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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended: JUNE 30, 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
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $.001 PER SHARE
(TITLE OF CLASS)
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
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Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates
of the Registrant as of September 21, 2001 was $138,349,281 based on the closing
price per share of common stock of $17.08 as of such date reported by the NASDAQ
National Market.
The number of shares outstanding of the registrant's Common Stock, par
value $.001 per share, as of September 21, 2001 was 10,589,035.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the following document are incorporated by reference
into this report: Definitive Proxy Statement in connection with
the 2001 Annual Meeting of Stockholders
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PART I
ITEM 1. BUSINESS
OVERVIEW
We have expertise in designing, developing, manufacturing and processing
proprietary biomaterials products for the orthopedics, cardiology,
drug/biologics delivery, dental and wound care markets. We also are a leader in
cardiovascular medical technology, specifically in puncture closure devices, and
are developing a product in the emerging distal protection market. We were the
original designers, developers and manufacturers of the Angio-Seal(TM) Vascular
Closure Device (Angio-Seal), which is designed to seal and close femoral artery
punctures made during diagnostic and therapeutic cardiovascular
catheterizations. Additionally, we are in clinical trials with the TriActiv(TM)
Balloon Protected Flush Extraction System (the TriActiv system), a device
designed to provide distal protection during saphenous vein graft (SVG)
treatment. We intend to leverage our proprietary knowledge and expertise to
develop new products and technologies and to explore additional applications for
our products.
In September 2000, we acquired THM Biomedical, Inc. (THM), a company focused on
developing tissue engineering devices for the repair and replacement of
musculoskeletal tissues. With this acquisition, we significantly broadened our
intellectual property portfolio in bioabsorbable materials and added to our
proprietary biomaterials technology platform with product applications in the
articular cartilage regeneration, bone regeneration, drug and growth factor
delivery and periodontal markets.
BIOMATERIALS MARKET OPPORTUNITY
Biomaterials, which are substances that treat, augment, or replace tissue,
organs or body functions, are used regularly as components and elements in a
wide variety of absorbable and permanent implants. Advances in materials
technology and a better understanding of the biological processes involved in
tissue formation and remodeling have led to the introduction of absorbable
biomaterials based products to address long-standing deficiencies of traditional
products and therapies. This trend has been observed in many markets, including
orthopedics, cardiology, drug/biologics delivery, wound care, surgery, dentistry
and urology. Generally, absorbable biomaterials based products have proven
attractive solutions for a number of reasons. First, physicians like to use an
implant which will not require a second surgery to remove the device. In
addition, the rate of absorption of products can be carefully engineered to
promote healing as the biomaterials based products work with the body's natural
healing response. Finally, absorbable biomaterials offer tremendous potential
for drug delivery. The ability to provide staged and sustained release of drugs
and biologics is a critical attribute of the growth in the use of absorbable
biomaterials based products.
The technological challenges involved in developing biomaterials products are
substantial. Developing products made from absorbable biomaterials requires an
understanding of the mechanical integrity, biocompatibility, and absorption
rates as well as the ability to sterilize these products without jeopardizing
the material properties.
OUR BIOMATERIALS TECHNOLOGY
Our expertise in biomaterials enables us to design, develop and manufacture
proprietary biomaterials products. These products are characterized by their
ability to be absorbed or incorporated in the body's own tissue. Our particular
expertise is in the properties, usage and processing of polymers, collagen,
ceramics and other absorbable materials. We believe that our diverse platforms
in and extensive experience with biomaterials technology give us a competitive
advantage as many participants in the market specialize in only one biomaterial
or have far less experience in biomaterials. Our broad and extensive
biomaterials background enables us to provide essential biomaterials building
blocks across multiple biomaterials platforms to address specific product needs
in a wide variety of markets.
- Polymers. We are a leader in the design, development and
manufacture of absorbable polymer products. We use many
different types of polymers, in combination or as single
entities, to achieve the desired properties in a particular
product. We have developed several unique polymer based
materials, products and processes, which have a variety of
applications in implantable absorbable medical devices. We
offer our customers and partners a complete solution, including
product design and engineering, tool design, process
development, commercial manufacture and packaging
configuration.
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Our recent acquisition of THM added open-cell polylactic acid
(OPLA), a porous polymer foam technology, and to our
biomaterials technology platform in the orthopedics drug and
delivery markets. This porous tissue matrix (PTM) technology
facilitates wound healing in both bone and soft tissue and is
bioabsorbable at controlled rates for specific functions and
tissues. This technology adds a series of products, development
programs and intellectual property related to porous
biodegradable regeneration matrices. Specifically, we are
researching applications for articular cartilage regeneration,
bone growth scaffolds for spinal and trauma applications and
for the delivery of drugs and growth factors.
- Collagen and Other Naturally Occurring Materials. We design,
develop and manufacture products using naturally occurring
materials such as collagen, elastin, hyaluronic acid and
alginate, which have applications in a wide variety of
absorbable medical devices. We are experts in processing
collagen into diverse product formulations, including powders,
gels, pastes, sponges and structural matrices. We combine
collagen and other naturally occurring materials using our
proprietary processes, thereby creating new materials with
unique characteristics and diverse product applications.
We have completed extensive biocompatibility and viral
inactivation studies on our collagen products. We have
established, and currently maintain, device master files which
contain the data from these studies. Unlike many of our
competitors, we allow customers who incorporate our collagen
products into their products to reference our device master
files in their regulatory submissions, thereby eliminating the
extensive and time consuming process of independently
generating their own data. We believe our policy of making our
device master files available to our customers provides us with
a significant competitive advantage.
- Ceramics Products. We are researching products using ceramic
materials in combination with other biomaterials that have
applications in bone grafting, spinal fusion, filling of bone
defects and fracture repair. We have ceramic experience
primarily with calcium phosphate salts such as hydroxyapatite.
These materials can be designed to replicate bone structure and
support new bone growth or as osteoconductive implants.
Ceramics are also useful for enhancing the material properties
of products, such as strength, when used in combination with
other biomaterials.
OUR BIOMATERIALS STRATEGY
Our strategy is to expand our leadership position and expertise in biomaterials
products and technology. The components of our strategy are presented below.
- Develop New Proprietary Biomaterials Products. We are
leveraging our technology and expertise to develop new
proprietary biomaterials products. We are experts in polymers,
collagen and other absorbable materials, as well as in
processing these materials. In addition, we have particular
expertise in the use of biomaterials in the orthopedics,
cardiology, drug/biologics delivery, dental and wound care
markets. We are using our expertise to develop new biomaterials
products, new formulations of existing biomaterials and new
biomaterials applications. In addition, we are currently
seeking regulatory approval for two proprietary PTM based
products with applications in the orthopedics market.
- Expand Our Existing Biomaterials Business. We intend to
aggressively expand our existing biomaterials business by
increasing sales to our current customers and attracting new
customers by providing proprietary, technologically superior
biomaterials products. We offer a complete range of services
including design, development, regulatory consulting,
manufacturing and package engineering. We will continue to
invest in new manufacturing technology and processes to meet
our customers' requirements, support product launches and
increase the demand for our biomaterials products.
Additionally, we will expand our marketing efforts to broaden
our customer base in the orthopedic, cardiology, drug/biologics
delivery, dental and wound care markets.
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- Commercialize Biomaterials Products. We are increasing the
level of value we add to the services and products we sell to
our customers and believe we will be able to increase our
financial participation in the commercialization of these
services and products. We either manufacture our biomaterials
products and provide them to our customers for incorporation
into their products or manufacture a complete product
incorporating our biomaterials and provide the finished product
to our customers for distribution. Currently, we are
independently designing and developing biomaterials products
which may enhance the features and benefits of our customers'
products. In addition, we are independently developing new
proprietary products and exploring new commercial relationships
with customers to maximize our return on our increased
investment in these products. As we continue to increase our
investment in the development of new biomaterials and products,
we believe we will be able to retain an increased percentage of
the financial return associated with the commercialization of
products using our biomaterials technology.
- Pursue Strategic Acquisitions and Alliances. We will continue
to seek strategic acquisitions and alliances which add
complementary technologies and expertise, broaden our
intellectual property portfolio and strengthen our competitive
position in our biomaterials business. We believe that our
expertise in biomaterials allows us to identify and attract
these opportunities. In September 2000, the acquisition of THM
added the PTM technology to our biomaterials platform as well
as broadened our intellectual property position. In September
2001, we entered into a distribution agreement with Curasan AG
for the European and middle eastern distribution of our
Epi-Guide(TM) periodontal barrier membrane product.
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OUR BIOMATERIALS PRODUCTS
We provide our customers with a variety of proprietary products ranging from
components to final packaged products which are then marketed and sold to end
users. We sell many of our biomaterials products to leading companies in each of
the markets listed below. The structure of our relationships with our customers
varies and includes development partnerships and manufacturing contracts. The
following table describes our biomaterials products, the markets they address
and their current status.
BIOMATERIALS MARKETS BIOMATERIALS PRODUCTS PRODUCT STATUS
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Orthopedics:
Sports Medicine Meniscal Repair Tacks Commercial; additional products in
regulatory review
Anterior Cruciate Ligament Repair Screws Commercial; additional products in
development and regulatory review
Rotator Cuff Repair Screws Commercial
Cranio-maxillofacial Fixation Cranio-maxillofacial Repair Plates, Commercial
Screws and Tacks
Spinal Fixation Absorbable Growth Factor Delivery Commercial, international only;
Matrice clinical
Spinal Fusion Development
Trauma Fixation Bone Graft Substrates Development
Bone Void Filler Regulatory Review, U.S. only
Joint Replacement Cement Restrictor Regulatory Review, U.S. only
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Cardiology:
Arterial Puncture Closure Absorbable Polymer Anchors Commercial; additional products
and Collagen Plugs for Angio-Seal(TM) in development
Vascular Grafts Vascular Graft Coatings Commercial, international only
Angiogenesis Angiogenic Growth Factors and Development
Pharmaceutical Delivery Matrices
Arterial Stents Advanced Intravascular Absorbable Development
Stents and Stent Covers
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Drug/Biologics Delivery:
Cervical Cancer and Dysplasia Drug Delivery Matrices Clinical
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Wound Care:
Burn Treatments and Skin Collagen Tissue Engineering Substrates Commercial; regulatory approval
Defects used for Culturing Skin Cells
Wound Dressings Collagen incorporated into Topical Commercial
Wound Dressings
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Dental:
Periodontal Drilac Commercial
Epi-Guide Commercial
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General Surgery:
Cosmetic Surgery Cosmetic Surgery Repair Device Product in development and
regulatory review
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Product status definitions:
Commercial -- Product approved by the appropriate regulatory agency and/or
available for sale.
Regulatory review - Regulatory submissions have been made; awaiting response.
Clinical -- Product approved by the appropriate regulatory agency for human
clinical studies.
Development -- Product in-process which has demonstrated feasibility but has not
been approved for clinical trials or sale.
Research -- Product or therapy concept which has not advanced to the development
stage.
Each of the above markets; orthopedics, cardiology, drugs/biologics delivery,
wound care, dental and general surgery, comprised 37%, 46%, 1%, 4%, 4% and 1%
respectively, of our total biomaterials revenue for the current fiscal year
ended June 30, 2001 (fiscal 2001).
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We have products that are commercially available for sale in the U.S. and
international markets, and products that are in various stages of development,
clinical trials or regulatory review. Additionally, we have biomaterials
research programs which we believe will provide us with opportunities to expand
our product offerings and strategic alliances. Following are descriptions of the
markets into which biomaterials products are being placed as well as the
applications for which our products and technology are currently being used or
have future potential use.
Orthopedic Products. Applications in the orthopedic market for our biomaterials
products include sports medicine, as well as spinal and trauma fixation.
Orthopedic applications of biomaterials include repair, regeneration or
augmentation of musculoskeletal tissues, including bone, cartilage, ligaments,
spinal discs and tendons. Companies in this market often look to third parties
to develop and manufacture their product concepts into marketable products. Our
capabilities and expertise have enabled us to develop relationships with several
major orthopedic companies, to whom we provide our biomaterials products.
Many of our biomaterials products manufactured from absorbable materials are
designed to replace metallic devices used in the fixation and repair of
musculoskeletal tissues. Use of absorbable biomaterials eliminates the need for
a second surgery which is frequently necessary to remove non-absorbable metallic
implants like bone rods and pins. This benefit provides our customers with a
cost-effective alternative to traditional non-absorbable based products.
Sports Medicine. The primary application for our biomaterials in the
sports medicine segment is soft tissue fixation. Soft tissue fixation
includes the repair of tendons and ligaments in the knee, such as the
anterior cruciate ligament, and in the shoulder, such as the rotator
cuff.
Spinal Fixation. The primary application for our biomaterials in the
spinal fixation market is spinal fusion. Spinal fusion devices are
used to restore normal spinal disc spacing and fuse adjacent vertebrae
for the correction of a spine or improvement in chronic back pain.
Biomaterials can either be components of a metallic spinal fusion cage
or can be used as the primary construct of the cage.
Trauma Fixation. Trauma fixation devices are used to repair broken
bones using nails, screws, plates, pins and bone growth stimulation
techniques.
Cranio-maxillofacial. Biomaterials products address the repair of the
skull or bones of the face using absorbable tacks, screws and plates.
The cranio-maxillofacial market is a subsegment of the trauma fixation
market.
Cardiology Products. Our biomaterials are used in arterial puncture closure
products and coatings for synthetic vascular grafts. We are independently
developing an absorbable polymer matrix to deliver angiogenic growth factors to
promote the growth of new blood vessels for use in myocardial revascularization
procedures. We are also independently exploring the use of our biomaterials in
an arterial stent and a stent cover.
Drug/Biologics Delivery Products. Biomaterials are particularly useful for the
controlled release of drugs and other biologically active agents such as growth
factors. In these applications, the drug is deposited or incorporated into a
biomaterials delivery matrix. As the matrix dissolves or is degraded by the
body, the drug is gradually released. The use of a biomaterials matrix for drug
delivery permits a locally targeted, low-dose release profile, improving the
delivery of the drug. The PTM technology provides even further benefits than
traditional biomaterials as the porosity of the material provides additional
release capabilities.
Wound Care Products. While the wound care market is currently dominated by
conventional bandages and dressings and surgical staples or sutures, there is a
new generation of products resulting from recent advances in biomaterials,
tissue engineering and biotechnology.
Dentistry Products. Biomaterials are predominantly used in the periodontal
segment of the dentistry market. Through our acquisition of THM, we now have two
commercialized products in the periodontal field, Drilac(TM), a product which is
indicated to prevent dry socket following tooth extraction, and Epi-Guide(TM), a
barrier membrane used in periodontal restorative procedures to prevent soft
tissue cells from growing into space reserved for bone.
