Exhibit 99.14
McGladrey & Pullen
Certified Public Accountants
Independent Auditor’s Report
To the Board of Directors
Teragenix Corporation
Fort Lauderdale, Florida
We have audited the accompanying balance sheets of Teragenix Corporation as of December 31, 2005 and 2004, and the related statements of income, stockholders’ equity (deficit) and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these 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 audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Teragenix Corporation as of December 31, 2005 and 2004, 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.
McGladrey & Pullen, LLP
Fort Lauderdale, Florida
February 17, 2006
McGladrey & Pullen, LLP is a member firm of RSM International,
an affiliation of separate and independent legal entities.
1
Teragenix Corporation
Balance Sheets
December 31, 2005 and 2004
Assets (Notes 3 and 4) |
| 2005 |
| 2004 |
| ||
Current Assets |
|
|
|
|
| ||
Cash and cash equivalents |
| $ | 760,146 |
| $ | 226,908 |
|
Accounts receivable, less allowance for doubtful accounts 2005 $95,375; 2004 $15,000 (Note 7) |
| 348,585 |
| 589,521 |
| ||
Inventory, less obsolescence reserve 2005 and 2004 $52,000 |
| 688,452 |
| 565,388 |
| ||
Prepaid expenses |
| 8,915 |
| 8,915 |
| ||
Total current assets |
| 1,806,098 |
| 1,390,732 |
| ||
|
|
|
|
|
| ||
Property and Equipment, net (Notes 2 and 5) |
| 190,273 |
| 210,998 |
| ||
|
|
|
|
|
| ||
Other Assets |
| 15,628 |
| 18,228 |
| ||
|
| $ | 2,011,999 |
| $ | 1,619,958 |
|
Liabilities and Stockholders’ Equity |
|
|
|
|
| ||
Current Liabilities |
|
|
|
|
| ||
Current maturities of long-term debt (Notes 4 and 5) |
| $ | 76,510 |
| $ | 33,453 |
|
Accounts payable and accrued expenses |
| 320,962 |
| 426,365 |
| ||
Distributions payable |
| 407,070 |
| — |
| ||
Deferred revenue |
| 127,961 |
| 662,356 |
| ||
Total current liabilities |
| 932,503 |
| 1,122,174 |
| ||
|
|
|
|
|
| ||
Long-Term Debt, less current maturities (Note 4) |
| 233,343 |
| 63,327 |
| ||
|
|
|
|
|
| ||
Current maturities of promissory notes (Note 4) |
| 100,000 |
| — |
| ||
Promissory notes, Less current maturities (Note 4) |
| 800,000 |
| — |
| ||
Total Long-term Debt |
| $ | 1,133,343 |
| $ | 63,327 |
|
Commitments and Contingency (Notes 5 and 8) |
|
|
|
|
| ||
|
|
|
|
|
| ||
Stockholders’ Equity (Deficit) (Notes 4 and 8) |
|
|
|
|
| ||
Common stock, no par value; authorized 50,000,000 shares |
| 1 |
| 100 |
| ||
Additional paid in capital |
| — |
| 200,000 |
| ||
Preferred stock, no par value; authorized 5,000,000 shares; issued none |
| — |
| — |
| ||
Retained earnings (deficit) |
| (53,848 | ) | 234,357 |
| ||
|
| (53,847 | ) | 434,457 |
| ||
|
| $ | 2,011,999 |
| $ | 1,619,958 |
|
See Notes to Financial Statements.
2
Teragenix Corporation
Statements of Income
Years Ended December 31, 2005 and 2004
|
| 2005 |
| 2004 |
| ||
Net sales (Note 7) |
| $ | 5,028,728 |
| $ | 2,532,855 |
|
Out of pocket reimbursements |
| 156,216 |
| — |
| ||
Total revenue |
| 5,184,944 |
| 2,532,855 |
| ||
Cost of goods sold |
| 1,701,908 |
| 981,353 |
| ||
Gross profit |
| 3,483,036 |
| 1,551,502 |
| ||
|
|
|
|
|
| ||
Operating expenses |
| 2,268,204 |
| 1,797,759 |
| ||
Operating income (loss) |
| 1,214,832 |
| (246,257 | ) | ||
|
|
|
|
|
| ||
Financial income (expense): |
|
|
|
|
| ||
Interest expense |
| (13,836 | ) | (9,825 | ) | ||
Other income |
| 3,863 |
| 796 |
| ||
|
| (9,973 | ) | (9,029 | ) | ||
Net income (loss) |
| $ | 1,204,859 |
| $ | (255,286 | ) |
See Notes to Financial Statements.
