-----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, GrCwZexL8yyn3qWryI+qceEOJzM5p+F4A1nLT1tzdUG8SI9pxvUAvowgK/0/EnNf EvJwt1FXk8AYUIM2WRddZw== 0000950137-02-000747.txt : 20020414 0000950137-02-000747.hdr.sgml : 20020414 ACCESSION NUMBER: 0000950137-02-000747 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20020214 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: 1934 Act SEC FILE NUMBER: 000-27120 FILM NUMBER: 02549968 BUSINESS ADDRESS: STREET 1: MARSH CREEK CORPORATE CENTER STREET 2: 55 EAST UWCHLAN AVE 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 c67545e10-q.txt QUARTERLY REPORT 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, 2001 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, 2002, there were outstanding 10,714,544 shares of Common Stock, par value $.001, of the registrant. KENSEY NASH CORPORATION QUARTER ENDED DECEMBER 31, 2001 INDEX
PAGE ---- PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS Consolidated Balance Sheets as of December 31, 2001 (Unaudited) and June 30, 2001......................... 3 Consolidated Statements of Operations for the three and six months ended December 31, 2001 and 2000 (Unaudited).......................................................... 4 Consolidated Statements of Stockholders' Equity as of December 31, 2001 (Unaudited) and June 30, 2001............................... 5 Consolidated Statements of Cash Flows for the six months ended December 31, 2001 and 2000 (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......................................................... 18 SIGNATURES................................................................................................. 19
2 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS KENSEY NASH CORPORATION CONSOLIDATED BALANCE SHEETS - --------------------------------------------------------------------------------
DECEMBER 31, ASSETS 2001 JUNE 30, CURRENT ASSETS: (UNAUDITED) 2001 ------------ ------------ Cash and cash equivalents $ 6,241,383 $ 2,841,963 Investments 25,716,804 24,164,887 Trade receivables, net of allowance for doubtful accounts of $26,456 and $1,000 at December 31, 2001 and June 30, 2001, respectively 2,412,362 4,623,456 Royalties receivable 2,356,539 2,270,091 Officer loans 1,207,299 1,170,276 Other receivables (including approximately $335,545 and $41,000 at December 31, 2001 and June 30, 2001, respectively, due from employees) 536,217 244,601 Inventory 2,192,983 1,321,511 Deferred tax asset, current portion 1,163,727 2,318,741 Prepaid expenses and other 1,050,254 512,099 ------------ ------------ Total current assets 42,877,568 39,467,625 ------------ ------------ PROPERTY, PLANT AND EQUIPMENT, AT COST: Leasehold improvements 5,676,760 5,676,760 Machinery, furniture and equipment 10,240,453 7,853,177 Construction in progress 863,483 1,606,181 ------------ ------------ Total property, plant and equipment 16,780,696 15,136,118 Accumulated depreciation (7,027,365) (6,105,575) ------------ ------------ Net property, plant and equipment 9,753,331 9,030,543 ------------ ------------ OTHER ASSETS: Restricted investments 2,113,072 2,231,251 Property under capital leases, net 1,525 Deferred tax asset, non-current portion 2,105,837 2,125,407 Acquired patents, net of accumulated amortization of $1,028,180 and $896,666 at December 31, 2001 and June 30, 2001, respectively 3,068,187 3,199,700 Goodwill, net of accumulated amortization of $100,037 at December 31, 2001 and June 30, 2001 3,284,303 3,284,303 ------------ ------------ Total other assets 10,571,399 10,842,186 ------------ ------------ TOTAL $ 63,202,298 $ 59,340,354 LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 1,446,737 $ 1,891,484 Accrued expenses 909,431 544,268 Current portion of debt and capital lease obligations 943,200 910,738 Deferred revenue 232,194 123,352 ------------ ------------ Total current liabilities 3,531,562 3,469,842 ------------ ------------ LONG TERM PORTION OF DEBT AND CAPITAL LEASE OBLIGATIONS 1,829,026 2,309,385 ------------ ------------ Total liabilities 5,360,588 5,779,227 ------------ ------------ COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY: Preferred stock, $.001 par value, 100,000 shares authorized, no shares issued or outstanding at December 31, 2001 and June 30, 2001 Common stock, $.001 par value, 25,000,000 shares authorized, 10,713,384 and 10,509,431 shares issued and outstanding at December 31, 2001 and June 30, 2001, respectively 10,713 10,509 Capital in excess of par value 66,024,280 63,974,745 Accumulated deficit (8,003,865) (10,196,713) Accumulated other comprehensive income (189,418) (227,414) ------------ ------------ Total stockholders' equity 57,841,710 53,561,127 ------------ ------------ TOTAL $ 63,202,298 $ 59,340,354 ============ ============
See notes to consolidated financial statements. 3 KENSEY NASH CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) - --------------------------------------------------------------------------------
Three Months Ended Six Months Ended December 31, December 31, ---------------------------- ---------------------------- 2001 2000 2001 2000 REVENUES: Net sales $ 4,257,699 $ 3,096,225 $ 8,850,878 $ 5,680,965 Research and development 175,299 115,000 280,733 116,843 Royalty income 2,358,267 1,925,471 4,570,100 3,922,455 ------------ ------------ ------------ ------------ Total revenues 6,791,265 5,136,696 13,701,711 9,720,263 ------------ ------------ ------------ ------------ OPERATING COSTS AND EXPENSES: Cost of products sold 2,029,582 1,611,932 4,165,209 3,326,755 Research and development 2,366,136 1,578,222 5,110,663 3,215,272 Selling, general and administrative 995,906 794,903 1,906,334 1,311,530 In-process research and development charge 7,593,597 7,593,597 ------------ ------------ ------------ ------------ Total operating costs and expenses 5,391,624 11,578,654 11,182,206 15,447,154 ------------ ------------ ------------ ------------ INCOME (LOSS) FROM OPERATIONS 1,399,641 (6,441,958) 2,519,505 (5,726,891) ------------ ------------ ------------ ------------ OTHER INCOME: Interest income 478,985 480,360 955,070 1,019,062 Interest expense (59,610) (75,907) (120,234) (101,610) Other (2,275) 400 (6,481) 400 ------------ ------------ ------------ ------------ Total other income - net 417,100 404,853 828,355 917,852 ------------ ------------ ------------ ------------ INCOME (LOSS) BEFORE INCOME TAXES 1,816,741 (6,037,105) 3,347,860 (4,809,039) Income tax expense (626,776) (1,155,012) ------------ ------------ ------------ ------------ NET INCOME (LOSS) $ 1,189,965 $ (6,037,105) $ 2,192,848 $ (4,809,039) ============ ============ ============ ============ BASIC EARNINGS (LOSS) PER SHARE $ 0.11 $ (0.58) $ 0.21 $ (0.46) ============ ============ ============ ============ DILUTED EARNINGS (LOSS) PER SHARE $ 0.11 $ (0.58) $ 0.20 $ (0.46) ============ ============ ============ ============ WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 10,664,773 10,459,568 10,601,932 10,457,993 ============ ============ ============ ============ DILUTED WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 11,322,039 10,459,568 11,207,860 10,457,993 ============ ============ ============ ============
See notes to consolidated financial statements. 4 KENSEY NASH CORPORATION CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY - --------------------------------------------------------------------------------
ACCUMULATED CAPITAL OTHER COMPREHENSIVE COMMON STOCK IN EXCESS ACCUMULATED COMPREHENSIVE INCOME / ------------------- OF PAR DEFICIT (LOSS) / GAIN (LOSS) TOTAL SHARES AMOUNT VALUE BALANCE, JUNE 30, 1999 7,470,710 $ 7,470 $37,697,452 $(18,562,619) $(241,402) $18,900,901 Shares issued upon Secondary Offering 2,959,000 2,959 26,247,007 26,249,966 Secondary Offering costs (501,241) (501,241) Exercise of stock options 25,789 26 246,824 246,850 Net income 4,749,164 $4,749,164 4,749,164 Comprehensive loss (241,284) (241,284) (241,284) ---------- Comprehensive income $4,507,880 ========== ---------- ------- ---------- ------------ -------- ---------- BALANCE, JUNE 30, 2000 10,455,499 10,455 63,690,042 (13,813,455) (482,686) 49,404,356 ---------- ------- ---------- ------------ -------- ---------- Secondary Offering costs (212,681) (212,681) Exercise of stock options 53,932 54 497,384 497,438 Net income 3,616,742 $3,616,742 3,616,742 Comprehensive gain 255,272 255,272 255,272 ---------- Comprehensive income $3,872,014 ---------- ------- ----------- ------------- --------- ========== ----------- BALANCE, JUNE 30, 2001 10,509,431 $10,509 $63,974,745 $(10,196,713) $(227,414) $53,561,127 ---------- ------- ----------- ------------- --------- ----------- Exercise of stock options 203,953 204 2,049,535 2,049,739 Net income 2,192,848 $2,192,848 2,192,848 Comprehensive loss 37,996 37,996 37,996 ---------- Comprehensive income $2,230,844 ---------- ------- ----------- ------------- --------- ========== ----------- BALANCE, DECEMBER 31, 2001 10,713,384 $10,713 $66,024,280 $ (8,003,865) $(189,418) $57,841,710 ========== ======= =========== ============= ========= ===========
5 KENSEY NASH CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) - --------------------------------------------------------------------------------
SIX MONTHS ENDED DECEMBER 31, ----------------------------- 2001 2000 OPERATING ACTIVITIES: Net income (loss) $ 2,192,848 $ (4,809,039) Adjustments to reconcile net income (loss) to net cash used in operating activities: Depreciation and amortization 1,054,828 934,783 In-process research and development charge 7,593,597 Changes in assets and liabilities which provided (used) cash: Accounts receivable 1,796,007 84,944 Deferred tax asset 1,174,584 Prepaid expenses and other current assets (538,155) (105,586) Inventory (871,472) (350,382) Accounts payable and accrued expenses (79,584) (589,706) Deferred revenue 108,842 (288,850) ------------ ------------ Net cash provided by operating activities 4,837,898 2,469,761 ------------ ------------ INVESTING ACTIVITIES: Additions to property, plant and equipment (1,644,578) (1,248,063) Acquisition of THM Biomedcal, Inc. (6,771,087) Redemption of investments 9,535,000 Purchase of investments (10,930,742) (4,153,462) ------------ ------------ Net cash used in investing activities (3,040,320) (12,172,612) ------------ ------------ FINANCING ACTIVITIES: Principal payments under capital leases (1,937) (5,898) Repayments of long term debt (445,960) (186,088) Secondary offering costs (212,326) Exercise of stock options 2,049,739 37,137 ------------ ------------ Net cash provided by (used in) financing activities 1,601,842 (367,175) ------------ ------------ INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 3,399,420 (10,070,026) CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 2,841,963 24,117,502 ------------ ------------ CASH AND CASH EQUIVALENTS, END OF PERIOD $ 6,241,383 $ 14,047,476 ============ ============ SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid for interest $ 120,234 $ 101,610 ============ ============ Cash paid for income taxes $ 80,000 $ ============ ============