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General Surgery and Urology Products. Biomaterials are used in these market
segments in products ranging from cosmetic surgery devices to absorbable sutures
to tissue barriers and even stents.
THE TRIACTIV(TM) BALLOON PROTECTED FLUSH EXTRACTION SYSTEM
We are designing and developing the TriActiv system to provide distal protection
during SVG treatment procedures. The system utilizes active flushing and
extraction to remove debris from the vessel post-procedure. There are
approximately 700,000 coronary bypass surgeries performed annually worldwide and
approximately half of all bypass grafts become diseased or occluded within ten
years of surgery. SVGs are used in coronary bypass graft procedures as a
replacement for the diseased or occluded native artery to restore blood flow.
The saphenous vein is removed from the patient's leg and surgically implanted to
bypass the diseased or occluded native artery. Current treatment options for
diseased SVGs include drug therapy, device-based therapies (including
angioplasty and the placement of stents) or repeat bypass surgery. There are
significant risks involved with these treatments ranging from continued
progression of disease, heart attack and possible death. We believe the use of
the TriActiv system will reduce these risks for patients.
We believe the TriActiv system currently is the only device, in clinical trials
or commercially available, which offers all three of the following features:
- a distal protection balloon placed beyond the occlusion to
prevent debris from flowing downstream and potentially causing
a heart attack;
- a flush catheter advanced over a guidewire that delivers fluid
to the vessel; and
- an active, controlled extraction system which removes the
debris.
To operate the TriActiv system, a guiding catheter is positioned at the entrance
to the graft. The guidewire, containing the distal protection balloon, is
advanced through the SVG beyond the occlusion. The distal protection balloon is
inflated and a stent is placed in the vessel at the occlusion. Following stent
placement, saline and contrast media are delivered into the graft from the flush
catheter to dislodge the occlusive material. The particles and debris that are
dislodged by the flush system are extracted through the lumen of the guiding
catheter.
We have enrolled a sufficient number of patients in our clinical trials to
submit for European (CE Mark) regulatory approval and anticipate this submission
will be complete in October 2001. The CE Mark is an international symbol of
adherence to quality assurance standards established by the European Union and
compliance with applicable European medical device directives. We anticipate
commercial launch in Europe in the fourth quarter of fiscal 2002. As of
September 25, 2001 we have enrolled 34 patients in our 40-50 patient U.S. pilot
study under an approved Investigational Device Exemption (IDE). To begin our
pivotal study, in lieu of an IDE supplement, the FDA has approved the use of an
appointed data safety monitoring board (DSMB) for review of the pilot study
data. Upon DSMB approval, we will initiate the PRotection During Saphenous Vein
Graft Intervention to Prevent Distal Embolization (PRIDE) study, a randomized,
controlled 500-800 patient pivotal trial.
We intend to commercialize the TriActiv system by either building a direct sales
and marketing force in the interventional cardiology market, establishing a
distributor network or entering into a strategic alliance with a leader in this
market.
We intend to modify the design of the TriActiv system to address additional
related applications including the treatment of diseased native coronary and
peripheral arteries and the re-occlusion of stented arteries. We are currently
evaluating selected design modifications to address these applications.
THE ANGIO-SEAL(TM) DEVICE
Leading cardiology industry journals currently estimate that there are
approximately 6.5 million cardiovascular catheterization procedures performed
annually, which translates to a potential worldwide arterial puncture closure
market in excess of $1 billion, with the U.S. market accounting for
approximately 75%. In addition, current industry estimates of market penetration
for arterial puncture closure devices are approximately 30% and 12%, for the
U.S.
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and the international markets, respectively. The Angio-Seal is a leading product
in the worldwide arterial puncture closure market with 1.4 million devices sold
as of June 30, 2001. Industry estimates show the Angio-Seal worldwide market
share for fiscal 2001 was approximately 35%.
The Angio-Seal puncture closure device acts to close and seal femoral artery
punctures made during diagnostic and therapeutic cardiovascular
catheterizations. The device consists of four components:
- an absorbable polymer anchor seated securely against the inside
surface of a patient's artery at the point of puncture;
- an absorbable collagen plug applied adjacent to the outside of
the artery wall;
- an absorbable suture; and
- a delivery system consisting of an insertion sheath, puncture
locator, guidewire, tamper tube and spring.
The anchor and suture act as a pulley to position the collagen into the puncture
tract adjacent to the outside of the artery wall, to seal and close the
puncture. A tamper tube is used to further position and secure the closure
device. The anchor, collagen and suture are all designed to be absorbed into the
patient's body within 60 to 90 days after the procedure. We believe that this
mechanical (via the anchor and collagen) and biochemical (via the collagen)
offers physicians a method for sealing and closing punctures with significant
advantages over traditional manual or mechanical compression methods, as well as
over other competitive products. We believe the Angio-Seal has several
advantages over traditional manual or mechanical compression procedures,
including: reduced time to ambulation, reduced staffing and hospital time,
possible reduction in procedure costs, increased patient comfort, greater
flexibility in post-procedure blood thinning therapy and increased blood flow to
the leg.
The Angio-Seal is manufactured, marketed, sold and distributed by St. Jude
Medical, Inc. (St. Jude Medical). We receive a royalty on every unit sold. In
addition, we manufacture components for the Angio-Seal and have historically
augmented St. Jude Medical's manufacturing of completed devices. We believe the
impact of continued sales and marketing efforts, along with new product
enhancements planned by St. Jude Medical, will provide continued growth
opportunities for the Angio-Seal.
PATENTS AND PROPRIETARY RIGHTS
Our intellectual property covers technology in the fields of arterial puncture
closure, blood vessel location, arterial revascularization systems,
drug/biologics delivery products, wound care products, periodontal products,
angiogenesis products and surgical instruments. We protect our technology by,
among other things, filing patent applications for the patentable technologies
that we consider material to our business. Our first U.S. patent for the concept
of sealing arterial punctures was issued in 1988. As of September 21, 2001, we
held 76 United States patents and 79 foreign national patents and had various
United States patents and foreign national patent applications pending.
We also rely heavily on trade secrets and unpatented proprietary know-how which
we seek to protect through non-disclosure agreements with corporations,
institutions and individuals exposed to our proprietary information. As a
condition of employment, we require that all full-time and part-time employees
enter into an invention assignment and non-disclosure agreement. Additionally,
non-compete agreements are being utilized for certain employees who are exposed
to our most sensitive trade secrets.
We have licensed our United States and foreign patents for the Angio-Seal to St.
Jude Medical and are required to license all improvements for the Angio-Seal to
St. Jude Medical. The license agreements with St. Jude Medical are exclusive and
worldwide, with rights to make, have made, use, sell, and have sold the
Angio-Seal, but are limited to the cardiovascular field of use only.
We will continue to aggressively protect any new manufacturing processes,
biomaterials products and technologies and medical products and devices which we
have invented or developed. We intend to broaden the scope of our intellectual
property and consider our core technologies to be critical to our future product
development.
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MANUFACTURING
We have developed unique manufacturing and processing capabilities for
absorbable collagen and polymers. We manufacture numerous absorbable
biomaterials products for use in applications including orthopedics, cardiology,
drug/biologics delivery, dental and wound care. We have our own capabilities in
tool and die making, injection molding, extrusion, compounding, machining, model
making and laser welding, which allow us to engineer and reengineer our
products in development on site.
We currently manufacture two of the major absorbable components of the
Angio-Seal, the collagen plug and polymer anchor, for St. Jude Medical. Prior to
August 2000, we manufactured Angio-Seal devices for St. Jude Medical's use
worldwide in clinical trials and manufactured partially and fully completed
commercial devices for sale in the U.S. and Europe. For fiscal 2001, the plug
and the anchor represented a total of $6.6 million ($3.3 million for each
component) in sales revenue. St. Jude Medical has the right to manufacture the
absorbable polymer anchor and intends to manufacture that component in the
future. However, we anticipate we will continue to be a source of anchor
requirements through the second quarter of fiscal year 2002. While we continue
to supply St. Jude Medical with the collagen requirements for the Angio-Seal,
our formal collagen supply agreement with St. Jude Medical expired in May 2000.
Our FDA-registered manufacturing facility in Exton, Pennsylvania contains
separate areas for TriActiv system and absorbable collagen and polymer
manufacturing. Our manufacturing facility is equipped with multiple class
100,000 clean room facilities and is certified to the two international quality
standards, ISO 9001 and EN 46001. Certification is based on adherence to
established standards of quality assurance and manufacturing process control.
Our manufacturing facility is subject to regulatory requirements and periodic
inspection by regulatory authorities. We have a separate in-house quality
assurance department that sets standards, monitors production, writes and
reviews operating procedures and protocols and performs final testing of sample
devices and products manufactured by or for us.
We purchase most raw materials, parts and peripheral components used in our
products. Although many of these supplies are off-the-shelf items readily
available from several supply sources, others are custom-made to meet our
specifications. We maintain adequate safety stock levels of these custom
materials in order to prevent any product down-time in the case of supply
interruption. In addition, we believe that, in most of these cases, alternative
sources of supply for custom-made materials are available or could be developed
within a reasonable period of time.
RESEARCH AND DEVELOPMENT
Our research and development and regulatory and clinical staff consisted of 62
individuals at September 21, 2001. Our research and development efforts are
focused on the continued development of the TriActiv system and of our
biomaterials capabilities. We incurred total research and development expenses
of $7.3, $5.3 and $5.7 million in the fiscal years ended June 30, 2001, 2000 and
1999, respectively. We also had a $7.6 million in-process research and
development (IPR&D) charge related to the acquisition of THM in September 2000.
In addition to the resources dedicated to the product development process, we
have an internal regulatory affairs and clinical management staff responsible
for managing our clinical trials and obtaining regulatory approvals for the
TriActiv system. Our staff also works closely with several of our customers to
obtain regulatory approvals for their products in the U.S., the European Union
and several other countries.
OUR RELATIONSHIP WITH ST. JUDE MEDICAL
The Angio-Seal is licensed to St. Jude Medical who manufactures, markets and
sells the Angio-Seal worldwide. The Angio-Seal has been sold in Europe since
1995 and in the U.S. since 1996. Under our license agreements, St. Jude Medical
has exclusive rights to manufacture, market and distribute all current and
future sizes of the patented Angio-Seal for hemostatic puncture closures for
cardiovascular use worldwide. We retain the rights to use this technology for
other applications. We earn a royalty on each Angio-Seal sold by St. Jude
Medical. The royalty rates are based on aggregate volume of Angio-Seal units
sold. Our royalty rate was 12% until October 2000, when it decreased to 9%,
based on Angio-Seal unit sales reaching a cumulative total of one million units
sold. The final decrease in royalty rate, to 6%, will occur when four million
cumulative units have been sold. We expect this
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decrease will occur sometime during our fiscal year 2005. These license
agreements provide for minimum royalty payments for five years following FDA
approval (ending September 30, 2001). The minimum royalty was exceeded in each
of the five years under the agreement and all appropriate royalty payments
received.
The term of the license agreements extends to the expiration date of the most
recently issued licensed patent, including all continuations or supplements. The
most recent patent for the Angio-Seal technology was issued in July 2000. We
have also applied for, and expect to have issued to us, additional patents. St.
Jude Medical may terminate the license agreements any time after the fifth
royalty year (ending September 30, 2001) for any reason upon twelve months
notice. "Angio-Seal" is a trademark of St. Jude Medical.
If a license under any third-party patent is necessary to make, use or sell the
Angio-Seal product licensed to St. Jude Medical, any payments and royalties for
such third-party license and any related attorney's fees, will be deducted from
payments due to us, on a territory-by-territory basis, in an amount not to
exceed in any one year one-half of any royalties in any such territory for that
year.
SALES AND MARKETING
As we develop and receive regulatory approval for new products, we will explore
a variety of means of commercializing these products. As a result, we may
contract with distributors, develop our own sales and marketing force and/or
license products to third parties. We have no experience hiring or training a
sales and marketing force and we may not be able to maintain a sales and
marketing force with technical expertise and the necessary supporting
distribution capabilities.
The Drilac and Epi-Guide products are distributed by Kensey Nash Corporation in
the U.S. We have entered into a distribution agreement with Curasan for European
and middle eastern distribution of the Epi-Guide.
COMPETITION
The market for our various products is fragmented, competitive and rapidly
changing. We compete directly and indirectly for customers with a wide variety
of companies. We believe that the principal competitive factors for our products
include:
- the ability to obtain regulatory approvals;
- safety and effectiveness;
- performance and quality;
- marketing;
- distribution;
- pricing;
- cost effectiveness;
- customer service;
- the development or acquisition of proprietary products and
processes;
- the ability to attract and retain skilled personnel;
- improvements to existing technologies;
- reimbursement; and
- compliance with regulations.
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We believe our products compete favorably with those of our competitors.
However, many of our existing competitors, as well as a number of potential new
competitors, have longer operating histories in these markets, greater name
recognition, larger customer bases and greater financial, technical and
marketing resources.
GOVERNMENT REGULATION
Our medical devices are subject to extensive regulation by the U.S. Food and
Drug Administration, or FDA, and by foreign governments. The FDA regulates the
clinical testing, design, manufacture, labeling, distribution and promotion of
medical devices. Noncompliance with applicable requirements can result in, among
other things, fines, injunctions, civil penalties, recall or seizure of
products, total or partial suspension of production, failure of the government
to grant pre-market clearance or pre-market approval for devices, withdrawal of
marketing approvals and criminal prosecution. The FDA also has the authority to
recall, request repair, replacement or refund of the cost of any device we
manufacture or distribute.
International sales of medical devices are subject to the regulatory agency
product registration requirements of each country in which they are sold. The
regulatory review process varies from country to country. Many countries also
impose product standards, packaging requirements, labeling requirements, price
restraints and import restrictions on devices. Delays in receipt of, or a
failure to receive approvals or clearances, or the loss of any previously
received approvals or clearances, could have a material adverse effect on our
business, financial condition and results of operations. In addition,
reimbursement coverage must be obtained in some countries.
Generally, our biomaterials products are incorporated by our customers into
another product which receives FDA and other government approvals. We maintain
device master files for some of our biomaterials products containing information
relating to the specifications, manufacturing, biochemical characterization,
biocompatibility and viral safety of our biomaterials products. These files, in
addition to our technical expertise, help our clients in their regulatory
approval process for products incorporating our biomaterials.
FDA premarket approval was granted for the Angio-Seal 8F device in September
1996 and for the 6F device in March 2000. St. Jude Medical is responsible for
all future FDA premarket approval application supplements for the Angio-Seal.
The 8F Angio-Seal received CE Mark approval from the European Community in
September 1995. The 6F Angio-Seal received CE Mark approval in February 1999.