3
Teragenix Corporation
Statements of Stockholders’ Equity (Deficit)
Years Ended December 31, 2005 and 2004
|
| Common Stock |
| Additional |
| Retained |
|
|
| ||||||
|
| Shares |
| Amount |
| Paid-in Capital |
| (Deficit) |
| Total |
| ||||
Balance, December 31, 2003 |
| 81,960 |
| $ | 100 |
| $ | 200,000 |
| $ | 598,931 |
| $ | 799,031 |
|
Stockholder distributions |
|
|
| — |
| — |
| (109,288 | ) | (109,288 | ) | ||||
Net loss |
|
|
| — |
| — |
| (255,286 | ) | (255,286 | ) | ||||
Balance, December 31, 2004 |
| 81,960 |
| 100 |
| 200,000 |
| 234,357 |
| 434,457 |
| ||||
Stock redemption (Note 8) |
| (46,454 | ) | (99 | ) | (200,000 | ) | (925,021 | ) | (1,125,120 | ) | ||||
Stockholder distributions |
|
|
| — |
| — |
| (568,043 | ) | (568,043 | ) | ||||
Net income |
|
|
| — |
| — |
| 1,204,859 |
| 1,204,859 |
| ||||
Balance (deficit), December 31, 2005 |
| 35,506 |
| $ | 1 |
| $ | — |
| $ | (53,848 | ) | $ | (53,847 | ) |
See Notes to Financial Statements.
4
Teragenix Corporation
Statements of Cash Flows
Years Ended December 31, 2005 and 2004
|
| 2005 |
| 2004 |
| ||
Cash Flows From Operating Activities |
|
|
|
|
| ||
Net Income (loss) |
| $ | 1,204,859 |
| $ | (255,286 | ) |
Adjustments to reconcile net income (loss) to net cash provided by operating activities: |
|
|
|
|
| ||
Depreciation |
| 66,967 |
| 88,649 |
| ||
Increase in inventory obsolescence reserve |
| — |
| 52,000 |
| ||
(Increase) decrease in: |
|
|
|
|
| ||
Accounts receivable |
| 240,936 |
| (234,306 | ) | ||
Inventory |
| (123,064 | ) | (145,724 | ) | ||
Prepaid expenses |
| — |
| (2,061 | ) | ||
Increase (decrease) in: |
|
|
|
|
| ||
Accounts payable and accrued expenses |
| (105,403 | ) | 177,276 |
| ||
Deferred revenue |
| (534,395 | ) | 662,356 |
| ||
Net cash provided by operating activities |
| 749,900 |
| 342,904 |
| ||
Cash Flows From Investing Activities |
|
|
|
|
| ||
Purchases of property and equipment |
| (46,242 | ) | (92,947 | ) | ||
Decrease (increase) in other assets |
| 2,600 |
| (2,510 | ) | ||
Net cash used in investing activities |
| (43,642 | ) | (95,457 | ) | ||
Cash Flows From Financing Activities |
|
|
|
|
| ||
Borrowings on long-term debt |
| 22,943 |
| 4,259 |
| ||
Repayments of long-term debt |
| (34,990 | ) | (52,370 | ) | ||
Stockholders’ distributions |
| (160,973 | ) | (109,288 | ) | ||
Net cash used in financing activities |
| (173,020 | ) | (157,399 | ) | ||
|
|
|
|
|
| ||
Net increase in cash and cash equivalents |
| 533,238 |
| 90,048 |
| ||
|
|
|
|
|
| ||
Cash and cash equivalents: |
|
|
|
|
| ||
Beginning |
| 226,908 |
| 136,860 |
| ||
Ending |
| $ | 760,146 |
| $ | 226,908 |
|
|
|
|
|
|
| ||
Supplemental Disclosures of Cash Flow Information: |
|
|
|
|
| ||
Cash payments for interest |
| $ | 5,961 |
| $ | 12,457 |
|
|
|
|
|
|
| ||
Supplemental Schedule of Noncash Investing and Financing Activities |
|
|
|
|
| ||
Redemption of common stock with long-term debt |
| $ | 225,120 |
| — |
| |
Redemption of common stock with promissory notes |
| $ | 900,000 |
| $ | — |
|
Long-term debt repaid and acquired through refinancing |
| $ | — |
| $ | 95,741 |
|
Distributions payable |
| $ | 407,070 |
| $ | — |
|
See Notes to Financial Statements.
