-----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, IFDPqZsXYCZBrY+Z4jmLl4g/+gNZzHZ/PcOmkFWZBrapgba96vdYkZGpd2FnjnGa UqulBy5Lxs4jC/nXyV6a/g== 0000950137-99-001717.txt : 19990518 0000950137-99-001717.hdr.sgml : 19990518 ACCESSION NUMBER: 0000950137-99-001717 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990517 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: 99628364 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 QUARTERLY REPORT DATED 3/31/99 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: MARCH 31, 1999 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 April 30, 1999, there were outstanding 7,469,460 shares of Common Stock, par value $.001, of the registrant. 1 2 KENSEY NASH CORPORATION QUARTER ENDED MARCH 31, 1999
INDEX PAGE PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS Consolidated Balance Sheets as of March 31, 1999 (Unaudited) and June 30, 1998 ......... 3 Consolidated Statements of Operations for the three and nine months ended March 31, 1999 and 1998 (Unaudited) ................................... 4 Consolidated Statements of Stockholders' Equity as of March 31, 1999 (Unaudited) and June 30, 1998 ................ 5 Consolidated Statements of Cash Flows for the nine months ended March 31, 1999 and 1998 (Unaudited) 6 Notes to Consolidated Financial Statements (Unaudited) ........ 7 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS .......................... 10 PART II - OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K ....................................... 15 SIGNATURES ..................................................................... 16
2 3 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS KENSEY NASH CORPORATION CONSOLIDATED BALANCE SHEETS
- ---------------------------------------------------------------------------------------------------------------- MARCH 31, JUNE 30, 1999 1998 ------------ ------------ ASSETS (Unaudited) CURRENT ASSETS: Cash and cash equivalents $ 2,825,530 $ 1,407,684 Short-term investments 5,304,364 6,368,866 Trade receivables 2,520,527 1,369,960 Royalties receivable (Note 2) 1,262,646 645,784 Other receivables (including approximately $91,000 and $59,000 at March 31, 1999 and June 30, 1998, respectively, due from employees) 374,609 225,424 Inventory (Note 3) 694,616 1,027,326 Prepaid expenses and other 352,817 200,169 ------------ ------------ Total current assets 13,335,109 11,245,213 ------------ ------------ PROPERTY, PLANT AND EQUIPMENT, AT COST: Leasehold improvements 4,023,373 4,006,066 Machinery, furniture and equipment 4,357,717 3,599,827 Construction in progress 398,419 191,154 ------------ ------------ Total property, plant and equipment 8,779,509 7,797,047 Accumulated depreciation (3,541,349) (2,843,785) ------------ ------------ Net property, plant and equipment 5,238,160 4,953,262 OTHER ASSETS: Restricted investments (Note 4) 5,274,387 1,914,418 Property under capital leases, net 35,964 61,181 Acquired patents, net of accumulated amortization of $318,228 and $127,291 at March 31, 1999 and June 30, 1998, respectively 3,674,181 3,865,118 ------------ ------------ Total other assets 8,984,532 5,840,717 ------------ ------------ TOTAL $ 27,557,801 $ 22,039,192 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 1,004,193 $ 639,605 Accrued expenses 893,752 551,573 Current portion of debt, obligation under patent acquisition agreement and capital lease obligations 561,877 577,891 Deferred revenue 15,250 53,120 ------------ ------------ Total current liabilities 2,475,072 1,822,189 ------------ ------------ DEFERRED REVENUE - ROYALTIES (Note 2) 1,084,592 1,979,580 DEBT, OBLIGATION UNDER PATENT ACQUISITION AGREEMENT and OBLIGATION UNDER CAPITAL LEASES, long-term portion 6,060,638 2,373,960 ------------ ------------ Total liabilities 9,620,302 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 March 31, 1999 and June 30, 1998 Common stock, $.001 par value, 25,000,000 shares authorized, 7,469,460 and 7,459,272 shares issued and outstanding at March 31, 1999 and June 30, 1998, respectively 7,469 7,459 Capital in excess of par value 37,687,769 37,597,381 Accumulated deficit (19,757,739) (21,741,377) ------------ ------------ Total stockholders' equity 17,937,499 15,863,463 ------------ ------------ TOTAL $ 27,557,801 $ 22,039,192 ============ ============
See notes to consolidated financial statements. 3 4 KENSEY NASH CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
