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October 6, 2008
2:00 p.m. CT
Audit Committee: Olathe
Audit Committee
Audit Committee Meeting
Kansas Bioscience Authority
25501 W. Valley Parkway
Suite 100
Olathe, Kansas 66061
2:00 PM – 3:00 PM
Monday, October 6, 2008
Call to Order: A sufficient quorum being present, the meeting was called to order by Chairwoman Angela Kreps at 2:00 PM. Directors in attendance via teleconference were John Carlin, Bob Hemenway, Sandra Lawrence, Bill Sanford and Ray Smilor. Others present were Jan Katterhenry, Tom Thornton and Marsh LoScalzo with the KBA. Representing legal counsel was Doug Anning from Polsinelli. Representing AGH was Shelly Hammond, Vice President.
Review of Minutes from the April 1 and August 11, 2008 Meeting: Mr. Sanford recommended that in the future the minutes should reflect more details outside of executive session. A motion was made to approve the minutes of April 1, 2008 and August 11, 2008 minutes by Mr. Sanford, Mr. Carlin seconded. Dr. Smilor abstained; he was not in the last meeting. The motion passed. Mr. Sanford asked that the minutes from the September 28, 2007 meeting be re-circulated.
Review of 2008 Audit: The audited financial statements and management letter were distributed to each of the committee members prior to the meeting. Ms. Kreps introduced Shelly Hammond, the auditor from Allen, Gibbs & Houlik, L.C. Ms. Hammond gave an explanation of the audit process and acknowledged that the KBA staff was cooperative during the process.
Ms. Hammond presented the management report which summarized matters required by professional standards to be communicated to the board in its oversight capacity, including disclosure of deficiencies if any existed. The fiscal year 2008 audit was performed in accordance with Government Auditing Standards at the request of the Kansas Legislative Post Auditor. The KBA is a component unit of the State Government of Kansas for financial reporting purposes, which means that its financial results are included in the State’s annual financial report. Because the State of Kansas as a governmental organization is required to have its audit conducted under Government Auditing Standards, the Legislative Post Auditor has requested that all of the State’s component units follow the same audit standards.
Ms. Hammond reported on the Independent Auditors Report on Internal Control over Financial Reporting and on Compliance and Other Matters, which is required by Government Auditing Standards. This report describes the scope of AGH’s testing of the KBA’s internal control over financial reporting and its compliance with laws, regulations and other matters, as well as the results of that testing, without providing an opinion.
Dr. Smilor inquired about a sentence in that Independent Auditors’ Report that appeared to be “an opinion”. Ms. Hammond clarified that they did not identify any deficiencies; however they were not providing an opinion on the effectiveness of internal control and did not test the controls to determine if they are working correctly. If AGH had identified any deficiencies, they would have informed the KBA about those deficiencies without providing an opinion on the effectiveness of internal control.
Accounting policies: Ms. Hammond noted that there were no significant changes to the current policies. One significant accounting policy that was applicable to the KBA’s financial results for the first time related to portfolio investments, which consist of convertible debentures and equity positions in start-up enterprises.
AGH did not find any significant estimates or unusual transactions in the financial statements. With regard to the KBA’s portfolio investments in convertible debentures and equity, there can be a risk that investments in startup companies are not appropriately valued and should be impaired. AGH agrees that the KBA’s portfolio investments are appropriately valued in the financial statements.
Audit adjustments: There were two adjustments made to the initial fiscal year 2008 accounting records. The first audit adjustment related to land that KBA received from the City of Olathe in connection with the new bioscience park that is currently under development. This land is required to be recorded at its estimated fair value.
The second adjustment involved the KBA’s equity investment in Innovia Medical LLC. After performing technical research on the appropriate accounting treatment of equity investments in limited liability companies, AGH determined that the Innovia equity investment, although less than 20%, should be recorded using the equity method. Under the equity method, the KBA’s proportional share of any net income or loss realized by the company should be recorded as an adjustment to the KBA’s original investment in the company.
Ms. Hammond noted there were no uncorrected misstatements found during the audit.
Management Representations: Ms. Hammond described the process of the standard management representation letter.
Other Disclosure: There were no disagreements with management during the audit. There were no other significant issues that were the subject of correspondence. In addition to this, Ms. Hammond added that Ms. Katterhenry and the KBA staff were very well prepared and it went very well. Other Observations: AGH noted that management had implemented processes to accumulate financial data from each company, and monitors activities through methods such as obtaining observation rights to attend the company’s board meetings. AGH recommended that management implement a process to formally document their evaluation of collectability and other-than-temporary impairment of the KBA’s portfolio investments as part of its year-end financial reporting close process. Management agreed to formalize this process.
Ms. Lawrence asked the auditors to provide a sample of the type of information or report that should be used in this process. The auditors will supply a sample of the type of information to collect.