We must obtain CE Mark approval and premarket clearance from the FDA, as well as
all future premarket supplement clearances for the TriActiv system. We
anticipate submission for CE mark approval will occur in October of 2001 as well
as the presentation of our pilot study data to the appointed DSMB to initiate
pivotal trials of the device in the U.S.
When human clinical trials of a device are required in connection with our new
proprietary products and the device presents a significant risk, we must file an
IDE application with the FDA prior to commencing human clinical trials. The IDE
application must be supported by data, typically including the results of animal
and laboratory testing. If the IDE application is approved, human clinical
trials may begin at a specific number of investigational sites with a specific
number of patients, as approved by the FDA. The conduct of human clinical trials
is also subject to regulation by the FDA. Sponsors of clinical trials are
permitted to sell those devices distributed during the course of the trial
provided such compensation does not exceed recovery of the costs of manufacture,
research, development and handling. Similar approvals are required to conduct
clinical trials in foreign countries.
Any products we manufacture or distribute pursuant to FDA clearance or approvals
are subject to pervasive and continuing regulation by the FDA, including record
keeping requirements and reporting of adverse experiences with the use of the
device. As a device manufacturer, we are required to register our manufacturing
facility with the FDA; list our devices with the FDA; and are subject to
periodic inspections by the FDA and certain state agencies. The Federal Food,
Drug, and Cosmetic Act requires devices to be manufactured in accordance with
Quality System regulations which impose certain procedural and documentation
requirements with respect to manufacturing and quality assurance activities.
Labeling and promotional activities are subject to scrutiny by the FDA and, in
certain instances, by the Federal Trade Commission. The FDA actively enforces
regulations prohibiting marketing of products for unapproved uses.
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Manufacturers are also subject to numerous federal, state and local laws
relating to such matters as safe working conditions, manufacturing practices,
environmental protection, fire hazard control and disposal of hazardous or
potentially hazardous substances. We may be required to incur significant costs
to comply with such laws and regulations in the future and any failure to comply
with such laws or regulations will have a material adverse effect upon our
ability to do business.
EMPLOYEES
As of September 21, 2001, we had 175 employees, including 86 employees in
operations, 65 employees in research and development and clinical and regulatory
affairs and 24 employees in finance, sales and marketing and administration.
Five of our employees are currently located in Duluth, Minnesota. All of our
remaining employees are located at our facility in Exton, Pennsylvania. We
believe that our success depends in a large part on our ability to attract and
retain employees in all areas of our business.
ITEM 2. PROPERTIES
We lease approximately 53,000 square feet of executive offices, manufacturing
and research and development facilities in Exton, Pennsylvania, a suburb of
Philadelphia. Our lease expires in 2005, subject to renewal options. We believe
that our facility is sufficient for our current operations. In addition, we
currently lease 3,500 square feet of manufacturing and research and development
facilities in Duluth, Minnesota.
ITEM 3. LEGAL PROCEEDINGS
In March 1998, we, along with our former Angio-Seal strategic partner, filed a
patent infringement suit against Perclose, Inc., a competitor in the puncture
closure market. Upon their acquisition of the Angio-Seal license in March 1999,
St. Jude Medical, as part of the transaction, assumed certain rights and
responsibilities with respect to the lawsuit from our previous partner. In 1999,
we amended the complaint to add a second patent to the infringement suit. The
original and amended complaints filed in Federal District Court for the Eastern
District of Pennsylvania, claim that Perclose infringes our U.S. patent numbers
5,676,689 and 5,861,004. These patents cover systems and methods related to
sealing percutaneous punctures. We seek damages and an order to permanently
enjoin Perclose from making, using or selling products that infringe these
patents.
Perclose filed four counterclaims against us and our strategic partner's
predecessor in answer to the complaint. The first counterclaim seeks to declare
our patents invalid and not infringed. The additional counterclaims asserted by
Perclose allege that our claims are frivolous and assert various antitrust
counter-claims, including price discrimination, predatory pricing and attempted
monopolization of the puncture closure market.
The U.S. District Court, Eastern District of Pennsylvania, has entered a Markman
hearing Order regarding claims interpretation, in favor of the defendant
Perclose. The Judge received notice that the parties were preparing a joint
stipulation, requesting the court to enter a judgement of non-infringement in
favor of Perclose, in order to expedite the review of the Markman order, by the
U.S. Court of Appeals for the Federal Circuit. Upon receiving this notice, the
Judge requested an additional hearing. This hearing was held on April 6, 2001,
and the Judge requested briefs on the issues presented. We filed our brief and a
Motion for Reconsideration on April 30, 2001. The judge denied the Motion for
Reconsideration on August 21, 2001; and the parties are now negotiating a
Stipulation For Final Judgement, to be presented to the Judge.
We are unable to predict the final outcome of this suit or whether the
resolution of this matter could materially affect our results of operations,
cash flows or financial position. Abbott Laboratories acquired Perclose in
November 1999.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
No matters were submitted to a vote of security holders in the fourth quarter of
fiscal 2001.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Our common stock is quoted in the Nasdaq National Market under the symbol "KNSY"
and has been traded publicly since our initial public offering in December 1995.
The following table sets forth the high and low closing sale prices per share of
our common stock as reported by the Nasdaq National Market for the periods
indicated.
HIGH LOW
---- ---
FISCAL YEAR ENDED JUNE 30, 1999
First Quarter................................. $ 9.88 $ 7.13
Second Quarter................................ 11.00 5.75
Third Quarter................................. 11.75 7.88
Fourth Quarter................................ 10.25 7.25
FISCAL YEAR ENDED JUNE 30, 2000
First Quarter................................. 15.63 7.75
Second Quarter................................ 16.75 10.00
Third Quarter................................. 21.38 12.50
Fourth Quarter................................ 18.88 9.19
FISCAL YEAR ENDED JUNE 30, 2001
First Quarter................................. 13.94 9.25
Second Quarter................................ 12.94 9.25
Third Quarter................................. 11.69 9.50
Fourth Quarter................................ 17.45 9.50
On September 21, 2001, the last reported sale price of our common stock in the
Nasdaq National Market was $17.08 per share. As of September 21, 2001, there
were 64 record owners and approximately 3,883 beneficial owners of our common
stock.
We have not declared or paid cash dividends and do not anticipate declaring or
paying any dividends on our common stock in the near future. Any future
determination as to the declaration and payment of dividends will be at the
discretion of our board of directors and will depend on then existing
conditions, including our financial conditions, results of operations,
contractual restrictions, capital requirements, business prospects, and such
other relevant factors.
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ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected consolidated statement of operations and
consolidated balance sheet data for the fiscal years ended June 30, 2001, 2000,
1999, 1998, and 1997. The selected financial data for each such fiscal year
listed below has been derived from the consolidated financial statements of the
Company for those years, which have been audited by Deloitte & Touche LLP,
independent certified public accountants, whose report for fiscal years 2001,
2000,and 1999 is included elsewhere herein. The following data for fiscal years
2001, 2000, and 1999 should be read in conjunction with "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and with the
Consolidated Financial Statements and related Notes and other financial
information included herein.
FISCAL YEAR ENDED JUNE 30,
------------------------------------------------------------------------
2001 2000 1999 1998 1997
---------- -------- ------- ------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
STATEMENT OF INCOME DATA:
Revenues:
Net sales $ 14,600 $ 13,144 $ 7,168 $ 4,669 $ 3,661
Research and development 330 59 1,894 3,642 2,843
Licensing and milestone fees 1,050
Royalty income and other 8,241 6,612 7,183 (1) 3,008 353
-------- -------- ------- ------- -------
Total revenues 23,171 19,815 16,245 11,319 7,907
-------- -------- ------- ------- -------
Operating costs and expenses:
Cost of products sold 7,427 7,614 5,135 4,084 3,063
Research and development 7,293 5,340 5,668 5,524 4,695
Selling, general and administrative 2,986 2,634 2,585 1,762 1,823
In process research and development charge 7,594
-------- -------- ------- ------- -------
Total operating costs and expenses 25,300 15,588 13,388 11,370 9,581
-------- -------- ------- ------- -------
(Loss) income from operations (2,129) 4,227 2,857 (51) (1,674)
-------- -------- ------- ------- -------
Other income (expense):
Net interest income 1,667 523 317 390 435
Other 24 (1) 4 4 8
Insurance settlement 969
-------- -------- ------- ------- -------
Total other income - net 1,691 522 321 394 1,412
-------- -------- ------- ------- -------
(Loss) income before income tax benefit (438) 4,749 3,178 343 (262)
Income tax benefit 4,054
-------- -------- ------- ------- -------
Net income (loss) $ 3,616 $ 4,749 $ 3,178 $ 343 $ (262)
======== ======== ======= ======= =======
Basic earnings (loss) per common share $ 0.35 $ 0.61 $ 0.43 $ 0.05 $ (0.04)
======== ======== ======= ======= =======
Diluted earnings (loss) per common share $ 0.34 $ 0.60 $ 0.43 $ 0.05 $ (0.04)
======== ======== ======= ======= =======
Weighted average common shares outstanding 10,462 7,766 7,463 7,552 7,182
======== ======== ======= ======= =======
Diluted weighted average common shares outstanding 10,591 7,975 7,477 7,552 7,182
======== ======== ======= ======= =======
JUNE 30,
--------------------------------------------------------------------------
2001 2000 1999 1998 1997
-------- -------- ------- ------- -------
(IN THOUSANDS)
Balance Sheet Data:
Cash and short-term investments $ 27,007 $ 31,721 $ 9,669 $ 7,777 $ 7,351
Inventory 1,322 902 749 1,027 736
Working capital 35,998 36,741 10,860 9,423 9,172
Total assets 59,340 51,183 28,215 22,039 16,593
Long-term obligations 2,309 2 6,013 2,374 574
Total stockholders' equity 53,561 49,404 18,901 15,863 12,127
(1) Includes one-time $1.5 million supplemental royalty payment from former
licensee of Angio-Seal.
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ITEM 7. 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 and our common stock became publicly traded in December
1995. We have been profitable in our last fourteen 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 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,
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. In fiscal
year 2001, the Angio-Seal components represent only 47% of our total
biomaterial sales. 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. In fiscal years 2001, 2000 and 1999 we manufactured and
sold 6F Angio-Seal devices to St. Jude Medical to supplement their
production requirements. In August 2001, St. Jude Medical transitioned
the manufacturing of these devices to their facility. We do not expect
any revenue from the manufacture of completed Angio-Seals in the
future. The manufacture of the 6F Angio-Seal represented $5.5 million,
or 42% of our total net sales for the fiscal year 2000. While this was
a significant portion of our total net sales for fiscal year 2000,
because of the substantial growth of our biomaterials business from
fiscal year 2000 to fiscal year 2001, we were able to achieve an 11%
increase in net sales despite the loss of the 6F Angio-Seal device
manufacturing business.
Research and Development Revenue. Historically, research and development revenue
has been derived solely from development work performed on the Angio-Seal. As
anticipated, these research and development activities have transitioned to St.
Jude Medical and no significant Angio-Seal research and development revenue is
expected in the future. Fiscal year 2001 research and development revenue was
derived from a National Institute of Standards & Technology (NIST) grant, under
which we are researching cartilage regeneration utilizing our 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.
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. Fiscal year 2001 unit growth was partially offset
by the anticipated 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 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.
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Cost of Products Sold. We have experienced an overall increase in gross margin
during the fiscal year 2001 reflecting the shift to higher margin sales of
biomaterials products and the elimination of lower margin Angio-Seal device
sales. In addition, 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 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 system, absorbable biomaterials products and technologies and other
development programs including expenses under the NIST program. While research
and development on the Angio-Seal has become an insignificant portion of our
overall development costs, 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. We anticipate research and
development expense will continue to increase as we pursue commercialization of
the TriActiv system 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 2001, 2000, and 1999 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. We
anticipate sales and marketing expenses will continue to increase as we continue
to evaluate opportunities for commercialization of the TriActiv system and
expand the marketing efforts for our biomaterials business.
RESULTS OF OPERATIONS
COMPARISON OF FISCAL YEARS 2001 AND 2000
Revenues. Revenues increased 17% to $23.2 million in the year ended June 30,
2001, or fiscal 2001, from $19.8 million in the year ended June 30, 2000, or
fiscal 2000. Net sales of products increased 11% to $14.6 million from $13.1
million for fiscal 2001 and 2000, respectively. Of this increase, $6.6 million
was attributable to increased sales of biomaterials products. This increase was
offset by a $5.1 million decrease in 6F Angio-Seal device sales to St. Jude
Medical. We had been providing St. Jude Medical with 6F Angio-Seal devices for
the international and U.S. markets, however, St. Jude Medical transitioned the
manufacturing of these devices to their facility in August 2000.
Research and Development Revenue. Research and development revenues increased
451% to $330,000 from $60,000 for fiscal 2001 and 2000, respectively. Current
year revenues were generated under the NIST articular cartilage development
grant acquired in conjunction with the THM acquisition. Research and development
revenues for the same period a year earlier were generated by work performed on
the Angio-Seal product for St. Jude Medical. As St. Jude Medical has
transitioned the Angio-Seal product research and development to their
facilities, we do not expect Angio-Seal product research and development
revenues in the future.
Royalty Income. Royalty income increased 25%, to $8.2 million from $6.6 million
in fiscal 2001 and 2000, respectively. This increase was achieved despite the
anticipated 25% reduction in the Angio-Seal royalty rate from 12% to 9% during
the second fiscal quarter of fiscal year 2001 and reflects a greater number of
units sold as well as an increase in average selling price for the Angio-Seal.
Royalty units increased 36% as approximately 483,000 Angio-Seal units were sold
to end-users during fiscal 2001 compared to approximately 354,000 units sold
during fiscal 2000. This unit increase was due to St. Jude Medical's increased
sales and marketing efforts, continued strong sales of the 6F Angio-Seal and
sales of the new 8F Angio-Seal in the U.S. market. The new version of the 8F
Angio-Seal was introduced in the U.S. in September 2000.
Cost of Products Sold. Cost of products sold decreased 2% to $7.4 million in
fiscal 2001 from $7.6 million in fiscal 2000. In addition, gross margin
increased to 49% from 42%. 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.
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Research and Development Expense. Research and development expense increased 37%
to $7.3 million in fiscal 2001 compared to $5.3 million in fiscal 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 13% to $3.0 million from $2.6 million, in fiscal 2001 and fiscal 2000,
respectively. This increase was primarily the result of increased sales and
marketing expenses which increased to $703,000 in fiscal 2001 from $398,000 in
fiscal 2000 related to marketing efforts on the TriActiv system and our
biomaterials products. In addition, general and administrative expenses
increased $362,000, to $2.1 million in fiscal 2001 from $1.8 million in fiscal
2000. This was attributable to $100,000 of goodwill amortization expense related
to the THM acquisition as well as increased personnel costs to support our
current sales research and development growth. This was partially offset by a
$315,000 decrease in litigation expenses.
