November 4, 2004
VIA EDGAR AND FACSIMILE
Mr. Daniel Gordon
United States Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, DC 20549
Re: Kensey Nash Corporation
Form 10-K for the Fiscal Year Ended June 30, 2004
File No. 000-27120
Dear Mr. Gordon:
We are in receipt of your letter dated October 21, 2004 and would like to
provide responses to the comments therein as follows.
COMMENT #1:
Item 6. Selected Financial Data - Page 20
In the future filings please revise to include footnotes to your selected
financial data table disclosing any matters that materially affect
comparability across the years presented.
See Item 301 of Regulation S-K.
Company Response to Comment #1:
In all future 10-K filings, Kensey Nash will, where necessary, incorporate
footnotes to our Selected Financial Data table to disclose any matters
that materially affect comparability across the years presented, as
required under Item 301 of Regulation S-K.
COMMENT #2:
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Overview - Page 21
In future filings, please consider focusing your discussion in the
"Overview" section of MD&A to address the following:
o the most important themes or other significant matters with which
management is concerned primarily in evaluating the company's
financial condition;
o further insight into material opportunities, challenges and
risks; and
o a business analysis of the company's approach to specific
challenges and opportunities that lie ahead.
Refer to SEC Release Nos. 33-8350, 34-48960, and FR-72.
Company Response to Comment #2:
While we believe we have addressed the most important themes and other
significant matters within the Overview section of our MD&A, in all future
filings, we will reevaluate our discussion to ensure that it is a thorough
overview. We will also add further insight into material opportunities,
challenges and risks of the Company as well as a business analysis of
management's approach to these opportunities and challenges.
COMMENT #3:
Financial Statements
Consolidated Balance Sheets - Page F-2
We note that accrued expenses comprise approximately 68% of total current
liabilities. In future filings, please state separately, in the balance
sheet or in a note, any item, included in accrued liabilities, which is in
excess of 5 percent of total current liabilities in accordance with
Regulation S-X Article 5-02(20).
Company Response to Comment #3:
In all future filings, the Company will state separately, either in the
balance sheet or in the notes to the financial statements, any item
included within accrued liabilities which is in excess of 5% of the total
current liabilities figure presented on the face of the financial
statements.
COMMENT #4:
Financial Statements
Note 1. Summary of Significant Accounting Policies; Inventory - Page F-8
We noted there does not appear to be an allowance for obsolete or slow
moving inventory. Tell us and disclose in future filings management's
policy for reviewing inventory for obsolescence and the related accounting
for items identified as slow moving or obsolete.
Company Response to Comment #4:
The Company does perform an evaluation of inventory balances for
impairment related to obsolete or slow moving items. Such evaluation
resulted in adjustments to inventory of $43,215 and $86,637, at June 30,
2004 and 2003, respectively, immaterial to the inventory balance and the
financial statements taken as a whole. We described our methodology for
evaluation of inventory balances for impairment within the Critical
Accounting Policies section of the MD&A (page 22) as follows:
"Adjustments to inventory are made at the individual part level for
estimated excess, obsolescence or impaired balances, to reflect
inventory at the lower of cost or market. Factors influencing these
adjustments include: changes in demand, rapid technological changes,
product life cycle and development plans, component cost trends,
product pricing, physical deterioration and quality concerns. Revisions
to these adjustments would be required if any of these factors differ
from our estimates."
In all future filings, we will include this description of management's
policy for the review of inventory for obsolescence in the footnotes to
the financial statements.
COMMENT #5:
Financial Statements
Revenue Recognition - Page F-9
We note that the company combines all of the biomaterials and TriActiv
System sales as "net sales" on the consolidated statements of income.
However, it is not clear what these sales are net of (i.e. returns,
discounts, etc.). Please tell us and clarify in future filings.
Company Response to Comment #5:
The Net Sales line item of the income statement is net of our sales returns
allowance and discounts. The Company manufactures custom medical products
for its customers which are subject to return only for failure to meet
customer specifications. The Company only offers discounts on its TriActiv
sales in Europe.
At June 30, 2004 our allowance for sales returns and discounts was $50,219
(.01% of sales, immaterial to the annual sales figure). We will revise
future filings to include disclosure of the definition of net sales, as
well as the amount of our allowance for sales returns and discounts, if
material.
COMMENT #6:
Financial Statements
Revenue Recognition - Page F-9
We noted that you record amounts received under various grants as research
and development revenue. Please supplementally explain why you have
recorded such amounts as revenue and cite the accounting literature on
which you relied. In addition, please expand your discussion to address
SFAS 68 and any obligations you have related to these grants.
Company Response to Comment #6:
We record our receipts under our government grants as revenue due to the
nature of the terms of the contracts. All grants that have been recorded
on this line item in the income statements of Kensey Nash Corporation have
been government programs under which the government (National Institute
for Standards and Technology; Advanced Technology Program and the National
Institute of Health) funds the research of high risk, enabling
technologies. Kensey Nash Corporation has entered into three such programs
dating back to September 1999. The program reflected in the income
statement for fiscal year 2004 is an award for the research of a synthetic
vascular graft and expired in September of 2004.
The only objective of our contracts with the government (referred to as
"awards") is to support the development of our novel technologies within
the U.S. There is no repayment feature or any obligation of the Company to
repay any amounts received under these programs. The Company essentially
exchanges research and development services for the funds received from
the government. The Company is obligated to perform the research and
development to which we committed in the initial application for and
approval of the grant and to make the results of such research available
to the U.S. government.
SFAS 68, Research and Development Arrangements, refers contractual
arrangements under which the enterprise receiving the funds is
contractually obligated to repay the amounts at some time in the future.
