,836
Related party loan payable(Note 6)		2,300,000			2,300,000
Deferred income taxes (Note 5)		28,811			200,475
Total liabilities		8,049,306			8,231,311
Commitments and contingencies (Notes 3, 9 and 10)
Shareholder’s equity
Common stock		28,902			28,902
Additional paid-in capital		22,542,355			22,542,355
Accumulated deficit		(6,071,306	)		(8,156,566	)
Accumulated other comprehensive income (loss) (Note 12)		(760,766	)		825,256
Total shareholder’s equity		15,739,185			15,239,947
Total liabilities and shareholder’s equity	$	23,788,491		$	23,471,258

See accompanying notes to financial statements.

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Year ended December 31,	2011			2010
Net sales(Notes 7 and 8)	$	41,286,613		$	38,660,338
Cost of sales (Note 7)		31,928,799			30,855,261
Gross profit		9,357,814			7,805,077
Operating expenses:
Selling, general and administrative (Note 7)		3,891,954			4,063,261
Research and development		3,029,897			2,213,475
Total operating expenses		6,921,851			6,276,736
Income from operations		2,435,963			1,528,341
Other income (expense):
Interest, net		(25,818	)		(42,465	)
Gains (losses) arising from foreign currency translation		(81,552	)		(150,194	)
Miscellaneous, net		464,318			—
Total other income (expense), net		356,948			(192,659	)
Income before income taxes		2,792,911			1,335,682
Income tax expense(Note 5)		707,651			350,907
Net income	$	2,085,260		$	984,775

See accompanying notes to financial statements.

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										Accumulated
					Additional					Other
	Common Stock				Paid-In		Accumulated			Comprehensive
	Shares		Amount		Capital		Deficit			Income (Loss)			Total
Balance, December 31, 2009		505	$	28,902	$	22,542,355	$	(9,141,341	)	$	136,580		$	13,566,496
Net income		—		—		—		984,775			—			984,775
Translation adjustment		—		—		—		—			(990,179	)		(990,179	)
Minimum pension liability adjustment (net of tax of $528,794)		—		—		—		—			1,678,855			1,678,855
Comprehensive income														1,673,451
Balance, December 31, 2010		505		28,902		22,542,355		(8,156,566	)		825,256			15,239,947
Net income		—		—		—		2,085,260			—			2,085,260
Translation adjustment		—		—		—		—			(644,165	)		(644,165	)
Minimum pension liability adjustment (net of tax of $158,000)		—		—		—		—			(941,857	)		(941,857	)
Comprehensive income														499,238
Balance, December 31, 2011		505	$	28,902	$	22,542,355	$	(6,071,306	)	$	(760,766	)	$	15,739,185

See accompanying notes to financial statements.

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Year ended December 31,	2011			2010
Cash flows from operating activities:
Net income	$	2,085,260		$	984,775
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		1,737,280			1,499,520
Realized and unrealized foreign exchange loss on related party loan		88,580			166,623
Deferred income taxes		(20,551	)		(12,982	)
Provision for pension		696,155			577,284
Payment of pension		(1,163,409	)		(464,835	)
Provision for losses on accounts receivable		38,265			37,930
Decrease (increase) in assets:
Accounts receivable		103,028			(990,822	)
Inventories		(1,241,470	)		592,227
Prepaid expenses and other		(222,026	)		110,795
Due from related parties		(11,107	)		—
Increase (decrease) in liabilities:
Accounts payable		48,333			(626,871	)
Other accrued expenses		(32,200	)		446,054
Due to related parties		193,344			(241,961	)
Net cash provided by operating activities		2,299,482			2,077,737
Cash flows from investing activities:
Additions to property and equipment		(2,080,540	)		(2,034,476	)
Net cash used in investing activities		(2,080,540	)		(2,034,476	)
Effect of exchange rates on cash and cash equivalents		(90,357	)		(136,612	)
Net change in cash and cash equivalents		128,585			(93,351	)
Cash and cash equivalents, beginning of year		1,690,411			1,783,762
Cash and cash equivalents, end of year	$	1,818,996		$	1,690,411

See accompanying notes to financial statements.