AGH noted that the investments entered into this year provided a template for future investments. Management requested and AGH agreed that questions arising through the year should be thoroughly reviewed at the time of the transaction rather than waiting until the audit. The audit committee suggested AGH put together a contract which will allow for those types of request.
Executive Session: Ms. Kreps stated that there were items to be discussed that would qualify for the attorney-client privilege, and that also pertain to the financial condition and financial operations of the Authority and how such financial information and records relate to the business and operational strategies of the Authority. Ms. Lawrence made a motion to enter executive session to discuss both with and without the KBA management. Dr. Smilor seconded the motion. The motion passed.
The KBA staff was excused from the committee discussion at 2:46 p.m. so that committee members could have a private meeting with the auditor as required by the charter. The KBA staff rejoined the meeting at 2:55 p.m; at 2:56 p.m. Ms. Hammond was asked to leave the room so committee members could have a private meeting with KBA staff. Ms. Hammond returned to the discussion at 3:05 p.m.
WHEREAS, the Audit Committee of the Board of Directors of the Kansas Bioscience Authority (the “Authority”) in this meeting of October 6, 2008 needs to review, consider, and discuss (i) financial and operational information and records related to the financial condition and financial operations of the Authority and how such financial information and records relate to the business and operational strategies of the Authority; (ii) operational information and records related to the marketing and operations of the Authority and how such information and records relate to the marketing, business, and operational strategies of the Authority; and (iii) matters with counsel for the Authority that would be subject to the attorney-client privilege; and
WHEREAS, pursuant to Kansas law, in particular the Kansas Bioscience Authority Act, as codified in K.S.A. §74-99b01 to §74-99b89 and elsewhere (the “Act”), the Authority may discuss and consider the following in executive session when, in the opinion of the Board, disclosure of such would be harmful to the competitive position of the Authority: (i) plans that could affect the value of property, real or personal, owned or desirable for ownership by the Authority; (ii) the condition, acquisition, use, or disposition of real or personal property, and (iii) contracts for bioscience research, bioscience product manufacturing or commercialization, construction and renovation of bioscience facilities, and marketing or operational strategies; and
WHEREAS, pursuant to the Act, records of the Authority shall not be subject to the provisions of the Kansas Open Records Act, when in the opinion of the Board, the disclosure of the information in the records would be harmful to the competitive position of the Authority, provided those records include, but are not limited to (i) proprietary information gathered by or in the possession of the Authority from third parties pursuant to a promise of confidentiality; (ii) contract cost estimates prepared for confidential use in awarding contracts for research development, construction, renovation, commercialization, or the purchase of goods or services; or (iii) data, records, or information of a proprietary nature produced or collected by or for the Authority, its employees, officers, or members of the board; financial statements not publicly available that may be filed with the Authority from third parties; the identity, accounts, or account status of any customer of the Authority; consulting or other reports paid for by the Authority to assist the Authority in connection with its strategic planning and goals; and the determination of marketing and operational strategies; and
WHEREAS, the Board believes that the disclosure of any such items and records would be harmful to the competitive position of the Authority; be it
RESOLVED, it is the opinion of the Board that the disclosure of such items would be harmful to the competitive position of the Authority, and therefore the Board declares that its review, consideration, and discussion of such financial and operational information and records at this Board meeting shall occur in executive session; and
FURTHER RESOLVED, it is the opinion of the Board that the disclosure of such records and information would be harmful to the competitive position of the Authority, and therefore, such records and information to be reviewed at this Board meeting shall not be subject to the provisions of the Kansas Open Records Act; and
FURTHER RESOLVED, that the Audit Committee of the Board of Directors shall meet in executive session from 2:46 p.m. until 2:56 p.m. on Monday, October 6, 2008 unless the Audit Committee of the Board of Directors earlier concludes its review, consideration, and discussion prior to 3:08 p.m., in which event, the executive session shall adjourn at such earlier time.
Upon motion duly made, the Directors voted unanimously to recess into executive session commencing at 2:46 p.m. until no later than 2:56 p.m.
Return to Open Session: Dr. Smilor made a motion to return to open session at 3:09 p.m., Mr. Carlin seconded the motion and the Audit Committee left executive session and returned to open meeting.
Other Business: Ms. Hammond noted that the audit will come in at the high end of the engagement letter and that additional expense was incurred to review the types of transactions entered into by the KBA.
Acceptance of Audit and Management Letter: Ms. Lawrence made a motion to accept the Audit and present it to the full board, Mr. Carlin seconded the motion. There being no further discussion, Ms. Kreps called for a vote and it passed unanimously.
Adjournment: There being no further business, Dr. Smilor made a motion to adjourn, Ms. Lawrence seconded the motion and the vote was approved unanimously. The meeting was adjourned at 3:15 pm.
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