1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended: DECEMBER 31, 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
of incorporation or organization) Identification No.)
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, 2001, there were outstanding 10,460,242 shares of
Common Stock, par value $.001, of the registrant.
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KENSEY NASH CORPORATION
QUARTER ENDED DECEMBER 31, 2000
INDEX
PAGE
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets
as of December 31, 2000 (Unaudited) and June 30, 2000......................... 3
Condensed Consolidated Statements of Operations
for the three and six months ended December 31, 2000
and 1999 (Unaudited).......................................................... 4
Condensed Consolidated Statements of Stockholders' Equity as of
December 31, 2000 (Unaudited) and June 30, 2000............................... 5
Condensed Consolidated Statements of Cash Flows
for the six months ended December 31, 2000 and 1999 (Unaudited)............... 6
Notes to Condensed 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 1. LEGAL PROCEEDINGS........................................................................ 16
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K......................................................... 16
SIGNATURES ................................................................................................ 17
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
- ------------------------------------------------------------------------------------------------------
DECEMBER 31, JUNE 30,
ASSETS 2000 2000
CURRENT ASSETS:
Cash and cash equivalents $ 14,047,476 $ 24,117,502
Short-term investments 12,136,297 7,603,308
Trade receivables 2,258,429 2,219,739
Royalties receivable 1,920,684 1,993,260
Officer loans 986,780 954,110
Other receivables (including approximately $47,000 and $53,000 at
December 31 and June 30, 2000, respectively, due from employees) 195,651 258,367
Inventory 1,291,630 902,118
Prepaid expenses and other 577,252 471,666
------------ ------------
Total current assets 33,414,199 38,520,070
------------ ------------
PROPERTY, PLANT AND EQUIPMENT, AT COST
Leasehold improvements 5,676,760 5,666,083
Machinery, furniture and equipment 7,091,775 5,586,159
Construction in progress 521,169 354,551
------------ ------------
Total property, plant and equipment 13,289,704 11,606,793
Accumulated depreciation (5,392,436) (4,390,796)
------------ ------------
Net property, plant and equipment 7,897,268 7,215,997
------------ ------------
OTHER ASSETS:
Restricted investments 2,081,651 2,081,651
Property under capital leases, net 5,153 9,944
Acquired patents, net 3,331,212 3,355,953
Goodwill, net 3,315,209
------------ ------------
Total other assets 8,733,225 5,447,548
------------ ------------
TOTAL $ 50,044,692 $ 51,183,615
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 789,982 $ 1,290,101
Accrued expenses 516,275 460,551
Current portion of obligation under acquisition agreement
and capital lease obligations 882,065 10,374
Deferred revenue 255,186 16,300
------------ ------------
Total current liabilities 2,443,508 1,777,326
------------ ------------
OBLIGATION UNDER ACQUISITION AGREEMENT and
OBLIGATION UNDER CAPITAL LEASES, long-term portion 2,801,528 1,933
------------ ------------
Total liabilities 5,245,036 1,779,259
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $.001 par value, 100,000 shares authorized,
no shares issued or outstanding at December 31 and June 30, 2000
Common stock, $.001 par value, 25,000,000 shares authorized,
10,459,725 and 10,455,499 shares issued and outstanding at
December 31 and June 30, 2000, respectively 10,460 10,455
Capital in excess of par value 63,514,849 63,690,042
Accumulated deficit (18,622,494) (13,813,455)
Accumulated other comprehensive loss (103,159) (482,686)
------------ ------------
Total stockholders' equity 44,799,656 49,404,356
------------ ------------
TOTAL $ 50,044,692 $ 51,183,615
============ ============
See notes to consolidated financial statements
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KENSEY NASH CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
- ------------------------------------------------------------------------------------------------------------
Three Months Ended Six Months Ended
December 31, December 31,
---------------------------- ----------------------------
2000 1999 2000 1999
REVENUES:
Net sales $ 3,096,225 $ 3,009,292 $ 5,680,965 $ 5,372,912
Research and development 115,000 8,199 116,843 42,597