Net Interest Income. Interest expense decreased 44% to $239,000 in fiscal 2001
from $430,000 in fiscal 2000. This was due to the repayment of the financing
agreement in May 2000 with the proceeds of our secondary offering offset by the
addition of an obligation incurred in September 2000 in conjunction with the THM
acquisition. Interest income increased 100% to $1.9 million in fiscal 2001 from
$953,000 in fiscal 2000 as a result of an increase in average total cash and
investment balances primarily related to the investment of our secondary
offering proceeds.
Other Non-Operating Income (Expense). Other non-operating income was $24,000 for
fiscal 2001 compared to other non-operating expense of $1,000 for fiscal 2000.
Other non-operating income (expense) for both periods represented primarily the
net gain or loss on the sale of fixed assets.
Net Income. Net income decreased 24% to $3.6 million in fiscal 2001 from $4.7
million in fiscal 2000 as a result of the changes noted above, an IPR&D charge
of $7.6 million (described below) and a $4.1 million income tax benefit. The
income tax benefit was recognized when the valuation allowance related to
certain deferred tax assets was reversed. Based on our current projections of
taxable income, we believe it is likely we will be able to utilize our federal
net operating loss (NOL) carryforwards. As a result, the valuation allowance
related to these carryforwards was no longer considered necessary.
COMPARISON OF FISCAL YEARS 2000 AND 1999
Revenues. Revenues increased 22% to $19.8 million in the year ended June 30,
2000, or fiscal 2000, from $16.2 million in the year ended June 30, 1999, or
fiscal 1999. Net sales of products increased 83% to $13.1 million from $7.2
million for fiscal 2000 and 1999, respectively. Of this increase, $4.5 million
was attributable to an increase in sales of 6F Angio-Seals to St. Jude Medical.
The remaining $1.4 million was attributable to increased sales of biomaterials
products. We had been providing St. Jude Medical with 6F Angio-Seals for the
international and U.S. markets; however, in August 2000 St. Jude Medical
transitioned the manufacturing of these devices to their facility.
Research and Development Revenue. Research and development revenues decreased
97% to $60,000 from $1.9 million for fiscal 2000 and 1999, respectively. St.
Jude Medical has transitioned substantially all of the Angio-Seal product
research and development in-house.
Royalty Income. Royalty income increased 16%, net of a $1.5 million supplemental
payment from our previous strategic partner in fiscal 1999, to $6.6 million from
$5.7 million in fiscal 2000 and 1999, respectively. Royalty units increased 14%
as approximately 354,000 Angio-Seal units were sold to end-users during fiscal
2000 compared to approximately 310,000 units sold during fiscal 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 Angio-Seal 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 48% to $7.6 million in
fiscal 2000 from $5.1 million in fiscal 1999. However, gross margin increased to
42% from 28% in fiscal 2001 and fiscal 2000, respectively. This increase
reflected an allocation of overhead across a greater sales volume, which
resulted in a decrease in per unit costs.
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Research and Development Expense. Research and development expense decreased 6%
to $5.3 million in fiscal 2000 compared to $5.7 million in fiscal 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 TriActiv system,
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 2%, or $50,000, in fiscal 2000 from fiscal 1999. This increase was
primarily the result of increased sales and marketing efforts for the TriActiv
system and our biomaterials products offset by a decrease in litigation
expenses.
Net Interest Income. Interest expense increased 30% to $430,000 in fiscal 2000
from $332,000 in fiscal 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 was used to fund leasehold improvements and
capital expansion. The financing agreement was repaid on June 1, 2000 with
proceeds from our secondary offering. Interest income increased 47% to $953,000
in fiscal 2000 from $649,000 in fiscal 1999 as a result of an increase in
average total cash and investment balances.
Other Non-Operating Income (Expense). Other non-operating expense was $1,000 for
fiscal 2000 compared to other non-operating income of $4,000 for fiscal 1999.
Other non-operating income (expense) for both periods represented primarily the
net gain or loss on the sale of fixed assets.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by our operating activities was $5.4 million and $2.4 million
during fiscal 2001 and 2000, respectively. In fiscal 2001, changes in asset and
liability balances resulted in a net $7.5 million use of cash, offset by net
income of $3.6 million, non-cash depreciation and amortization of $1.8 million
and a non-cash write-off of in process research and development of $7.6 million.
In fiscal 2000, changes in asset and liability balances resulted in a net $3.2
million use of cash, offset by net income of $4.7 million and non-cash
depreciation and amortization of $862,000.
Our cash, cash equivalents and short-term investments were $27.0 million at June
30, 2001. In addition, we had $2.2 million in restricted investment accounts. We
have pledged $2.2 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 had a capital spending plan for fiscal 2001, of which $3.1 million was
expended primarily on machinery, equipment and leasehold improvements. These
expenditures were related to the continued expansion of our manufacturing
capabilities, principally for our biomaterials product lines.
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 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. See Risk Factors.
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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 "Risk Factors " as well as in this 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 devices 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 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 our financial statements, with a remaining balance of
$3.2 million at June 30, 2001.
The $7.6 million IPR&D charge represents the estimated fair value of purchased
in-process technology which has not yet reached technological feasibility and
has 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 (PTM) 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 on PTM technology to the articular cartilage application
and have expended $328,000 on such efforts through June 30, 2001. In addition,
we are currently seeking regulatory approval for two proprietary PTM based
products with applications in the orthopedics market.
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.
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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.
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 June 30, 2001, our total portfolio consisted of
approximately $24.2 million of investments, with maturities ranging from one to
fifteen years. Additionally, we generally hold securities until the earlier of
their call date 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 $3.2 million in outstanding debt at June 30, 2001
related to the acquisition of THM.
RISK FACTORS
You should carefully consider the following risk factors, in addition to the
other information set forth in this report, before purchasing shares of common
stock of Kensey Nash. Each of these risk factors could adversely affect our
business, operating results and financial condition, as well as adversely affect
the value of an investment in our common stock. This investment involves a high
degree of risk.
RISKS RELATED TO OUR BUSINESS
IF OUR BIOMATERIALS PRODUCTS ARE NOT SUCCESSFUL, OUR OPERATING RESULTS AND
BUSINESS MAY BE SUBSTANTIALLY IMPAIRED.
The success of our existing biomaterials products, as well as any we develop in
the future, depends on a variety of factors, including our ability to continue
to manufacture, sell and competitively price these products and the acceptance
of these products by the medical profession. In addition, we may be required to
obtain regulatory approval for any future biomaterials products. We will require
substantial additional funds to develop and market our biomaterials products. We
expect to fund the growth of our biomaterials business out of our operating
income and cannot guarantee that this operating income will be sufficient to
develop new biomaterials products. To date, we have relied on strategic partners
or customers to market and sell our biomaterials products. We cannot assure you
that we will commercialize our products successfully either indirectly through
strategic partners or directly through the development of a sales force.
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WE CANNOT ASSURE YOU THAT WE WILL BE ABLE TO OBTAIN THE NECESSARY REGULATORY
APPROVALS FOR THE TRIACTIV SYSTEM.
We need to conduct additional human clinical trials for the TriActiv system. The
TriActiv system has not been approved for marketing by the FDA or by any
governmental entity outside of the United States. We will require substantial
additional funds to develop the product, conduct clinical trials and gain the
necessary regulatory approvals for the TriActiv system. Prior to granting
approval, the FDA may require clarification of information provided in our
regulatory submissions, more information or more clinical studies. If granted,
FDA approval may impose limitations on the uses for which our product may be
marketed or how our product may be marketed. Should we experience delays or be
unable to receive approval from the FDA, our operating results and business may
be substantially impaired.
A SUBSTANTIAL PORTION OF OUR REVENUES WILL CONTINUE TO COME FROM THE ANGIO-SEAL,
WHICH IS MANUFACTURED, MARKETED AND DISTRIBUTED BY ST. JUDE MEDICAL.
To date, a significant portion of our revenues have been derived from Angio-Seal
sales. Under our license agreements with St. Jude Medical, the Angio-Seal is
manufactured, marketed and sold on a worldwide basis by St. Jude Medical. Two of
our significant sources of revenue for the future are expected to be sales of
collagen to St. Jude Medical for use in the Angio-Seal and royalty income from
the sale of the Angio-Seal product line. As of June 1, 2000, St. Jude Medical is
no longer obligated to buy collagen from us. Our success with the Angio-Seal
depends in part on the time, effort and attention that St. Jude Medical devotes
to the Angio-Seal product line and on their success in manufacturing, marketing
and selling the Angio-Seal product line. Under the terms of our agreements with
St. Jude Medical, we have no control over the pricing and marketing strategy for
the Angio-Seal product line. In addition, we depend on St. Jude Medical to
successfully maintain levels of manufacturing sufficient to meet anticipated
demand, abide by applicable manufacturing regulations and seek reimbursement
approvals. St. Jude Medical can terminate our arrangement at any time after
September 30, 2001 for any reason upon 12 months notice. At such time we would
receive all sales & marketing, manufacturing and distribution rights to the
Angio-Seal product line back. There can be no assurance that St. Jude Medical
will successfully pass future inspections of its manufacturing facility or
adequately perform its manufacturing, marketing and selling duties. Any such
failure by St. Jude Medical may negatively impact Angio-Seal unit sales and
therefore reduce our royalties and impair our operating results and business.
WE DEPEND ON OUR CUSTOMERS TO MARKET AND OBTAIN REGULATORY APPROVALS FOR THEIR
BIOMATERIALS PRODUCTS.
We depend on the efforts of our biomaterials customers in marketing their
products which include our biomaterials components. There can be no assurance
that our customers' end use products which include our biomaterials components
will be commercialized successfully by our customers or that our customers will
otherwise be able to compete effectively in their markets. If our customers fail
to commercialize their products, our operating results and business may be
substantially impaired.
IF WE RECEIVE U.S. AND/OR INTERNATIONAL REGULATORY APPROVAL, WE MAY NOT BE
SUCCESSFUL COMMERCIALIZING THE TRIACTIV SYSTEM.
If the TriActiv system clinical trials are completed successfully and we obtain
the necessary governmental approvals, we will need to commercialize the product.
We cannot assure you that we will be able to find a suitable partner and/or
develop and train our own sales force to sell and market the TriActiv system. We
do not have a sales and marketing force nor do we have any experience hiring or
training a sales and marketing force. We may not be able to establish and
maintain an internal sales and marketing force with technical expertise and
supporting distribution capabilities. If we are unable to successfully
commercialize the TriActiv system, our growth prospects will be diminished.
WE MAY BE REQUIRED TO DELAY, REDUCE OR ELIMINATE SOME OR ALL OF OUR EFFORTS TO
DEVELOP AND MARKET THE TRIACTIV SYSTEM IF WE FAIL TO OBTAIN ADDITIONAL FUNDING
THAT MAY BE REQUIRED TO SATISFY OUR FUTURE CAPITAL NEEDS.
We plan to continue to spend substantial funds to develop and market the
TriActiv system. Our future liquidity and capital requirements will depend upon
numerous factors, including the progress and success of our clinical trials, the
timing and cost involved in obtaining regulatory approvals, the timing and cost
of developing sales and marketing
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strategies, our ability to enter into strategic alliances, manufacturing and
research and development activities, the extent to which the TriActiv system
gains market acceptance and competitive developments. Any additional required
financing may not be available on satisfactory terms, if at all. If we are
unable to obtain financing, we may be required to delay, reduce or eliminate
some or all of our research and development activities or sales and marketing
efforts, in which case our operating results and business may be substantially
impaired.
THE MARKETS FOR OUR PRODUCTS ARE HIGHLY COMPETITIVE AND ARE LIKELY TO BECOME
MORE COMPETITIVE, AND OUR COMPETITORS MAY BE ABLE TO RESPOND MORE QUICKLY TO NEW
OR EMERGING TECHNOLOGIES AND CHANGES IN CUSTOMER REQUIREMENTS.
The existing markets for our current and proposed products are intensely
competitive. We expect competition to increase further as additional companies
begin to enter our markets and/or modify their existing products to compete
directly with ours. We compete with some of the largest players in the
biomaterials markets. If we are successful in commercializing the TriActiv
system, our competitors will include Boston Scientific Corporation, Johnson and
Johnson, Inc., Possis Medical, Inc., Medtronic, Inc. (which owns Percu-Surge
Inc.) and Guidant Corporation, as well as other companies and other current and
future therapies. The primary competitors in the vascular sealing device market
are Abbott Laboratories (which owns Perclose, Inc.), Datascope Corp. and
Vascular Solutions, Inc.
Our competitors may have broad product lines which allow them to negotiate
exclusive, long-term supply contracts and offer comprehensive pricing for their
products. Broader product lines may also provide our competitors with a
significant advantage in marketing competing products to group purchasing
organizations and other managed care organizations that are increasingly seeking
to reduce costs through centralized purchasing. Greater financial resources and
product development capabilities may allow our competitors to respond more
quickly to new or emerging technologies and changes in customer requirements
that may render our products obsolete.
Because a significant portion of our revenue depends on sales of medical devices
by our customers to the end user market, we are also affected by competition
within the markets for these devices. Competition within the medical device
market could also have an adverse effect on our business for a variety of
reasons, including that our customers may compete directly with larger, dominant
manufacturers with extensive product lines and greater sales, marketing and
distribution capabilities. We are also unable to control other factors that may
impact the commercialization of our components for end use products, such as
marketing and sales efforts and competitive pricing pressures within particular
markets.
IF OUR PRODUCTS ARE NOT ACCEPTED BY THE MEDICAL COMMUNITY, OUR BUSINESS MAY
SUFFER.
The success of our existing products depends on continued acceptance of these
products by the medical community. The success of any products we develop in the
future will depend on the adoption of these products by our targeted markets. We
cannot predict how quickly, if at all, the medical community will accept our
future products or the extent to which our future products will be used. If we
encounter difficulties introducing future products into our targeted markets,
our operating results and business may be substantially impaired.
THE LOSS OF, OR INTERRUPTION OF SUPPLY FROM, KEY VENDORS COULD LIMIT OUR ABILITY
TO MANUFACTURE OUR PRODUCTS.
We purchase certain materials and components for our products from various
suppliers. Some of these components are custom made for us including many of our
absorbable polymer and suture raw materials which are used in our custom polymer
products across all markets. Any loss of, or interruption of supply from, key
vendors may require us to find new vendors. We could experience production or
development delays while we seek new vendors which could substantially impair
our operating results and business.
WE MAY HAVE PROBLEMS MANUFACTURING AND DELIVERING OUR BIOMATERIALS PRODUCTS IN
THE FUTURE.
The biomaterials industry is an emerging area, using many materials which are
untested or whose properties are still not known. Consequently, from time to
time we may experience unanticipated difficulties in manufacturing and
delivering our biomaterials products to our customers. These difficulties may
include an inability to meet customer demand, delays in delivering products or
quality control problems with certain biomaterials products. Any such difficulty
to fulfill orders on a timely basis could materially and adversely affect our
operating results and business.
