-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, QG7F7ivStTUjKuaazQ90mwt+C5R1BNorm7I3zy7J9Z/mNHpSRb+DNR34udr//WH2 YQo28/I2eKEQb/4OcrfN9Q== 0000950124-99-001258.txt : 19990218 0000950124-99-001258.hdr.sgml : 19990218 ACCESSION NUMBER: 0000950124-99-001258 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990217 FILER: COMPANY DATA: COMPANY CONFORMED NAME: KENSEY NASH CORP CENTRAL INDEX KEY: 0001002811 STANDARD INDUSTRIAL CLASSIFICATION: SURGICAL & MEDICAL INSTRUMENTS & APPARATUS [3841] IRS NUMBER: 363316412 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-27120 FILM NUMBER: 99544266 BUSINESS ADDRESS: STREET 1: 55 E UWCHLAN AVE STREET 2: STE 204 CITY: EXTON STATE: PA ZIP: 19341 BUSINESS PHONE: 6105947156 MAIL ADDRESS: STREET 1: 55 EAST UWCHLAN AVE STREET 2: STE 201 CITY: EXTON STATE: PA ZIP: 19341 10-Q 1 FORM 10-Q 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended: DECEMBER 31, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Transition Period From __________ to __________. Commission File Number: 0-27120 KENSEY NASH CORPORATION (Exact name of registrant as specified in its charter) DELAWARE 36-3316412 (State or other jurisdiction (IRS Employer Identification No.) of incorporation or organization)
MARSH CREEK CORPORATE CENTER, 55 EAST UWCHLAN AVENUE, EXTON, PENNSYLVANIA 19341 (Address of principal executive offices and zip code) Registrant's telephone number, including area code: (610) 524-0188 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No__ As of January 31, 1999, there were outstanding 7,459,460 shares of Common Stock, par value $.001, of the registrant. 1 2 KENSEY NASH CORPORATION QUARTER ENDED DECEMBER 31, 1998 INDEX
PAGE PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS Consolidated Balance Sheets as of December 31, 1998 (Unaudited) and June 30, 1998........................ 3 Consolidated Statements of Operations for the three and six months ended December 31, 1998 and 1997 (Unaudited)..................................................... 4 Consolidated Statements of Stockholders' Equity as of December 31, 1998 (Unaudited) and June 30, 1998............................... 5 Consolidated Statements of Cash Flows for the six months ended December 31, 1998 and 1997 (Unaudited)............... 6 Notes to Consolidated Financial Statements (Unaudited).......................... 7 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS..................................... 9 PART II - OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.................................................. 14 SIGNATURES .......................................................... 15
2 3 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS KENSEY NASH CORPORATION CONSOLIDATED BALANCE SHEETS - --------------------------------------------------------------------------------
DECEMBER 31, JUNE 30, 1998 1998 ------------------- -------------------- ASSETS (Unaudited) CURRENT ASSETS: Cash and cash equivalents $ 253,246 $ 1,407,684 Short-term investments 6,215,417 6,368,866 Trade receivables 2,115,884 1,369,960 Royalties receivable (Note 2) 1,531,180 645,784 Other receivables (including approximately $81,000 and $59,000 at December 31, 1998 and June 30, 1998, respectively, due from employees) 489,670 225,424 Inventory (Note 3) 660,003 1,027,326 Prepaid expenses and other 243,996 200,169 ---------------- ---------------- Total current assets 11,509,396 11,245,213 ---------------- ---------------- PROPERTY, PLANT AND EQUIPMENT, AT COST: Leasehold improvements 4,007,274 4,006,066 Machinery, furniture and equipment 3,878,452 3,599,827 Construction in progress 555,254 191,154 ---------------- ---------------- Total property, plant and equipment 8,440,980 7,797,047 Accumulated depreciation (3,275,628) (2,843,785) ---------------- ---------------- Net property, plant and equipment 5,165,352 4,953,262 OTHER ASSETS: Restricted investments (Note 4) 1,949,387 1,914,418 Property under capital leases, net 43,907 61,181 Acquired patents, net of accumulated amortization of $254,582 and $127,291 at December 31, 1998 and June 30, 1998, respectively 3,737,827 3,865,118 ---------------- ---------------- Total other assets 5,731,121 5,840,717 ---------------- ---------------- TOTAL $ 22,405,869 $ 22,039,192 ================ ================ LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 808,380 $ 639,605 Accrued expenses 642,557 551,573 Current portion of line of credit, obligation under patent acquisition agreement and capital lease obligations 698,779 577,891 Deferred revenue 53,100 53,120 ---------------- ---------------- Total current liabilities 2,202,816 1,822,189 ---------------- ---------------- DEFERRED REVENUE - ROYALTIES (Note 2) 1,294,360 1,979,580 LINE OF CREDIT, OBLIGATION UNDER PATENT ACQUISITION AGREEMENT and OBLIGATION UNDER CAPITAL LEASES, long-term portion 2,018,878 2,373,960 ---------------- ---------------- Total liabilities 5,516,054 6,175,729 ---------------- ---------------- COMMITMENTS AND CONTINGENCIES (Note 4) STOCKHOLDERS' EQUITY: Preferred stock, $.001 par value, 100,000 shares authorized, no shares issued or outstanding at December 31, 1998 and June 30, 1998 Common stock, $.001 par value, 25,000,000 shares authorized, 7,459,460 and 7,459,272 shares issued and outstanding at December 31, 1998 and June 30, 1998, respectively 7,459 7,459 Capital in excess of par value 37,599,026 37,597,381 Accumulated deficit (20,716,670) (21,741,377) ---------------- ---------------- Total stockholders' equity 16,889,815 15,863,463 ---------------- ---------------- TOTAL $ 22,405,869 $ 22,039,192 ================ ================ See notes to consolidated financial statements.