Royalty income 1,925,471 1,525,115 3,922,455 2,946,217
------------ ------------ ------------ ------------
Total revenues 5,136,696 4,542,606 9,720,263 8,361,726
------------ ------------ ------------ ------------
OPERATING COSTS AND EXPENSES:
Cost of products sold 1,611,932 1,637,289 3,326,755 3,065,397
Research and development 1,578,222 1,315,038 3,215,272 2,639,905
Selling, general and administrative 794,903 809,125 1,311,530 1,340,445
In-process research and development charge 7,593,597 7,593,597
------------ ------------ ------------ ------------
Total operating costs and expenses 11,578,654 3,761,452 15,447,154 7,045,747
------------ ------------ ------------ ------------
(LOSS) INCOME FROM OPERATIONS (6,441,958) 781,154 (5,726,891) 1,315,979
------------ ------------ ------------ ------------
OTHER INCOME:
Interest income 480,360 212,851 1,019,062 436,851
Interest expense (75,907) (117,879) (101,610) (232,532)
Other 400 25 400 (1,006)
------------ ------------ ------------ ------------
Total other income - net 404,853 94,997 917,852 203,313
------------ ------------ ------------ ------------
NET (LOSS) INCOME $ (6,037,105) $ 876,151 $ (4,809,039) $ 1,519,292
============ ============ ============ ============
BASIC and DILUTED EARNINGS PER SHARE $ (0.58) $ 0.12 $ (0.46) $ 0.20
============ ============ ============ ============
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 10,459,568 7,464,048 10,457,993 7,472,531
============ ============ ============ ============
DILUTED WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 10,459,568 7,611,669 10,457,993 7,571,119
============ ============ ============ ============
See notes to consolidated financial statements.
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KENSEY NASH CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
- -----------------------------------------------------------------------------------------------
Capital
Common Stock in Excess
---------------------------- of Par Accumulated
Shares Amount Value Deficit
BALANCE, JUNE 30, 1997 7,198,251 $ 7,198 $ 34,203,807 $(22,084,059)
Exercise of stock options 61,021 61 556,174
Shares issued under Patent
Acquisition Agreement 200,000 200 2,837,400
Net income 342,682
---------- ------------ ------------ ------------
BALANCE, JUNE 30, 1998 7,459,272 7,459 37,597,381 (21,741,377)
---------- ------------ ------------ ------------
Exercise of stock options 11,438 11 100,071
Net income 3,178,758
Comprehensive loss
Comprehensive income
---------- ------------ ------------ ------------
BALANCE, JUNE 30, 1999 7,470,710 7,470 37,697,452 (18,562,619)
---------- ------------ ------------ ------------
Shares issued upon Secondary
Offering 2,959,000 2,959 25,745,766
Exercise of stock options 25,789 26 246,824
Net income 4,749,164
Comprehensive loss
Comprehensive income
---------- ------------ ------------ ------------
BALANCE, JUNE 30, 2000 10,455,499 10,455 63,690,042 (13,813,455)
---------- ------------ ------------ ------------
Secondary Offering costs (212,325)
Exercise of stock options 4,226 5 37,132
Net loss (4,809,039)
Comprehensive income
Comprehensive loss
---------- ------------ ------------ ------------
BALANCE, DECEMBER 31, 2000 10,459,725 $ 10,460 $ 63,514,849 $(18,622,494)
========== ============ ============ ============
Accumulated
Other Comprehensive
Comprehensive Income/
Loss (Loss) Total
BALANCE, JUNE 30, 1997 $ 12,126,946
Exercise of stock options 556,235
Shares issued under Patent
Acquisition Agreement 2,837,600
Net income $ 342,682 342,682
============ -----------
BALANCE, JUNE 30, 1998 15,863,463
-----------
Exercise of stock options 100,082
Net income $ 3,178,758 3,178,758
Comprehensive loss $ (241,402) (241,402) (241,402)
------------
Comprehensive income $ 2,937,356
============
------------ ------------
BALANCE, JUNE 30, 1999 (241,402) 18,900,901
------------ ------------
Shares issued upon Secondary
Offering 25,748,725
Exercise of stock options 246,850
Net income $ 4,749,164 4,749,164
Comprehensive loss (241,284) (241,284) (241,284)
------------
Comprehensive income $ 4,507,880
------------ ============ ------------
BALANCE, JUNE 30, 2000 (482,686) 49,404,356
------------ ------------
Secondary Offering costs (212,325)
Exercise of stock options 37,137
Net loss $ (4,809,039) (4,809,039)
Comprehensive income 379,527 379,527 379,527
------------
Comprehensive loss $ (4,429,512)
------------ ============ ------------
BALANCE, DECEMBER 31, 2000 $ (103,159) $ 44,799,656
============ ============
See notes to consolidated financial statements.