See notes to consolidated financial statements. 6 KENSEY NASH CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 1 --CONSOLIDATED FINANCIAL STATEMENTS BASIS OF PRESENTATION The consolidated balance sheet at December 31, 2001, the consolidated statements of operations for the three and six months ended December 31, 2001 and 2000 and the consolidated statements of cash flows for the six months ended December 31, 2001 and 2000 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, 2001 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 accounting principles generally accepted in the United States of America, 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, 2001 consolidated financial statements filed with the Securities and Exchange Commission on Form 10-K. The results of operations for the period ended December 31, 2001 are not necessarily indicative of operating results for the full year. PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION The consolidated financial statements include the accounts of Kensey Nash Corporation and Kensey Nash Holding Company. All intercompany transactions and balances have been eliminated. Kensey Nash Holding Company, incorporated in Delaware on January 8, 1992, was formed to hold title to certain Company patents and has no operations. The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America necessarily requires management to make estimates and assumptions. These estimates and assumptions, which may differ from actual results, will affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenue and expense during the period. CASH AND CASH EQUIVALENTS Cash and cash equivalents represent cash in banks and short-term investments having an original maturity of less than six months. EXPORT SALES There were $104,617 and $264,489 in export sales from the Company's U.S. operations to unaffiliated customers in Europe in the three and six months ended December 31, 2001, respectively. There were no export sales in the three and six months ended December 31, 2000. REVENUE RECOGNITION The Company recognizes revenue under the provisions of Staff Accounting Bulletin (SAB) No. 101, Revenue Recognition in Financial Statements (SAB 101). Accordingly, sales revenue is recognized when the related product is shipped. Revenue under research and development contracts is recognized as the related costs are incurred. Advance payments received for products or services are recorded as deferred revenue and are recognized when the product is shipped or services are performed. The Company receives a royalty (historically 12%, became 9% in October 2000 when a cumulative 1,000,000 units had been sold) on every Angio-Seal unit sold by our partner, St. Jude Medical. We recognize the revenue, in accordance with the Licensing Agreement between the Company and St. Jude Medical, at the end of each month when St. Jude Medical advises us of their total Angio-Seal sales dollars for the month. Royalty payments are received within 45 days of the end of each calendar quarter. 7 EARNINGS PER SHARE Earnings per share are calculated in accordance with 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. COMPREHENSIVE INCOME The Company accounts for comprehensive income under the provisions of SFAS No. 130, Reporting Comprehensive Income (SFAS 130). Accordingly, accumulated other comprehensive loss is shown in the consolidated statements of shareholders' equity at December 31, 2001, June 30, 2001, 2000 and 1999, and is solely comprised of unrealized gains and losses on the Company's available-for-sale securities. The tax effect of other comprehensive income for the six months ended December 31, 2001 and for the fiscal years ended June 30, 2001 and 2000 was $98,000, $117,000 and $0, respectively. RECENT PRONOUNCEMENTS In June 2001 the Financial Accounting Standards Board (FASB) issued SFAS No. 141, Business Combinations (SFAS 141), and SFAS No. 142, Goodwill and Other Intangible Assets (SFAS 142), which were effective July 1, 2001 for the Company, as the Company early adopted SFAS 142. SFAS 141 requires that the purchase method of accounting be used for all business combinations subsequent to June 30, 2001 and specifies criteria for recognizing intangible assets acquired in a business combination. SFAS 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized upon adoption of this standard, but instead be tested for impairment at least annually. Intangible assets with definite useful lives will continue to be amortized over their respective useful lives. The Company recorded $100,036 in goodwill amortization expense for the year ended June 30, 2001. Goodwill amortization expense for the year ending June 30, 2002 would have been $205,111 if the Company had decided not to early adopt SFAS 142. The early adoption of SFAS 142 did not result in the reclassification of any intangible assets, changes in the amortization periods for those intangible assets with definite lives or in the impairment of any intangible assets. In accordance with the provisions of SFAS 142, the Company has done an evaluation of goodwill for impairment and determined that no impairment has occurred as of December 31, 2001. The FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations (SFAS 143) and SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS 144), which will both be effective for the Company's fiscal year beginning July 1, 2002. The Company is currently evaluating all of the provisions of SFAS 143 and SFAS 144 and is, therefore, not presently able to quantify the impact of adoption. NOTE 2 -- 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, JUNE 30, 2001 2001 ------------ ---------- Raw materials $1,726,634 $1,062,626 Work in process 466,349 240,451 Finished Goods 18,434 ---------- ---------- Total $2,192,983 $1,321,511 ========== ========== NOTE 3 -- COMMITMENTS AND CONTINGENCIES As of December 31, 2001, the Company has pledged $2,113,072 in investments as collateral to secure certain bank loans to officers which were used by such officers for the payment of taxes incurred as the result of the receipt of Common Stock at the Company's initial public offering in December 1995. In exchange for the Company pledging collateral for such loans, each affected officer has pledged their Common Stock as collateral to the Company. The loans are repayable at the sooner of the sale of the officer's stock or December 2002. The balance outstanding on such officer loans was $2,030,620 at December 31, 2001. 8 NOTE 4 -- INCOME TAXES As of June 30, 2001, the Company had net operating loss (NOL) carryforwards for federal and state tax purposes totaling $5.4 and $20.0 million, respectively. A portion of the NOL may be subject to various statutory limitations as to its usage. The Company recognized income tax expense for the first time in the quarter ended September 30, 2001 as a result of the recognition of a tax benefit in fiscal year 2001 related to the realization of certain deferred tax assets which had previously been offset by a valuation allowance. NOTE 5 -- THM ACQUISITION On September 1, 2000 the Company acquired THM Biomedical, Inc. (THM), a developer of porous, biodegradable, tissue-engineering products for the repair and replacement of musculoskeletal tissues, for approximately $10.5 million plus acquisition costs of approximately $239,000. The transaction was financed with $6.6 million of the Company's cash and a note payable to the shareholders of THM in the amount of $4.5 million (the Acquisition Obligation). The Acquisition Obligation is due in equal quarterly installments of $281,000 beginning on December 31, 2000 and ending on September 30, 2004. Accordingly, the present value of the cash payments (discounted based upon the Company's available borrowing rate of 7.5%) of $3.8 million was recorded as a liability on the Company's financial statements, with a remaining balance of $2.8 million at December 31, 2001. The acquisition has been accounted for under the purchase method of accounting and THM's results of operations are included in those of the Company since the date of acquisition. The purchase price has been allocated to the assets acquired and liabilities assumed based on their estimated fair values on the date of acquisition. The allocation has resulted in goodwill of approximately $3.4 million, which was originally being amortized, on a straight-line basis over 17 years. The following is a summary of the allocation (in thousands): Assets $ 400 Accrued expenses and other liabilities (702) In-process research and development 7,594 Excess of cost over net assets acquired (goodwill) 3,384 ------- $10,676 ======= A significant portion of the purchase price was identified as acquired in-process research and development (IPR&D). The valuation of IPR&D was performed in an independent appraisal using proven valuation procedures and techniques and represents the estimated fair market value based on risk-adjusted cash flows related to the IPR&D programs. The IPR&D consists of four primary research and development programs that are expected to reach completion between late 2002 and 2005. At the date of acquisition, the development of these programs had not yet reached technological feasibility and the IPR&D had no alternative future uses. Accordingly, these costs were immediately expensed in the consolidated statement of operations on the acquisition date. The following unaudited pro-forma financial information assumes that the acquisition had occurred as of the beginning of the earliest period presented: SIX MONTHS SIX MONTHS ENDED ENDED 12/31/01 12/31/00 ------------ ------------ Total revenue $ 13,701,711 $ 10,987,158 ============ ============ IPR&D Charge $ -- $ (7,593,597) ============ ============ Net income $ 2,192,848 $ (3,834,430) ============ ============ Basic earnings per share $ 0.21 $ (0.37) ============ ============ Diluted earnings per share $ 0.20 $ (0.37) ============ ============ 9 These pro forma results are based on certain assumptions and estimates. The pro forma results do not necessarily represent results that would have occurred if the acquisition had taken place at the beginning of the specified periods, nor are they indicative of the results of future combined operations. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis should be read in conjunction with our financial statements and the related notes included in this report. OVERVIEW We were founded in 1984 and our common stock became publicly traded in December 1995. We have been profitable in our last sixteen fiscal quarters (excluding the one time IPR&D charge taken in our second quarter of fiscal year 2001). Revenues Our revenues consist of three components: net sales, research and development revenue and royalty income. Net Sales. Net sales is comprised of absorbable biomaterials products and Angio-Seal(TM)devices we manufactured and sold to St. Jude Medical. Biomaterials. The biomaterials component of net sales represents the sale of our biomaterials products to customers for use in the following markets: orthopedics, cardiology, drug/biologics delivery, dental and wound care. In 1997, our biomaterials sales were comprised almost 100% of the absorbable collagen and polymer components of the Angio-Seal supplied to our strategic alliance partner. Since that time we have experienced significant sales growth in our biomaterials products as we have brought in new customers, increased sales to those customers over the past four years, assisted in the development of new product offerings and expanded our marketing activities. We believe this growth will continue because of greater acceptance by the medical community of biomaterials and technological advances which have expanded the applications for our biomaterials products. In the three and six months ended December 31, 2001, the Angio-Seal components represent only 33% and 38% of our total biomaterial sales, respectively. Angio-Seal. In August 2000, St. Jude Medical transitioned the manufacturing of 6F Angio-Seal devices from Kensey Nash to their facility. We do not expect any revenue from the manufacture of completed Angio-Seal devices in the future. The manufacture of the 6F Angio-Seal represented $358,000, or 6% of our total net sales for the six months ended December 31, 2000. For the six months ended December 31, 2001, we experienced 56% growth in our net sales despite the loss of the 6F Angio-Seal device manufacturing business. Research and Development Revenue. Research and development revenue in the three and six months ended December 31, 2000 was derived from a National Institute of Standards & Technology (NIST) grant, under which we are researching cartilage regeneration utilizing our porous tissue matrix (PTM) technology. This project will continue through early fiscal year 2003. This grant was acquired in conjunction with our acquisition of THM in September 2000. In addition, in October 2001 we received a second NIST grant, under which we are researching a synthetic vascular graft also utilizing our porous tissue matrix (PTM) technology. This project will continue through early fiscal year 2005. Royalty Income. We receive a royalty on every Angio-Seal unit sold worldwide. We anticipate sales of the Angio-Seal will continue to grow as St. Jude Medical continues to expand its sales and marketing efforts and releases future generations of the Angio-Seal. As a result, royalty income will continue to be a significant source of revenue. The unit growth for the three and six months ended December 31, 2001 over the three and six months ended December 31, 2000 was partially offset by the reduction in our royalty rate, from 12% to 9%, in accordance with our licensing agreements. This rate reduction occurred during the quarter ended December 31, 2000, when a cumulative one million Angio-Seal units had been sold. There will be one further decrease in the royalty rate, to 6%, upon reaching four million cumulative units sold. We anticipate this next reduction will not occur until fiscal year 2005. 10 Cost of Products Sold. We have experienced an overall increase in gross margin during the three and six months ended December 31, 2001 reflecting the higher volume of our biomaterials products and the elimination of lower margin Angio-Seal device sales. This increase in sales volume allows us to spread our fixed costs of manufacturing over a greater number of units. We anticipate our gross margin will continue to improve as our biomaterials sales levels increase and our product mix becomes more favorable. Research and Development Expense. Research and development expense consists of expenses incurred for the development of our proprietary technologies such as the TriActiv(TM) system, absorbable biomaterials products and technologies and other development programs, including expenses under the NIST program. While we no longer perform research and development on the Angio-Seal, the progression of the TriActiv system into the clinical trial phase and our continued development of proprietary biomaterials products and technologies has offset this decrease. In January 2002, we received CE Mark approval from the European regulatory authority for the TriActiv system, which allows commercial sale of the product in the European union. We anticipate research and development expense will continue to increase as we pursue commercialization of the TriActiv system in the United States as well as explore opportunities for our other technologies. Selling, General and Administrative. Selling, general and administrative expenses include general and administrative costs as well as costs related to the marketing of our products. During the three and six months ended December 31, 2001 and 2000, the costs of our patent litigation are also included within selling, general and administrative expenses. The marketing component of selling, general and administrative expenses has increased as we move toward commercialization of the TriActiv system in both Europe and the United States. We received CE Mark approval for the TriActiv System in January 2002. During the quarter ended December 31, 2001 we established a subsidiary in Germany and hired a Vice President of European sales. We will continue to add personnel to our European marketing team as we will be selling the TriActiv system direct to the market in Germany and are in the process of identifying distributors for the rest of Europe. We anticipate sales and marketing expenses will continue to increase as we will launch the product in Europe in our fourth fiscal quarter of 2002. We also continue to evaluate opportunities for commercialization of the TriActiv system in the United States and expand the marketing efforts for our biomaterials business. RESULTS OF OPERATIONS COMPARISON OF THREE MONTHS ENDED DECEMBER 31, 2001 AND 2000 Revenues. Revenues increased 32% to $6.8 million in the three months ended December 31, 2001 from $5.1 million in the three months ended December 31, 2000. Net sales of products increased 38%, to $4.3 million from $3.1 million for the three months ended December 31, 2001 and 2000, respectively. Net sales for the three months ended December 31, 2001 and 2000 consisted entirely of biomaterials sales. The final shipment of Angio-Seal devices was made in the three months ended September 30, 2000. Research and Development Revenues. Research and development revenues increased 52% to $175,000 from $115,000 for the three months ended December 30, 2001 and 2000, respectively. Prior year revenues were generated under the NIST articular cartilage development grant acquired in conjunction with the THM acquisition. The increase over the prior year reflects the addition of a second NIST grant for synthetic vascular graft research in October 2001. Royalty Income. Royalty income increased 22% to $2.4 million from $1.9 million in the three months ended December 31, 2001 and 2000, respectively. This increase was achieved despite the contractual 25% reduction in the Angio-Seal royalty rate from 12% to 9% during the quarter ended December 31, 2000 and reflects a greater number of units sold as well as an increase in average selling price for the Angio-Seal. Royalty units increased 34% as approximately 153,000 Angio-Seal units were sold to end-users during the three months ended December 31, 2001 compared to approximately 114,000 units sold during the three months ended December 31, 2000. This unit increase was due to St. Jude Medical's increased sales and marketing efforts and continued strong sales of the 6F and 8F Angio-Seal in the worldwide market. Cost of Products Sold. Cost of products sold increased 26% to $2.0 million in the three months ended December 31, 2001 from $1.6 million in the three months ended December 31, 2000. While overall cost of products sold increased, 11 gross margin also increased to 52% from 48%. This increase reflects the higher margins on our biomaterials products as well as continued allocation of overhead across greater sales volumes, which results in a decrease in per unit costs. Research and Development Expense. Research and development expense increased 50% to $2.4 million in the three months ended December 31, 2001 from $1.6 million in the three months ended December 31, 2000. This increase was mainly attributable to our continued development efforts on the TriActiv system, including clinical trial expenses. We also continued to expand our development efforts on our biomaterials products including our work under the NIST articular cartilage development grant. We expect research and development expense to increase as we investigate and develop new products, conduct clinical trials and seek regulatory approvals for our proprietary products. Selling, General and Administrative. Selling, general and administrative expense increased 25% to $996,000 in the three months ended December 31, 2001 from $795,000 in the three months ended December 31, 2000. This increase was primarily the result of sales and marketing expenses which increased to $325,000 in the three months ended December 31, 2001 from $190,000 in the three months ended December 31, 2000 related to primarily to increased marketing efforts on the TriActiv system. In addition, general and administrative expenses increased $69,000, to $655,000 in the three months ended December 31, 2001 from $586,000 in the three months ended December 31, 2000. This was primarily attributable to $65,000 of increased personnel costs in our human resources, management information systems (MIS) and finance departments to support our continued growth. Litigation expenses for our patent infringement suit, which are included in selling, general and administrative expense, decreased to $16,000 for the three months ended December 31, 2001 from $19,000 from the three months ended December 31, 2000. Net Interest Income. Interest expense decreased 21% to $60,000 in the three months ended December 31, 2001 from $76,000 in the three months ended December 31, 2000. This decrease was the result of a lower principal balance on the THM Biomedical acquisition obligation as we have made four quarterly payments to date. Interest income decreased