Exhibit 99.2
Western Medical, Inc.
Index to Condensed Financial Statements
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| | PAGE |
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| Condensed Balance Sheet as of March 31, 2006 (Unaudited) | F-13 |
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| Condensed Statements of Income for the Three Months ended March 31, 2006 and 2005 (Unaudited) | F-14 |
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| Condensed Statements of Cash Flows for the Three Months ended March 31, 2006 and 2005 (Unaudited) | F-15 |
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| Notes to Condensed Financial Statements (Unaudited) | F-16 |
F-12
WESTERN MEDICAL, INC.
CONDENSED BALANCE SHEET
MARCH 31, 2006 (UNAUDITED)
Assets
Current assets: March 31, 2006
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Cash $ 586,240
Marketable securities, available-for-sale 903,024
Accounts receivable, net 390,556
Inventories 935,000
Prepaid expenses and other current assets 1,600
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Total current assets 2,816,420
Property and equipment, net 67,754
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Total assets $2,884,174
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Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable and accrued expenses $ 306,558
Notes payable - shareholders 459,687
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Total liabilities 766,245
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Commitments and contingencies
Shareholders' equity:
Common stock; no par value; 100 shares authorized,
issued and outstanding 977,800
Retained earnings 1,146,241
Accumulated other comprehensive loss (6,112)
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Total shareholders' equity 2,117,929
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Totals $2,884,174
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See Notes to Condensed Financial Statements.
F-13
WESTERN MEDICAL, INC.
CONDENSED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 2006 AND 2005 (UNAUDITED)
2006 2005
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Net sales $1,498,533 $1,540,491
Cost of sales 897,983 940,984
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Gross profit 600,550 599,507
Operating expenses 407,388 442,947
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Income from operations 193,162 156,560
Other income (expense):
Interest income 2,757 2,509
Investment income 5,320 3,500
Interest expense - related parties (6,877) (8,077)
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Income before income taxes 194,362 154,492
Provision for state income taxes 2,600 2,000
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Net income $ 191,762 $ 152,492
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See Notes to Condensed Financial Statements.
F-14
WESTERN MEDICAL, INC.
CONDENSED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2006 AND 2005 (UNAUDITED)
2006 2005
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Operating activities:
Net income $ 191,762 $ 152,492
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 4,168 5,943
Accrued interest added to principal of shareholder
loans - 8,077
Changes in operating assets and liabilities:
Accounts receivable 247,135 304,294
Inventories 7,072 (75,829)
Prepaid expenses and other current assets 19,614 59,665
Accounts payable and accrued expenses (114,908) (262,185)
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Net cash provided by operating activities 354,843 192,457
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Investing activities:
Purchases of marketable securities (6,020) (53,500)
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Net cash used in investing activities (6,020) (53,500)
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Financing activities:
Proceeds from shareholder loans 35,000 -
Payments of notes payable to shareholders (133,700) -
Distributions to shareholders (105,000) (150,000)
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Net cash used in financing activities (203,700) (150,000)
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Net increase (decrease) in cash and cash equivalents 145,123 (11,043)
Cash and cash equivalents, beginning of period 441,117 588,479
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Cash and cash equivalents, end of period $ 586,240 $ 577,436
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See Notes to Financial Statements.
F-15
WESTERN MEDICAL, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
1. Organization and Basis of Presentation
Organization
Western Medical, Inc. (the “Company”) is a provider of wound care and wound closure products. The Company markets its products principally through independent distributors servicing the long-term, home health and acute markets in the United States and other international markets. The Company’s distribution facility is located in Chattanooga, Tennessee.
Basis of Presentation
The accompanying condensed financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and the requirements of the Securities and Exchange Commission. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements and should be read in conjunction with the audited financial statements of the Company included in this amended report on Form 8-K. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included in the accompanying condensed financial statements. Operating results for the three month period ended March 31, 2006 are not necessarily indicative of the results that may be expected for the year ending December 31, 2006.
Effective December 31, 2004, the Company was required to adopt FIN 46(R). Adoption would have resulted in the consolidation of a Variable Interest Entity (“VIE”) of which the Company would be considered the primary beneficiary. The Company’s variable interest in this VIE is the result of leasing facilities from JBCM Partnership (“JBCM”), a partnership which is owned by its shareholders. JBCM was established for the sole purpose of acquiring and leasing the building to the Company. The Company is providing a substantial guarantee on behalf of JBCM and another related party, as discussed in Note 3. The VIE was created before December 31, 2003 and the Company was unable to obtain the information necessary to apply FIN46(R) pertaining to the cost of the building. The Company’s potential loss pursuant to guarantees is limited to the outstanding balance on the mortgage on the building which was $1,451,463 at March 31, 2006.
2. Inventories
Inventories include the following:
March 31, 2006
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Finished goods $ 745,850
Raw and packaging components 189,150
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Total inventories $ 935,000
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3. Related Party Transactions and Balances
Related Party Lease — The Company leases facilities on a month-to month basis from JBCM, a partnership in which the Company’s shareholders are partners. Total rent paid to the partnership was $60,000 for the three months ended March 31, 2006 and 2005. The Company will continue to lease the facilities on a month-to-month basis and guarantee the mortgage on the leased property (see below).
Related Party Sales — The Company’s shareholders also control other entities to which the Company made sales of approximately $15,000 and $25,000 during the three months ended March 31, 2006 and 2005, respectively. Accounts receivable due from these affiliates were approximately $400 at March 31, 2006.
Related Party Consulting Services — During the three months ended March 31, 2005 the Company incurred and paid $50,000 for consulting services from an entity wholly-owned by two of the Company’s shareholders.
F-16
WESTERN MEDICAL, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
Notes Payable to Shareholders — At March 31, 2006 the Company has notes payable (with the balance including accrued interest previously added to principal) of $459,687 due to two of its shareholders that are due on demand. The notes are unsecured and bear interest at 5%. Interest accrued on the notes of $6,877 and $8,077 in three months ended March 31, 2006 and 2005, respectively, was added to the note principal.
Guarantee of Related-Party Indebtedness — As of March 31, 2006 the Company is contingently liable as guarantor with respect to $1,451,463 of mortgage debt of BCD Partnership (“BCD”) and JBCM, as co-borrowers, entities owned by the Company’s shareholders. The term of the guarantee is through August 2006. At any time through the term of the guarantee, the Company guarantees the timely payment and performance of all liabilities and of all obligations of BCD and JBCM.
4. Comprehensive Income
The Company’s comprehensive income was as follows:
Three Months Ended
March 31,
2006 2005
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Net income as reported $ 191,762 $ 152,492
Other comprehensive income:
Unrealized losses on marketable securities (445) (3,140)
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Comprehensive income $ 191,317 $ 149,352
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5. Subsequent Events
On April 18 2006, the Company sold its products, product formulations and manufacturing specifications, inventory, customer lists, customer contracts (to the extent assignable), manufacturing equipment, trademark registrations, trade secrets, and the right to utilize the name “Western Medical” during an 18 month post-closing transition period (collectively, the “Assets”) to Derma Sciences, Inc. (“Derma Science”), a publicly-traded company. The purchase price of the Assets was $6.5 million, together with the assumed liabilities.
F-17