- ------------------------------------------------------------------------------------------------------------ THREE MONTHS ENDED NINE MONTHS ENDED MARCH 31, MARCH 31, ------------------------------------------------------------ 1999 1998 1999 1998 REVENUES (Notes 1 and 2): Net sales $ 1,789,974 $ 1,602,429 $ 4,996,010 $ 3,338,785 Research and development 451,677 1,079,343 1,611,315 2,841,313 Royalty income (Note 2 and 8) 2,126,718 925,183 5,026,853 1,754,228 ------------ ------------ ------------ ------------ Total revenues 4,368,369 3,606,955 11,634,178 7,934,326 ------------ ------------ ------------ ------------ OPERATING COSTS AND EXPENSES: Cost of products sold 1,274,399 994,604 3,713,322 2,851,323 Research and development 1,438,534 1,507,672 4,265,523 4,087,332 Selling, general and administrative 781,762 400,512 1,896,657 1,208,562 ------------ ------------ ------------ ------------ Total operating costs and expenses 3,494,695 2,902,788 9,875,502 8,147,217 ------------ ------------ ------------ ------------ INCOME (LOSS) FROM OPERATIONS 873,674 704,167 1,758,676 (212,891) ------------ ------------ ------------ ------------ OTHER INCOME: Interest income 180,605 136,639 443,837 405,823 Interest expense (95,836) (31,183) (221,731) (66,690) Other 488 99 2,856 4,292 ------------ ------------ ------------ ------------ Total other income - net 85,257 105,555 224,962 343,425 ------------ ------------ ------------ ------------ INCOME BEFORE INCOME TAXES 958,931 809,722 1,983,638 130,534 Provision for income taxes (Note 5) ------------ ------------ ------------ ------------ NET INCOME $ 958,931 $ 809,722 $ 1,983,638 $ 130,534 ============ ============ ============ ============ EARNINGS PER COMMON SHARE and EARNINGS PER COMMON SHARE - $ 0.13 $ 0.11 $ 0.27 $ 0.02 assuming dilution (Note 1) ============ ============ ============ ============ WEIGHTED AVERAGE COMMON SHARES OUTSTANDING (Note 1) 7,513,359 7,699,505 7,478,887 7,504,584 ============ ============ ============ ============
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 10,188 10 90,388 90,388 Net income 1,983,638 1,983,638 ------------ ------------ ------------ ------------ ------------ BALANCE, MARCH 31, 1999 (Unaudited) 7,469,460 $ 7,469 $ 37,687,769 $(19,757,739) $ 17,937,499 ============ ============ ============ ============ ============
See notes to consolidated financial statements. 5 6 KENSEY NASH CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
- ----------------------------------------------------------------------------------------------------------- NINE MONTHS ENDED MARCH 31, ------------------------------- 1999 1998 OPERATING ACTIVITIES: Net income $ 1,983,638 $ 130,534 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 913,718 689,774 Changes in assets and liabilities which provided (used) cash: Accounts receivable (1,916,614) (1,541,249) Prepaid expenses and other current assets (152,648) 108,929 Inventory 332,710 (438,058) Accounts payable and accrued expenses 706,767 473,229 Deferred revenue (932,858) (369,106) ----------- ---------- Net cash provided by (used in) operating activities 934,713 (945,947) ----------- ---------- INVESTING ACTIVITIES: Patent costs capitalized (69,539) Additions to property, plant and equipment (982,462) (1,451,902) Purchase of restricted investments (3,359,969) Sale of investments 1,064,502 1,702,616 ----------- ---------- Net cash (used in) provided by investing activities (3,277,929) 181,175 ----------- ---------- FINANCING ACTIVITIES: Principal payments under capital leases (28,560) (33,538) Repayments of patent acquisition obligation (375,776) (125,000) Proceeds from long-term debt 5,000,000 925,000 Repayments of long-term debt (925,000) Exercise of stock options 90,398 541,857 ----------- ---------- Net cash provided by financing activities 3,761,062 1,308,319 ----------- ---------- INCREASE IN CASH AND CASH EQUIVALENTS 1,417,846 543,547 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 1,407,684 868,180 ----------- ---------- CASH AND CASH EQUIVALENTS, END OF PERIOD $ 2,825,530 $ 1,411,727 =========== =========== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid for interest $ 204,830 $ 66,690 =========== =========== Cash paid for income taxes $ 30,000 $ =========== ===========
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 March 31, 1999, the consolidated statements of operations for the three and nine months ended March 31, 1999 and 1998 and the consolidated statements of cash flows for the nine months ended March 31, 1999 and 1998 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 March 31, 1999 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 March 31, 1999 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 $102,878 and $15,000 for the three months ended March 31, 1999 and 1998, respectively and $242,893 and $72,035 for the nine months ended March 31, 1999 and 1998, 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 7 8 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 March 31, 1999, the Company had exceeded the first, second and third royalty year (periods ended September 30, 1997, 1998 and 1999) Minimum Royalties by $352,310, $3,058,970 and $419,534, respectively. The deferred revenue balance has been reduced by 50% of such total excess, to $1,084,592. 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 March 31, 1999. NOTE 3 -- INVENTORY Inventory is stated at the lower of cost (determined by the average cost method, which approximates first-in, first-out) or markets. Inventory primarily includes the cost of material utilized in the processing of the Company's products and is as follows:
MARCH 31, 1999 JUNE 30, 1998 Raw materials $ 646,984 $ 971,357 Work in process 47,632 55,969 ---------- ------------ Total $ 694,616 $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 $1,823,967 at March 31, 1999. As of March 31, 1999, the Company had $3,325,000 in investments, which are restricted under a debt agreement with a bank (see Note 6). 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 ($30,000 for the nine months ended March 31, 1999) has generated AMT tax credits that are recorded as deferred tax assets. NOTE 6 -- DEBT 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 the Company's $5 million tax exempt bond issue, which was made through the local development authority, and made the proceeds available to the Company under the Tax Free Loan. Of the $5 million proceeds, $925,000 was used to pay down the Company's existing balance under its $2 million term loan. The remaining proceeds of the Tax Free Loan are held by the bank in investments restricted for the Company's capital equipment financing through June 30, 2000. As of March 31, 1999, the restricted investment balance was $3,325,000. The Tax Free 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 8 9 November. The assets of the Company, with the exception of the Company's patents, collateralize the Tax Free Loan. NOTE 7 -- 6F ANGIO-SEAL EUROPEAN COMMUNITY MARK APPROVAL In February the Company announced European Community ("CE") Mark Approval had been granted for its new 6F Angio-Seal puncture closure device. CE Mark approval allows the sale of the device throughout the European Union. This smaller version of the Company's 8F Angio-Seal, currently marketed in both the US and Europe, is designed to seal arterial punctures 6F and smaller and address the largest segment of the puncture closure market. NOTE 8 -- STRATEGIC ALLIANCE PARTNER On March 16, 1999, St. Jude Medical, Inc. ("St. Jude") announced the completion of its acquisition of the marketing and manufacturing rights of the Angio-Seal Product Line from TYCO International Ltd. ("TYCO"), the Company's previous Strategic Alliance Partner. Under the purchase agreement, all of the Company's agreements with its Strategic Alliance Partner will be transferred to St. Jude. Accordingly, St. Jude replaced TYCO as the Company's Strategic Alliance Partner upon finalization of the acquisition. The Company received additional royalty payments (the "Supplemental Royalty") from the previous owner of the Angio-Seal License Agreements, TYCO, in the amount of $1.5 million. The Supplemental Royalty was to compensate the Company for lost Angio-Seal sales and expenses incurred during the ongoing transition of corporate ownership of the Angio-Seal License Agreements to St. Jude. The payments were made in two equal installments on March 29, 1999 and April 5, 1999. As such, the Company has recorded the first payment of $750,000 as royalty income for the quarter ending March 31, 1999. 9 10 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. On March 16, 1999, St. Jude Medical, Inc. ("St. Jude") announced the completion of its acquisition of the marketing and manufacturing rights of the Angio-Seal product line from TYCO International Ltd. ("TYCO"), the Company's previous Strategic Alliance Partner. Under the purchase agreement, all of the Company's agreements with its Strategic Alliance Partner will be transferred to St. Jude. Accordingly, St. Jude replaced TYCO as the Company's Strategic Alliance Partner upon finalization of the acquisition. In February the Company announced European Community ("CE") Mark Approval had been granted for its new 6F Angio-Seal puncture closure device. CE Mark approval allows the sale of the device throughout the European Union. This smaller version of the Company's 8F Angio-Seal, currently marketed in both the US and Europe, is designed to seal arterial punctures 6F and smaller and address the largest segment of the puncture closure market. The Company has expanded its capabilities in absorbable biomaterials. The Company is currently manufacturing collagen products for third parties for use as delivery systems in numerous 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 MARCH 31, 1999 COMPARED TO THREE MONTHS ENDED MARCH 31, 1998 Revenues for these periods consisted of net sales, research and development revenue and royalty income. Revenues increased 21% to $4,368,000 in the three months ended March 31, 1999 from $3,607,000 in the three months ended March 31, 1998. Net sales of products increased 12% to $1,790,000 from $1,602,000 for the three months ended March 31, 1999 and 1998, respectively. Research and development revenues decreased 58% to $452,000 from $1,079,000 for the three months ended March 31, 1999 and 1998, respectively. The increase in net sales was attributable to an increase