slightly to $479,000 in the three months ended December 31, 2001 from $480,000 in the three months ended December 31, 2000. Although our cash and investment balances have increased, this has been offset by lower interest rates. Other Non-Operating Income (Expense). Other non-operating expense was $2,000 for the three months ended December 31, 2001 and represents a loss on the disposal of fixed assets. Net Income. Net income increased to $1.2 million in the three months ended December 31, 2001 from a net loss of $6.0 million in the three months ended December 31, 2000. Net income for the three months ended December 31, 2001 was the result of $1.8 million of income before income taxes and a $627,000 charge for income taxes. This is our second quarter of recognizing income tax expense as a result of the recognition of a tax benefit in fiscal year 2001 related to the realization of certain deferred tax assets which had previously been offset by a valuation allowance. The $6.0 million net loss for the three months ended December 31, 2000 was the result of the $7.6 million IPR&D charge. Prior to this charge, net income would have been $1.6 million. There was no income tax expense for this period. COMPARISON OF SIX MONTHS ENDED DECEMBER 31, 2001 AND 2000 Revenues. Revenues increased 41% to $13.7 million in the six months ended December 31, 2001 from $9.7 million in the six months ended December 31, 2000. Net sales of products increased 56%, to $8.9 million from $5.7 million for the six months ended December 31, 2001 and 2000, respectively. Biomaterials sales increased 60%, as the $8.9 million of sales for the six months ended December 31, 2001 were entirely biomaterials sales compared to $5.3 million in the six months ended December 31, 2000. The six months ended December 2000 included $358,000 of Angio-Seal device sales to St. Jude Medical. St. Jude Medical transitioned the manufacturing of these devices to their facility in August 2000. Research and Development Revenues. Research and development revenues increased 40% to $281,000 from $117,000 for the six months ended December 30, 2001 and 2000, respectively. Prior year revenues were generated under the NIST articular cartilage development grant acquired in conjunction with the THM acquisition. 12 The increase over the prior year reflects the addition of a second NIST grant for synthetic vascular graft research in October 2001. Royalty Income. Royalty income increased 17% to $4.6 million from $3.9 million in the six months ended December 31, 2001 and 2000, respectively. This increase was achieved despite the contractual 25% reduction in the Angio-Seal royalty rate, from 12% to 9%, during the quarter ended December 31, 2000 and reflects a greater number of units sold as well as an increase in average selling price for the Angio-Seal. Royalty units increased 38% as approximately 292,000 Angio-Seal units were sold to end-users during the six months ended December 31, 2001 compared to approximately 211,000 units sold during the six months ended December 31, 2000. This unit increase was due to St. Jude Medical's increased sales and marketing efforts and continued strong sales of the 6F and 8F Angio-Seal in the worldwide market. Cost of Products Sold. Cost of products sold increased 25% to $4.2 million in the six months ended December 30, 2001 from $3.3 million in the six months ended December 31, 2000. While overall cost of products sold increased, gross margin also increased to 53% from 41%. This increase reflects the high margins on our biomaterials products as well as continued allocation of overhead across greater sales volumes, which results in a decrease in per unit costs. Research and Development Expense. Research and development expense increased to 59% to $5.1 million in the six months ended December 31, 2001 from $3.2 million in the six months ended December 31, 2000. This increase was mainly attributable to our continued development efforts on the TriActiv system, including clinical trial expenses. We also continued to expand our development efforts on our biomaterials products including our work under the NIST articular cartilage and synthetic vascular graft development grants. We expect research and development expense to increase as we investigate and develop new products, conduct clinical trials and seek regulatory approvals for our proprietary products. Selling, General and Administrative. Selling, general and administrative expense increased 45% to $1.9 million in the six months ended December 31, 2001 from $1.3 million in the six months ended December 31, 2000. This increase was primarily the result of sales and marketing expenses which increased to $591,000 in the six months ended December 31, 2001 from $267,000 in the six months ended December 31, 2000 related primarily to increased marketing efforts on the TriActiv system as we prepare for the commercial launch of this product in Europe in the fourth fiscal quarter of 2002 and continue to evaluate our market strategy for the U.S. In addition, general and administrative expenses increased 24%, or $246,000, to $1.3 million in the six months ended December 31, 2001 from $1.0 million in the six months ended December 31, 2000. This was attributable to $170,000 of increased personnel costs in our human resources, management information systems (MIS) and finance departments to support our continued growth. Litigation expenses for our patent infringement suit increased to $50,000 for the six months ended December 31, 2001 from $4,000 from the six months ended December 31, 2000. These costs related to our motion for reconsideration of prior orders and subsequent filing of appeal, which occurred in November 2001. Net Interest Income. Interest expense increased 18% to $120,000 in the six months ended December 31, 2001 from $102,000 in the six months ended December 31, 2000. This increase was the result of interest expense on the THM Biomedical acquisition obligation for a full six months in the current year as opposed to four months of expense in the prior year. Interest income decreased slightly to $955,000 in the six months ended December 31, 2001 from $1.0 million in the six months ended December 31, 2000. Although our cash and investment balances have increased, this has been offset by lower interest rates. Other Non-Operating Income (Expense). Other non-operating expense was $6,000 for the six months ended December 31, 2001 and represents a loss on the disposal of fixed assets. Net Income. Net income increased to $2.2 million in the six months ended December 31, 2001 from a net loss of $4.8 million in the six months ended December 31, 2000. Net income for the six months ended December 31, 2001 was the result of $3.3 million of income before income taxes and a $1.2 million charge for income taxes. This is our first fiscal year of recognizing income tax expense as a result of the recognition of a tax benefit in fiscal year 2001 related to the realization of certain deferred tax assets which had previously been offset by a valuation allowance. The $4.8 million net 13 loss for the six months ended December 31, 2000 was the result of the $7.6 million IPR&D charge. Prior to this charge, net income would have been $2.8 million. There was no income tax expense for this period. LIQUIDITY AND CAPITAL RESOURCES Net cash provided by our operating activities was $4.8 million and $2.5 million in the six months ended December 31, 2001 and 2000, respectively. In the six months ended December 31, 2001, changes in asset and liability balances provided $1.6 million of cash, in addition to net income of $2.2 million and non-cash depreciation and amortization of $1.1 million. In the six months ended December 31, 2000, changes in asset and liability balances used $1.2 million of cash. The net loss of $4.8 million was offset by the $7.6 million and $935,000 non-cash charges for the write-off of in-process research and development and depreciation and amortization, respectively. Our cash, cash equivalents and short-term investments were $32.0 million at December 31, 2001. In addition, we had $2.1 million in restricted investment accounts. We have pledged $2.1 million in investments as collateral to secure bank loans made to employees to pay taxes incurred by these employees when they received common stock at the time of our initial public offering. In exchange for our pledging this collateral, the employees have pledged their common stock to us as collateral. We have a $4.1 million capital spending plan for fiscal 2002, of which $1.6 million has been spent primarily on machinery and equipment. These expenditures are related to the continued expansion of our manufacturing capabilities for our biomaterials and TriActiv product lines. We have a $2.8 million obligation to the shareholders of THM Biomedical, Inc., a company we acquired in September 2000 (see below). The obligation is due in equal quarterly installments of $281,250 which began on December 31, 2000 and end on September 30, 2004. We plan to continue to spend substantial amounts to fund clinical trials, to gain regulatory approvals to expand our facilities to accomodate the manufacturing of the TriActiv and our expanding base of biomaterials products and to continue to expand research and development activities, particularly for the TriActiv system and our biomaterials products. We believe our current cash and investment balances, in addition to cash generated from operations, will be sufficient to meet our operating and capital requirements through at least fiscal 2003. Our future capital requirements and the adequacy of available funds will depend, however, on numerous factors, including market acceptance of our existing and future products; the successful commercialization of products in development; progress in our product development efforts; the magnitude and scope of such efforts; progress with pre-clinical studies, clinical trials and product clearance by the FDA and other agencies, the cost and timing of our efforts to expand our manufacturing capabilities; the cost of filing, prosecuting, defending and enforcing patent claims and other intellectual property rights; competing technological and market developments; and the development of strategic alliances for the marketing of certain of our products. There can be no assurance that we will record profits in future periods. The terms of any future equity financing may be dilutive to our stockholders and the terms of any debt financing may contain restrictive covenants, which limit our ability to pursue certain courses of action. Our ability to obtain financing is dependent on the status of our future business prospects as well as conditions prevailing in the relevant capital markets. No