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KENSEY NASH CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
- -------------------------------------------------------------------------------------------------
Six Months Ended
December 31,
-----------------------------
2000 1999
OPERATING ACTIVITIES:
Net (loss) income $ (4,809,039) $ 1,519,292
Adjustments to reconcile net (loss) income to net cash used in
operating activities:
Depreciation and amortization 934,783 747,868
In-process research and development charge 7,593,597
Changes in assets and liabilities which provided (used) cash:
Accounts receivable 84,944 (1,611,101)
Prepaid expenses and other current assets (105,586) (161,741)
Inventory (350,382) (85,275)
Accounts payable and accrued expenses (589,706) (755,295)
Deferred revenue (288,850) (381,596)
------------ ------------
Net cash provided by (used in) operating activities 2,469,761 (727,848)
------------ ------------
INVESTING ACTIVITIES:
Additions to property, plant and equipment (1,248,063) (1,729,165)
Acquisition of THM Biomedical, Inc. (6,771,087)
(Purchase) sale of investments (4,153,462) (2,952,793)
------------ ------------
Net cash used in investing activities (12,172,612) (1,223,628)
------------ ------------
FINANCING ACTIVITIES:
Principal payments under capital leases (5,898) (15,930)
Repayments of long term debt (186,088) (503,453)
Secondary offering costs (212,326)
Exercise of stock options 37,137 41,544
------------ ------------
Net cash used in financing activities (367,175) (477,839)
------------ ------------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (10,070,026) 17,941
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 24,117,502 1,189,083
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 14,047,476 $ 1,207,024
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 101,610 $ 117,879
============ ============
Cash paid for income taxes $ $
============ ============
See notes to consolidated financial statements.
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KENSEY NASH CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 -- CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
BASIS OF PRESENTATION
The consolidated balance sheet at December 31, 2000, the consolidated
statements of operations for the six months ended December 31, 2000 and
1999 and the consolidated statements of cash flows for the six months
ended December 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 December 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, 2000 consolidated financial statements filed with the Securities and
Exchange Commission on Form 10-K. The results of operations for the period
ended December 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 six months.
EXPORT SALES
There were no export sales from the Company's U.S. operations to
unaffiliated customers in Europe for the three and six months ended
December 31, 2000. Export sales totaled $116,562 and $231,595 for the
three and six months ended December 31, 1999, respectively.
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
Accumulated other comprehensive loss, shown in the consolidated statements
of shareholders' equity at December 31, 2000 and June 30, 2000, 1999 and
1998, is solely comprised of unrealized losses on the Company's
available-for-sale securities. There was no unrealized gain or loss in the
year ended June 30, 1998. The tax effect for 2000 and 1999 of other
comprehensive income was not significant.
RECENT PRONOUNCEMENTS
SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities, as amended, establishes new accounting and reporting standards
for derivative financial instruments and for hedging activities. It
requires an entity to recognize all derivatives as either assets or
liabilities in the balance sheet, depending on the Company's rights or
obligations under the applicable
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derivative contract, and to measure those instruments at fair value.
Adoption of the new method of accounting for derivatives and hedging
activities, which is required as of July 1, 2000, is not expected to have
a material impact on the Company's financial position or operations.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin, SAB 101, Revenue Recognition in Financial
Statements, as amended, with an effective date of October 1, 2000, which
summarizes the SEC's views in applying generally accepted accounting
principles to revenue recognition. This statement did not have a material
impact on our consolidated financial statements.