in both 8F Angio-Seal components and the addition of complete 6F Angio-Seal commercial devices as well as increased sales of commercial bioabsorbable OEM polymer and collagen products. The increases in 10 11 sales of Angio-Seal components and devices, sold to the Company's Strategic Alliance Partner, come as a result of increased demand for the 8F product in the US and European markets, as well as the planned European launch of the new 6F Angio-Seal device by the Company's Strategic Alliance Partner. The decrease in research and development revenues is due to a reduction in research and development activity as the new 6F Angio-Seal transitioned from research and development to commercial launch. In addition, the Company was informed by its Strategic Alliance Partner that it would perform ongoing research and development in-house. Royalty income increased 130% to $2,127,000 from $925,000 in the three months ended March 31, 1999 and 1998, respectively. Approximately 72,000 Angio-Seal units were sold to end-users in the quarter ending March 31, 1999 compared to 51,000 units sold in the quarter ending March 31, 1998. 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 a $750,000 supplemental royalty payment received by the Company in March 1999 from the previous owner of the Angio-Seal Licensing Agreements, TYCO. As the Company's Strategic Alliance Partner continues to increase production and enhance marketing efforts for the Angio-Seal product line 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 28% to $1,274,000 in the three months ended March 31, 1999 from $995,000 in the three months ended March 31, 1998. This increase reflects greater net sales of products in addition to unfavorable product mix which resulted in an unfavorable gross margin trend. Research and development expense, including regulatory and clinical expense, decreased 5% to $1,439,000 in the three months ended March 31, 1999 from $1,508,000 in the three months ended March 31, 1998. This decrease in expense is mainly attributable to the ongoing shift of development for the Angio-Seal to the Company's Strategic Alliance Partner as well as the commercialization of the 6F product. This decrease is offset by the Company's expansion of development efforts on its biomaterials products, including absorbable polymers and collagen. In addition, the Company continues its development efforts in revascularization technology as it targets commencement of clinical trials on the AVS. The Company expects research and development expense to increase as it investigates and develops new products, conducts clinical trials and seeks regulatory approval for its proprietary products. Selling, general and administrative expense increased 95% to $782,000 in the three months ended March 31, 1999 from $401,000 in the three months ended March 31, 1998. This increase was primarily a result of legal expenses incurred related to the Company's ongoing patent infringement suit. Interest expense increased 207% to $96,000 in the three months ended March 31, 1999 from $31,000 in the three months ended March 31, 1998. This increase was due to an increase in the Company's outstanding debt from $1,425,000 at March 31, 1998 to $6,075,000 at March 31, 1999. Interest income increased 32% to $181,000 in the three months ended March 31, 1999 from $137,000 in the three months ended March 31, 1998 as a result of an increase in average total cash and investment balances. NINE MONTHS ENDED MARCH 31, 1999 COMPARED TO NINE MONTHS ENDED MARCH 31, 1998 Revenues for these periods consisted of net sales, research and development revenue and royalty income. Revenues increased 47% to $11,634,000 in the nine months ended March 31, 1999 from 11 12 $7,934,000 in the nine months ended March 31, 1998. Net sales of products increased 50% to $4,996,000 from $3,339,000 for the nine months ended March 31, 1999 and 1998, respectively. Research and development revenues decreased 43% to $1,611,000 from $2,841,000 for the nine months ended March 31, 1999 and 1998, respectively. The increase in net sales was attributable to an increase in both 8F Angio-Seal components and the addition of complete 6F Angio-Seal commercial devices as well as increased sales of commercial bioabsorbable OEM polymer and collagen products. The increases in sales of Angio-Seal components and devices, sold to the Company's Strategic Alliance Partner, come as a result of increased demand for the 8F product in the US and European markets, as well as the planned European launch of the new 6F Angio-Seal device by the Company's Strategic Alliance Partner. The decrease in research and development revenues is due to a reduction in research and development activity as the new 6F Angio-Seal transitioned from research and development to commercial launch. In addition, the Company was informed by its Strategic Alliance Partner that it would perform ongoing research and development in-house. Royalty income increased 187% to $5,027,000 from $1,754,000 in the nine months ended March 31, 1999 and 1998, respectively. Approximately 227,000 Angio-Seal units were sold to end-users in the nine months ending March 31, 1999 compared to 110,000 units sold in the nine months ending March 31, 1998. 