3 4 KENSEY NASH CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) ================================================================================
THREE MONTHS ENDED SIX MONTHS ENDED DECEMBER 31, DECEMBER 31, ===================================================================== 1998 1997 1998 1997 REVENUES (Notes 1 and 2): Net sales $ 1,829,058 $ 1,202,295 $ 3,206,036 $ 1,736,356 Research and development 390,530 1,028,639 1,159,638 1,761,970 Royalty income 1,494,724 531,147 2,900,135 829,045 ----------- ----------- ----------- ------------ Total revenues 3,714,312 2,762,081 7,265,809 4,327,371 ----------- ----------- ----------- ------------ OPERATING COSTS AND EXPENSES: Cost of products sold 1,160,550 1,040,629 2,438,923 1,856,719 Research and development 1,429,218 1,394,275 2,826,989 2,579,660 Selling, general and administrative 541,366 443,833 1,114,895 808,050 ----------- ----------- ----------- ------------ Total operating costs and expenses 3,131,134 2,878,737 6,380,807 5,244,429 ----------- ----------- ----------- ------------ INCOME (LOSS) FROM OPERATIONS 583,178 (116,656) 885,002 (917,058) ----------- ----------- ----------- ------------ OTHER INCOME: Interest income 128,519 135,519 263,232 269,184 Interest expense (59,936) (20,923) (125,895) (35,507) Other 2,367 2,552 2,368 4,193 ----------- ----------- ----------- ------------ Total other income - net 70,950 117,148 139,705 237,870 ----------- ----------- ----------- ------------ INCOME (LOSS) BEFORE INCOME TAXES 654,128 492 1,024,707 (679,188) Provision for income taxes (Note 5) ----------- ------------ ----------- ------------ NET INCOME (LOSS) $ 654,128 $ 492 $ 1,024,707 $ (679,188) =========== ============ =========== ============ EARNINGS (LOSS) PER COMMON SHARE and EARNINGS (LOSS) PER COMMON SHARE - $ 0.09 $ .00 $ 0.14 $ (0.09) assuming dilution (Note 1) =========== ============ =========== ============ WEIGHTED AVERAGE COMMON SHARES OUTSTANDING (Note 1) 7,472,851 7,639,455 7,469,123 7,418,279 =========== ============ =========== ============
See notes to consolidated financial statements. 4 5 KENSEY NASH CORPORATION CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY - -------------------------------------------------------------------------------
CAPITAL COMMON STOCK IN EXCESS --------------------------- OF PAR ACCUMULATED SHARES AMOUNT VALUE DEFICIT TOTAL BALANCE, JUNE 30, 1997 7,198,251 $ 7,198 $ 34,203,807 $(22,084,059) $ 12,126,946 Exercise of stock options 61,021 61 556,174 556,235 Shares issued under Patent Acquisition Agreement 200,000 200 2,837,400 2,837,600 Net income 342,682 342,682 --------- ------------- ------------ ------------ ------------ BALANCE, JUNE 30, 1998 7,459,272 7,459 37,597,381 (21,741,377) 15,863,463 Exercise of stock options 188 -- 1,645 1,645 Net income 1,024,707 1,024,707 --------- ------------- ------------ ------------ ------------ BALANCE, DECEMBER 31, 1998 (Unaudited) 7,459,460 $ 7,459 $ 37,599,026 $(20,716,670) $ 16,889,815 ========= ============ ============ ============ ============
See notes to consolidated financial statements. 5 6 KENSEY NASH CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) - --------------------------------------------------------------------------------
SIX MONTHS ENDED DECEMBER 31, ----------------------------------------- 1998 1997 OPERATING ACTIVITIES: Net income (loss) $ 1,024,707 $ (679,188) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 576,408 416,839 Changes in assets and liabilities which used cash: Accounts receivable (1,895,566) (167,588) Prepaid expenses and other current assets (43,827) 95,043 Inventory 367,323 (300,552) Accounts payable and accrued expenses 259,759 437,589 Deferred revenue (685,240) (151,155) ----------- ----------- Net cash used in operating activities (396,436) (349,012) ----------- ----------- INVESTING ACTIVITIES: Patent costs capitalized (69,539) Additions to property, plant and equipment (643,933) (778,784) Sale of investments 118,480 1,724,039 ----------- ----------- Net cash (used in) provided by investing activities (525,453) 875,716 ----------- ----------- FINANCING ACTIVITIES: Principal payments under capital leases (19,302) (23,061) Repayments of patent acquisition obligation (214,892) Proceeds from long-term debt 575,000 Exercise of stock options 1,645 255,885 ----------- ----------- Net cash (used in) provided by financing activities (232,549) 807,824 ----------- ----------- (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (1,154,438) 1,334,528 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 1,407,684 868,180 ----------- ----------- CASH AND CASH EQUIVALENTS, END OF PERIOD $ 253,246 $ 2,202,708 ----------- ----------- SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid for interest $ 126,909 $ 5,239 =========== =========== Cash paid for income taxes $ 14,000 $ =========== ===========