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,
2000 2000
----------- ---------
Raw materials $ 942,350 $ 823,570
Work in process 342,486 78,548
Finished Goods 6,794
---------- ---------
Total $1,291,630 $ 902,118
========== =========
NOTE 3 -- COMMITMENTS AND CONTINGENCIES
The Company has pledged $2,081,651 in investments as collateral to secure
certain bank loans to employees which were used by such employees 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 employee has
pledged their Common Stock as collateral to the Company. The balance
outstanding on such employee loans was $2,046,055 at December 31, 2000.
NOTE 4 -- INCOME TAXES
As of June 30, 2000, the Company had net operating loss carryforwards for
federal and state tax purposes totaling $11.3 and $10.0 million,
respectively. As such, no provision has been made for income taxes for the
six months ended December 31, 2000. A portion of the NOL may be subject to
various statutory limitations as to its usage.
NOTE 5 -- ACQUISITION OF THM BIOMEDICAL
On September 1, 2000 the Company acquired THM Biomedical, Inc. ("THM"), a
developer of porous, biodegradable, tissue-engineering devices for the
repair and replacement of musculoskeletal tissues, for approximately $10.5
million plus acquisition costs of approximately $228,000. 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 "THM
Obligation"). The THM Obligation is due in equal quarterly installments of
$281,250 beginning on December 31, 2000 and ending on September 30, 2004.
The present value of this obligation, $3,856,816, has been recorded in the
Company's financial statements.
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
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is 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) 3,371
--------
$ 10,663
========
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
feasability 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
12/31/00 12/31/99
------------ ------------
Total revenue $ 10,987,158 $ 8,668,041
============ ============
Net income (loss) $ 3,997,379 $ (5,980,129)
============ ============
Basic and diluted earnings (loss)
per share $ 0.38 $ (0.80)
============ ============
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.
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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
"Selected Consolidated Financial Data" and our financial statements and the
related notes included in this report.
OVERVIEW
We were founded in 1984, our common stock became publicly traded in December
1995 and we completed a secondary offering in May 2000.
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 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, wound care
and dental. Historically, our biomaterials sales have represented
primarily the absorbable collagen and polymer components of the
Angio-Seal(TM) device supplied to St. Jude Medical, the licensee of the
Angio-Seal(TM) product line. We have experienced significant sales
growth in our biomaterials products in every fiscal year since 1998 due
to sales to new customers, increased sales to existing customers, new
product offerings, including sales of the dental products we recently
acquired, and the expansion of 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.
Angio-Seal(TM) Devices. In fiscal year 2000, we supplied St. Jude
Medical with 6F Angio-Seal(TM) devices to supplement their production
requirements. A final shipment of 6F Angio-Seal(TM) devices was made in
the quarter ended September 30, 2000. St. Jude Medical has now
transitioned the manufacturing of these devices to their facility. We
do not expect any revenue from the manufacture of completed
Angio-Seal(TM) devices in the future.
Research and Development Revenue. Historically, research and development revenue
has been derived solely from development work performed on the Angio-Seal(TM)
device. As anticipated, these research and development activities have
transitioned to St. Jude Medical and no significant Angio-Seal(TM) research and
development revenue is expected in the future. However, we do expect future
research and development grant revenue under contracts acquired in conjunction
with the THM Biomedical, Inc. acquisition completed during September 2000.
Royalty Income. We receive a royalty on every Angio-Seal(TM) device sold
worldwide. We anticipate sales of the Angio-Seal(TM) device will continue to
grow, particularly due to the recent launches of the new 6F and 8F
Angio-Seal(TM) devices 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 has been partially offset in our fiscal year 2001 by the reduction in our
royalty rate, from 12% to 9%, in accordance with our licensing agreements. This
rate reduction occurred during the second quarter of fiscal year 2001 when a
cumulative 1.0 million Angio-Seal(TM) devices were sold. The next contracted
rate reduction will occur when 4.0 million Angio-Seal(TM) devices are sold,
which we believe will not occur for several years.
