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, 2000 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 17, 2000, there were outstanding 7,492,488 shares of Common Stock, par value $.001, of the registrant. 2 KENSEY NASH CORPORATION QUARTER ENDED MARCH 31, 2000 INDEX PAGE ---- PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS Consolidated Balance Sheets as of March 31, 2000 (Unaudited) and June 30, 1999.. 3 Consolidated Statements of Operations for the three and nine months ended March 31, 2000 and 1999 (Unaudited)............................ 4 Consolidated Statements of Stockholders' Equity as of March 31, 2000 (Unaudited) and June 30, 1999......... 5 Consolidated Statements of Cash Flows for the nine months ended March 31, 2000 and 1999 (Unaudited)..................................... 6 Notes to Consolidated Financial Statements (Unaudited)............................... 7 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS................ 9 PART II - OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K............................. 14 SIGNATURES................................................................. 15 2 3 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS KENSEY NASH CORPORATION CONSOLIDATED BALANCE SHEETS - - - - - - - - ---------------------------------------------------------------------------------------------------------------- MARCH 31, JUNE 30, ASSETS 2000 1999 CURRENT ASSETS: (UNAUDITED) Cash and cash equivalents $ 1,398,998 $ 1,189,083 Short-term investments 7,633,405 8,479,617 Trade receivables 2,582,339 2,247,050 Royalties receivable (Note 2) 1,736,071 742,143 Officer loans 783,797 264,535 Other receivables (including approximately $112,407 and $62,000 at March 31, 2000 and June 30, 1999, respectively, due from employees) 339,327 170,181 Inventory (Note 3) 1,137,197 748,698 Prepaid expenses and other 610,279 320,106 ----------- ----------- Total current assets 16,221,413 14,161,413 ----------- ----------- PROPERTY, PLANT AND EQUIPMENT, AT COST: Leasehold improvements 5,666,083 4,023,373 Machinery, furniture and equipment 5,997,698 4,840,529 Construction in progress 105,207 676,836 ----------- ----------- Total property, plant and equipment 11,768,988 9,540,738 Accumulated depreciation (4,729,838) (3,801,514) ----------- ----------- Net property, plant and equipment 7,039,150 5,739,224 ----------- ----------- OTHER ASSETS: Restricted investments (Note 4) 2,455,725 4,675,725 Property under capital leases, net 12,341 28,368 Acquired patents, net of accumulated amortization of $572,810 and $381,873 at March 31, 2000 and June 30, 1999, respectively 3,419,599 3,610,536 ----------- ----------- Total other assets 5,887,665 8,314,629 ----------- ----------- TOTAL $29,148,228 $28,215,266 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 974,037 $ 1,446,800 Accrued expenses 523,415 863,458 Current portion of debt, obligation under patent acquisition agreement and capital lease obligations 196,725 600,398 Deferred revenue - royalties and other (Note 2) 10,250 390,846 ----------- ----------- Total current liabilities 1,704,427 3,301,502 DEBT and OBLIGATION UNDER CAPITAL LEASES, long-term portion 5,863,917 6,012,863 ----------- ----------- Total liabilities 7,568,344 9,314,365 ----------- ----------- COMMITMENTS AND CONTINGENCIES (Note 4): STOCKHOLDERS' EQUITY: Preferred stock, $.001 par value, 100,000 shares authorized, no shares issued or outstanding at March 31, 2000 and June 30, 1999 Common stock, $.001 par value, 25,000,000 shares authorized, 7,492,488 and 7,470,710 shares issued and outstanding at March 31, 2000 and June 30, 1999, respectively 7,492 7,470 Capital in excess of par value 37,850,676 37,697,452 Accumulated deficit (15,730,644) (18,562,619) Accumulated other comprehensive income (547,640) (241,402) ----------- ----------- Total stockholders' equity 21,579,884 18,900,901 ----------- ----------- TOTAL $29,148,228 $28,215,266 =========== =========== 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, --------------------------- ---------------------------- 2000 1999 2000 1999 REVENUES (Notes 1 and 2): Net sales $ 3,702,541 $ 1,789,974 $ 9,075,453 $ 4,996,010 Research and development 5,447 451,677 48,044 1,611,315 Royalty income (Note 2) 1,693,726 2,126,718 4,639,943 5,026,853 ----------- ----------- ----------- ----------- Total revenues 5,401,714 4,368,369 13,763,440 11,634,178 ----------- ----------- ----------- ----------- OPERATING COSTS AND EXPENSES: Cost of products sold 2,022,742 1,274,399 5,088,140 3,713,322 Research and development 1,434,389 1,438,534 4,074,294 4,265,523 Selling, general and administrative 700,299 781,762 2,040,744 1,896,657 ----------- ----------- ----------- ----------- Total operating costs and expenses 4,157,430 3,494,695 11,203,178 9,875,502 ----------- ----------- ----------- ----------- INCOME FROM OPERATIONS 1,244,284 873,674 2,560,262 1,758,676 ----------- ----------- ----------- ----------- OTHER INCOME: Interest income 186,311 180,605 623,162 443,837 Interest expense (118,211) (95,836) (350,743) (221,731) Other 300 488 (706) 2,856 ----------- ----------- ----------- ----------- Total other income - net 68,400 85,257 271,713 224,962 ----------- ----------- ----------- ----------- INCOME BEFORE INCOME TAXES 1,312,684 958,931 2,831,975 1,983,638 ----------- ----------- ----------- ----------- Provision for income taxes (Note 5) NET INCOME $ 1,312,684 $ 958,931 $ 2,831,975 $ 1,983,638 =========== =========== =========== =========== BASIC and DILUTED EARNINGS PER SHARE $ 0.17 $ 0.13 $ 0.37 $ 0.27 =========== =========== =========== =========== WEIGHTED AVERAGE COMMON SHARES OUTSTANDING (Note 1) 7,867,490 7,513,359 7,616,374 7,478,887 =========== =========== =========== =========== See notes to consolidated financial statements. 4 5 KENSEY NASH CORPORATION CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY - - - - - - - - ------------------------------------------------------------------------------- CAPITAL IN EXCESS ACCUMULATED COMMON STOCK OF PAR OTHER COMPREHENSIVE -------------------- OF PAR ACCUMULATED COMPREHENSIVE INCOME / SHARES AMOUNT VALUE DEFICIT LOSS (LOSS) 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 $ 342,682 342,682 --------- ------- ------------ ------------- =========== ----------- BALANCE, JUNE 30, 1998 7,459,272 7,459 37,597,381 (21,741,377) 15,863,463 --------- ------- ------------ ------------- ----------- Exercise of stock options 11,438 11 100,071 100,082 Net income 3,178,758 3,178,758 3,178,758 Comprehensive loss (Note 1) (241,402) (241,402) (241,402) ----------- Comprehensive income 2,937,356 --------- ------- ------------ ------------- ---------- =========== ----------- BALANCE, JUNE 30, 1999 7,470,710 7,470 37,697,452 (18,562,619) (241,402) 18,900,901 --------- ------- ------------ ------------- ---------- ----------- Exercise of stock options 21,778 22 153,224 153,246 Net income 2,831,975 2,831,975 2,831,975 Comprehensive loss (Note 1) (306,238) (306,238) (306,238) ----------- ----------- Comprehensive income $ 2,525,737 --------- ------- ------------ ------------- ---------- =========== BALANCE, MARCH 31, 2000 (Unaudited) 7,492,488 $ 7,492 $ 37,850,676 $ (15,730,644) $ (547,640) $21,579,884 ========= ======= ============ ============= ========== =========== See notes to the consolidated financial statements. 5 6 KENSEY NASH CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) - - - - - - - - ------------------------------------------------------------------------------ NINE MONTHS ENDED MARCH 31, ------------------------------ 2000 1999 OPERATING ACTIVITIES: Net income $ 2,831,975 $ 1,983,638 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 1,135,288 913,718 Changes in assets and liabilities which provided (used) cash: Accounts receivable (2,017,625) (1,916,614) Prepaid expenses and other current assets (290,173) (152,648) Inventory (388,499) 332,710 Accounts payable and accrued expenses (812,806) 706,767 Deferred revenue (380,596) (932,858) ----------- ----------- Net cash provided by operating activities 77,564 934,713 ----------- ----------- INVESTING ACTIVITIES: Additions to property, plant and equipment (2,228,250) (982,462) Purchase of restricted investments (3,359,969) Sale of investments 2,759,974 1,064,502 ----------- ----------- Net cash provided by (used in) investing activities 531,724 (3,277,929) ----------- ----------- FINANCING ACTIVITIES: Principal payments under capital leases (19,688) (28,560) Repayments of patent acquisition obligation (503,453) (375,776) Proceeds from long-term debt 5,000,000 Repayments of long-term debt (29,478) (925,000) Exercise of stock options 153,246 90,398 ----------- ----------- Net cash (used in) provided by financing activities (399,373) 3,761,062 ----------- ----------- INCREASE IN CASH AND CASH EQUIVALENTS 209,915 1,417,846 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 1,189,083 1,407,684 ----------- ----------- CASH AND CASH EQUIVALENTS, END OF PERIOD $ 1,398,998 $ 2,825,530 =========== =========== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid for interest $ 357,296 $ 204,830 =========== =========== Cash paid for income taxes $ $ =========== =========== See notes to consolidated financial statements. 