5
Teragenix Corporation
Notes to Financial Statements
Note 1. Nature of Business and Significant Accounting Policies
Nature of business: Teragenix Corporation (the “Company”), a Florida Corporation, operates an in-vitro diagnostic development service business. The Company transacts its business worldwide and deals primarily with U.S. blood banks, reference laboratories, major pharmaceutical companies and investigational review boards.
A summary of the Company’s significant accounting policies follows:
Accounting estimates: The preparation of the 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.
Revenue recognition and shipping and handling: The Company recognizes revenue upon shipment of specimens to its customers. The Company also collects specific specimens for certain customers under contracts. Advance payments are generally required under the contracts. These advance payments are considered deferred revenue until the specimens are shipped in accordance with the contract terms. Out of pocket reimbursements are recognized as revenue and expenses when the expense is incurred. Shipping and handling costs are expensed as incurred and recorded as a component of cost of goods sold.
Cash and cash equivalents: The Company considers money market accounts to be cash equivalents. The Company maintains its cash and cash equivalents with one financial institution, which, at times, may exceed federally-insured limits. The Company has not experienced any losses in such accounts. The Company believes it is not exposed to any significant credit risk on cash and cash equivalents.
Accounts receivable: Accounts receivable are carried at original invoice amount less an estimate made for doubtful receivables based on a review of all outstanding amounts on a monthly basis. Accounts receivable are written off when deemed uncollectible. Recoveries of accounts receivable previously written off are recorded when received. An account receivable is considered past due if any portion of the receivable balance is outstanding for more than 60 days.
Inventory: The Company’s inventory, which is comprised of various components of blood and blood plasma, is valued at the lower of cost or market using the moving average cost method.
Property and equipment: Property and equipment is stated at cost. Depreciation is computed using the straight-line method over the following estimated useful lives:
| Years |
| |
Computer equipment |
| 5 |
|
Furniture and fixtures |
| 7 |
|
Leasehold improvements |
| Lease Term |
|
Machinery and equipment |
| 7 |
|
Depreciation of leasehold improvements is over the shorter of the assets’ estimated useful lives or term of the lease and is included with depreciation expense on owned assets.
6
Note 1. Nature of Business and Significant Accounting Policies (Continued)
Income taxes: The Company, with the consent of its stockholders, has elected to be taxed under sections of the federal and state income tax laws that provide that, in lieu of corporation income taxes, the stockholders account for their pro rata share of the Company’s items of income, deduction, losses and credits. Therefore, no provision for income taxes is reflected in the Company’s financial statements. No provision has been made for any amounts which may be advanced or paid as a distribution to the stockholders to assist them in paying their personal income taxes on the income of the Company.
Reclassifications: Certain reclassifications have been made in the 2004 financial statements in order to conform to the 2005 financial statement presentation, with no effect on net loss or stockholders’ equity.