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Cost of Products Sold. We experienced an overall increase in gross margins
during fiscal year 2000 as our net sales increased and we were able to spread
our fixed costs of manufacturing over a greater number of units. We anticipate
our gross margins will continue to improve throughout fiscal year 2001 as our
sales levels increase and our product mix becomes more favorable. Specifically,
we have had a shift to higher margin sales of biomaterials products and the
elimination of sales of lower margin Angio-Seal(TM) devices during the second
fiscal quarter of fiscal year 2001.
Research and Development Expense. Research and development expense consists of
expenses incurred for the development of our proprietary technology such as our
newly renamed product, TriActiv(TM) Balloon Protected Flush Extraction System
(formerly known as the Aegis Vortex System), absorbable biomaterials products
and technologies as well as other development programs. While research and
development on the Angio-Seal(TM) product has become an insignificant portion of
our overall development costs, the progression of the TriActiv(TM) system into
the clinical trial phase and our continued development of proprietary
biomaterials products and technologies has offset this decrease. We anticipate
research and development expense will continue to increase as we pursue
commercialization of the TriActiv(TM) product 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 fiscal years 2001 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
TriActiv(TM) product and expand the marketing efforts for our biomaterials
business.
RESULTS OF OPERATIONS
COMPARISON OF THREE MONTHS ENDED DECEMBER 31, 2000 TO THREE MONTHS ENDED
DECEMBER 31, 1999
Revenues. Revenues increased 13% to $5.1 million in the three months ended
December 31, 2000 from $4.5 million in the three months ended December 31, 1999.
Net sales of products increased 3% to $3.1 million from $3.0 million for the
three months ended December 31, 2000 and 1999, respectively. As anticipated, we
had no sales of Angio-Seal(TM) devices to St. Jude Medical, as we made our final
shipment of 6F devices during the three months ended September 30, 2000. This
resulted in a $1.0 million decrease in Angio-Seal(TM) device sales in the three
months ended December 31, 2000 from the three months ended December 31, 1999.
This was offset by increased sales of biomaterials products as well as the
addition of dental product sales related to the first fiscal quarter acquisition
of THM Biomedical.
Research and Development Revenues. Research and development revenues increased
to $115,000 from $8,000 for the three months ended December 31, 2000 and 1999,
respectively. Research and development revenue for the three months ended
December 31, 2000 was generated under an articular cartilage development grant
acquired in conjunction with the THM Biomedical acquisition. Research and
development revenue for the same period a year earlier was generated by work
performed on the Angio-Seal(TM) product for St. Jude Medical. As St. Jude
Medical has transitioned the Angio-Seal(TM) research and development in-house,
we do not expect Angio-Seal(TM) research and development revenue in the future.
Royalty Income. Royalty income increased 26% to $1.9 million from $1.5 million
in the three months ended December 31, 2000 and 1999, respectively. This
increase comes despite the anticipated 25% reduction in the Angio-Seal(TM)
device royalty rate from 12% to 9% during the quarter and reflects greater units
sold as well as an increase in average selling price for the Angio-Seal(TM)
device. Royalty units
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increased 39% as 114,000 Angio-Seal(TM) units were sold to end-users during the
three months ended December 31, 2000 compared to approximately 82,000 units sold
during the three months ended December 31, 1999. This unit increase was due to
St. Jude Medical's increased sales and marketing efforts and sales of both the
new 6F and 8F devices in the U.S. market. The new version of the 8F device was
introduced in the U.S. in September 2000.
Cost of Products Sold. Cost of products sold decreased 2% in the three months
ended December 31, 2000 from the three months ended December 31, 1999. While
sales increased 3% over the same period a year earlier, the decrease in cost of
products sold reflects favorable product mix as sales of biomaterials products
increased. We anticipate our gross margin will continue to improve through
fiscal year 2001 as our sales levels increase and our product mix continues to
be concentrated in high margin biomaterials products.