There are no such features to our grants with the government. In addition,
the SCOPE section of SFAS 68 states that the reporting of
government-sponsored research and development is not addressed within SFAS
68.
COMMENT #7:
Financial Statements
Note 9. Consulting Contracts - Page F-15
We noted that the company issued stock options to non-employees on two
occasions, October 2002 and July 2003. Supplementally, please explain why
you recorded a prepaid asset rather than accrue the expense as the
services were provided and expense the related amounts over the vesting
period of the options. For reference see paragraphs 92-95 of SFAS 123.
Company Response to Comment #7:
The options issued to non-employees of Kensey Nash Corporation represent
consulting arrangements under which the non-employees were granted options
to purchase the Company's stock in exchange for consulting services to be
performed over a future period. The options were issued at the fair market
value on the date of grant. The periods of future service were five years
and two years. Paragraphs 92 - 95 of SFAS 123, while entitled "Prepaid
Compensation" refer almost entirely to options granted to employees of the
Company. However, an excerpt from paragraph 93 reads:
"....unlike most other amounts paid to suppliers before services are
performed, the proposed prepaid compensation for non-vested stock-based
employee compensation did not meet the definition of an asset in paragraph
25 of Concepts Statement 6, which defines asset as "probable future
economic benefits obtained or controlled by a particular entity as a
result of past transactions or events". Prepaid fees for legal services,
consulting services, insurance services, and the like represent probable
future economic benefits that are controlled by the entity because the
other party to the transaction has entered into a contract to provide
services to earn the fees. The service provider is not entitled to walk
away from its obligation to render the services that are the subject of
the contract by merely foregoing collection of the fee for services not
rendered."
From this paragraph, we interpret that a contract for consulting services
to be performed over a future period of time, whether paid in cash or
equity, should be classified as an asset. The asset should then be
expensed over the period during which the services are to be provided (as
called for by the contracts).
COMMENT #8:
Financial Statements
Note 15. Restricted Stock - Page F-18
Tell us and expand your disclosure in future fillings to address the
following:
o Please further define the term "outside directors"
o Clarify the plan under which these instruments were issued, we
noted Footnote 15 states they were awarded under the Employee
Plan, however, Footnote 14 states as of June 30, 2004, awards
under the Employee Plan consist solely of stock options.
o Also, supplementally explain how the company calculated the
compensation expense related to the restricted stock issued in
2004. You disclose that the fair value of the shares granted
equals $84,650. How was this amount determined?
Company Response to Comment #8:
o The term "outside directors" refers to the non-employee members
of our board of directors.
o The shares were issued under the Employee Plan. Footnote 14
should have stated that awards under the plan as of June 30, 2004
consisted of both stock options and 11,580 shares of restricted
stock.
o There were a total of 11,580 shares granted in December of 2003.
The shares vest in three equal annual increments, based upon the
achievement of certain performance criteria and the continued
service of the board member on each anniversary of the date of
grant (December 3, 2003). The fair value of the shares that
vested during fiscal 2004 was calculated as the number of shares
multiplied by the fair value on the date of grant (3,860 shares
multiplied by $21.93 or $84,650). The presentation of this data
within the table in Footnote 15 implies that this is the fair
value of all 11,580 shares granted, not the 3,860 shares that
vested. The Company will revise the table in future filings to
properly present this value.
o In addition, the Company has realized that the proper accounting
for these restricted shares would have used the fair value on the
date the performance criteria were met or achievement was deemed
"reasonably probable", not on the date of grant. The dates the
performance criteria were met or deemed to be probable were
January 29, 2004 and April 20, 2004 when the fair value of the
shares was $26.74 and $27.09 per share, respectively. These
values result in a total fair value calculation of $103,892
(1,930 shares x $26.74 and 1,930 shares x $27.09). This results
in a difference from our disclosed value of $19,242, which the
company has deemed immaterial but will correct in future filings.
The Company will modify all future filings to define the term "outside
director", clarify the disclosure in Footnote 14 and revise the
presentation of the fair value of shares in each fiscal period.
COMMENT #9:
Financial Statements
Note 16. Earnings Per Share - Page F-18
In future filings provide the disclosures required by paragraph 40 (c) of
SFAS 128.
Company Response to Comment #9:
Paragraph 40 (c) of SFAS 128 calls for disclosure of all securities that
could potentially dilute basic EPS in the future that were not included in
the computation of diluted EPS because to do so would have been
antidilutive for the period(s) presented. If applicable, the Company will
provide the disclosures required by paragraph 40 (c) of SFAS 128 in all
future filings or state that there are no such securities.
In reference to all responses above, the Company is aware that:
1) the Company is responsible for the adequacy and accuracy of the
disclosure in the filings;
2) staff comments or changes to disclosure in response to staff
comments in the filings reviewed by the staff do not foreclose
the Commission from taking any action with respect to the filing;
and
3) the Company may not assert staff comments as a defense in any
proceeding initiated by the Commission or any person under the
federal securities laws of the United States.
To the extent applicable, all changes in disclosure in response to the staff
comments will be complied with in future or amended filings made pursuant to the
Securities Act of 1933 and the Securities Exchange Act of 1934.
We believe this letter fully responds to your questions. However, if there are
any further questions please contact me at (610) 594-7156 or at the address on
record for Kensey Nash Corporation.
Sincerely,
Wendy F. DiCicco
Chief Financial Officer
cc: Julie Sherman, U.S. Securities and Exchange Commission
Martin James, U.S. Securities and Exchange Commission
David R. Shevitz, Esq., Katten Muchin & Zavis
J. David Viehman, Deloitte & Touche LLP
Joseph W. Kaufmann, Kensey Nash Corporation