6 7 KENSEY NASH CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 1 -- CONDENSED CONSOLIDATED FINANCIAL STATEMENTS BASIS OF PRESENTATION The consolidated balance sheet at March 31, 2000, the consolidated statements of operations for the three and nine months ended March 31, 2000 and 1999 and the consolidated statements of cash flows for the nine months ended March 31, 2000 and 1999 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, 2000 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, 1999 consolidated financial statements filed with the Securities and Exchange Commission on Form 10-K/A. The results of operations for the period ended March 31, 2000 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 There were no export sales from the Company's U.S. operations to unaffiliated customers in Europe for the three months ended March 31, 2000. Export sales totaled $102,878 for the three months ended March 31, 1999 and $206,045 and $242,893 for the nine months ended March 31, 2000 and 1999, respectively. EARNINGS PER SHARE 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 Accumulated other comprehensive loss, shown in the consolidated statements of shareholders' equity at March 31, 2000 and June 30, 1999, 1998 and 1997, is solely comprised of unrealized losses on the Company's available-for-sale securities. There were no unrealized gains or losses in the year ended June 30, 1998. The tax effect of other comprehensive income on fiscal years 2000 and 1999 was not significant. 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 partner, St. Jude Medical, Inc. ("St. Jude Medical"). Such advance was recorded as deferred revenue. The Licensing Agreement provides for certain minimum royalty payments ("Minimum 7 8 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 $3.0 million advance was reduced in each period by 50% of royalties earned in excess of the Minimum Royalty in any royalty year. The remainder of royalties earned was received as cash proceeds by the Company. At March 31, 2000 the entire $3.0 million royalty advance had been repaid by the Company through these royalty payment reductions. NOTE 3 -- INVENTORY Inventory is stated at the lower of cost (determined by the average cost method, which approximates first-in, first-out) or market. Inventory primarily includes the cost of material utilized in the processing of the Company's products and is as follows: MARCH 31, 2000 JUNE 30, 1999 -------------- ------------- Raw materials $ 896,169 $ 666,271 Work in process 241,028 82,427 -------------- ------------- Total $ 1,137,197 $ 748,698 ============== ============= NOTE 4 -- COMMITMENTS AND CONTINGENCIES The Company has pledged $1,949,386 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 in settlement of the employee stock rights. 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 $1,975,908 at March 31, 2000. In addition, under the terms of the Company's Financing Agreement, the Company has placed the remaining proceeds of such agreement into a certificate of deposit ("CD"). The CD is restricted for capital expenditure purposes only. The balance of the CD at March 31, 2000 was $506,339 and is included in restricted investments due to the capital expenditure restriction placed on its use. NOTE 5 -- INCOME TAXES As of June 30, 1999, the Company had net operating loss carryforwards for federal and state tax purposes totaling $14.8 and $3.0 million, respectively. As such, no provision has been made for income taxes for the three or nine months ended March 31, 2000 or 1999. A portion of the NOL may be subject to various statutory limitations as to its usage. NOTE 6 -- 6F ANGIO-SEAL FDA APPROVAL In March 2000, the Company announced that the FDA granted approval to St. Jude Medical for the new 6F Angio-Seal puncture closure device, allowing sale of the product in the United States. This smaller version of the Angio-Seal is designed to seal arterial punctures 6F and smaller and specifically address the largest segment of the puncture closure market. 8 9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW We were founded in 1984 and our common stock became publicly traded in December 1995. We have been profitable in each of our last ten fiscal quarters. Revenues Our revenues consist of three components: net sales, research and development revenue and royalty income. Net Sales. Net sales is comprised of resorbable biomaterials products and Angio-Seal devices manufactured by us. 