Research and Development Expense. Research and development expense increased to
20% to $1.6 million in the three months ended December 31, 2000 from $1.3
million in the three months ended December 31, 1999. While development of the
Angio-Seal(TM) product line has transitioned to St. Jude Medical, our
development efforts on the TriActiv(TM) product 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 2% to $795,000 in the three months ended December 31, 2000 from
$809,000 in the three months ended December 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 TriActiv(TM)
system and for our biomaterials products.
Net Interest Income. Interest expense decreased 36% to $76,000 in the three
months ended December 31, 2000 from $118,000 in the three months ended December
31, 1999. This was due to the repayment of $6.1 million of debt on June 1, 2000
with the proceeds from our secondary offering, offset by interest expense on the
$4.5 million obligation incurred in conjunction with the THM Biomedical
acquisition. Interest income increased 125% to $480,000 in the three months
ended December 31, 2000 from $213,000 in the three months ended December 31,
1999 due to an increase in average cash and investment balances resulting from
the proceeds of our secondary offering.
COMPARISON OF SIX MONTHS ENDED DECEMBER 31, 2000 TO SIX MONTHS ENDED
DECEMBER 31, 1999
Revenues. Revenues increased 16% to $9.7 million in the six months ended
December 31, 2000 from $8.4 million in the six months ended December 31, 1999.
Net sales of products increased 6% to $5.7 million from $5.4 million for the six
months ended December 31, 2000 and 1999, respectively. As anticipated, sales of
Angio-Seal(TM) devices decreased as we made our final shipment of 6F devices to
St. Jude in July 2000. This resulted in a $1.1 million decrease in
Angio-Seal(TM) device sales in the six months ended December 31, 2000 from the
six months ended December 31, 1999. This decrease was offset by increased sales
of biomaterials products as well as the addition of dental product sales related
to the first fiscal quarter acquisition of THM Biomedical.
Research and Development Revenues. Research and development revenues increased
174% to $117,000 from $43,000 for the six months ended December 31, 2000 and
1999, respectively. Research and
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development revenue for the six months ended December 31, 2000 was generated
under an articular cartilage development grant acquired in conjunction with the
THM Biomedical acquisition. Research and development revenue for the same period
a year earlier was generated by work performed on the Angio-Seal(TM) product for
St. Jude Medical. As St. Jude Medical has transitioned the Angio-Seal(TM)
research and development in-house, we do not expect Angio-Seal(TM) research and
development revenue in the future.
Royalty Income. Royalty income increased 33% to $3.9 million from $2.9 million
in the six months ended December 31, 2000 and 1999, respectively. This increase
comes despite the anticipated 25% reduction in the Angio-Seal(TM) royalty rate
from 12% to 9% during the second fiscal quarter and reflects greater units sold
as well as an increase in average selling price for the Angio-Seal(TM) device.
Royalty units increased 30% as 211,000 Angio-Seal(TM) units were sold to
end-users during the six months ended December 31, 2000 compared to
approximately 162,000 units sold during the six months ended December 31, 1999.
This unit increase was due to St. Jude Medical's increased sales and marketing
efforts and sales of both the new 6F and 8F devices in the U.S. market. The new
version of the 8F device was introduced in the U.S. in September 2000.
Cost of Products Sold. Cost of products sold increased 9% to $3.3 million in the
six months ended December 31, 2000 from $3.1 million in the six months ended
December 31, 1999. This increase reflects greater net sales of products as well
as increased manufacturing expenses. We anticipate our gross margin will improve
through fiscal year 2001 as our sales levels increase and our product mix
becomes more favorable, reflecting the shift to higher margin biomaterials
product sales.
Research and Development Expense. Research and development expense increased 22%
to $3.2 million in the six months ended December 31, 2000 from $2.6 million in
the six months ended December 31, 1999. While development of the Angio-Seal(TM)
product line has transitioned to St. Jude Medical, our development efforts on
the TriActiv(TM) product have significantly increased. We also have 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 2% in the six months ended December 31, 2000 from the six months ended
December 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 TriActiv(TM) product and for our biomaterials
products.