See notes to consolidated financial statements. 6 7 KENSEY NASH CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 1 --CONSOLIDATED FINANCIAL STATEMENTS BASIS OF PRESENTATION The consolidated balance sheet at December 31, 1998, the consolidated statements of operations for the three and six months ended December 31, 1998 and 1997 and the consolidated statements of cash flows for the six months ended December 31, 1998 and 1997 have been prepared by Kensey Nash Corporation (the "Company") and have not been audited by the Company's Independent Auditors. In the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position, results of operations and cash flows at December 31, 1998 and for all periods presented have been made. Certain information and note disclosures normally included in the Company's annual financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. These consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in the Company's June 30, 1998 consolidated financial statements filed with the Securities and Exchange Commission on Form 10-K. The results of operations for the period ended December 31, 1998 are not necessarily indicative of operating results for the full year. CASH AND CASH EQUIVALENTS Cash and cash equivalents represent cash in banks and short-term investments having an original maturity of less than three months. EXPORT SALES Export sales from the Company's U.S. operations to unaffiliated customers in Europe totaled $110,105 and $34,550 for the three months ended December 31, 1998 and 1997, respectively and $140,015 and $57,035 for the six months ended December 31, 1998 and 1997, respectively. EARNINGS PER SHARE Earnings per share are calculated in accordance with Statement of Financial Accounting Standards ("SFAS") No. 128, Earnings per Share, which requires the Company to report both basic and diluted earnings per share ("EPS"). Basic and diluted EPS are computed using the weighted average number of shares of common stock outstanding, with common equivalent shares from options included in the diluted computation when their effect is dilutive. All previously disclosed earnings per share data have been recalculated to reflect the provisions of SFAS No. 128. NOTE 2 -- DEFERRED REVENUE - ROYALTIES Upon receipt of pre-market approval for the 8 French ("F") size Angio-Seal device (the "Angio-Seal") from the Food and Drug Administration (the "FDA") on September 30, 1996, the Company received a $3 million advance on future royalties under the Company's licensing agreement (the "Licensing Agreement") with its Strategic Alliance Partner. Such advance has been recorded as deferred revenue. The Licensing Agreement provides for certain minimum royalty payments ("Minimum Royalty") during the first five years after receiving FDA approval (each royalty year begins on October 1 and ends on September 30). As stipulated in the Licensing Agreement, the $3 million advance will be reduced in each period by 50% of royalties earned in excess of the Minimum Royalty in any royalty year. The remainder of royalties earned will be received as cash proceeds by the Company. At September 30, 1998, the Company had exceeded the first and second royalty year (periods ended September 30, 1997 and September 30, 1998) Minimum Royalties by $352,310 and $3,058,970, respectively. The deferred revenue 7 8 balance has been reduced by 50% of such total excess, to $1,294,360. As the Company cannot reasonably estimate the excess, if any, of future royalty payments over the Minimum Royalty in each year, the entire balance has been classified as long-term at December 31, 1998. NOTE 3 -- INVENTORY Inventory is stated at the lower of cost (determined by the average cost method, which approximates first-in, first-out) or market. Inventory primarily includes the cost of material utilized in the processing of the Company's products and is as follows:
DECEMBER 31, 1998 JUNE 30, 1998 Raw materials $ 607,690 $ 971,357 Work in process 52,313 55,969 ----------- ----------- Total $ 660,003 $ 1,027,326 =========== ===========