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. In addition, the Company received a $750,000 supplemental royalty payment in March 1999 from the previous owner of the Angio-Seal Licensing Agreements, TYCO. As the Company's Strategic Alliance Partner continues to increase production and enhance marketing efforts of the Angio-Seal product line 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 30% to $3,713,000 in the nine months ended March 31, 1999 from $2,851,000 in the nine months ended March 31, 1998. This increase reflects greater net sales of products, which resulted in favorable trends in gross margins. Research and development expense, including regulatory and clinical expense, increased 4% to $4,266,000 in the nine months ended March 31, 1999 from $4,087,000 in the nine months ended March 31, 1998. The Company continued 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. The Company expects research and development expense to increase as it investigates and develops new products, conducts clinical trials and seeks regulatory approval for its products. Selling, general and administrative expense increased 57% to $1,897,000 in the nine months ended March 31, 1999 from $1,209,000 in the nine months ended March 31, 1998. This increase was primarily a result of legal expenses incurred related to the Company's ongoing patent infringement suit. Interest expense increased 232% to $222,000 in the nine months ended March 31, 1999 from $67,000 in the nine months ended March 31, 1998. This increase was due to the Company's balance under the line of credit increasing from $1,425,000 to $6,075,000 as well as interest charges recorded in relation to the obligation under the Company's Patent Acquisition Agreement. Interest income increased 12 13 9%, to $444,000 in the nine months ended March 31, 1999, from $406,000 in the nine months ended March 31, 1998 as a result of an increase in average total cash and investment balances. LIQUIDITY AND CAPITAL RESOURCES Net cash provided by the Company's operating activities during the nine months ended March 31, 1999 was $935,000, while net cash used by the Company's operating activities during the nine months ended March 31, 1998 was $946,000. In the nine months ending March 31, 1999, changes in asset and liability balances resulted in a $1,963,000 use of cash, which was offset by a net income of $1,984,000 and non-cash depreciation and amortization of $914,000. Changes in asset and liability balances resulted in a $1,766,000 use of cash offset by net income of $131,000 in the nine months ending March 31, 1998. Depreciation and amortization increased $224,000 in the nine months ended March 31, 1999 from the nine months ended March 31, 1998. Capital expenditures were $982,000 for the nine months ended March 31, 1999, primarily representing machinery and equipment and leasehold improvements 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 $8,130,000 at March 31, 1999. In addition, the Company has $5,274,000 in restricted investment accounts (not included in the $8,130,000). The Company has pledged $1,949,000 in investments 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. The Company also has $3,325,000 in investments restricted for capital spending through June 30, 2000. In January 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 the Company's $5 million tax exempt bond issue, which was made through the local development authority, and made the proceeds available to the Company under the Tax Free Loan. The Company had a $2,000,000 term loan payable in 60 equal installments beginning February 1, 2000. A portion of this term loan was repaid with the proceeds of the Tax Free Loan. 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 March 31, 1999 is $503,000. 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 13 14 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 continue to expand research and development activities particularly for its 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. 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 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. 14 15 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 15 16 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: May 17, 1999 By: /s/ Wendy F. DiCicco ----------------------------- Wendy F. DiCicco Chief Financial Officer 16 EX-27 2 FDS
5 9-Mos Jun-30-1999 Jul-01-1998 Mar-31-1999 2,825,530 8,629,364 4,157,782 0 694,616 16,660,109 8,779,509 3,541,349 27,557,801 2,475,072 0 0 0 7,469 17,937,499 27,557,801 4,996,010 11,634,178 3,713,322 9,875,502 0 0 221,731 1,983,638 0 1,983,638 0 0 0 1,983,638 0.27 0.27
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