assurance can be given that any additional financing will be made available to us or will be available on acceptable terms should such a need arise. Our estimate of the time periods for which cash and cash equivalents will be adequate to fund operations is a forward looking statement within the meaning of Private Securities Litigation Reform Act of 1995 and is subject to risks and uncertainties. Actual results may differ materially from those contemplated in such forward-looking statements. In addition to those described above, factors which may cause such a difference are set forth under the caption "Risks Related to Our Business " as well as in our annual report on form 10-K generally. ACQUISITION OF THM BIOMEDICAL, INC. AND IN-PROCESS RESEARCH AND DEVELOPMENT CHARGE On September 1, 2000 we acquired THM Biomedical, Inc. (THM), a developer of porous, biodegradable, tissue-engineering products for the repair and replacement of muskuloskeletal tissues, for approximately $10.5 million plus acquisition costs of approximately $228,000. The transaction was financed with $6.6 million in cash and a note 14 payable to the shareholders of THM in the amount of $4.5 million (the Acquisition Obligation). The Acquisition Obligation is due in equal quarterly installments of $281,250 beginning on December 31, 2000 and ending on September 30, 2004. Accordingly, the present value of the cash payments (discounted based upon our available borrowing rate of 7.5%) of $3.9 million was recorded as a liability on the Company's financial statements, with a remaining balance of $2.8 million at December 31, 2001. The $7.6 million IPR&D charge represented the estimated fair value of purchased in-process technology which had not yet reached technological feasibility and had no alternative future use and was comprised of the following projects: Articular Cartilage ($5.4 million), Bone Fusion ($389,000), Other Bone Applications ($261,000), and Drug Delivery ($1.5 million). Each of the four projects utilizes the core open-cell poly lactic acid (OPLA) technology, a porous tissue matrix (PTM) technology developed by THM. PTM technology facilitates wound healing in both bone and soft tissue and is bioabsorbable at controlled rates for specific functions and tissues. Each of the IPR&D projects utilizes these properties of the PTM technology to address its respective market. For example, the articular cartilage project uses the PTM technology as the foundation for an articular cartilage repair and regrowth product. The total IPR&D value was determined by estimating the stage of completion of each IPR&D project at the date of the acquisition, estimating the costs to develop each IPR&D project into commercially viable products, estimating the resulting net cash flows from such projects, and discounting the net cash flows back to their present values. The discount rate in each project takes into account the uncertainty surrounding the successful development and commercialization of the purchased in-process technology. The stage of completion for all projects ranged from 48% to 72% as of the acquisition date with the weighted average completion rate approximately 56%. As of that date, the estimated costs to bring the projects under development to technological feasibility and through clinical trials were approximately $7.3 million. Since the date of the acquisition, as planned, we have primarily devoted our development efforts of PTM technology to the articular cartilage application and have expended $545,000 on such efforts through December 31, 2001. In addition, in October 2001 we received regulatory approval for a proprietary PTM based product, Improvise, which is a cement flow restrictor, with applications in the orthopedics market. We are also seeking regulatory approval on a second proprietary PTM based orthopedic product. The net cash flows from IPR&D projects were based on management's best estimates of revenue, cost of sales, research and development costs, general and administrative costs, and income taxes from such projects. These estimates were determined considering our historical experience and industry trends and averages. The cash flow estimates from sales of products incorporating these technologies are expected to commence between the fiscal years 2003 and 2005, depending on the project, with revenue growth rates in the 50% range in the immediate years following worldwide market launch, declining to the 5% range as each market nears maturity. These projections were based on our best estimates of market size and growth, expected trends in technology and the nature and expected timing of new product introductions by us and our competitors. The cash flows from revenues in each period are reduced by related expenses, capital expenditures, the cost of working capital and an assigned contribution to the core technology serving as a foundation for the research and development. The discount rates used in discounting the net cash flows from purchased in-process technology were 80% for articular cartilage, 85% for bone fusion, 78% for other bone applications and 83% for drug delivery. These discount rates for each project were determined upon consideration of the stage of completion of the project, the assumptions, nature and timing of the remaining efforts for completion and risks and uncertainties of the project. Substantial further research and development, pre-clinical testing and clinical trials will be required to determine the technical feasibility and commercial viability of the products under development. There can be no assurance such efforts will be successful. If these projects are not successfully developed, our revenue and profitability may be adversely affected in future periods. We are continuously monitoring our development projects and believe that the assumptions used in the valuation of purchased in-process technology reasonably estimate the future benefits attributable to such purchased in-process technology. No assurance can be given that actual results will not deviate from those assumptions in future periods. 15 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Our interest income and expense are sensitive to changes in the general level of interest rates. In this regard, changes in interest rates affect the interest earned on our cash, cash equivalents and investments as well as interest paid on our debt. Our investment portfolio consists primarily of high quality U.S. government securities and certificates of deposit with an average maturity of eight years. We mitigate default risk by investing in what we believe are the safest and highest credit quality securities and by monitoring the credit rating of investment issuers. The portfolio includes only marketable securities with active secondary or resale markets to ensure portfolio liquidity and there are limitations regarding duration of investments. These available-for-sale securities are subject to interest rate risk and decrease in market value if interest rates increase. At December 31, 2001, our total portfolio consisted of approximately $25.8 million of investments, with maturities ranging from one to fifteen years. Additionally, we generally hold securities until the earlier of their call or their maturity. Therefore, we do not expect our results of operations or cash flows to be materially impacted due to a sudden change in interest rates. We have $2.8 million in outstanding debt at December 31, 2001 related to the acquisition of THM. FORWARD-LOOKING STATEMENTS AND FACTORS THAT MAY AFFECT FUTURE RESULTS This document and other documents we have filed with the Securities and Exchange Commission (SEC) have forward-looking statements. In addition, our senior management may make forward-looking statements orally to analysts, investors, the media and others. Forward-looking statements might include one or more of the following: - - Projections of revenues, income earnings per share, capital expenditures, capital structure or other financial items; - - Descriptions of plans or objectives of management for future operations, products or services, including future acquisition objectives; - - Forecasts of future economic performance; and - - Descriptions of assumptions underlying or relating to any of the foregoing Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts. They often include words such as "believe", "expect", "anticipate", "intend", "plan", "estimate", or words of similar meaning, or future conditional verbs such as "will", "would", "should", "could" or "may". Such statements give our expectations or predictions of future conditions, events or results. They are not guarantees of future performance. By their nature, forward-looking statements are subject to risks and uncertainties. There are a number of factors, many of which are beyond our control, that could cause actual conditions, events or results to differ significantly from those described in the forward-looking statements. Some of these factors are described as "Risks Related to our Business" below. Factors relating to the regulation and supervision of our company are also described or incorporated in our Annual Report on Form 10-K filed with the SEC. There are other factors besides those described or incorporated in this report or in the Form 10-K that could cause actual conditions, events or results to differ from those in the forward-looking statements. Forward-looking statements speak only as of the day they are made. We do not undertake to publicly update or revise forward-looking statements to reflect circumstances or events that occur after the date the forward-looking statements are made. RISKS RELATED TO OUR BUSINESS There are many risk factors that could adversely affect our business, operating results and financial condition. These risk factors, described in detail in our Annual Report on Form 10-K, include but are not limited to: - - the continued growth and success of our biomaterials products; - - our dependence on our biomaterials customers for marketing and obtaining regulatory approval for their products; - - successful commercialization of the Tri-Activ system in the European community; 16 - - our ability to obtain regulatory approval for the TriActiv system in the United States; - - subsequent to regulatory approval, the successful commercialization of the TriActiv system; - - our reliance on revenues from the Angio-Seal product line; - - the performance of St. Jude Medical as the manufacturer, marketer and distributor of the Angio-Seal product; - - our ability to obtain any additional required funding for future development and marketing of the TriActiv product as well as our biomaterials products; - - the competitive markets for our products and our ability to respond more quickly than our competitors to new or emerging technologies and or changes in customer requirements; - - the acceptance of our products by the medical community; - - our dependence on key vendors and key personnel; - - the use of hazardous materials which could expose us to future environmental liabilities; - - our failure to expand our management systems and controls to support anticipated growth; - - the ownership of our stockholders may be diluted by future acquisitions or strategic alliances; - - risks related to our intellectual property, including patent and proprietary rights and trademarks; and - - risks related to our industry including potential for litigation, ability to obtain reimbursement for our products and our products exposure to extensive government regulation. 