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OUR USE OF HAZARDOUS MATERIALS EXPOSES US TO THE RISK OF MATERIAL ENVIRONMENTAL
LIABILITIES.
Because we use hazardous substances in our research and development and
manufacturing operations, we are potentially subject to material liabilities
related to personal injuries or property damages that may be caused by hazardous
substance releases or exposures at or from our facility. Decontamination costs,
other clean-up costs and related damages or liabilities could substantially
impair our business and operating results. We are required to comply with
increasingly stringent laws and regulations governing environmental protection
and workplace safety, including requirements governing the handling, storage and
disposal of hazardous substances.
ST. JUDE MEDICAL'S INTERNATIONAL SALES ARE SUBJECT TO A NUMBER OF RISKS THAT
COULD HARM FUTURE INTERNATIONAL SALES OF ANGIO-SEAL AND THEIR ABILITY TO
SUCCESSFULLY COMMERCIALIZE NEW PRODUCTS IN INTERNATIONAL MARKETS.
St. Jude Medical sells the Angio-Seal product line internationally and pays us a
royalty on each unit sold. Our royalties are subject to several risks,
including:
- the impact of recessions in economies outside the United States;
- unexpected changes in regulatory requirements, tariffs or other
trade barriers;
- weaker intellectual property rights protection in some countries;
- fluctuations in exchange rates;
- potentially adverse tax consequences; and
- political and economic instability.
The occurrence of any of these events could seriously harm St. Jude Medical's
future international sales and our ability to receive royalties from sales of
the Angio-Seal in international markets.
OUR SUCCESS DEPENDS ON KEY PERSONNEL, THE LOSS OF WHOM COULD IMPAIR OUR
OPERATING RESULTS AND BUSINESS.
Our success depends, to a significant extent, upon the efforts and abilities of
Joseph W. Kaufmann, Douglas G. Evans and other members of senior management. The
loss of the services of one or more of these key employees could harm our
operating results and business. In addition, we will not be successful unless we
can attract and retain skilled personnel, particularly in the areas of research
and product development.
OUR FAILURE TO EXPAND OUR MANAGEMENT SYSTEMS AND CONTROLS TO SUPPORT ANTICIPATED
GROWTH OR INTEGRATE FUTURE ACQUISITIONS COULD SERIOUSLY HARM OUR OPERATING
RESULTS AND BUSINESS.
Our operations continue to grow and we expect this expansion to continue as we
execute our business strategy. Sustaining our growth has placed significant
demands on management and our administrative, operational, information
technology, manufacturing, financial and personnel resources. Accordingly, our
future operating results will depend on the ability of our officers and other
key employees to continue to implement and improve our operational, client
support and financial control systems, and effectively expand, train and manage
our employee base. We cannot assure you that any future acquisitions can be
successfully integrated into our operations or be operated profitably. We may
not be able to manage our growth successfully. This inability to sustain or
manage our growth could seriously harm our operating results and business.
THE OWNERSHIP INTEREST OF OUR STOCKHOLDERS MAY BE DILUTED BY ANY FUTURE
ACQUISITIONS OR STRATEGIC ALLIANCES.
Our stockholders will depend upon the judgment of our management with respect to
any future acquisitions we make or strategic alliances we enter into. Our
management may decide to acquire other companies or finance strategic alliances
by issuing equity securities. As a result, you may experience dilution of your
ownership interest.
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RISKS RELATED TO OUR INTELLECTUAL PROPERTY
IF WE ARE UNABLE TO PROTECT OUR PATENTS AND PROPRIETARY RIGHTS, OUR REPUTATION
AND COMPETITIVENESS IN THE MARKETPLACE MAY BE MATERIALLY DAMAGED.
We regard our patents, biomaterials trade secrets and other intellectual
property as important to our success. We rely upon patent law, trade secret
protection, confidentiality agreements and license agreements with St. Jude
Medical to protect our proprietary rights. We have registered certain of our
patents with applicable governmental authorities. Effective patent protection
may not be available in every country in which our products are made available,
and we have not sought protection for our intellectual property in every country
where our products may be sold. There can be no assurance that the steps we take
to protect our proprietary rights will be adequate or that third parties will
not infringe or otherwise violate our patents or similar proprietary rights.
We and St. Jude Medical are plaintiffs in a patent infringement lawsuit against
Perclose, which was acquired by Abbott Laboratories, and we are co-defendants
against counterclaims filed by Perclose in response to our complaint. We have
spent substantial resources on this litigation. Intellectual property litigation
in recent years has proven to be very costly and complex, and the outcome of
such litigation is difficult to predict.
WE MAY BE ACCUSED OF INFRINGING UPON THE PROPRIETARY RIGHTS OF OTHERS AND ANY
RELATED LITIGATION COULD MATERIALLY DAMAGE OUR OPERATING RESULTS AND BUSINESS.
An adverse determination in any intellectual property litigation or interference
proceedings brought against us could prohibit us from selling our products,
subject us to significant liabilities to third parties or require us to seek
licenses from third parties. The costs associated with these license
arrangements may be substantial and could include ongoing royalties.
Furthermore, the necessary licenses may not be available to us on satisfactory
terms, if at all. Adverse determinations in a judicial or administrative
proceeding or failure to obtain necessary licenses could prevent us from
manufacturing and selling our products.
WE DO NOT OWN OR CONTROL THE USE OF THE ANGIO-SEAL DEVICE TRADEMARK.
The term Angio-Seal is a trademark of St. Jude Medical. All goodwill generated
by the marketing and sales of devices bearing the Angio-Seal trademark belongs
to St. Jude Medical and not to us. Should the St. Jude Medical license
agreements terminate, we would not have the right to call any of our products
"Angio-Seal" unless we purchase or license the trademark from St. Jude Medical.
Without rights to the Angio-Seal trademark, we would have to market our products
under a different trademark. Moreover, upon the termination of the St. Jude
Medical license agreements, St. Jude Medical would have the right to compete
against us by selling collagen and puncture closure devices under the Angio-Seal
trademark. Thus, purchasers of puncture closure devices may be more likely to
recognize and purchase products labeled Angio-Seal regardless of whether those
devices originate from us.
RISKS RELATED TO OUR INDUSTRY
WE MAY FACE PRODUCT LIABILITY CLAIMS THAT COULD RESULT IN COSTLY LITIGATION AND
SIGNIFICANT LIABILITIES.
The manufacture and sale of medical products entail significant risk of product
liability claims. The medical device industry in general has been subject to
significant product liability litigation. Any product liability claims, with or
without merit, could result in costly litigation, reduced sales, significant
liabilities and diversion of our management's time, attention and resources. We
cannot be sure that our product liability insurance coverage is adequate or that
it will continue to be available to us on acceptable terms, if at all.
WE FACE UNCERTAINTY RELATING TO THIRD PARTY REIMBURSEMENT FOR OUR PRODUCTS.
We could be seriously harmed by changes in reimbursement policies of
governmental or private healthcare payors, particularly to the extent any
changes affect reimbursement for catheterization procedures in which our
products are used. If physicians, hospitals and other users of our products fail
to obtain sufficient reimbursement from healthcare payors for procedures in
which our products are used or adverse changes occur in governmental and private
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third-party payors' policies toward reimbursement for these procedures, our
operating results and business may be substantially impaired.
OUR PRODUCTS AND MANUFACTURING ACTIVITIES ARE SUBJECT TO EXTENSIVE GOVERNMENTAL
REGULATION THAT COULD MAKE IT MORE EXPENSIVE AND TIME CONSUMING FOR US TO
INTRODUCE NEW AND IMPROVED PRODUCTS.
Our products and manufacturing activities are subject to extensive regulation by
a number of governmental agencies, including the FDA and comparable
international agencies. We are required to:
- obtain the approval of the FDA and international agencies before
we can market and sell new products;
- satisfy these agencies' requirements for all of our labeling,
sales and promotional materials in connection with our existing
products;
- comply with all applicable manufacturing regulations; and
- undergo rigorous inspections by these agencies.
Compliance with the regulations of these agencies may delay or prevent us from
introducing any new or improved products, including the TriActiv system.
Furthermore, we may be subject to sanctions, including temporary or permanent
suspension of operations, product recalls and marketing restrictions if we fail
to comply with the laws and regulations pertaining to our business.
We are also required to demonstrate compliance with the FDA's quality system
regulations. The FDA enforces its quality system regulations through
pre-approval and periodic post-approval inspections. These regulations relate to
product testing, vendor qualification, design control and quality assurance, as
well as the maintenance of records and documentation. If we are unable to
conform to these regulations, we will be required to locate alternative
manufacturers that do conform. Identifying and qualifying alternative
manufacturers may be a long, costly and difficult process and could seriously
harm our business.
The FDA and international regulatory agencies may also limit the indications for
which our products are approved. These regulatory agencies may restrict or
withdraw approvals we have received if additional information becomes available
to support this action.
FORWARD-LOOKING STATEMENTS
This report includes forward-looking statements within the meaning of Section
27A of the Securities Act and Section 21E of the Exchange Act. We have based
these forward-looking statements largely on our current expectations and
projections about future events and financial trends affecting the financial
condition of our business. These forward-looking statements are subject to a
number of risks, uncertainties and assumptions about Kensey Nash, including,
among other things:
- general economic and business conditions, both nationally and in
our markets;
- our expectations and estimates concerning future financial
performance and financing plans;
- the impact of competition;
- anticipated trends in our business;
- existing and future regulations affecting our business;
- strategic alliances and acquisition opportunities; and
- other risk factors set forth under "Risk Factors" in this report.
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In addition, in this report, the words "believe", "may", "will", "estimate",
"continue", "anticipate", "intend", "expect" and similar expressions, as they
relate to Kensey Nash, our business or our management, are intended to identify
forward-looking statements.
We undertake no obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise
after the date of this report. In light of these risks and uncertainties, the
forward-looking events and circumstances discussed in this report may not occur
and actual results could differ materially from those anticipated or implied in
the forward-looking statements.
*****
Statements contained in this Form 10-K 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.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements, with the report of the independent auditors, listed in
Item 14, are included in this Annual Report on Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING FINANCIAL
DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information in response to this item is incorporated by reference from the
"Election of Directors", "Executive Officers", and "Compliance with Section
16(a) of the Exchange Act" sections of the Company's definitive Proxy Statement
in connection with its 2001 Annual Meeting of Stockholders scheduled to be held
on December 5, 2001 (the 2001 Proxy Statement), which will be filed with the
Securities and Exchange Commission on or before November 1, 2001.
ITEM 11. EXECUTIVE COMPENSATION
Information in response to this item is incorporated by reference to the 2001
Proxy Statement captioned "Executive Compensation and Certain Transactions."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference to the
information under the captions "Security Ownership of Certain Shareholders" and
"Security Ownership of Management" in the 2001 Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference to the
information under the caption "Certain Transactions" in the 2001 Proxy
Statement.
*****
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
14(a) 1. FINANCIAL STATEMENTS
The following financial statements of the Company and Report of Deloitte &
Touche LLP, Independent Auditors are included in this report:
Independent Auditors' Report
Consolidated Balance Sheets as of June 30, 2001 and 2000
Consolidated Statements of Income for the Years Ended June 30, 2001,
2000 and 1999
Consolidated Statements of Stockholders' Equity for the Years Ended
June 30, 2001, 2000 and 1999
Consolidated Statements of Cash Flows for the Years Ended June 30,
2001, 2000 and 1999
Notes to Consolidated Financial Statements
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
Kensey Nash Corporation:
We have audited the accompanying consolidated balance sheets of Kensey
Nash Corporation and its subsidiary (the "Company") as of June 30, 2001
and 2000, and the related consolidated statements of income,
stockholders' equity and cash flows for each of the three years in the
period ended June 30, 2001. These financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the Untied States of America. Those standards require that
we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly,
in all material respects, the financial position of the Company as of
June 30, 2001 and 2000, and the results of its operations and its cash
flows for each of the three years in the period ended June 30, 2001 in
conformity with accounting principles generally accepted in the Untied
States of America.
DELOITTE & TOUCHE LLP
Philadelphia, Pennsylvania
August 15, 2001 (except for Note 18 for which the
date is August 21, 2001)
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KENSEY NASH CORPORATION
CONSOLIDATED BALANCE SHEETS
--------------------------------------------------------------------------------
JUNE 30, JUNE 30,
ASSETS 2001 2000
CURRENT ASSETS:
Cash and cash equivalents ................................................. $ 2,841,963 $ 24,117,502
Investments ............................................................... 24,164,887 7,603,308
Trade receivables, net of allowance for doubtful accounts of $1,000
and $0 at June 30, 2001 and 2000, respectively ......................... 4,623,456 2,219,739
Royalties receivable ...................................................... 2,270,091 1,993,260
Officer loans ............................................................. 1,170,276 954,110
Other receivables (including approximately $41,000 and $53,000 at
June 30, 2001 and 2000, respectively, due from employees) .............. 244,601 258,367
Inventory ................................................................. 1,321,511 902,118
Deferred tax asset, current portion ....................................... 2,318,741 139,885
Prepaid expenses and other ................................................ 512,099 329,666
------------ ------------
Total current assets ............................................... 39,467,625 38,517,955
------------ ------------
PROPERTY, PLANT AND EQUIPMENT, AT COST:
Leasehold improvements .................................................... 5,676,760 5,666,083
Machinery, furniture and equipment ........................................ 7,853,177 5,586,159
Construction in progress .................................................. 1,606,181 354,551
------------ ------------
Total property, plant and equipment ................................ 15,136,118 11,606,793
Accumulated depreciation .................................................. (6,105,575) (4,390,796)
------------ ------------
Net property, plant and equipment .................................. 9,030,543 7,215,997
------------ ------------
OTHER ASSETS:
Restricted investments .................................................... 2,231,251 2,081,651
Property under capital leases, net ........................................ 1,525 9,944
Deferred tax asset, non-current portion ................................... 2,125,407 2,115
Acquired patents, net of accumulated amortization of $891,037 and
$636,454 at June 30, 2001 and 2000, respectively ....................... 3,199,700 3,355,953
Goodwill, net of accumulated amortization of $100,037 at June 30, 2001 .... 3,284,303
------------ ------------
Total other assets ................................................. 10,842,186 5,449,663
------------ ------------
TOTAL ....................................................................... $ 59,340,354 $ 51,183,615
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable .......................................................... $ 1,891,484 $ 1,290,101
Accrued expenses .......................................................... 544,268 460,551
Current portion of debt and capital lease obligations ..................... 910,738 10,374
Deferred revenue .......................................................... 123,352 16,300
------------ ------------
Total current liabilities .......................................... 3,469,842 1,777,326
------------ ------------
LONG TERM PORTION OF DEBT AND CAPITAL LEASE OBLIGATIONS ..................... 2,309,385 1,933
------------ ------------
Total liabilities .................................................. 5,779,227 1,779,259
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $.001 par value, 100,000 shares authorized,
no shares issued or outstanding at June 30, 2001 and 2000
Common stock, $.001 par value, 25,000,000 shares authorized,
10,509,431 and 10,455,499 shares issued and outstanding at
June 30, 2001 and 2000, respectively .................................. 10,509 10,455
Capital in excess of par value ............................................ 63,974,745 63,690,042
Accumulated deficit ....................................................... (10,196,713) (13,813,455)
Accumulated other comprehensive income .................................... (227,414) (482,686)
------------ ------------
Total stockholders' equity ......................................... 53,561,127 49,404,356
------------ ------------
TOTAL ....................................................................... $ 59,340,354 $ 51,183,615
============ ============
See notes to consolidated financial statements.