Note 2. Property and Equipment
Property and equipment as of December 31, 2005 and 2004, consist of the following:
|
| 2005 |
| 2004 |
| ||
Computer equipment |
| $ | 97,581 |
| $ | 52,886 |
|
Furniture and fixtures |
| 26,212 |
| 25,413 |
| ||
Leasehold improvements |
| 108,786 |
| 108,786 |
| ||
Machinery and equipment |
| 180,275 |
| 179,527 |
| ||
|
| 412,854 |
| 366,612 |
| ||
Less accumulated depreciation |
| 222,581 |
| 155,614 |
| ||
|
| $ | 190,273 |
| $ | 210,998 |
|
Note 3. Line of Credit
During 2004, the Company entered into a line of credit agreement with a bank. Maximum borrowings of $250,000 are available bearing interest at the prime rate (7.25% as of December 31, 2005) plus 1%. Borrowings are due on demand. The line is collateralized by the assets of the Company and guaranteed by one of the stockholders. There were no outstanding borrowings under this agreement as of and for the years ended December 31, 2005 and 2004.
7
Note 4. Long-Term Debt
Long-term debt as of December 31,2005 and 2004 consists of the following:
|
| 2005 |
| 2004 |
| ||
Note payable to a bank with interest at 6.5%, payable in monthly installments, including interest, of $3,069 maturing October 2007, collateralized by substantially all assets of the Company and guaranteed by one of the Company’s stockholders. |
| $ | 63,328 |
| $ | 94,915 |
|
Note payable to a bank with interest at 8%, payable in monthly installments, including interest, of $5,082 maturing 2010, collateralized by substantially all assets of the Company and guaranteed by one of the Company’s stockholders. |
| 246,525 |
| — |
| ||
Promissory note payable to former stockholder with interest at 7%, payable in annual installments of $50,000, plus interest, maturing November 2014 collateralized by a pledge agreement of the redeemed stock. (i) |
| 450,000 |
| — |
| ||
Promissory note payable to former stockholder with interest at 7%, payable in annual installments of $50,000, plus interest, maturing November 2014 collateralized by a pledge agreement of the redeemed stock. (i) |
| 450,000 |
|
|
| ||
21.9% capital lease obligation due May 2005 (Note 5) |
| — |
| 1,865 |
| ||
|
| 1,209,853 |
| 96,780 |
| ||
Less current maturities |
| 176,510 |
| 33,453 |
| ||
|
| $ | 1,033,343 |
| $ | 63,327 |
|
(i) If the Company has a change in ownership control, the full amount outstanding becomes immediately due. There are also certain covenants on distributions which create mandatory prepayment of principal and interest in an amount equal to 25.2% of the amount distributed.
8
Note 4. Long-Term Debt (Continued)
Aggregate maturities required on long-term debt as of December 31,2005 are summarized as follows:
Year Ending |
|
|
| |
December 31, |
|
|
| |
2006 |
| $ | 176,510 |
|
2007 |
| 175,985 |
| |
2008 |
| 150,208 |
| |
2009 |
| 154,375 |
| |
2010 |
| 152,775 |
| |
Thereafter |
| 400,000 |
| |
|
| $ | 1,209,853 |
|
Note 5. Leases
The Company leased equipment under an agreement that had been classified as a capital lease. The lease ended in May 2005. For the year ended December 31, 2004, machinery and equipment included cost of $12,097 and accumulated depreciation of $4,608 for the capitalized equipment.
The Company leases its office facilities under an agreement classified as an operating lease expiring August 2006. The Company also leases several vehicles under operating leases expiring through July 2008. Rent expense was $142,694 and $123,028 for the years ended December 31, 2005 and 2004.
Future minimum lease payments under the noncancelable operating leases are due as follows as of December 31, 2005:
Year Ending |
|
|
| |
December 31, |
|
|
| |
2006 |
| $ | 76,358 |
|
2007 |
| 21,168 |
| |
2008 |
| 5,205 |
| |
Total minimum lease payments |
| $ | 102,731 |
|
Note 6. Profit Sharing Plan
The Company has a defined contribution 401(k) profit-sharing plan (the “Plan”) which provides for benefits to substantially all full-time employees upon their retirement, death or disability who meet the various requirements as defined in the Plan, based on years of service and an employee’s compensation during the last two years of employment. Contributions by the Company are limited to the maximum amount deductible for federal income tax purposes, and are expensed as incurred throughout the year, as approved by the Board of Directors. For the years ended December 31, 2005 and 2004, the Board elected to make employer contributions, which aggregated $6,931 and $11,308, respectively and are included in operating expenses.