NOTE 4 -- COMMITMENTS AND CONTINGENCIES The Company has pledged $1,949,387 in investments as collateral to secure certain bank loans to employees which were used by such employees for the payment of taxes incurred by such employees as the result of the receipt of Common Stock at the Company's IPO. In exchange for the Company pledging collateral for such loans, each affected employee has pledged their Common Stock as collateral to the Company. The balance outstanding on such employee loans was $1,815,952 at December 31, 1998. NOTE 5 -- INCOME TAXES As of June 30, 1998, the Company had net operating loss carryforwards ("NOLs") for federal and state tax purposes totaling $18.0 and $2.8 million, respectively. However, the Company anticipates that it will be subject to the federal alternative minimum tax ("AMT") in the current year. The Company's NOLs may only be utilized for AMT purposes to the extent that the net operating loss does not exceed 90% of current alternative minimum taxable income. The payment of the AMT ($14,000 for the three months ended December 31, 1998) has generated AMT tax credits that are recorded as deferred tax assets. NOTE 6 -- SUBSEQUENT EVENTS On January 21, 1999 the Company entered into a $5 million tax-free revolving credit and term loan agreement ("the Tax Free Loan") with a bank. The bank purchased a $5 million tax exempt bond issue of the Company, made through the local development authority, and made the proceeds available to the Company under the Tax Free Loan. The proceeds of the loan will be used for capital equipment financing through June 30, 2000 and to pay down the Company's existing balance under its $2 million term loan with the bank. The loan bears interest at the five year U.S. Treasury rate plus 1%, adjusted quarterly on the first day of each of February, May, August and November. The assets of the Company, with the exception of the Company's patents, collateralize the loan. On February 5, 1999, TYCO International Ltd., the Company's Strategic Partner, announced the sale of the marketing and manufacturing rights of the Angio-Seal product line to St. Jude Medical, Inc. Under the purchase agreement, all of the Company's agreements with its current Strategic Partner will be transferred to St. Jude Medical, Inc. in a transaction which is expected to close by the end of March 1999. 8 9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW The Company is a medical device company which has established three technology platforms: puncture closure (Angio-Seal), biomaterials (collagen and absorbable polymers) and revascularization (the Aegis Vortex System) ("AVS"). The Company's operations are focused on the commercialization and continuing development of its proprietary principal product, the Angio-Seal Product Line, the continued expansion of its capabilities in biomaterials, and the development of its revascularization catheter system, the AVS. The Angio-Seal is a device for the sealing of arterial punctures created during diagnostic and therapeutic cardiovascular procedures such as angiography, angioplasty, atherectomy and the placement of stents. The Company participates in the puncture closure market primarily through its relationship with its Strategic Alliance Partner, from which it generates royalty income, research and development funding and sales revenue through the manufacture of clinical devices and components for the Angio-Seal. The Company has expanded its capabilities in absorbable biomaterials. The Company is currently manufacturing collagen products for third parties for use as delivery systems for various applications including bone growth proteins, artificial skin for burn victims and drug delivery for products in various stages of clinical trials. As a result of its absorbable polymer capabilities, the Company has entered the orthopedic marketplace as an OEM supplier of specialized products. The Company's revascularization platform has been established to address a market opportunity in cardiology for the treatment of occluded saphenous vein bypass grafts. The Company is developing the AVS, utilizing its patent platform and in-house expertise to address these medical conditions. The following discussion and analysis should be read in conjunction with the Consolidated Financial Statements and the notes thereto contained elsewhere in this report. THREE MONTHS ENDED DECEMBER 31, 1998 COMPARED TO THREE MONTHS ENDED DECEMBER 31, 1997 Revenues for these periods consisted of net sales, research and development revenue, and royalty income. Revenues increased 34% to $3,714,000 in the three months ended December 30, 1998 from $2,762,000 in the three months ended December 31, 1997. Net sales of products increased 52% to $1,829,000 from $1,202,000 for the three months ended December 31, 1998 and 1997, respectively. Research and development revenues decreased 62% to $391,000 from $1,029,000 for the three months ended December 31, 1998 and 1997, respectively. The increase in net sales was mainly attributable to an increase in Angio-Seal components sold to the Company's Strategic Alliance Partner, as a result of increased demand in the U.S. and European markets, as well as increases in sales of commercial bioabsorbable OEM polymer and collagen products. The decrease in research and development revenues related to decreased performance of contract