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 and wound care. Historically, our biomaterials sales have represented primarily the resorbable collagen and polymer components of the Angio-Seal device supplied to St. Jude Medical. We have experienced significant sales growth in our biomaterials products in fiscal years 1998, 1999 and 2000 due to sales to new customers, increased sales to existing customers, new product offerings and the expansion of our marketing activities. We believe this growth will continue because of greater acceptance of biomaterials and technological advances by the medical community. This acceptance has expanded the applications for our biomaterials products. Angio-Seal Devices. Historically, we supplied our strategic partner with partially completed 8F Angio-Seal devices. In fiscal years 1999 and 2000, we have supplied our partner with 6F Angio-Seal devices to supplement their production requirements. We anticipate that St. Jude Medical will transition the manufacturing of these devices to their facility by June 30, 2000. Research and Development Revenue. Historically, research and development revenue has been derived solely from development work performed on the Angio-Seal. As anticipated, the research and development activities have transitioned to St. Jude Medical and no additional research and development revenue is expected. Royalty Income. We receive a royalty on every Angio-Seal unit sold worldwide. We anticipate sales of the Angio-Seal device will continue to grow, particularly due to the recent launches of the 6F Angio-Seal in the U.S. and Europe. As a result, royalty income will continue to be a significant source of revenue. The anticipated increase in unit sales will be partially offset in the fiscal year 2001 by an anticipated reduction in our royalty rate, from 12% to 9%, in accordance with our licensing agreements. We expect this rate reduction will occur during the second quarter of fiscal year 2001. Cost of Products Sold We have experienced an overall increase in gross margin during the fiscal year 2000 as our net sales have increased and we have been able to spread our fixed costs of manufacturing over a greater number of units. We anticipate our gross margin will continue to improve as our sales levels increase and our product 9 10 mix becomes more favorable, reflecting the shift to higher margin sales of biomaterials products and a reduction in sales of lower margin Angio-Seal devices. Research and Development Expense Research and development expense consists of expenses incurred for the development of our proprietary technology such as the Aegis Vortex, resorbable biomaterials products and technologies and other development programs. While research and development on the Angio-Seal has become an insignificant portion of our overall development costs, the progression of the Aegis Vortex into the clinical trial phase and our continued development of proprietary biomaterials products and technologies will offset this decrease. We anticipate research and development expense will continue to increase as we pursue commercialization of the Aegis Vortex 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 fiscal years 1999 and 2000, the costs of our patent litigation are also included within selling, general and administrative expenses. We anticipate the marketing component of selling, general and administrative expenses, which has been insignificant in past fiscal years, will increase as we evaluate opportunities for commercialization of the Aegis Vortex and expand the marketing efforts for our biomaterials business. RESULTS OF OPERATIONS COMPARISON OF THREE MONTHS ENDED MARCH 31, 1999 AND 2000 Revenues. Revenues increased 24%, to $5.4 million in the three months ended March 31, 2000 from $4.4 million in the three months ended March 31, 1999. Net sales of products increased 107%, to $3.7 million from $1.8 million for the three months ended March 31, 2000 and 1999, respectively. Of this increase, $1.2 million was attributable to an increase in sales of 6F Angio-Seal devices to St. Jude Medical. The remaining $700,000 was attributable to increased sales of biomaterials products. We have been providing St. Jude Medical with 6F Angio-Seal devices for the U.S. and international markets. We expect to continue to supplement St. Jude Medical's manufacturing of these devices for the remainder of fiscal year 2000. Research and Development Revenues. Research and development revenues decreased 99%, to $5,000 from $452,000, for the three months ended March 31, 2000 and 1999, respectively. St. Jude Medical has transitioned substantially all of the Angio-Seal research and development in-house. We do not expect research and development revenues to be significant in the future. Royalty Income. Royalty income increased 23%, net of a $750,000 supplemental payment from our previous partner in the three months ended March 31, 1999, to $1.7 million from $1.4 million in the three months ended March 31, 2000 and 1999, respectively. Royalty units increased as approximately 93,000 Angio-Seal units were sold to end-users during the three months ended March 31, 2000 compared to approximately 73,000 units sold during the three months ended March 31, 1999. This unit increase was due to St. Jude Medical's increased sales and marketing efforts primarily in the U.S. and sales of the new 6F device in the international markets. The 6F device was introduced in the international markets in April 1999 and in the U.S. in late March 2000. 