OTHER INFORMATION

Foreign exchange

During the three and nine months ended July 31, 2016, the Company recorded a foreign exchange gain of $3.2 million and a foreign exchange loss of $8.2 million, respectively. During the three and nine months ended July 31, 2015, the Company recorded foreign exchange losses of $1.6 million and $9.2 million, respectively. These amounts resulted from hedge and operating exposures.

Management Incentive Plan

On March 11, 2014, the Company adopted the Management Long-Term Incentive Plan (the "LTIP") to provide long-term incentives to select key management employees of Patheon and its subsidiaries who have contributed and are expected to contribute materially to the success of the Company, and to reward outstanding performance by such employees. Leadership, key positions or identified key talent may be invited to participate in the LTIP during an identified plan year. Compensation is payable under this plan upon an Exit Event by the controlling investors of the Company (JLL and DSM), if the participant is still employed by the Company, or a qualifying termination, as defined.

An Exit Event is defined as the earlier of: (a) a change of control, and (b) in connection with or following an Initial Public Offering ("IPO"), the sale or disposition by JLL or any of its affiliates of equity securities such that, immediately following such sale or disposition, either (i) JLL and its affiliates own less than 20% of the outstanding equity securities of the Partnership or the Partnership offeror, calculated on a fully-diluted basis, or (ii) JLL and its affiliates have received, in the aggregate, distributions in respect of such sale or disposition (together with any sale or disposition occurring prior thereto) equal to or in excess of 250% of the initial capital contributions and any additional capital contributions made by JLL and its affiliates for all equity securities of the Partnership or the Partnership offeror held by JLL and its affiliates prior to such sale or disposition.

Not later than 90 days following commencement of each applicable Company fiscal year that would end during the term of the LTIP, the compensation committee of the board of directors of the Company (the "Compensation Committee") will determine, in its sole and absolute discretion, with respect to such fiscal year, (i) the Participants (as defined in the LTIP) with respect to that fiscal year, (ii) the EBITDA Target (as defined in the LTIP), and (iii) the targeted amount of each Award. Each award shall be evidenced by a written notice and shall be deemed granted on the first day of the fiscal year with respect to which the Compensation Committee resolves to grant such award (the "Grant Date"). Awards are denominated as a percentage of the Participant’s base salary, with the target percentage based on the Participant’s level within the organization, as determined by the Compensation Committee in its sole and absolute discretion. All awards will be paid in the form of cash, or other property having a value equal to such cash payment, as determined by the Compensation Committee in its sole and absolute discretion.

Under the LTIP, the Company has granted $11.2 million in outstanding awards from March 11, 2014 through July 31, 2016, all of which vest over a five-year period. The Company did not report any compensation expense for the LTIP during the three and nine months ended July 31, 2016 and 2015 as this plan becomes payable only as a result of an event which is deemed to not be probable until the actual occurrence of the event.

Contingencies

Procaps Antitrust Matter

On December 10, 2012, Procaps S.A. (‘‘Procaps’’) filed a complaint against the Company in the United States District Court for the Southern District of Florida (the ‘‘District Court’’) (Case No. 12-cv-24356-DLG). The complaint involves the Company’s collaboration agreement with Procaps, pursuant to which both companies agreed to work together with respect to the marketing of a line of certain prescription pharmaceutical soft-gel development and manufacturing services. Procaps alleges that the Company’s acquisition of Banner, a business that historically has generated less than 10% of its revenues from softgel services for prescription pharmaceuticals, transformed the collaboration agreement into an anticompetitive restraint of trade and an agreement between direct competitors to set prices, divide markets and/or allocate geographic territories. Procaps seeks (i) a declaratory judgment that the collaboration agreement must cease and/or terminate; (ii) an injunction requiring that Patheon divest all of Banner’s soft-gel manufacturing capabilities; and (iii) monetary damages under federal and state antitrust and unfair competition laws, including treble damages for violations of the Sherman Act. Patheon subsequently answered Procaps’ complaint and filed its affirmative defenses to the complaint. In July 2014, upon Motion for Summary Judgment by Patheon, the court dismissed Procaps’ unfair competition claims, leaving only the antitrust claims in dispute. In March 2015, the court ordered trial to commence on November 16, 2015.

In October 2015, the court granted Patheon’s motion for summary judgment with respect to all of Procaps’ remaining claims in this matter. In November 2015, Procaps filed a notice of appeal with the United States Court of Appeals for the Eleventh Circuit (the ‘‘11th Circuit Court’’). Procaps filed its initial brief with the 11th Circuit Court in February 2016 and we filed our reply brief in May 2016. Procaps filed its reply to our reply brief in June 2016. The 11th Circuit Court has notified the parties that it will hear oral argument in this matter in November 2016.