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. We caution that a number of important factors could cause our actual results for fiscal year 2002 and beyond to differ materially from those in any forward-looking statements made by us or on our behalf. These important factors include, without limitation, the success of our biomaterials products, our ability to obtain the necessary regulatory approvals for, fund and commercialize the TriActiv system, the success of St. Jude Medical in manufacturing, marketing and distributing the Angio-Seal product line, the ability of our customers to market and obtain regulatory approvals for their biomaterials products, the acceptance of our products by the medical community, our ability to maintain key vendors and personnel, competition in our markets, general business conditions in the healthcare industry and general economic conditions. Our 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 our common stock. 17 PART II - OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. A. Exhibits. 10.15 Form of Executive Officer Employment Agreement B. Reports on Form 8-K. None 18 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 14, 2002 By: /s/ Wendy F. DiCicco ---------------------------------- Wendy F. DiCicco Chief Financial Officer 19 EX-10.15 3 c67545ex10-15.txt FORM OF EXECUTIVE OFFICER EMPLOYMENT AGREEMENT EXHIBIT 10.15 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT ("Agreement"), is made and entered into as of the 1st day of September, 2001, by and between Kensey Nash Corporation, a Delaware corporation (the "Company"), and ____________(Executive"). WHEREAS, the Company wishes to retain Executive as an executive employee, and Executive wishes to be employed by the Company in such capacity, all upon the terms and conditions hereinafter set forth. NOW, THEREFORE, in consideration of the mutual covenants of parties hereinafter set forth, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereby agree as follows: 1. EMPLOYMENT OF EXECUTIVE. The Company engages and employs Executive in an executive capacity and Executive accepts such employment and agrees to act as an employee of the Company in accordance with the terms of employment hereinafter specified. Executive shall hold the office of _____________ and shall, subject to the direction and supervision of the Company's Board of Directors, (a) have the responsibilities and authority customarily associated with such office, and (b) perform such other duties and responsibilities as the Company's Board of Directors shall from time to time assign to him/her. Executive agrees diligently and faithfully to serve the Company and to devote his/her best efforts, his/her full business time and his/her highest talents and skills to the furtherance and success of the Company's business. 2. COMPENSATION. As full and complete compensation to Executive for all services to be rendered by Executive hereunder, the Company shall pay Executive as follows: (a) The Company shall, during the term of Executive's full-time employment, pay or cause to be paid to Executive a base salary at the rate________of per annum, or Executive's most recent per annum base salary, whichever is greater. Such base salary shall be paid in periodic installments at the discretion of the Company (but not less frequently than monthly) in accordance with the Company's normal mode of executive salary payment. (b) The Company may, during the term of Executive's employment, pay or cause to be paid to Executive an annual bonus of cash, stock or other property in such amounts as the Company's Board of Directors may determine in their sole discretion, but not to exceed 75% of Executive's base salary. 3. TERM OF EMPLOYMENT; SEVERANCE. (a) The term of Executive's employment hereunder (the "Employment Term") shall commence on the date hereof and shall expire two (2) years after such date. (b) Termination of Executive's employment pursuant to this Agreement or voluntary termination of employment shall not constitute a waiver of any of Executive's obligations hereunder -1- which survive termination hereof, including without limitation those arising under paragraphs 5 through 9 inclusive hereof. (c) In the event Executive's employment is terminated by the Company without cause (as hereinafter determined), Executive shall continue to be entitled to receive those fringe benefits enumerated in paragraph 4 hereof until the expiration of the original Employment Term and the Company shall pay to Executive a severance fee equal to the greater of (i) any amount of base salary remaining until the expiration of the original Employment Term and bonus for each remaining year of the original Employment Term, which bonus shall be based on an average of the bonuses received by Executive during the last two fiscal years prior to such termination without cause (the "Estimated Bonus"), to which Executive would otherwise be entitled but for such termination, or (ii) twelve (12) months of Executive's salary and Estimated Bonus; provided, however, that Executive shall not be entitled to receive any fringe benefits or such severance fee if Executive breaches any of his obligations arising under paragraphs 7 through 9 hereof. The continuance of Executive's fringe benefits and the payment by the Company of any severance fee to Executive pursuant to this Agreement shall be in complete satisfaction and settlement of, and as liquidated damages for, any and all of Executive's claims, damages or causes of action arising directly or indirectly from this Agreement. In addition, upon the termination of Executive's employment by the Company without cause, all options to purchase shares of common stock of the Company ("Options") that were granted to Executive and have vested prior to the date of such termination without cause shall remain exercisable for a period of one (1) year from the date of such termination without cause. (d) In the event Executive's employment is terminated with cause, the Company shall have no further obligations hereunder or otherwise with respect to Executive's employment from and after the date of such termination, except for the payment of Executive's base salary accrued through the date of such termination. For purposes of this Agreement, "cause" for termination shall be deemed to exist upon (i) a determination by the Company's Board of Directors that Executive has committed an act of fraud, embezzlement or other act of dishonesty which would reflect adversely on the integrity of the Company or if Executive is convicted of any criminal statute involving breach of fiduciary duty or moral turpitude; (ii) a reasonable determination by the Company's Board of Directors that Executive has failed to discharge his duties in a reasonably satisfactory manner which failure is not cured by Executive within thirty (30) days after delivery of written notice to Executive specifying the nature of such failure; (iii) the death of Executive; (iv) a mental or physical disability of Executive which renders Executive, in the reasonable opinion of the Company's Board of Directors, unable to effectively perform his duties hereunder for a substantially continuous period of one hundred eighty (180) days; or (v) the voluntary termination of Executive's employment hereunder other than as a result of a breach of the Company's obligations hereunder. (e) In the event Executive's employment is terminated by the Company pursuant to a Change in Control (as that term is defined in that certain Termination and Change in Control Agreement dated of even date herewith between the Company and Executive (the "Change in Control Agreement")), the Company shall pay to Executive a severance fee equal to the greater of (i) the amount Executive would be entitled to receive under paragraph 3(c) of this Agreement for a termination without cause, or (ii) the amount Executive would be entitled to receive pursuant to a Change in Control under the Change in Control Agreement. -2- (f) In the event Executive's employment is not renewed by the Company upon the expiration of the Employment Term for a term (the "Renewal Term") of at least one (1) year, Executive shall, upon (i) the expiration of the Renewal Term, if any, or (ii) the Employment Term in the event there is no Renewal Term, or (iii) upon Executive's voluntary termination within 60 days of the Company's failure to renew/her his employment on substantially the same terms as set forth herein for at least one (1) year, continue to receive those fringe benefits enumerated in paragraph 4 hereof for a period of twelve (12) months, and the Company shall pay to Executive a severance fee equal to three (3) months of Executive's salary and the Estimated Bonus; provided, however, that Executive shall not be entitled to receive any fringe benefits or such severance fee if Executive breaches any of his obligations arising under paragraphs 7 through 9 hereof. In addition, all Options that were granted to Executive and have vested prior to the expiration of the Renewal Term shall remain exercisable for a period of one (1) year from the expiration of the Renewal Term. (g) In the event any payments or benefits received by the Executive upon his termination of employment (which payments shall include, without limitation, the vesting of an option or other non-cash benefit or property), whether pursuant to the terms of this Agreement or any other plan, arrangement, or agreement with the Company or any affiliated company (collectively, the "Total Payments") would be subject (in whole or in part) to the excise tax imposed by Section 4999 of the Internal Revenue Code of 1986, as amended (the "Code"), or any similar tax as may hereafter be imposed (the "Excise Tax"), the following provisions shall apply: (i) In the event that the Total Payments cause the Executive's "parachute payments" within the meaning of Section 280G(b)(2) of the Code to equal or to exceed three times