10 11 Cost of Products Sold. Cost of products sold increased 59% to $2.0 million in the three months ended March 31, 2000 from $1.3 million in the three months ended March 31, 1999. However, gross margin increased to 45% from 29%. This increase reflects an allocation of overhead across a greater sales volume resulting in a decrease in per unit costs. Research and Development Expense. Research and development expense was $1.4 million in both the three months ended March 31, 2000 and March 31, 1999. While development of the Angio-Seal product line has transitioned to St. Jude Medical, our development efforts on the Aegis Vortex, including clinical trials, have significantly increased. We also continued to expand our development efforts on our biomaterials products. 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 decreased 10% to $700,000 in the three months ended March 31, 2000 from $782,000 in the three months ended March 31, 1999. This decrease was the result of a reduction in legal expenses related to our patent infringement suit offset by an increase in our sales and marketing efforts for the Aegis Vortex and our biomaterials products. Net Interest Income. Interest expense increased 23% to $118,000 in the three months ended March 31, 2000 from $96,000 in the three months ended March 31, 1999. This was due to the addition of a $5.0 million financing agreement in January 1999, of which $925,000 was used to repay a portion of the $2.0 million term loan. The remainder of the proceeds from the $5.0 million financing agreement are being used to fund leasehold improvements and capital expansion. Interest income increased 3% to $186,000 in the three months ended March 31, 2000 from $181,000 in the three months ended March 31, 1999 as a result of a slight increase in average cash and investment balances. COMPARISON OF NINE MONTHS ENDED MARCH 31, 1999 AND 2000 Revenues. Revenues increased 18%, to $13.8 million in the nine months ended March 31, 2000 from $11.6 million in the nine months ended March 31, 1999. Net sales of products increased 82% to $9.1 million from $5.0 million for the nine months ended March 31, 2000 and 1999, respectively. Of this increase, $2.5 million was attributable to an increase in sales of 6F Angio-Seal devices to St. Jude Medical. The remaining $1.6 million was attributable to increased sales of biomaterials products. We have been providing St. Jude Medical with 6F Angio-Seal devices for the international and U.S. markets. We expect to continue to supplement St. Jude Medical's manufacturing of these devices for the remainder of fiscal year 2000. Research and Development Revenues. Research and development revenues decreased 97% to $48,000 from $1.6 million for the nine months ended March 31, 2000 and 1999, respectively. St. Jude Medical has transitioned substantially all of the Angio-Seal research and development in-house. We do not expect research and development revenues to be significant in the future. Royalty Income. Royalty income increased 8%, net of a $750,000 supplemental payment from our previous strategic partner in the nine months ended March 31, 1999, to $4.6 million from $4.3 million in the nine months ended March 31, 2000 and 1999, respectively. Royalty units increased as approximately 255,000 Angio-Seal units were sold to end-users during the nine months ended March 31, 2000 compared to approximately 227,000 units sold during the nine months ended March 31, 1999. This unit increase was due to St. Jude Medical's increased sales and marketing efforts primarily in the U.S. and sales of the new 11 12 6F device in the international markets. The 6F device was introduced in the international markets in April 1999 and in the U.S. in late March 2000. Cost of Products Sold. Cost of products sold increased 37% to $5.1 million in the nine months ended March 31, 2000 from $3.7 million in the nine months ended March 31, 1999. However, gross margin increased to 44% from 26%. This increase reflected an allocation of overhead across a greater sales volume, which resulted in a decrease in per unit costs. Research and Development Expense. Research and development expense decreased 4% to $4.1 million in the nine months ended March 31, 2000 compared to $4.3 million in the nine months ended March 31, 1999. This decrease was mainly attributable to the transition of substantially all of the development for the Angio-Seal product line to St. Jude Medical. This decrease was offset by our continued development efforts on the Aegis Vortex, including clinical trial expenses. We also continued to expand our development efforts on our biomaterials products. 