In May 2016, Procaps filed a request for arbitration with the International Court of Arbitration of the International Chamber of Commerce. The request for arbitration involves the above-mentioned collaboration agreement. Procaps alleges that (i) Patheon’s acquisition of Banner violated the exclusivity provision of the collaboration agreement, (ii) Patheon failed to return or destroy confidential information of Procaps, (iii) Patheon was unjustly enriched by obtaining the benefit of such confidential information to which it was not entitled, and (iv) Patheon breached implied duties of good faith and fair dealing in carrying out the collaboration agreement. Procaps seeks (i) with respect to the alleged breaches, compensatory damages and (ii) with respect to the claim for unjust enrichment, (a) disgorgement of profits received by Patheon by using any confidential information of Procaps, (b) repayment for all payments made to Patheon pursuant to the collaboration agreement, and (c) payment for the value of any intellectual property associated with the collaboration agreement. The Company filed its answer to the request for arbitration with the International Court of Arbitration of the International Chamber of Commerce in June 2016. The arbitration panel that will hear this matter was appointed in September 2016.

The Company has not included any accrual in the consolidated financial statements as of July 31, 2016 related to these matters as a result of its assessment that the likelihood of a material loss in connection with these matters are not probable. However, an adverse outcome in this matter could have a material adverse effect on the Company’s business, results of operations and financial condition.

Oral Contraceptive Putative Class Action and Mass Action

Two civil actions are pending in the United States (in Georgia and Pennsylvania) against the Company and one of its customers. These actions are in connection with the recall of certain lots of allegedly defective products manufactured by the Company for the customer. The customer has given the Company notice of its intent to seek indemnification from the Company for all damages, costs and expenses, pursuant to the manufacturing services agreement between the customer and the Company.

The first action is a two-plaintiff action in United States District Court for the Northern District of Georgia. The two named plaintiffs in this action had previously brought a motion for class certification that would have included 113 other plaintiffs as a class action. Defendants opposed the motion and the motion was denied in November 2015. The action was ordered to proceed on behalf of the two named plaintiffs only. Following denial of class certification in Georgia, plaintiffs’ lawyers commenced the second action as a mass action in the State of Pennsylvania on behalf of the 113 other plaintiffs that would have comprised the class in the Georgia action. Defendants removed the state action to the United States District Court for the Eastern District of Pennsylvania and have filed a motion to transfer the Pennsylvania federal action back to the federal district court in Georgia. Following closure of discovery in the Georgia action, plaintiffs filed a motion to transfer the Georgia action to Pennsylvania. Defendants opposed the motion and the motion was denied. Defendants then filed a motion for summary judgment in the Georgia action on August 24, 2016. On August 31, 2016, plaintiffs filed a motion to dismiss the Georgia action (without prejudice). The Court denied plaintiffs’ motion to dismiss on September 6, 2016. As the litigation is at an early stage, the Company is unable to estimate the potential damages for which the Company may be directly or indirectly liable.

Italian Client Dispute

In November 2015, the largest client of Patheon Italia S.p.A.’s (‘‘Patheon Italia’’), Ferentino, Italy facility filed a motion for injunctive relief in a Milan court under Article 700 of the Italian Civil Code. The client claims that remediation actions implemented by the Ferentino facility in response to the May 2015 FDA inspection, including, among other things, the use of a third party to certify all production batches for release, caused a significant slowdown in the quality control testing and batch release processes for the client’s product, thereby impairing the client’s ability to supply product in the amounts needed to fulfill its customers’ needs. The client sought an injunction ordering the Ferentino facility to (i) deliver products set forth in an October 6-7, 2015 release plan discussed by the parties; (ii) transfer products and documentation to the client to enable the client to perform the necessary quality control testing and release the products; and (iii) continue manufacture of the products at the capacity levels set forth in the supply agreement between the parties. The client further asked the court to impose a penalty of €0.2 million per day for every day that the Ferentino facility failed to comply with the order.

On December 7, 2015, Patheon Italia filed a response to the motion, denying all the claims set forth in the client’s motion and asserting several defenses. In particular, Patheon Italia informed the court that the parties had in fact executed an amendment to the existing quality agreement agreeing to transfer the testing and release responsibilities to the client, such amendment was executed prior to the filing of the motion by the client and should have been disclosed to the court in the client’s motion.

On December 10, 2015, the court held a hearing in this matter and on December 18, 2015, denied the client’s motion. The client has filed an appeal to the court's decision, which was heard on February 11, 2016. On February 29, 2016, the appeals court denied the client's appeal. The supply agreement with the client includes an arbitration provision and in its initial motion, the client indicated its intention to file an arbitration claim seeking money damages in this matter. This matter is in the early stages and the Company is unable to estimate the potential damages for which Patheon Italia may be liable if the client files an arbitration claim and prevails in such proceeding.

Statements of cash flows non-cash investing and financing activities



	Nine months ended July 31,
	2016	2015
Non-cash financing activities:	$	$
Assumption of earnout liability from the Partnership ⁽¹⁾	36.0	—
Distribution to member in form of a note payable ⁽²⁾	51.0	—
Partnership units issued and value contributed to Patheon from Irix acquisition	—	1.0
Spinoff of subsidiary	—	34.1
Partnership units issued and value contributed to Patheon from Agere acquisition	—	6.8

(1) Refer to Note 11 for further information

(2) Refer to Note 12 for further information