the Executive's "base amount" within the meaning of Section 280G(b)(3) of the Code (the "Trebled Base Amount") by an amount which is not greater than 10% of the Trebled Base Amount, the Total Payments shall be reduced (or eliminated) such that no portion of the Total Payments is subject to the Excise Tax. Reductions shall be made first to those Total Payments arising under the terms of this Agreement. (ii) In the event that the Total Payments cause the parachute payments to exceed 110% of the Trebled Base Amount, the Company shall pay to the Executive at the time specified below, an additional amount determined as set forth below (the "Gross-up Payment"). The Gross-up Payment shall be made with respect to the amount which equals 100% of the Executive's "excess parachute payments" subject to the Excise Tax. The Gross-up Payment shall be an amount such that the net amount retained by Executive with respect to the Total Payments after reduction for any Excise Tax on the Total Payments and any federal, state and local income or employment tax and Excise Tax payable by the Executive on the Gross-up Payment hereunder (provided that such amount is actually paid when due) shall be equal to the amount of the Total Payments that the Executive would retain if the Total Payments did not constitute parachute payments. (iii) For purposes of determining whether any of the Total Payments will be subject to the Excise Tax and the amount of any Excise Tax: -3- (a) The Total Payments shall be treated as "parachute payments" within the meaning of Section 280G(b)(2) of the Code, and all "excess parachute payments" within the meaning of Section 280G(b)(1) of the Code shall be treated as subject to the Excise Tax, unless, and except that to the extent that, in the written opinion of independent legal counsel, compensation consultants or auditors of nationally recognized standing ("Independent Advisors") selected by the Company and reasonably acceptable to Executive, the Total Payments (in whole or in part) do not constitute parachute payments, or such excess parachute payments (in whole or in part) represent reasonable compensation for services actually rendered within the meaning of Section 280G(b)(4) of the Code in excess of the base amount within the meaning of Section 280G(b)(3) of the Code or are otherwise not subject to the Excise Tax; (b) The amount of the Total Payments which shall be treated as subject to the Excise Tax shall be equal to the lesser of (i) the total amount of the Total Payments or (ii) the total amount of excess parachute payments within the meaning of Section 280G(b)(1) of the Code (after applying Section 3(g)(iii)(a) above); and (c) The value of any non-cash benefits or any deferred payment or benefit shall be determined by the Independent Advisors in accordance with the principles of Sections 280G(d)(3) and (4) of the Code. In the event that the Excise Tax is subsequently determined to be less than the amount taken into account hereunder at the time the Gross-up Payment is made, Executive shall repay to the Company at the time that the amount of such reduction in Excise Tax is finally determined (but, if previously paid to the taxing authorities, not prior to the time the amount of such reduction is refunded to Executive or otherwise realized as a benefit by Executive) the portion of the Gross-up Payment that would not have been paid if such Excise Tax had been applied to initially calculating the Gross-up Payment, plus interest on the amount of such repayment at the rate provided in Section 1274(b)(2)(B) of the Code. In the event that the Excise Tax is determined to exceed the amount taken into account hereunder at the time the Gross-up Payment is made (including by reason of any payment the existence or amount of which cannot be determined at the time of the Gross-up Payment), the Company shall make an additional Gross-up Payment and shall indemnify and hold Executive harmless in respect of such excess (plus any interest and penalties payable with respect to such excess) at the time that the amount of such excess is finally determined. The Gross-up Payment provided for above shall be paid on the 30th day (or such earlier date as the Excise Tax becomes due and payable to the taxing authorities) after it has been determined that the Total Payments (or any other portion thereof) are subject to the Excise Tax; provided, however, that if the amount -4- of such Gross-up Payment or portion thereof cannot be finally determined on or before such day, the Company shall pay to Executive on such day an estimate, as determined by the Independent Advisors, of the minimum amount of such payments and shall pay the remainder of such payments (together with interest at the rate provided in Section 1274(b)(2)(B) of the Code), as soon as the amount thereof can be determined. In the event that the amount of the estimated payments exceeds the amount subsequently determined to have been due, such excess shall constitute a loan by the Company to Executive, payable on the fifth day after demand by the Company (together with interest at the rate provided in Section 1274(b)(2)(B) of the Code). If more than one Gross-up Payment is made, the amount of each Gross-up Payment shall be computed so as not to duplicate any prior Gross-up Payment. Executive shall notify the Company in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Company of the Gross-up Payment. Such notification shall be given as soon as practicable but no later than ten (10) business days after Executive is informed in writing of such claim and shall apprise the Company of the nature of such claim and the date on which such claim is requested to be paid. Executive shall not pay such claim prior to the expiration of the 30-day period following the date on which it gives such notice to the Company (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Company notifies Executive in writing prior to the expiration of such period that it desires to contest such claim, Executive shall: (i) give the Company any information reasonably requested by the Company relating to such claim; (ii) take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Company; (iii) cooperate with the Company in good faith in order effectively to contest such claim; and (iv) permit the Company to participate in any proceedings relating to such claim; provided, however, that the Company shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify and hold Executive harmless, on an after-tax basis, for any Excise Tax or income or employment tax (including interest and penalties with respect thereto) imposed as a result of such representation and payment of costs and expenses. Without limitation on the foregoing provisions of this Section 3(g), the Company shall control all proceedings taken in connection with such contest -5- and, at its sole option, may pursue or forgo any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and proceedings, hearings and conferences with the taxing authority in respect of such claim and may, at its sole option, either direct Executive to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and Executive agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine; provided, however, that if the Company directs Executive to pay such claim and sue for a refund, the Company shall advance the amount of such payment to Executive, on an interest-free basis, and shall indemnify and hold Executive harmless, on an after-tax basis, from any Excise Tax or income or employment (including income or employment or interest or penalties with respect thereto) imposed with respect to such advance or with respect to any imputed income with respect to such advance; and further provided that any extension of the statute of limitations relating to payment of taxes for the taxable year of Executive with respect to which such contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Company's control of the contest shall be limited to issues with respect to which a Gross-up Payment would be payable hereunder and the Executive shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. If, after the receipt by Executive of an amount advanced by the Company pursuant to this Section 3(g), Executive becomes entitled to receive any refund with respect to such claim, Executive shall (subject to the Company's complying with the requirements of this Section 3(g)) promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). If, after the receipt by Executive of an amount advanced by the Company pursuant to this Section 3(g), a determination is made that Executive shall not be entitled to any refund with respect to such claim and the Company does not notify Executive in writing of its intent to contest such denial of refund prior to the expiration of thirty (30) days after such determination, then such advance shall be forgiven and shall not be required to be repaid and the amount of such advance shall offset, to the extent thereof, the amount of Gross-up Payment required to be paid. 4. FRINGE BENEFITS. (a) During the Employment Term, Executive shall be entitled to participate in all health insurance and retirement benefit programs normally available to other executives of the Company holding positions similar to that of Executive hereunder (subject to all applicable eligibility rules thereof), as from time to time in effect. Executive shall also receive the benefits listed on Exhibit A hereto. (b) Executive shall be entitled to paid vacation according to the normal vacation schedule for other executive employees. Executive shall make good faith efforts to schedule such vacations so as to least conflict with the conduct of the Company's business and shall give the Company adequate advance notice of his planned absences. Accumulated, unused vacation time -6- for Officers of the Corporation is not vested and will not be paid to Executive either while employed or upon termination of employment. (c) The Company shall reimburse Executive for all business-related expenses incurred by Executive at the Company's direction. Executive shall submit to the Company expense reports in compliance with established Company guidelines. 