29
30
KENSEY NASH CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
--------------------------------------------------------------------------------
YEAR ENDED JUNE 30,
--------------------------------------------
2001 2000 1999
------------ ------------ ------------
REVENUES:
Net sales ...................................... $ 14,600,518 $ 13,143,813 $ 7,168,103
Research and development ....................... 329,754 59,857 1,894,350
Royalty income ................................. 8,240,809 6,611,685 7,182,969
------------ ------------ ------------
Total revenues ........................ 23,171,081 19,815,355 16,245,422
------------ ------------ ------------
OPERATING COSTS AND EXPENSES:
Cost of products sold .......................... 7,427,146 7,614,068 5,135,311
Research and development ....................... 7,292,937 5,340,021 5,667,668
Selling, general and administrative ............ 2,986,451 2,634,358 2,584,766
In-process research and development charge ..... 7,593,597
------------ ------------ ------------
Total operating costs and expenses .... 25,300,131 15,588,447 13,387,745
------------ ------------ ------------
(LOSS) INCOME FROM OPERATIONS .................... (2,129,050) 4,226,908 2,857,677
------------ ------------ ------------
OTHER INCOME (EXPENSE):
Interest income ................................ 1,906,789 952,772 649,435
Interest expense ............................... (239,098) (429,949) (331,969)
Other .......................................... 23,702 (567) 3,615
------------ ------------ ------------
Total other income - net .............. 1,691,393 522,256 321,081
------------ ------------ ------------
(LOSS) INCOME BEFORE INCOME TAX BENEFIT ......... (437,657) 4,749,164 3,178,758
Income tax benefit ............................ 4,054,399
------------ ------------ ------------
NET INCOME ...................................... $ 3,616,742 $ 4,749,164 $ 3,178,758
============ ============ ============
BASIC EARNINGS PER SHARE ......................... $ 0.35 $ 0.61 $ 0.43
============ ============ ============
DILUTED EARNINGS PER SHARE ....................... $ 0.34 $ 0.60 $ 0.43
============ ============ ============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING ....... 10,461,552 7,766,184 7,462,723
============ ============ ============
DILUTED WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING ........................... 10,591,147 7,975,439 7,476,939
============ ============ ============
See notes to consolidated financial statements.
30
31
KENSEY NASH CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
--------------------------------------------------------------------------------
CAPITAL ACCUMULATED
COMMON STOCK IN EXCESS OTHER COMPREHENSIVE
-------------------- OF PAR ACCUMULATED COMPREHENSIVE INCOME /
SHARES AMOUNT VALUE DEFICIT (LOSS)/GAIN (LOSS) TOTAL
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 $ (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
---------- -------- ----------- ------------- ---------- -----------
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
========== ======== =========== ============= ========== ===========
See notes to consolidated financial statements.
31
32
KENSEY NASH CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
--------------------------------------------------------------------------------------------------------------------
YEAR ENDED JUNE 30,
---------------------------------------------
2001 2000 1999
OPERATING ACTIVITIES:
Net income ....................................................... $ 3,616,742 $ 4,749,164 $ 3,178,758
Adjustments to reconcile net income to net cash
provided by operating activities -
Depreciation and amortization ............................... 1,827,703 862,289 1,253,844
In-process research and development charge .................. 7,593,597
Changes in assets and liabilities which (used) provided cash:
Accounts receivable ......................................... (2,861,936) (2,001,567) (1,182,741)
Deferred tax asset .......................................... (4,302,148) (88,000)
Prepaid expenses and other current assets ................... (182,433) (63,560) (119,937)
Inventory ................................................... (380,263) (153,420) 278,628
Accounts payable and accrued expenses ....................... 510,486 (559,606) 1,119,080
Deferred revenue ............................................ (420,684) (374,546) (1,641,854)
------------ ------------ ------------
Net cash provided by operating activities .................. 5,401,064 2,370,754 2,885,778
------------ ------------ ------------
INVESTING ACTIVITIES:
Additions to property, plant and equipment ....................... (3,097,439) (2,066,055) (1,743,691)
Acquisition of THM Biomedical, Inc., net of cash acquired ........ (6,781,861)
Redemption of investments ........................................ 3,900,000 635,025 4,491,096
Purchase of investments .......................................... (20,206,307) (6,886,937)
------------ ------------ ------------
Net cash used in investing activities ...................... (26,185,607) (1,431,030) (4,139,532)
------------ ------------ ------------
FINANCING ACTIVITIES:
Principal payments under capital leases .......................... (10,370) (22,501) (37,814)
Proceeds from issuance of long term debt ......................... 5,000,000
Repayments of long term debt ..................................... (615,783) (6,578,453) (1,300,776)
Purchase of restricted investments ............................... (149,600) (132,265) (4,075,000)
Sale of restricted investments ................................... 2,726,339 1,348,661
Secondary offering costs ......................................... (212,681) (501,241)
Proceeds from Secondary Offering ................................. 26,249,996
Proceeds from exercise of stock options .......................... 497,438 246,850 100,082
------------ ------------ ------------
Net cash (used in) provided by financing activities ........ (490,996) 21,988,725 1,035,153
------------ ------------ ------------
(DECREASE) INCREASE IN CASH ........................................ (21,275,539) 22,928,449 (218,601)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR ....................... 24,117,532 1,189,083 1,407,684
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, END OF YEAR ............................. $ 2,841,993 $ 24,117,532 $ 1,189,083
============ ============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest ........................................... $ 239,098 $ 465,082 $ 310,762
============ ============ ============
Cash paid for income taxes ....................................... $ 130,000 $ 88,000 $ 54,000
============ ============ ============
SUPPLEMENTAL DISCLOSURE OF FINANCING INFORMATION:
During the year ended June 30, 2001, the Company entered into an Acquisition
Obligation in connection with the acquisition of THM Biomedical, Inc. (see
Note 3). The present value of this Acquisition Obligation at the date of
acquisition was $3,856,816.
See notes to consolidated financial statements.
32
33
KENSEY NASH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2001, 2000 AND 1999
--------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS - Kensey Nash Corporation (the Company) has developed, or assisted in
developing, and is manufacturing absorbable biomaterials products for leading
companies in the orthopedic, cardiology, drug/biologics delivery, dental and
wound care markets for incorporation into their products. The Company also
independently or on behalf of its customers designs and develops various new
absorbable biomaterials products for all of these markets.
The Company also is a leader in the development and manufacturing of
cardiovascular medical technology devices for distal protection and arterial
puncture closure. The Company is developing the TriActiv(TM) Balloon Protected
Flush Extraction System (the TriActiv system), a device designed to provide
distal protection during saphenous vein graft treatment. Sufficient patient
enrollment in the European (CE mark) clinical trial has been completed and the
Company will be submitting for CE mark approval in October 2001. The Company
intends to commercialize the device during the second half of its fiscal year
ended June 30, 2002 (fiscal 2002). Clinical trials are underway in the United
States. Additionally, the Company is the original designer, developer and
manufacturer of the Angio-Seal Vascular Closure Device (Angio-Seal), a leading
product in arterial puncture closure, which is manufactured, marketed and sold
by St. Jude Medical, Inc. This device is designed to seal and close femoral
artery punctures made during diagnostic and therapeutic cardiovascular
catheterizations. The Company was incorporated in Delaware on August 6, 1984.
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 three
months.
FAIR VALUE OF FINANCIAL INSTRUMENTS - The carrying amounts of financial
instruments including cash and cash equivalents, short-term investments,
accounts receivable, accounts payable and debt approximated fair value as of
June 30, 2001 and 2000. The fair value of short-term investments is based on
quoted market prices.
INVESTMENTS - Investments at June 30, 2001 consist of Certificates of Deposit
and Government and Corporate Obligations. In accordance with Statement of
Financial Accounting Standards (SFAS) No. 115, Accounting for Certain
Investments in Debt and Equity Securities (SFAS 115), the Company has classified
its entire investment portfolio as available-for-sale securities. The Company's
entire investment portfolio is reported at fair value with unrealized gains and
losses included in stockholders' equity (see Comprehensive Income).
33
34
The following is a summary of available-for-sale securities at June 30, 2001.
YEAR ENDED JUNE 30, 2001
----------------------------------------------------------------
GROSS UNREALIZED ESTIMATED
AMORTIZED ------------------------- FAIR
DESCRIPTION COST GAIN LOSS VALUE
----------- ------------ --------- --------- -------------
U.S. Government Agency Obligations $ 14,439,677 $ 29,903 $ (99,569) $ 14,370,011
U.S. Corporate Obligations 10,000,000 -- (274,900) 9,725,100
Certificate of Deposit 2,301,027 -- -- 2,301,027
------------ -------- ---------- ------------
Total Investments 26,740,704 29,903 (374,469) 26,396,138
Amounts classified as Restricted (2,231,251) -- -- (2,231,251)
------------ -------- ---------- ------------
Investments $ 24,509,453 $ 29,903 $ (374,469) $ 24,164,887
============ ======== ========== ============
The above investments have maturities ranging from 1-15 years. There were no
realized gains or losses on investments in the years ended June 30, 2001, 2000
and 1999. Certain securities are pledged as collateral and are presented as
restricted investments (see Note 10).
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 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 for 2001, 2000, and 1999 of other
comprehensive income was not significant.
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:
JUNE 30,
----------------------------
2001 2000
Raw materials $1,062,626 $ 823,570
Work in process 240,451 78,548
Finished goods 18,434
---------- ---------
Total $1,321,511 $ 902,118
========== =========
PROPERTY, PLANT AND EQUIPMENT - Property, plant and equipment consists primarily
of machinery and equipment and leasehold improvements and is recorded at cost.
Maintenance and repairs are expensed as incurred. Machinery, furniture and
equipment is depreciated using the straight-line method over its useful life
ranging from five to seven years. Leasehold improvements are amortized using the
straight-line method over the lesser of the term of the lease or useful life of
the asset.
IMPAIRMENT OF LONG-LIVED ASSETS - Long-lived assets are reviewed for impairment
whenever events or circumstances indicate that the carrying amount of an asset
may not be recoverable. If the undiscounted expected future cash flows to be
generated by the related asset are less than the carrying value of the asset,
the Company measures the amount of the impairment by comparing the carrying
amount of the asset to its fair value. The estimation of fair value is generally
measured by discounting expected future cash flows at the rate the Company
borrows.
ACCOUNTS RECEIVABLE ALLOWANCE - The Company had trade receivable allowances of
$1,000 and $0 at June 30, 2001 and 2000. The Company established trade
receivable allowances of $1,000 and $0 and wrote off amounts totaling $0 and
$239 in the years ended June 30, 2001 and 2000, respectively. These amounts are
included in selling, general and administrative expense for the years ended June
30, 2001 and 2000.
PATENTS - The costs of internally developed patents are expensed when incurred
due to the long development cycle for patents and the Company's inability to
measure the recoverability of these costs when incurred.
34
35
The cost of acquired patents is being amortized over the remaining period of
economic benefit, ranging from 8 to 15 years at June 30, 2001.
REVENUE RECOGNITION - Effective in fiscal 2001, the Company adopted Staff
Accounting Bulletin (SAB) No. 101, Revenue Recognition in Financial Statements
(SAB 101), which clarifies certain conditions to be met in order to recognize
revenue. The Company's adoption of SAB 101 did not have a material impact on the
results of operations, financial position or cash flows. 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. We then accrue royalty revenue equal to 9% of the total sales
dollars reported to us. Royalty payments are received within 45 days of the end
of each calendar quarter.
INCOME TAXES - The Company accounts for income taxes under the provisions of
SFAS No. 109, Accounting for Income Taxes, (SFAS 109) (see Note 9).
EARNINGS PER SHARE - Earnings per share are calculated in accordance with SFAS
No. 128, Earnings per Share (SFAS 128), 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 (see Note 15).
STOCK-BASED COMPENSATION - Stock-based compensation cost is accounted for under
SFAS No. 123, Accounting for Stock-Based Compensation (SFAS 123), which permits
continued application of the intrinsic value method of Accounting Principles
Board Opinion No. 25, Accounting for Stock Issued to Employees (APB 25). Under
the intrinsic value method, compensation cost represents the excess, if any, of
the quoted market price of the Company's common stock at the grant date over the
amount the grantee must pay for the stock. The Company's policy is to grant
stock options at the fair market value at the date of grant (see Note 14).
Options granted to non-employees, as defined under SFAS 123, would be recorded
as compensation expense. The Company has not granted any options to
non-employees during the years ended June 30, 2001, 2000 and 1999.
SECONDARY OFFERING - On May 23, 2000 the Company sold 2,700,000 shares of common
stock in a secondary public offering (the Secondary Offering). On June 22, 2000,
the underwriters elected to exercise their over-allotment option for an
additional 259,000 shares. The net proceeds from the Secondary Offering
(approximately $25.5 million) have been and will continue to be used primarily
for research and development of the TriActiv system, including clinical trials;
repayment of certain indebtedness (see Note 7); and general corporate purposes,
including capital expenditures and potential strategic acquisitions (see
Note 3).
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES - Effective July 1, 2000, the
Company adopted SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities (SFAS 133), as amended, which established 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 derivative contract, and to measure those
instruments at fair value. Adoption of the new method of accounting for
derivatives and hedging activities did not have a material impact on the
Company's financial position or operations.
NEW ACCOUNTING PRONOUNCEMENTS - Effective July 1, 2000 the Company adopted
Financial Interpretation No. 44, Accounting for Certain Transactions Involving
Stock Compensation (FIN 44). FIN 44 clarifies the
35
36
application of APB 25 for certain issues. Adoption of this interpretation, as
well as guidance provided by EITF 00-23, did not have an impact on the Company's
financial position or results of operations.
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 are effective July 1, 2001 for the Company,
as the Company will early adopt 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 be $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.