Net Interest Income. Interest expense decreased 56% to $102,000 in the six
months ended December 31, 2000 from $233,000 in the six months ended December
31, 1999. This was due to the repayment of $6.1 million of debt on June 1, 2000
with the proceeds from our secondary offering, offset by interest expense on the
$4.5 million obligation incurred in conjunction with the THM Biomedical
acquisition. Interest income increased 133% to $1.0 million in the six months
ended December 31, 2000 from $437,000 in the six months ended December 31, 1999
due to an increase in average cash and investment balances resulting from the
proceeds of our secondary offering.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by our operating activities was $2.5 million in the six months
ended December 31, 2000 compared to net cash used by our operating activities of
$728,000 in the six months ended December 31, 1999. 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. In the six months ended December
31, 1999, changes in asset and liability balances resulted in a $3.0
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million use of cash, offset by net income of $1.5 million and non-cash
depreciation and amortization of $748,000.
Our cash, cash equivalents and short-term investments were $26.2 million at
December 31, 2000. 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 $3.3 million capital spending plan for fiscal year 2001, of which $1.2
million has been expended primarily on machinery, equipment and leasehold
improvements. These expenditures are related to the continued expansion of our
manufacturing capabilities, principally for our biomaterials product lines.
In September 2000, we acquired the assets and assumed certain liabilities of THM
Biomedical, Inc., a company engaged in the development of bioabsorbable tissue
engineering devices, for a purchase price of approximately $10.5 million. The
purchase price consisted of a $6.6 million cash payment at closing and
$1,125,000 annually for the subsequent four years. The annual amounts are due in
quarterly payments of $281,250, the first of which was made on December 31,
2000. The present value of the payments, $3.8 million, was recorded as a
liability at September 30, 2000. The transaction was accounted for under the
purchase method. The purchase price was allocated amongst assets acquired and
liabilities assumed, $400,224 and $702,351, respectively, as well as a $7.6
million allocation to in-process research and development. The remainder of the
purchase price, $3.4 million, was allocated to goodwill and will be amortized
over 17 years.
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 TriActiv(TM) system 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 December 31, 2000, our total portfolio consisted of
approximately $12.1 million of investments, with maturities ranging from three
months to ten years. We generally hold securities until maturity and therefore
do not expect our results of operations or cash flows to be materially impacted
due to a sudden change in interest rates.
FORWARD-LOOKING STATEMENTS AND FACTORS THAT MAY AFFECT FUTURE RESULTS
This document and other documents filed by the Company with the Securities and
Exchange Commission (SEC) have forward-looking statements. In addition, the
Company's senior management may make
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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 the Company's 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 the
Company's 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 the Company are also
described or incorporated in the Company's 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. The Company
does 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 the Company's business,
operating results and financial condition. These risk factors, described in
detail in the Company's Annual Report on Form 10-K, include but are not limited
to:
- - the success of our biomaterials products;
- - our dependence on our biomaterials customers for marketing and obtaining
regulatory approval for their products;
- - our ability to obtain regulatory approvals for the TriActiv(TM)system;
- - subsequent to regulatory approval, the successful commercialization of the
TriActiv(TM) system;
- - our reliance on revenues from the Angio-Seal(TM) product line;
- - the performance of St. Jude Medical as the manufacturer, marketer and
distributor of the Angio-Seal(TM) product;
- - our ability to obtain any additional required funding for future development
and marketing of the TriActiv(TM) 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.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
On January 23, 2001, the Company provided an update on its ongoing
patent infringement suit against Perclose, Inc., involving Kensey Nash
U.S. Patent Nos. 5,676,689 and 5,861,004. The U.S. District Court,
Eastern District of Pennsylvania, has entered a Markman hearing order
regarding claims interpretation in favor of Perclose. The parties are
preparing a joint stipulation, pursuant to which the Court would enter
a judgement of non-infringement in favor of Perclose, which will permit
the parties to seek an expedited review of the Markman decision from
the U.S. Court of Appeals for the Federal Circuit. The Company intends
to appeal the District Court's decision.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
A. Exhibits.
None
B. Reports on Form 8-K.
None
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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, 2001 By: /s/ Wendy F. DiCicco
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Wendy F. DiCicco
Chief Financial Officer
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