9
Note 7. Major Customers
Net sales for the years ended December 31, 2005 and 2004 include sales to the following major customers, together with the accounts receivable due from these customers as of December 31, 2005 and 2004
|
| 2005 |
| ||||
Customer |
| Net |
| Accounts |
| ||
A |
| $ | 1,319,665 |
| $ | 57,401 |
|
B |
| 1,474,544 |
| 135,051 |
| ||
|
| $ | 2,794,209 |
| $ | 192,452 |
|
|
|
|
|
|
| ||
|
| 2004 |
| ||||
A |
| $ | 421,600 |
| $ | 189,345 |
|
C |
| 304,840 |
| 23,294 |
| ||
|
| $ | 726,440 |
| $ | 212,639 |
|
Note 8. Stock Redemption
During 2005, the Company redeemed 46,454 shares. The stock redemption was financed through a bank loan and promissory notes with the former stockholders (see Note 4). If the Company has a change in ownership control within 12 months of November 11, 2005, the Company will owe $62,560 to a former stockholder.
Note 9. Subsequent Event
The Company signed a nonbinding letter of intent subsequent to December 31, 2005. The letter sets forth proposed terms for 100% of all the outstanding capital stock of the Company to be required. Unless mutually agreed by both parties, the letter will terminate on June 11, 2006.
10
McGladrey & Pullen
Certified Public Accountants
Independent Auditor’s Report
on the Supplementary Information
To the Board of Directors
Teragenix Corporation
Fort Lauderdale, Florida
Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The supplementary information is presented for purposes of additional analysis and is not a required part of the basic financial statements. Such information has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, is fairly stated in all material respects in relation to the basic financial statements taken as a whole.
McGladrey & Pullen, LLP
Fort Lauderdale, Florida
February 17, 2006
11
Teragenix Corporation
Statements of Income Information
Years Ended December 31, 2005 and 2004
Operating Expenses |
| 2005 |
| 2004 |
| ||
|
|
|
|
|
| ||
Advertising and business development |
| $ | 12,001 |
| 11,610 |
| |
Automobile expenses |
| 25,910 |
| 24,329 |
| ||
Bad debt expense |
| 85,703 |
| — |
| ||
Bank and credit card charges |
| 15,571 |
| 9,671 |
| ||
Computer expense |
| 61,647 |
| 78,454 |
| ||
Commissions |
| 39,592 |
| 88,649 |
| ||
Depreciation |
| 66,967 |
| 6,975 |
| ||
Donations |
| 665 |
| 500 |
| ||
Dues and subscriptions |
| 800 |
| 5,881 |
| ||
Entertainment |
| — |
| 8,185 |
| ||
Equipment rental |
| 7,265 |
| 3,893 |
| ||
Insurance |
| 83,679 |
| 59,562 |
| ||
Legal fees |
| 7,753 |
| 4,959 |
| ||
Laboratory supplies |
| 56,085 |
| 68,398 |
| ||
Licenses and taxes |
| 7,253 |
| 13,608 |
| ||
Marketing |
| 39,118 |
| 19,686 |
| ||
Membership and subscription |
| 5,309 |
| — |
| ||
Office expense |
| 46,861 |
| 61,296 |
| ||
Payroll processing fees |
| 18,874 |
| 15,604 |
| ||
Payroll tax expense |
| 82,287 |
| 60,865 |
| ||
401(k) plan contributions |
| 6,931 |
| 11,308 |
| ||
Professional fees |
| 88,285 |
| 111,176 |
| ||
Rent expense |
| 116,784 |
| 98,699 |
| ||
Repairs and maintenance |
| 43,105 |
| 36,986 |
| ||
Salaries and wages expense |
| 1,209,764 |
| 879,327 |
| ||
Telephone expense |
| 37,263 |
| 39,445 |
| ||
Travel |
| 66,731 |
| 51,573 |
| ||
Utilities |
| 23,058 |
| 19,153 |
| ||
Other |
| 12,943 |
| 7,967 |
| ||
|
| $ | 2,268,204 |
| $ | 1,797,759 |
|
12