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1. Summary of Significant Accounting Policies Business – Banner Pharmacaps Europe B.V. (the “Company”), is an indirect wholly owned subsidiary of VION Holding N.V. (“VION”).   The Company manufactures soft elastic gelatin capsules, primarily containing prescription and non-prescription pharmaceuticals, vitamins and dietary supplements.   Use of Estimates – The preparation of financial statements in conformity 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 reporting period. Actual results could differ from those estimates.   Foreign Currency Translation – The Company’s assets and liabilities are primarily denominated in Euros and are translated to United States dollars at year-end exchange rates. Revenues and expenses are translated at average exchange rates prevailing during the year. The effects of translation are recorded in the accumulated other comprehensive income (loss) component of shareholder’s equity.   Transactions denominated in foreign currency are translated using the exchange rate in effect at the transaction date. Gains and losses arising from subsequent fluctuations in exchange rates are included in other income.   Revenue Recognition – Revenue is recognized when products are shipped or delivered to the customer (based on shipping terms) and ownership has been transferred to the customer. Customers are primarily located within Europe.   Distributor and Royalty Agreements – The Company has agreements with various distributors that allow the Company to share in product profits. The Company recognizes these profits once the distributor ships the product and title passes to their customer.

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1. Summary of Significant Accounting Policies (Continued) Shipping and Handling Charges – Amounts billed to customers for shipping and handling costs are included in net sales. Related freight expenses are included in selling, general and administrative expenses and were approximately $160,000 and $137,000 in 2011 and 2010.   Trade Accounts Receivable and Credit Risk – Accounts receivable are customer obligations due under normal trade terms. Substantially all of the Company’s trade receivables are from pharmaceutical, biotech and retail companies.   The Company performs continuing credit evaluations of its customers’ financial condition and generally does not require collateral. Management reviews accounts receivable on a monthly basis to determine if any receivables will potentially be uncollectible. The allowance for doubtful accounts includes any accounts receivable balances that are determined to be uncollectible, along with a general reserve based on management’s assessment of their customers’ overall financial position. After all attempts to collect a receivable have failed, the receivable is written off against the allowance. The Company has a limited number of customers with individually large amounts due at any given balance sheet date. See Note 8 for major customers. Any unanticipated change in one of those customers’ credit worthiness, or other matters affecting the collectability of amounts due from such customers, could have a material effect on the results of operations in the period in which such changes or events occur. Based on all available information, management believes the allowance for doubtful accounts is adequate. However, actual write-offs could exceed the recorded allowance.   Cash and Cash Equivalents – The Company considers investments with an original maturity of three months or less when purchased to be cash equivalents.   Inventories – Inventories are valued at the lower of cost or market. Cost is determined by the first-in, first-out (FIFO) method.

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1. Summary of Significant Accounting Policies (Continued) Property and Equipment – Property and equipment are carried at cost. Depreciation is computed over the estimated useful lives of the assets by the straight-line method for financial reporting purposes and by accelerated methods for income tax purposes. Assets are depreciated for financial reporting purposes based on estimated useful lives as follows: Buildings and improvements (25-40 years); Machinery, equipment and other assets (5-12 years).   Long-Lived Assets – Long-lived assets, such as property and equipment, are evaluated for impairment when events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable through the estimated undiscounted future cash flows from the use of these assets. When any such impairment exists, the related assets will be written down to fair value. No impairment charges were incurred in 2011 and 2010.   Fair Value of Financial Instruments – The carrying amount of cash and cash equivalents, accounts receivable and accounts payable approximates fair value because of the short maturity of those instruments. The recorded value of the Company’s related party loans approximate their fair values based on the variable interest rates and the current rates available to the Company for debt of similar remaining maturities.   Income Taxes – Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets, including tax loss and credit carryforwards, and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Deferred income tax expense represents the change during the period in deferred tax assets and liabilities. The components of the deferred tax assets and liabilities are individually classified as current and non-current based on their characteristics. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized.

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1. Summary of Significant Accounting Policies (Concluded) Tax benefits are recorded only for tax positions that would be more likely than not to be sustained upon examination by tax authorities. The amount recognized is measured as the largest amount of benefit that is greater than 50 percent likely to be realized upon ultimate settlement. Unrecognized tax benefits are tax benefits claimed in the Company’s tax return that do not meet these recognition and measurement standards. The Company’s policy is to classify any interest or penalties as income tax expense, if applicable.   Research and Development Expenses – Research and development (R&D) costs are expensed as incurred. These expenses consist of the Company’s proprietary R&D efforts.   Other Comprehensive Income (Loss) – Other comprehensive income (loss) includes translation adjustments arising from the translation of the assets and liabilities of the Company into US Dollars as well as changes in the value of plan assets and liabilities of the deferred benefit pension plan not included in net periodic benefit cost.   Comparative Financial Statements– Certain 2010 amounts have been classified to conform to the 2011 presentation. These reclassifications have no effect on previously recorded net income.   Subsequent Events– Management has evaluated events occurring subsequent to the balance sheet date through April 4 2012, the date that the financial statements were available to be issued, determining no events require adjustment to or additional disclosure in the financial statements.