research and development for the Company's Strategic Alliance Partner as they assumed a more active role in the Angio-Seal R&D programs and as the 6F product nears commercialization. Royalty income increased 181% to $1,495,000 from $531,000 in the three months ended December 31, 1998 and 1997, respectively. Approximately 80,000 Angio-Seal units were sold to end-users in the quarter ending December 31, 1998 compared to 38,000 units sold in the quarter ending December 31, 1997. The increase in royalty income reflected increased demand in both the U.S. and European markets versus the same quarter a year earlier as well as an increase in total royalty per unit 9 10 resulting from the Patent Acquisition Agreement. As the Company's Strategic Alliance Partner continues to increase production and enhance marketing efforts for the Angio-Seal in the United States and in Europe, the Company expects royalty income to become an increasingly significant source of revenue. Royalty rates are based on volume of units sold and are equivalent in both the domestic and foreign licensing agreements with the Company's Strategic Alliance Partner. Cost of products sold increased 12% to $1,161,000 in the three months ended December 31, 1998 from $1,041,000 in the three months ended December 31, 1997. This increase reflects greater net sales of products offset by favorable trends in gross margins. Research and development expense, including regulatory and clinical expense, increased 3% to $1,429,000 in the three months ended December 31, 1998 from $1,394,000 in the three months ended December 31, 1997. The Company continues to assist in the development of the Angio-Seal and has expanded development on its biomaterials products, including absorbable polymers and collagen. In addition, the Company has significantly expanded its development efforts in revascularization technology as it targets commencement of clinical trials on the AVS in the second half of fiscal year 1999. The Company expects research and development expense to continue at recent levels, if not slightly increase, as it continues to assist its Strategic Partner in the development of the Angio-Seal, investigates and develops new products, conducts clinical trials and seeks regulatory approval for its proprietary products. Selling, general and administrative expense increased 22% to $541,000 in the three months ended December 31, 1998 from $444,000 in the three months ended December 31, 1997. This increase was primarily a result of legal expenses incurred related to the Company's ongoing patent infringement suit as well as one-time advisory fees incurred during the quarter. Interest expense increased 186% to $60,000 in the three months ended December 31, 1998 from $21,000 in the three months ended December 31, 1997. This increase was due to the Company's balance under the line of credit increasing from $500,000 to $2,000,000 as well as interest charges recorded in relation to the obligation under the Company's Patent Acquisition Agreement. Interest income decreased to $129,000 in the three months ended December 31, 1998 from $136,000 in the three months ended December 31, 1997 as a result of a slight decrease in average total cash and investment balances. SIX MONTHS ENDED DECEMBER 31, 1998 COMPARED TO SIX MONTHS ENDED DECEMBER 31, 1997 Revenues for these periods consisted of net sales, research and development revenue, and royalty income. Revenues increased 68% to $7,266,000 in the six months ended December 31, 1998 from $4,327,000 in the six months ended December 31, 1997. Net sales of products increased 85% to $3,206,000 from $1,736,000 for the six months ended December 31, 1998 and 1997, respectively. Research and development revenues decreased 34% to $1,160,000 from $1,762,000 for the six months ended December 31, 1998 and 1997, respectively. The increase in net sales was mainly attributable to an increase in Angio-Seal components sold to the Company's Strategic Alliance Partner, as a result of increased demand in the U.S. and European markets, as well as increases in sales of commercial bioabsorbable OEM polymer and collagen products. The decrease in research and development revenues relates to decreased performance of contract research and development for the Company's Strategic Alliance Partner as they assumed a more active role in the Angio-Seal R&D programs and as the 6F product nears commercialization. Royalty income increased 250% to $2,900,000 from $829,000 in the six months ended December 31, 1998 and 1997, respectively. Approximately 155,000 Angio-Seal units were sold to end-users in the six months ending December 31, 1998 compared to 60,000 units sold in the six months ending December 31, 1997. The increase in royalty income reflected increased demand in both the U.S. and European markets versus the same period a year earlier as well as an increase in total royalty per unit resulting from the Patent Acquisition Agreement. As the Company's Strategic Alliance