PRESENTATION - Certain items in the 2000 and 1999 consolidated financial
statements have been reclassified to conform with the presentation in the 2001
consolidated financial statements.
2. STRATEGIC ALLIANCE AGREEMENTS
The Company has a strategic alliance with St. Jude Medical, Inc. (St. Jude
Medical) which incorporates United States and foreign license agreements
(together, the License Agreements). The Company also had a research and
development agreement and a collagen supply agreement which have expired (see
Research and Development and Collagen Supply Agreement, below).
THE LICENSE AGREEMENTS - Under the License Agreements, St. Jude Medical has
exclusive rights to manufacture and market all current and future sizes of the
Angio-Seal worldwide. Also under the License Agreements, the Company receives
royalty payments based upon a percentage of the revenues generated from the sale
of the Angio-Seal. The License Agreements also provide for certain minimum
royalty payments (Minimum Royalty) during the first five years after receiving
US Food and Drug Administration (FDA) approval.
During 1999, the Company received additional royalty payments (the Supplemental
Royalty) from the previous owner of the Angio-Seal License Agreements, Tyco
International, Ltd., in the amount of $1.5 million (hereafter, St. Jude Medical,
Tyco International or any other previous partner under the License Agreements
will be referred to as the Strategic Alliance Partner). The Supplemental Royalty
was to compensate the Company for lost Angio-Seal sales and expenses incurred
during the period of transition of corporate ownership (November 1998 to March
1999) of the Angio-Seal License Agreements to St. Jude Medical. The payments
were made in two equal installments on March 29, 1999 and April 5, 1999. As
such, the Company recorded the $1.5 million as royalty income for the year ended
June 30, 1999.
THE RESEARCH AND DEVELOPMENT AGREEMENT - The Company had an agreement whereby
its Strategic Alliance Partner funded certain ongoing research and development
costs incurred by the Company. The Company contributed one-third of such
research and development costs while the Strategic Alliance Partner contributed
the remaining two-thirds. This agreement has expired and St. Jude Medical is
performing any remaining development work on the Angio-Seal product line,
although the Company still performs contract research and development for St.
Jude Medical upon request.
THE COLLAGEN SUPPLY AGREEMENT - Pursuant to an agreement with St. Jude Medical,
the Company was to manufacture collagen to be used in the Angio-Seal. The
agreement contained a minimum purchase requirement from the Company, the price
of which fluctuated based on size and cumulative quantities sold, for five years
ended May 31, 2000. Although the agreement has expired, the Company continues to
supply St. Jude Medical with the collagen requirements for the Angio-Seal.
36
37
3. THM ACQUISITION
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 $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 $281,250 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 $3,833,970 was recorded as a liability on the
Company's financial statements, with a remaining balance of $3,218,185 at
June 30, 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 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) 3,384
--------
$ 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:
ENDED ENDED
06/30/01 06/30/00
----------- ------------
Total revenue $24,437,976 $ 20,361,133
=========== ============
Net income $12,423,160 $ 3,501,161
=========== ============
Basic earnings per share $ 1.19 $ .45
=========== ============
Diluted earnings per share $ 1.17 $ .44
=========== ============
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.
37
38
4. LEASES
At June 30, 2001, future minimum annual rental commitments under
non-cancelable lease obligations are as follows:
CAPITAL LEASES OPERATING LEASES
-------------- -----------------
Year Ending June 30:
2002 $ 1,948 $ 394,328
2003 413,481
2004 437,077
2005 460,673
------- -----------
Total minimum lease payments 1,948 $ 1,705,559
===========
Amount representing interest (at a rate of 7.0%) 10
-------
Present value of net minimum lease payments 1,938
Current portion (1,938)
-------
Long-term portion $
=======
Rent expense for operating leases consists of rent for the Company's
facilities in Exton, Pennsylvania and Duluth, Minnesota. Rent expense for the
fiscal years ended June 30, 2001, 2000 and 1999 was approximately $402,000,
$366,000 and $360,000, respectively.
The carrying value of equipment under capital leases was $1,525 and $9,944 at
June 30, 2001 and 2000, respectively.
Such assets are amortized over periods ranging from one to four years, which
represent the lesser of the term of the lease or useful life of the asset.
5. OFFICER LOANS
The Company has granted loans to a current officer of the Company totaling
$1.2 million, which were for personal use and are collaterilized by the
officer's stock. Interest on the loans ranges from 7.0% to 7.75% and is
based on the prime rate of interest. Total interest income earned by the
Company on these loans was $66,166, $39,575 and $9,174 for the years ended
June 30, 2001, 2000 and 1999, respectively. Interest and principal on the
loans are due at the earlier of the sale of a portion of the officer's stock
or June 29, 2002.
6. PATENT ACQUISITION AGREEMENT
On November 10, 1997, the Company entered into an agreement (the Patent
Acquisition Agreement) to acquire a portfolio of puncture closure patents and
patent applications as well as the rights of the seller under a pre-existing
licensing agreement. As a result of the Patent Acquisition Agreement,
beginning January 1, 1998, the Company earns royalty fees, formerly paid to
the sellers, for each Angio-Seal sold. These royalties are in addition to the
royalties already earned by the Company under its own License Agreement with
its Strategic Alliance Partner.
Under the terms of the Patent Acquisition Agreement, the Company issued
200,000 shares of common stock and made cash payments totaling $1.2 million
for the transfer of ownership of the patents. The cash portion was payable in
eight quarterly installments (four $125,000 payments followed by four
$175,000 payments), beginning on March 31, 1998. The final quarterly payment
was made on December 31, 1999.
The acquired patents are valued at the share price on the date of the Patent
Acquisition Agreement plus the present value of the cash payments and the
legal and related costs incurred to acquire the patents. The patents are
being amortized over the average remaining useful life of the acquired
portfolio at the time of the acquisition (13 years).
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39
7. DEBT
FINANCING AGREEMENT - The Company had a $5.0 million financing agreement with
a bank which was repaid on June 1, 2000 with the proceeds of the Secondary
Offering.
TERM LOAN - The Company had $1,075,000 outstanding under a $2.0 million term
loan, which was repaid on June 1, 2000 with the proceeds of the Secondary
Offering.
ACQUISITION OBLIGATION - The Company has $3,218,185 outstanding under its
Acquisition Obligation (see Note 3) of which $908,800 is current at June 30,
2001.
8. RETIREMENT PLAN
The Company has a 401(k) Salary Reduction Plan and Trust (the 401(k) Plan) in
which all employees that are at least 21 years of age are eligible to
participate. Contributions to the 401(k) Plan are made by employees through
an employee salary reduction election. Effective October 1, 1999, the Company
implemented a 25% discretionary matching contribution, on up to 6% of an
employee's total compensation, on all employee contributions. Employer
contributions to the 401(k) plan for 2001, 2000 and 1999 were $70,234,
$41,379 and $0, respectively.
9. INCOME TAXES
The Company accounts for income taxes under SFAS No. 109, which generally
provides that deferred tax assets and liabilities be recognized for temporary
differences between the financial reporting basis and the tax basis of the
Company's assets and liabilities and expected benefits of utilizing net
operating loss (NOL) carryforwards. The impact on deferred taxes of changes
in tax rates and laws, if any, applied to the years during which temporary
differences are expected to be settled are reflected in the financial
statements in the period of enactment.
For 2001 the Company has recognized a tax benefit related to the realization
of certain deferred assets which were previously offset by a valuation
allowance. The differences between the Company's income tax expense (benefit)
and the income tax expense (benefit) computed using the U.S. federal income
tax rate were as follows:
JUNE 30,
-----------------------------------------
2001 2000 1999
Net income before income taxes .......................... $ (437,657) $ 4,749,164 $ 3,178,758
=========== =========== ===========
Tax provision (benefit) at U.S. statutory rate .......... (148,804) 1,612,590 1,080,729
State income tax provision, net of federal benefit
Reconciliation to actual tax rate:
Non-deductible meals and entertainment ............. 8,252 10,892 13,062
Utilization of net operating loss carryforwards .... (1,623,482) (1,093,791)
Other............................................... 168,860
Release of valuation allowance .......................... (4,082,707)
----------- ----------- -----------
Income tax benefit ...................................... $(4,054,399) $ $
=========== =========== ===========
Current income tax benefit............................... $ 120,788
===========
Deferred income tax benefit.............................. $ 3,933,611
===========
39
40
Significant components of the Company's deferred tax assets are as follows:
JUNE 30,
-------------------------------------------------------------
2001 2000
--------------------------- -------------------------------
CURRENT NONCURRENT CURRENT NONCURRENT
DEFERRED TAX ASSET (GROSS):
Accrued vacation .................... $ 47,442 $ 41,619
Basis difference - patents .......... $ 55,393 $ 76,885
Inventory ........................... 80,106 83,593
Goodwill - THM Acquisition .......... 2,340,648
Other ............................... 4,666
----------- ----------- ----------- ---------
Deferred tax asset .................. 132,214 2,396,042 125,212 76,885
NOL carryforwards ................... 3,525,479 4,646,537
----------- ----------- ----------- ---------
3,657,694 2,396,042 4,771,749 76,885
Less valuation allowance ............ (1,318,000) (4,599,707)
----------- ----------- ----------- ---------
Deferred tax asset .................. $ 2,339,693 $ 2,396,042 $ 172,042 $ 76,885
----------- ----------- ----------- ---------
DEFERRED TAX LIABILITY (GROSS):
Basis difference - fixed assets .... (270,634) (74,770)
Prepaid insurance ................... (20,952) (26,463)
Other ............................... (5,694)
----------- ----------- ----------- ---------
Deferred tax liability .............. $ (20,952) $ (270,634) $ (32,157) (74,770)
----------- ----------- ----------- ---------
Net Deferred Tax Asset .............. $ 2,318,741 $ 2,125,407 $ 139,885 $ 2,115
=========== =========== =========== =========
A portion of the Company's deferred tax asset is offset by a valuation
allowance relating to the state NOL carryforwards due to the restrictions
imposed by the state and the uncertainty surrounding its use. The valuation
allowance reduces deferred tax assets to an amount that represents
management's best estimate of the amount of such deferred tax assets that
more than likely will not be realized. At June 30, 2001, the Company had NOL
carryforwards for federal and state tax purposes totaling $5.4 and $20.0
million, respectively which expire though 2019. A portion of the NOL may be
subject to various statutory limitations as to its usage.
10. COMMITMENTS AND CONTINGENCIES
The Company has pledged $2,231,251 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 sales of the officer's stock or December
2001. The balance outstanding on such officer loans was $2,154,791 at June
30, 2001.
11. CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist primarily of cash and cash
equivalents, short-term investments and accounts receivable. The Company
places its cash, cash equivalents and short-term investments with high
quality financial institutions and has established guidelines relative to
diversification and maturities that maintain safety and high liquidity. With
respect to trade and royalty receivables, such receivables are primarily
with St. Jude Medical (40% and 100% of trade and royalty receivables,
respectively, at June 30, 2001) (see Note 2). The trade receivable from one
other customer was 35% of trade receivables at June 30, 2001. If either one
of these customers' receivable balances should be deemed uncollectable it
would have a material adverse effect on the Company's results of operations
and financial condition. The Company performs ongoing credit
40
41
evaluations on the remainder of its customers' financial conditions, but
does not require collateral to support customer receivables.
12. CERTAIN COMPENSATION AND EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with certain of its
officers, which provide for aggregate annual base salaries of $1,042,900
through June 30, 2002.
13. PREFERRED STOCK
The Company has an authorized class of undesignated Preferred Stock
consisting of 100,000 shares with a $.001 par value. The Board of Directors
may authorize the issuance of Preferred Stock which ranks senior to the
common stock with respect to the payment of dividends and the distribution
of assets on liquidation. In addition, the Board of Directors is authorized
to fix the limitations and restrictions, if any, upon the payment of
dividends on Common Stock to be effective while any shares of Preferred
Stock are outstanding. The Board of Directors, without stockholder approval,
can issue Preferred Stock with voting and conversion rights, which could
adversely affect the voting power of the holders of Common Stock. At June
30, 2001 and 2000 no shares of Preferred Stock were outstanding. The Company
has no present intention to issue shares of Preferred Stock.
14. STOCK OPTION PLANS
During 1995, the Company adopted the Employee Incentive Compensation Plan
(the Employee Plan), a flexible plan that provides the Employee Plan
Committee (the Committee) broad discretion to award eligible participants
with stock-based and performance-related incentives as the Committee deems
appropriate. The persons eligible to participate in the Employee Plan are
officers and employees of the Company who, in the opinion of the Committee,
contribute to the growth and success of the Company.
The Compensation Committee of the Board of Directors oversees the Committee
and may grant nonqualified stock options, incentive stock options or a
combination thereof to the participants. The Employee Plan provides for a
total of 3.2 million shares available for option grants. Options granted
will provide for the purchase of Common Stock at prices determined by the
Compensation Committee, but in no event less than fair market value on the
date of grant. As of June 30, 2001, awards consist solely of stock options
as summarized in the table below.
During 1995, the Company adopted the Non-employee Directors' Stock Option
Plan (the Directors' Plan). The Directors' Plan grants nonqualified stock
options for the purchase of Common Stock to directors who are not employees.
The Directors' Plan provides for a total number of 410,000 shares available
for option grants.
Each non-employee director was granted an option to purchase 5,000 shares of
Common Stock on the Directors' Plan's effective date. In addition, the
Director's plan provides for the grant of an option to purchase 7,500 shares
of Common Stock on the date of each regular annual stockholder meeting after
the effective date to each participant upon such date. The participant must
either be continuing as a non-employee director subsequent to the meeting or
have been elected at such meeting to serve as a non-employee director.
Options granted under the Directors' Plan must provide for the purchase of
Common Stock at fair market value on the date of grant.
Under both plans, the options are exercisable over a maximum term of ten
years from the date of grant and vest over periods of zero to four years
based on the grant date.