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2. Inventories Inventories are summarized as follows:

December 31,	2011		2010
Raw materials	$	1,525,906	$	1,549,421
Work-in-process		2,329,328		1,832,511
Finished goods		1,083,937		553,905
Total inventories	$	4,939,171	$	3,935,837

3. Property and Equipment Property and equipment consists of the following:

December 31,	2011			2010
Land, buildings and improvements	$	7,776,871		$	6,484,925
Machinery and equipment		26,719,975			30,246,310
Projects in progress		395,930			1,080,400
Less: accumulated depreciation and amortization		23,746,893			26,583,672
Net property and equipment	$	11,145,883		$	11,227,963
			��

		Depreciation expense amounted to $1,737,280 and $1,499,520 for 2011 and 2010. The Company estimates that costs to complete projects in progress at December 31, 2011 will be approximately $25,000.
4.	Accrued Expenses	Other accrued expenses consist of the following components:

December 31,	2011		2010
Compensation	$	1,181,347	$	1,162,622
Other		1,280,461		1,420,409
Total accrued expenses	$	2,461,808	$	2,583,031

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5. Income Taxes The Company is part of a group that files consolidated tax returns. Taxes are allocated to the Company as if that entity filed its own income tax returns.   Income tax expense consists of foreign deferred taxes. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.   Significant components of the Company’s deferred tax assets (liabilities) are as follows:

December 31,	2011			2010
Property and equipment	$	89,439		$	73,112
Accrued pension expenses		(118,250	)		(273,587	)
Net non-current deferred tax liability	$	(28,811	)	$	(200,475	)

		The Company’s effective rate of income tax differs from the Dutch federal statutory rate primarily due to the difference between the commercial and fiscal balance sheet
		There were no interest or penalties paid by the Company in 2011 and 2010.
6.	Related Party Loans	The loans consist of $2.3 million in two notes to companies affiliated by common ownership. Interest is charged at LIBOR plus 1.5% totaling 1.91% at December 31, 2011 and 1.79% at December 31, 2010. No accrued interest is included in amounts due to related parties in the balance sheets at December 31, 2011 and 2010.

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7.	Related Party Transactions	The Company purchased materials from parties related through common ownership totaling $2,485,000 and $1,908,000 during 2011 and 2010. An administration charge of $672,000 and $633,000 from an entity related through common ownership was recorded in 2011 and 2010. This charge is included in the selling, general and administrative expenses in the statements of income.
8.	Major Customers	Four customers accounted for 52% of 2011 net sales and two customers accounted for 27% of accounts receivable at December 31, 2011. Three customers accounted for 48% of 2010 net sales and two customers accounted for 61% of accounts receivable at December 31, 2010.
9.	Defined Benefit Plans	The Company has a defined benefit pension plan. The pension obligation has been calculated using the defined unit credit method. Consistent with the instructions of this method, future benefits earned by employees in their current and past periods of services are being estimated. Subsequently, the present value of this obligation is calculated. The funded status of this plan is as follows:

December 31,	2011		2010
Projected benefit obligation	$	9,914,937	$	8,695,989
Fair value of plan assets		10,387,937		9,790,337
Net funded status	$	473,000	$	1,094,348

Amounts recognized in the balance sheets are as follows:

December 31,	2011		2010
Non-current assets	$	473,000	$	1,094,348

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9. Defined Benefit Plans (Continued) Amounts recognized in accumulated other comprehensive income (loss) consist of the following:

December 31,	2011		2010
Net loss (gain)	$	1,275,293	$	(1,816,932	)
Prior service cost (credit)		47,687		49,422
	$	1,322,980	$	(1,767,510	)

The following are assumptions used to determine benefit obligations:

December 31,	2011			2010
Discount rate		5.35	%		5.30	%
Rate of compensation increase		2.00	%		2.00	%

The following are assumptions used to determine net periodic benefit cost:

December 31,	2011			2010
Discount rate		5.35	%		5.30	%
Expected return on plan assets		4.20	%		4.25	%
Rate of compensation increase		2.00	%		2.00	%

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9. Defined Benefit Plans (Continued) The Company’s expected long-term return on plan assets assumption is based on a periodic review and modeling of the plans’ asset allocation and liability structure over a long-term period. Expectations of returns for each asset class are the most important of the assumptions used in the review and modeling and are based on comprehensive reviews of historical data and economic/financial market theory. The expected long-term rate of return on assets was selected from within the reasonable range of rates determined by (1) historical real returns, net of inflation, for the asset classes covered by the investment policy and (2) projections of inflation over the long-term period during which benefits are payable to plan participants.