Partner continues to increase 10 11 production and enhance marketing efforts of the Angio-Seal in the United States and in Europe, the Company expects royalty income to become an increasingly significant source of revenue. Royalty rates are based on volume of units sold and are equivalent in both the domestic and foreign licensing agreements with the Company's Strategic Alliance Partner. Cost of products sold increased 31% to $2,439,000 in the six months ended December 31, 1998 from $1,857,000 in the six months ended December 31, 1997. This increase reflects greater net sales of products offset by favorable trends in gross margins. Research and development expense, including regulatory and clinical expense, increased 10% to $2,827,000 in the six months ended December 31, 1998 from $2,580,000 in the six months ended December 31, 1997. The Company continues to assist in the development of the Angio-Seal and has expanded its development efforts on biomaterials products, including absorbable polymers and collagen. In addition, the Company has significantly expanded its development in revascularization technology as it targets commencement of clinical trials on the AVS in the second half of fiscal year 1999. The Company expects research and development expense to continue at recent levels, if not slightly increase, as it continues to assist in the development of the Angio-Seal, investigates and develops new products, conducts clinical trials and seeks regulatory approval for its products. Selling, general and administrative expense increased 38% to $1,115,000 in the six months ended December 31, 1998 from $808,000 in the six months ended December 31, 1997. This increase was primarily a result of legal expenses incurred related to the patent infringement suit against Perclose, Inc. which was initiated in March 1998 as well as one-time advisory fees incurred during the quarter. Interest expense increased 255% to $126,000 in the six months ended December 31, 1998 from $36,000 in the six months ended December 31, 1997. This increase was due to the Company's balance under the line of credit increasing from $500,000 to $2,000,000 as well as interest charges recorded in relation to the obligation under the Company's Patent Acquisition Agreement. Interest income decreased slightly, to $263,000 in the six months ended December 31, 1998, from $269,000 in the six months ended December 31, 1997. Total average cash and investment balances have remained fairly consistent. LIQUIDITY AND CAPITAL RESOURCES Net cash used in the Company's operating activities during the six months ended December 31, 1998 and 1997 was $396,000 and $349,000, respectively. In the six months ending December 31, 1998, changes in asset and liabilities resulted in a $1,998,000 use of cash, which was offset by a net income of $1,025,000. In comparison, changes in asset and liabilities resulted in a $87,000 use of cash and the Company had a net loss of $679,000 in the six months ending December 31, 1997. Depreciation and amortization increased $160,000 in the six months ended December 31, 1998 from the six months ended December 31, 1997. Capital expenditures were $644,000 for the six months ended December 31, 1998, primarily representing leasehold improvements and machinery and equipment related to the continued expansion of the Company's manufacturing capabilities principally its collagen and polymer product lines. The Company's cash, cash equivalents and short-term investments were $6,469,000 at December 31, 1998. In addition, the Company has pledged $1,949,000 in investments (not included in the $6,469,000) as collateral to secure bank loans made to employees for the payment of taxes incurred by such employees as a result of their receipt of Common Stock at the time of the IPO. In exchange for the Company's pledging this collateral, the employees have pledged their Common Stock as collateral to the Company. 11 12 The Company has a $2,000,000 bank revolving line of credit that converts to a term loan payable in 60 equal installments beginning January 1, 2000. A portion of this loan will be repaid with the proceeds of a $5 million tax-free loan which was obtained by the Company subsequent to December 31, 1998. The remaining proceeds of the tax-free loan will be used to finance the Company's capital financing needs through June 30, 2000. The Company received a $3,000,000 royalty advance under the License Agreement upon receipt of FDA approval of the Angio-Seal in fiscal year 1997. This royalty advance continues to be reduced as the Company exceeded minimum royalty stipulations under the Licensing Agreement. In November 1997, the Company acquired patents under a Patent Acquisition Agreement in exchange for 200,000 shares of common stock and a series of eight quarterly cash payments, beginning on March 31, 1998, totaling $1.2 million. The patents were recorded on the balance sheet at the value of the shares on the date of the agreement plus the present value of the $1.2 million cash and any legal and other related costs incurred to acquire such patents. The present value of the cash payments ($1.1 million) was recorded between short and long-term liabilities at December 31, 1997. The remaining balance at December 31, 1998 is $664,000. The Company anticipates that its results of operations will fluctuate for the foreseeable future due to a number of factors. Such factors include the Company's Strategic Alliance Partner's performance in the marketing, manufacturing and distribution of the Angio-Seal Product Line, the timing of future regulatory approvals in the United States and in countries outside of Europe including Japan, the results of ongoing and planned clinical trials for the Angio-Seal and other products, the acceptance of the Company's products in the marketplace and competitive products generally and in particular those designed for the sealing of arterial site punctures. The Company plans to continue to expend substantial resources to fund clinical trials to gain regulatory approvals and make additional marketing claims and to continue to expand research and development activities for the Angio-Seal, revascularization technology and biomaterials products. The Company believes cash generated from operations as well as funds available under financing arrangements with its bank will be sufficient to meet the Company's operating and capital requirements for the next twelve months. SALE OF ANGIO-SEAL PRODUCT LINE On February 5, 1999, TYCO International Ltd., the Company's Strategic Partner, announced the sale of the marketing and manufacturing rights of the Angio-Seal product line to St. Jude Medical, Inc. Under the purchase agreement, all of the Company's agreements with its current Strategic Partner will be transferred to St. Jude Medical, Inc. and the transaction is expected to close by the end of March 1999. YEAR 2000 COMPLIANCE The Company began work on the computer Year 2000 issue in fiscal year 1998 and expects to complete its efforts by the end of fiscal year 1999. Software applications, hardware and related information and non-information technologies have been, or are in the process of being, upgraded or replaced to ensure that all systems are Year 2000 compliant. Replacing hardware or software in this fashion is considered a normal cost of doing business and is being expensed or capitalized as appropriate. The Company is also working with its significant suppliers and customers to address any impact of their Year 2000 issues on the Company. The Company does not warrant, however, that these companies' year 2000 compliance activities will be completely successful. Management does not anticipate that the costs of year 2000 compliance will have a material effect on the Company's results of operations, cash flows, or financial position. The Company does not presently expect that its operations will be materially affected by problems with its computer systems or those of third parties with whom it deals. Statements contained in this Form 10-Q that are not historical facts are forward-looking statements that are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. The Company cautions that a number of important factors could cause the Company's actual results for fiscal year 1999 and beyond to differ materially from those in any forward-looking statements made by, or on behalf of, the Company. These important factors include, without 12 13 limitation, the time, effort and priority level that the Company's Strategic Alliance Partner and its successors attach to the Angio-Seal and the Strategic Alliance Partner's ability to successfully market and manufacture the Angio-Seal, the Company's ability to manufacture Angio-Seal components, the results of ongoing clinical trials and timing of additional regulatory approvals, announcements of technological innovations or the introduction of new products by the Company or its competitors, competition of puncture closure devices in general, general business conditions in the healthcare industry and general economic conditions. Results of operations in any past period should not be considered indicative of the results to be expected for future periods. Fluctuations in operating results may also result in fluctuations in the price of the common stock. 13 14 PART II - OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. A. Exhibits. None B. Reports on Form 8-K. None C. Financial Data Schedule 14 15 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. KENSEY NASH CORPORATION Date: February 16, 1999 By: /s/ Wendy F. DiCicco --------------------------- Wendy F. DiCicco Chief Financial Officer 15 EX-27 2 FINANCIAL DATA SCHEDULE
5 6-MOS JUN-30-1998 JUL-01-1998 DEC-31-1998 253,246 6,215,417 4,136,734 0 660,003 11,509,396 8,440,980 3,275,628 22,405,869 2,202,816 0 0 0 7,459 16,882,356 22,405,869 3,206,036 7,265,809 2,438,923 6,380,807 0 0 125,895 1,024,707 0 1,024,707 0 0 0 1,024,707 0.14 0.14
-----END PRIVACY-ENHANCED MESSAGE-----