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42
A summary of the stock option activity under both plans for the years ended
June 30, 2001, 2000 and 1999, is as follows:
EMPLOYEE PLAN DIRECTORS' PLAN
-------------------------- -------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
SHARES PRICE SHARES PRICE
-------------------------- -------------------------
Balance at June 30, 1998 879,542 $ 10.12 37,500 $ 14.28
Granted 816,650 8.56 15,000 8.88
Cancelled (40,924) 10.47
Exercised (11,438) 9.59 --
---------- -----------
Balance at June 30, 1999 1,643,830 9.34 52,500 12.73
---------- -----------
Granted 14,000 14.95 75,000 13.25
Cancelled (16,936) 9.32
Exercised (25,789) 16.03 --
---------- -----------
Balance at June 30, 2000 1,615,105 9.39 127,500 13.04
---------- -----------
Granted 974,205 13.78 55,000 10.03
Cancelled (5,873) 10.42 --
Exercised (53,932) 9.09 --
---------- -----------
Balance at June 30, 2001 2,529,505 11.08 182,500 12.13
========== ===========
Exercisable portion 1,406,952 9.77 72,502 13.18
========== ===========
Available for future grant 476,557 227,500
========== ===========
Weighted-average fair value of options
granted during the year ended June 30,
1999 $ 5.78 $ 6.00
========== ===========
2000 $ 10.25 $ 9.08
========== ===========
2001 $ 7.42 $ 5.40
========== ===========
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted average
assumptions used for grants:
YEAR ENDED JUNE 30,
------------------------------------------
2001 2000 1999
Dividend yield 0% 0% 0%
Expected volatility 40% - 65% 50% - 80% 50%-81%
Risk-free interest rate 4.98% 6.13% 5.77%
Expected lives:
Employee Plan 6.01 6.94 7.61
Directors Plan 6.01 6.94 7.61
The following table summarizes significant option groups outstanding at June
30, 2001 and related weighted average exercise price and remaining
contractual life information as follows:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------ -----------------------------------
RANGE OF REMAINING WGHTD AVG WGHTD AVG
EXERCISE NUMBER AT CONTRACTUAL EXERCISE NUMBER AT EXERCISE
PRICES JUNE 30, 2001 LIFE PRICE JUNE 30, 2001 PRICE
--------------------- ------------------ -------------- -------------- ------------------- ---------------
$7.625 - $9.375 1,267,519 6.17 $ 8.58 1,008,530 $ 8.59
$11.75 - $13.375 793,181 7.74 12.44 431,590 12.57
$14.875 - $16.25 651,305 9.67 14.60 39,334 15.76
--------- ---------
2,712,005 1,479,454
========= =========
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The Company has adopted the disclosure only provisions of SFAS 123.
Accordingly, no compensation cost has been recognized for the Company's two
stock option plans. Had compensation cost for the plans been determined
based on the fair market value at the grant date for awards, consistent with
the provisions of SFAS 123, the Company's net income and earnings per share
would have been reduced to the proforma amounts below:
JUNE 30, 2001 JUNE 30, 2000 JUNE 30, 1999
----------------------------- ------------------------------ -----------------------------
AS REPORTED PRO FORMA AS REPORTED PRO FORMA AS REPORTED PRO FORMA
------------- ------------ -------------- ------------- ------------- -------------
Net income $3,616,742 $593,800 $4,749,164 $2,469,406 $3,178,758 $1,698,182
Income per share $0.34 $0.06 $0.60 $0.31 $0.43 $0.23
15. EARNINGS PER SHARE
The following table shows the reconciliation between the numerators and
denominators for the basic and diluted EPS calculations, where income is the
numerator and the weighted average number of shares is the denominator.
YEAR ENDED JUNE 30, 2001
------------------------------------
PER SHARE
INCOME SHARES AMOUNT
------------------------------------
BASIC EPS
Income available to common shareholders $3,616,742 10,461,552 $0.35
=====
EFFECT OF DILUTIVE SECURITIES
Options -- 129,595
---------- ---------
DILUTED EPS
Income available to common shareholders
including assumed conversions $3,616,742 10,591,147 $0.34
========== ========== =====
YEAR ENDED JUNE 30, 2000 YEAR ENDED JUNE 30, 1999
----------------------------------------------------------------------------
PER SHARE PER SHARE
INCOME SHARES AMOUNT INCOME SHARES AMOUNT
------------------------------------ --------------------------------------
BASIC EPS
Income available to common shareholders $4,749,164 7,766,184 $ 0.61 $3,178,758 7,462,723 $ 0.43
======= =======
EFFECT OF DILUTIVE SECURITIES
Options -- 209,255 -- 14,216
---------- --------- ---------- ---------
DILUTED EPS
Income available to common shareholders
including assumed conversions $4,749,164 7,975,439 $ 0.60 $3,178,758 7,476,939 $ 0.43
========== ========= ======= ========== ========= =======
16. SEGMENT REPORTING
Operating segments are identified as components of an enterprise about which
separate discrete financial information is available for evaluation by the
chief operating decision-making group in making decisions how to allocate
resources and assess performance. Based on the criteria established by SFAS
No. 131, Disclosures About Segments of an Enterprise and Related Information
(SFAS 131), the Company's operations and products have been aggregated into
a single reportable segment since they have similar economic
characteristics, production processes, types of customers and distribution
methods.
The Company's primary products include Biomaterials and Puncture Closure
(the Angio-Seal). Puncture Closure primarily represents Angio-Seal device
sales to St. Jude Medical. Under Biomaterials products, the Company designs
and/or manufactures and markets various absorbable polymer and collagen
products for use in numerous applications including orthopedic, cardiology,
drug/biologics delivery, dental and wound care. The Company also receives
royalty revenue from the sale of Angio-Seal units by its Strategic Alliance
Partner and research and development revenue under certain research and
development contracts or grants. Net sales by product line and a
reconciliation to total revenue is as follows:
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REVENUE FOR THE YEAR ENDED JUNE 30,
----------------------------------------
2001 2000 1999
Puncture Closure $ 357,905 $ 5,486,977 $ 1,127,641
Biomaterials 14,242,613 7,656,836 6,040,462
----------- ----------- -----------
Net Sales 14,600,518 13,143,813 7,168,103
Research and development 329,754 59,857 1,894,350
Royalty income 8,240,809 6,611,685 7,182,969
----------- ----------- -----------
Total Revenue $23,171,081 $19,815,355 $16,245,422
=========== =========== ===========
For the years ended June 30, 2001, 2000 and 1999, revenues from the
Strategic Alliance Partner represented the following percentages of total
revenues of the Company:
PERCENTAGE OF TOTAL REVENUE
FOR THE YEAR ENDED JUNE 30,
-----------------------------
2001 2000 1999
Net sales 48% 66% 66%
Research and development (see Note 2) 0% 100% 100%
Royalty Income (see Note 2) 100% 100% 100%
The Company's revenues from external customers are summarized below.
Revenues are attributed to a country based on the location of the customer.
No one country other than the US represented more than 10% of the Company's
revenues. In addition, all of the Company's long-lived assets are located in
the US.
REVENUES FOR THE YEAR ENDED JUNE 30,
-----------------------------------------
2001 2000 1999
United States $ 23,171,081 $ 19,583,759 $ 15,911,292
Other foreign countries -- 231,596 334,130
------------ ------------ ------------
Total $ 23,171,081 $ 19,815,355 $ 16,245,422
============ ============ ============
17. QUARTERLY FINANCIAL DATA (UNAUDITED)
The summarized quarterly results of operations of the Company for the years
ended June 30, 2001 and June 30, 2000 are presented below:
YEAR ENDED JUNE 30, 2001
----------------------------------------------------------------
1ST 2ND 3RD 4TH
QUARTER QUARTER QUARTER QUARTER
--------------- --------------- -------------- --------------
Operating revenues $ 4,583,566 $ 5,136,696 $ 6,025,009 $ 7,425,810
Operating costs and expenses $ 3,868,500 $ 11,578,654 $ 4,535,668 $ 5,317,309
Income tax benefit $ 4,054,399
Net income (loss) $ 1,228,065 $ (6,037,105) $ 1,870,252 $ 6,555,530
Basic and diluted earnings (loss)
per share $ 0.12 $ (0.58) $ 0.18 $ 0.62
YEAR ENDED JUNE 30, 2000
----------------------------------------------------------------
1ST 2ND 3RD 4TH
QUARTER QUARTER QUARTER QUARTER
--------------- --------------- --------------- ---------------
Operating revenues $ 3,819,120 $ 4,542,606 $ 5,401,714 $ 6,051,915
Operating costs and expenses $ 3,284,295 $ 3,761,452 $ 4,157,430 $ 4,385,269
Net income $ 643,141 $ 876,151 $ 1,312,684 $ 1,917,188
Basic and diluted earnings
per share $ 0.09 $ 0.12 $ 0.17 $ 0.22
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Quarterly and total year earnings per share are calculated independently
based on the weighted average number of shares outstanding during each
period.
18. LITIGATION
In March 1998, the Company, together with its Strategic Alliance Partner,
filed a patent infringement claim against Perclose, Inc. of Menlo Park,
California ("Perclose"), a competitor in the puncture closure market. In
1999, the Company amended the claim to add a second patent to the
infringement suit. The original and amended suits, filed in the Federal
District Court for the Eastern District of Pennsylvania, claim that Perclose
infringes the Company's US Patent Nos. 5,676,689 and 5,861,004 (together,
the "Patents"). The Patents cover a system and method for sealing a puncture
in a blood vessel (e.g. the femoral artery). The Company seeks damages and
an order to permanently enjoin Perclose from making, using or selling
product that infringes the Patents.
Perclose filed four counterclaims in answer to the complaint. The first
counterclaim seeks to declare the Patent invalid and not infringed; the
second and third counterclaims maintain that the Company committed antitrust
violations; and the fourth counterclaim asserts that the Company committed
unfair competition.
The U.S. District Court, Eastern District of Pennsylvania, has entered a
Markman hearing Order regarding claims interpretation, which is dated
December 21, 2000, in favor of the defendant Perclose. The Judge received
notice that the parties were preparing a joint stipulation, requesting the
court to enter a judgement of non-infringement in favor of Perclose, in
order to expedite the review of the Markman Order, by the U.S. Court of
Appeals for the Federal Circuit. Upon receiving this notice, the Judge
requested an additional hearing. This hearing was held on April 6, 2001, and
the Judge requested briefs on the issues presented. Kensey Nash filed its
brief and a Motion for Reconsideration, of the December 21 Order, on April
30, 2001. The judge denied the Motion for Reconsideration on August 21,
2001; and the parties are now negotiating a Stipulation for final Judgement,
to be presented to the Judge.
Management is unable to predict the final outcome of the suit or whether the
resolution of the matter could materially affect the Company's results of
operations, cash flows, or financial position. The Company has expensed
legal costs, as a component of selling, general and administrative expenses,
as services have been incurred.
*****
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14(a) 2. FINANCIAL STATEMENT SCHEDULES
All schedules have been omitted because they are not applicable or not
required.
14(a) 3. EXHIBITS
Exhibit # Description
--------- -----------
1.1* Form of Underwriting Agreement
1.2* Form of Irrevocable Power of Attorney of Selling Stockholder
1.3* Form of Letter of Transmittal and Custody Agreement
2.1** Asset Purchase Agreement dated September 1, 2000 by and among Kensey
Nash Corporation, THM Acquisition Sub, Inc., THM Biomedical, Inc.
and the stockholders of THM Biomedical, Inc.
3.1*** Amended and Restated Certificate of Incorporation of Kensey Nash
3.2*** Amended and Restated Bylaws of Kensey Nash
4.1*** Specimen stock certificate representing Kensey Nash common stock
5.1* Opinion of Katten Muchin Zavis
10.1**** Kensey Nash Corporation Third Amended and Restated Employee
Incentive Compensation Plan and form of Stock Option Agreement
10.2**** Kensey Nash Corporation Fourth Amended and Restated Nonemployee
Directors' Stock Option Plan and form of Stock Option Agreement
10.3*** Form of Directors' Indemnification Agreement
10.4 Employment Agreement dated July 1, 2001, by and between Kensey Nash
and Joseph W. Kaufmann
10.5 Employment Agreement dated September 1, 2001, by and between Kensey
Nash and Wendy F. DiCicco
10.6* Employment Agreement dated December 1, 1998, by and between Kensey
Nash and John E. Nash, P.E.
10.7 Employment Agreement dated July 1, 2001, by and between Kensey Nash
and Douglas G. Evans, P.E.
10.8*** Collagen Component Supply Agreement dated May 31, 1995, by and
between Kensey Nash and Quinton Instrument Company
10.10*** License Agreement (United States) dated September 4, 1991, by and
between Kensey Nash and American Home Products Corporation
10.11*** License Agreement (Foreign) dated September 4, 1991, by and between
Kensey Nash and American Home Products Corporation
10.12* Tenant Lease dated November 19, 1996, by and between Kensey Nash and
Marsh Creek Associates One and Lease Amendment dated January 3, 2000
10.13 Employment Agreement dated March 1, 2000, by and between Kensey
Nash and Caron S. D'Ambruso
10.14 Employment Agreement dated October 1, 2000, by and between Kensey
Nash and Todd M. DeWitt
23.2* Consent of Katten Muchin Zavis (included in opinion filed as
Exhibit 5.1)
24.1* Form of Power of Attorney
* This exhibit is incorporated by reference to the exhibit with the same
Exhibit Number in our Registration Statement on Form S-3, Registration
Statement No. 333-35494.
** This exhibit is incorporated by reference to the exhibit with the same
Exhibit Number in our Current Report on Form 8-K filed with the SEC on
November 30, 2000.
*** This exhibit is incorporated by reference to the exhibit with the same
Exhibit Number in our Registration Statement on Form S-1, Registration
Statement No. 33-98722.
**** This exhibit is incorporated by reference to Exhibit A of our
definitive Proxy Statement filed with the SEC on November 2, 2000.
All other schedules are omitted because they are not required, are not
applicable or the information is scheduled in our financial statements or notes
thereto.
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47
14(b). REPORTS ON FORM 8-K
Form 8K filed November 30, 2000.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, on the 28th day of
September, 2001.
KENSEY NASH CORPORATION
By: /s/ WENDY F. DICICCO
---------------------
Wendy F. DiCicco
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below by the following persons on behalf of the Registrant and
in the capacities indicated on the 28th day of September 2001.
SIGNATURE TITLES
/s/ JOSEPH W. KAUFMANN Chief Executive Officer (Principal Executive Officer), President,
------------------------------------------- Secretary and Director
Joseph W. Kaufmann
/s/ JOHN E. NASH, P.E. Vice President of New Technologies and Director
-------------------------------------------
John E. Nash, P.E.
/s/ DOUGLAS G. EVANS, P.E. Chief Operating Officer, Assistant Secretary and Director
-------------------------------------------
Douglas G. Evans, P.E.
/s/ WENDY F. DICICCO, CPA Chief Financial Officer (Principal Accounting and Financial Officer)
-------------------------------------------
Wendy F. DiCicco, CPA
/s/ KENNETH R. KENSEY, M.D. Director
-------------------------------------------
Kenneth R. Kensey, M.D.
/s/ ROBERT J. BOBB Director
-------------------------------------------
Robert J. Bobb
/s/ HAROLD N. CHEFITZ Director
-------------------------------------------
Harold N. Chefitz
/s/ WALTER R. MAUPAY, JR. Director
-------------------------------------------
Walter R. Maupay, Jr.
/s/ C. MCCOLLISTER EVARTS, M.D. Director
-------------------------------------------
C. McCollister Evarts, M.D.
/s/ STEVEN J. LEE Director
-------------------------------------------
Steven J. Lee
</Table>
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