5. INVENTIONS. Executive agrees, on behalf of himself, his heirs and personal representatives, that he will promptly communicate, disclose and transfer to the Company free of all encumbrances and restrictions (and will execute and deliver any papers and take any action at any time deemed necessary by the Company to further establish such transfer) all inventions and improvements relating to Company's business originated or developed by Executive solely or jointly with others during the term of his employment hereunder. Such inventions and improvements shall belong to the Company whether or not they are patentable and whether or not patent applications are filed thereon. Such transfer shall include all patent rights (if any) to such inventions or improvements in the United States and in all foreign countries. Executive further agrees, at the request of Company, to execute and deliver, at any time during the term of his employment hereunder or after termination thereof, all assignments and other lawful papers (which will be prepared at the Company's expense) relating to any aspect of the prosecution of such patent applications and rights in the United States and foreign countries. 6. EXPOSURE TO PROPRIETARY INFORMATION. (a) Executive acknowledges and agrees that during the course of his employment by Company, he will be in continuous contact with customers, suppliers and others doing business with the Company throughout the world. Executive further acknowledges that the performance of his duties hereunder will expose him to data and information concerning the business and affairs of the Company, including but not limited to information relative to the Company's proprietary rights and technology, patents, financial statements, sales programs, pricing programs, profitability analyses and profit margin information, customer buying patterns, needs and inventory levels, supplier identities and other related matters, and that all of such data and information (collectively "the Proprietary Information") is vital, sensitive, confidential and proprietary to Company. (b) In recognition of the special nature of his employment hereunder, including but not limited to his special access to the Proprietary Information, and in consideration of his employment, Executive agrees to the covenants and restrictions set forth in paragraphs 7 through 9 inclusive hereof. As used in this Agreement, the term "Company" shall include, where applicable, any parent, subsidiary, sub-subsidiary, or affiliate of Company. 7. USE OF PROPRIETARY INFORMATION. Executive acknowledges that the Proprietary Information constitutes a protectible business interest of Company, and covenants and agrees that during the term of his employment hereunder and after the termination of such employment, he shall not, directly or indirectly, whether individually, as a director, stockholder, owner, partner, employee or agent of any business, or in any other capacity, make known, disclose, furnish, make available or utilize any of the Proprietary Information, other than in the proper performance of his duties during the term of his employment hereunder. Executive's obligations under this paragraph -7- with respect to particular Proprietary Information shall terminate only at such time (if any) as the Proprietary Information in question becomes generally known to the public other than through a breach of Executive's obligations hereunder. 8. RESTRICTION AGAINST COMPETITION AND EMPLOYING OR SOLICITING COMPANY EMPLOYEES, CUSTOMERS OR SUPPLIERS. Executive covenants and agrees that during the term hereof and for the one (1) year period immediately following the effective date of any termination of his employment hereunder (the "Termination Date"), he shall not, directly or indirectly, whether individually, as a director, stockholder, partner, owner, employee or agent of any business, or in any other capacity, (i) engage in a business substantially similar to that which is conducted by the Company in any market area in which such business is operated; (ii) solicit any party who is or was a customer or supplier of the Company on the Termination Date or at any time during the six month period immediately prior thereto for the sale or purchase of any type or quantity of products sold by or used in the business of the Company on the Termination Date or at any time within such six month period; or (iii) solicit for employment any person who was or is an employee of the Company on the Termination Date or at any time during the twelve month period immediately prior thereto. 9. RETURN OF COMPANY MATERIALS UPON TERMINATION. Executive acknowledges that all price lists, sales manuals, catalogs, binders, customer lists and other customer information, supplier lists, financial information, and other records or documents containing Proprietary Information prepared by Executive or coming into his possession by virtue of his employment by the Company is and shall remain the property of the Company and that upon termination of his employment hereunder, Executive shall return immediately to the Company all such items in his possession, together with all copies thereof. 10. EQUITABLE REMEDIES. (a) Executive acknowledges and agrees that the covenants set forth in paragraphs 5 through 9 inclusive hereof are reasonable and necessary for the protection of the Company's business interests, that irreparable injury will result to the Company if Executive breaches any of the terms of said covenants, and that in the event of Executive's actual or threatened breach of any such covenants, the Company will have no adequate remedy at law. Executive accordingly agrees that in the event of any actual or threatened breach by him of any of said covenants, the Company shall be entitled to immediate injunctive and other equitable relief, without bond and without the necessity of showing actual monetary damages. Nothing contained herein shall be construed as prohibiting the Company from pursuing any other remedies available to it for such breach or threatened breach, including the recovery of any damages which it is able to prove. (b) Each of the covenants in paragraphs 5 through 9 inclusive hereof shall be construed as independent of any other covenants or other provisions of this Agreement. (c) In the event of any judicial determination that any of the covenants set forth in paragraphs 5 through 9 inclusive hereof is not fully enforceable, it is the intention and desire of the parties that the court treat said covenants as having been modified to the extent deemed necessary by the court to render them reasonable and enforceable, and that the court enforce them to such extent. -8- 11. LIFE INSURANCE. The Company may at its discretion and at any time apply for and procure as owner and for its own benefit and at its own expense, insurance on the life of Executive in such amounts and in such form or forms as the Company may choose. Executive shall cooperate with the Company in procuring such insurance and shall, at the request of Company, submit to such medical examinations, supply such information and execute such documents as may be required by the insurance company or companies to whom the Company has applied for such insurance. Executive shall have no interest whatsoever in any such policy or policies, except that, upon the termination of Executive's employment hereunder, Executive shall have the privilege of purchasing any such insurance from the Company for an amount equal to the actual premiums thereon previously paid by Company. 12. NOTICES. Any notice required or permitted pursuant to the provisions of this Agreement shall be deemed to have been properly given if in writing and when sent by United States mail, certified or registered, postage prepaid, when sent by facsimile or when personally delivered, addressed as follows: If to Company: Kensey Nash Corporation Marsh Creek Corporate Center 55 East Uwchlan Avenue, Suite 204 Exton, Pennsylvania 19341 Attention: Joseph Kaufmann With a copy to: Katten Muchin & Zavis 525 West Monroe Street Suite 1600 Chicago, Illinois 60661-3693 Attention: David R. Shevitz, Esq. If to Executive: Employee Name Employee Address Each party shall be entitled to specify a different address for the receipt of subsequent notices by giving written notice thereof to the other party in accordance with this paragraph. 13. WAIVER OF BREACHES. No waiver of any breach of any of the terms, provisions or conditions of this Agreement shall be construed or held to be a waiver of any other breach, or a waiver of, acquiescence in or consent to any further or succeeding breach thereof. -9- 14. ASSIGNMENT. This Agreement shall not be assignable by either party without the written consent of the other; provided, however, that this Agreement shall be assignable to any corporation or entity which purchases the assets of or succeeds to the business of the Company (a "Successor Employer"), and the Company agrees to cause this Agreement to be assumed by any Successor Employer as a condition to such purchase or succession. Subject to the foregoing, this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective heirs, personal representatives, successors and assigns. 15. GOVERNING LAW. This Agreement shall be governed by and construed in accordance with laws and judicial decisions of the State of Pennsylvania. 16. SEVERABILITY. If any term or provision of this Agreement shall be held to be invalid or unenforceable, the remaining terms and provisions hereof shall not be affected thereby. 17. MISCELLANEOUS. Paragraph headings herein are for convenience only and shall not affect the meaning or interpretation of the contents hereof. This Agreement contains the entire agreement between the parties hereto with respect to the subject matter hereof and supersedes all prior agreements and understandings between the parties and all prior obligations of the Company with respect to the employment of Executive by the Company or the payment to Executive of compensation of any kind whatsoever. No supplement or modification of this Agreement shall be binding unless in writing and signed by both parties hereto. This agreement may be executed in multiple counterparts, each of which shall be deemed enforceable without production of the others. IN WITNESS WHEREOF, the parties have caused this Agreement to be executed as of the date first hereinabove set forth. -------------------------------------- KENSEY NASH CORPORATION By: ----------------------------------- Title: -------------------------------- -10- Exhibit A BENEFITS Health/prescription, dental, and vision insurance equal to that provided for all other full-time exempt Kensey Nash Corporation employees. Life insurance in the amount of $50,000 Short term disability insurance equal to that provided for all other full-time exempt Kensey Nash Corporation employees. Long term disability benefits at 40% of salary Supplemental long term disability insurance Three weeks annual vacation accrued at 10 hours per month. Accumulated, unused vacation time for Officers of the Corporation is not vested and will not be paid to Executive either while employed or upon termination of employment. Six days annual personal leave Eleven holidays each year 401K Plan Employee Incentive Compensation Plan -11- -----END PRIVACY-ENHANCED MESSAGE-----