	2011		2010
Benefit cost	$	473,000	$	1,094,348
Employer contributions		1,071,014		464,998
Participant contributions		217,812		181,723
Benefits paid		54,131		32,069

The fair values of the Company’s pension plan assets at December 31, 2011, by asset category using quoted prices in active markets for identical assets (level 1); significant other observable inputs (level 2); and significant unobservable inputs (level 3) are as follows:

Asset Category	Level 1		Level 2		Level 3		Total
Equity securities	$	1,215,389	$	186,983	$	—	$	1,402,372
Debt securities		8,258,410		—		—		8,258,410
Real estate		—		218,147		509,008		727,155
Totals	$	9,473,799	$	405,130	$	509,008	$	10,387,937

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9. Defined Benefit Plans (Concluded) The Company expects to contribute $816,000 to its pension plan in 2012.   The pension benefit payments, which reflect expected future service, are expected to be in the next years:

Year ending
2012	$	75,000
2013		80,000
2014		67,000
2015		81,000
2016		99,000
2017-2021		1,265,000

		The Company’s defined benefit pension plan has a measurement date of December 31 of the applicable year.
10.	Commitments and Contingencies	Litigation – The Company is involved in various claims and lawsuits incidental to its business and where appropriate has or will establish reserves where it is probable that a liability has occurred. In the opinion of management, other claims and lawsuits in the aggregate will not have a material effect on the Company’s financial statements. Guarantees – The Company unconditionally guarantees VION’s bank debt. The maximum amount of the guarantee may vary, but is limited to the sum of the total outstanding principal, related interest and fees, or approximately $1.1 billion at December 31, 2011. VION’s bank debt is denominated in Euros, and therefore, will vary based on fluctuations in foreign exchange rates. The guarantee is scheduled to expire in November 2015. There is currently no recorded liability for potential losses under this guarantee, nor is there any liability for the Company’s obligation to “stand ready” to fund such guarantee. Management believes there is only a remote possibility that VION will not remain current with its debt payments and that the Company will be required to perform under the guarantee.

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10. Commitments and Contingencies (Concluded) Leases – The Company is committed to pay rent under non-cancelable operating lease agreements with terms exceeding one year, as summarized below:

Year ending
2012	$	79,000
2013		52,000
2014		43,000
2015		10,000
Thereafter		—
Total minimum payments	$	184,000

		In 2011 and 2010, rental expense under operating leases was approximately $79,000 and $115,000, respectively.
11.	Supplemental Cash Flow Information	Cash was paid during the year for:

December 31,	2011		2010
Interest, related party loans	$	42,252	$	42,465

12. Accumulated Other Comprehensive Loss The components of accumulated other comprehensive income (loss) are as follows:

December 31,	2011			2010
Foreign currency translation adjustments	$	(1,242,189	)	$	(598,410	)
Unamortized pension losses (gains) and prior service costs, net of tax		481,423			1,423,666
	$	(760,766	)	$	825,256

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13. Recent Accounting Pronouncements In May 2011, the Financial Accounting Standards Board (“FASB”) issued an accounting update (Update No. 2011-04 – Fair Value Measurement (Topic 820)) that amends existing guidance regarding fair value measurements and disclosure requirements. For nonpublic entities, the amendments are effective for annual periods beginning after December 15, 2011 and are to be applied prospectively. The accounting update will be applicable to the Company beginning in fiscal year 2012. The adoption of this update is not expected to materially impact the Company’s financial statements.   In June 2011, the FASB issued an accounting update (Update No. 2011-05 – Comprehensive Income (Topic 220) – Presentation of Comprehensive Income) that amends the presentation of other comprehensive income in the financial statements including requiring an entity to report comprehensive income either in a single continuous financial statement or in two separate but continuous financial statements. For nonpublic entities, the new guidance is generally effective for fiscal years ending after December 15, 2012, with early adoption permitted. In December 2011, the FASB issued an accounting update (Update No. 2011-12 – Comprehensive Income (Topic 220)) effectively deferring those changes in Update No. 2011-05 that relate to the presentation of reclassification adjustments out of accumulated other comprehensive income. The Company will adopt this update in fiscal year 2012.

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