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 8% to $2.0 million in the nine months ended March 31, 2000 from $1.9 million in the nine months ended March 31, 1999. This increase was primarily the result of increased sales and marketing efforts for the Aegis Vortex and our biomaterials products. Net Interest Income. Interest expense increased 58% to $351,000 in the nine months ended March 31, 2000 from $222,000 in the nine months ended March 31, 1999. This was due to the addition of a $5.0 million financing agreement in January 1999, of which $925,000 was used to repay a portion of the $2.0 million term loan. The remainder of the proceeds from the $5.0 million financing agreement are being used to fund leasehold improvements and capital expansion. Interest income increased 40% to $623,000 in the nine months ended March 31, 2000 from $444,000 in the nine months ended March 31, 1999 as a result of an increase in average total cash and investment balances. LIQUIDITY AND CAPITAL RESOURCES Net cash provided by our operating activities was $78,000 and $935,000 during the nine months ended March 31, 2000 and 1999, respectively. In the nine months ending March 31, 2000, changes in asset and liability balances resulted in a net $3.9 million use of cash, offset by net income of $2.8 million and non-cash depreciation and amortization of $1.1 million. Changes in asset and liability balances resulted in a net $2.0 million use of cash, offset by net income of $2.0 million and non-cash depreciation and amortization of $914,000, in the nine months ending March 31, 1999. Our cash, cash equivalents and short-term investments were $9.0 million at March 31, 2000. In addition, we have $2.5 million in restricted investment accounts. We have pledged $1.9 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 also have $507,000 in investments restricted for capital spending through June 30, 2000 under the terms of an agreement which provided a total of $5.0 million. Related to this financing agreement, we have a capital spending plan for fiscal year 2000 of which, for the nine months ended March 31, 2000, $2.2 million was expended primarily on machinery, equipment and leasehold improvements. These expenditures were related to the continued expansion of our manufacturing capabilities, principally our for biomaterials product lines. 12 13 We received a $3.0 million royalty advance under our licensing agreement upon receipt of FDA approval for the Angio-Seal in fiscal year 1997. This royalty advance has been reduced in each period by 50% of the excess of royalty income over minimum royalties stipulated within the licensing agreement. During the nine months ended March 31, 2000, the liability was retired. In November 1997, we acquired patents in exchange for 200,000 shares of common stock and a series of eight quarterly cash payments, which began 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 the legal and other related costs incurred to acquire such patents. The present value of the cash payments was $1.1 million and was recorded on the balance sheet as an obligation. The obligation was fully repaid during the nine months ended March 31, 2000. We plan to continue to spend substantial amounts to fund clinical trials, to gain regulatory approvals and to continue to expand research and development activities, particularly for the Aegis Vortex and our biomaterials products. We believe cash generated from operations will be sufficient to meet our operating and capital requirements for the next twelve months. 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 one year or less. 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 March 31, 2000, our total portfolio consisted of approximately $11.5 million of investments, all of which had maturities within one year. Additionally, we generally hold securities until 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 $1.1 million in fixed rate debt, for which the risk would be an inability to refinance if rates decreased. The remaining $5.0 million of our debt fluctuates with the U.S. treasury rate and is therefore subject to increases in U.S. interest rates. The estimated potential reduction in earnings from a one-point increase in the Five Year U.S. treasury rate for the nine months ended March 31, 2000 would have been approximately $37,500. 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 2000 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 Aegis Vortex, the success of St. Jude Medical in manufacturing, marketing and distributing the Angio-Seal, 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. 13 14 PART II - OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. A. Exhibits. None B. Reports on Form 8-K. None C. Financial Data Schedule 14 15 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. KENSEY NASH CORPORATION Date: April 24, 2000 By: /s/ Wendy F. DiCicco ----------------------- Wendy F. DiCicco Chief Financial Officer 15