UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended: SEPTEMBER 30, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From __________ to __________.
Commission File Number: 0-27120
KENSEY NASH CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 36-3316412
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
MARSH CREEK CORPORATE CENTER, 55 EAST UWCHLAN AVENUE, EXTON, PENNSYLVANIA 19341
(Address of principal executive offices and zip code)
Registrant's telephone number, including area code: (610) 524-0188
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No__
Indicate by check mark whether the registrant is an accelerated filer (as
defined in rule 12b-2 of the Exchange Act ). Yes - X No__
As of October 31, 2004, there were 11,342,122 outstanding shares of Common
Stock, par value $.001, of the registrant.
KENSEY NASH CORPORATION
QUARTER ENDED SEPTEMBER 30, 2004
INDEX
PAGE
----
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets
as of September 30, 2004 (Unaudited) and June 30, 2004............... 3
Condensed Consolidated Statements of Operations
for the three months ended September 30, 2004
and 2003 (Unaudited)................................................. 4
Condensed Consolidated Statements of Stockholders' Equity for the
three months ended September 30, 2004 (Unaudited) and
for the year ended June 30, 2004...................................... 5
Condensed Consolidated Statements of Cash Flows
for the three months ended September 30, 2004 and 2003 (Unaudited)... 6
Notes to Condensed Consolidated Financial Statements (Unaudited)....... 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.......................... 16
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK..................... 35
ITEM 4. CONTROLS AND PROCEDURES........................................................ 35
PART II - OTHER INFORMATION
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS................... 36
ITEM 6. EXHIBITS...................................................................... 36
SIGNATURES................................................................................... 37
EXHIBITS..................................................................................... 38
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS [OBJECT OMITTED]
KENSEY NASH CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
- ------------------------------------------------------------------------------------------------------------------------------------
September 30,
ASSETS 2004 June 30,
CURRENT ASSETS: (Unaudited) 2004
---------------- ---------------
Cash and cash equivalents ................................................................ $ 6,541,161 $ 14,615,633
Investments .............................................................................. 50,630,683 46,480,854
Trade receivables, net of allowance for doubtful accounts of $127,152
and $13,590 at September 30, 2004 and June 30, 2004, respectively ..................... 5,358,199 6,005,702
Royalties receivable ..................................................................... 4,557,818 4,432,692
Other receivables (including approximately $20,000 and $14,000 at
September 30, 2004 and June 30, 2004, respectively, due from employees ................ 648,670 511,186
Inventory ................................................................................ 3,821,815 3,481,599
Deferred tax asset, current portion ...................................................... 2,611,094 2,607,669
Prepaid expenses and other ............................................................... 1,463,880 1,418,528
------------- -------------
Total current assets .............................................................. 75,633,320 79,553,863
------------- -------------
PROPERTY, PLANT AND EQUIPMENT, AT COST:
Land ..................................................................................... 3,245,972 --
Leasehold improvements ................................................................... 9,699,370 9,599,237
Machinery, furniture and equipment ....................................................... 19,703,964 18,598,090
Construction in progress - new facility .................................................. 1,581,458 918,442
Construction in progress ................................................................. 970,107 1,142,349
------------- -------------
Total property, plant and equipment ............................................... 35,200,871 30,258,118
Accumulated depreciation ................................................................. (15,147,073) (14,273,218)
------------- -------------
Net property, plant and equipment ................................................. 20,053,798 15,984,900
------------- -------------
OTHER ASSETS:
Deferred tax asset, non-current portion .................................................. 2,825 2,825
Acquired patents and proprietary rights, net of accumulated amortization of
$1,930,810 and $1,685,743 at September 30, 2004 and June 30, 2004, resectively .......... 4,765,556 2,410,623
Goodwill ................................................................................. 3,284,303 3,284,303
------------- -------------
Total other assets ................................................................ 8,052,684 5,697,751
------------- -------------
TOTAL ...................................................................................... $ 103,739,802 $ 101,236,514
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable ......................................................................... $ 2,280,862 $ 1,847,127
Accrued expenses ......................................................................... 3,441,437 4,636,239
Current portion of debt .................................................................. - 219,147
Deferred revenue ......................................................................... 18,534 109,773
------------- -------------
Total current liabilities ......................................................... 5,740,833 6,812,286
------------- -------------
Total liabilities ................................................................. 5,740,833 6,812,286
------------- -------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $.001 par value, 100,000 shares authorized,
no shares issued or outstanding at September 30, 2004 and June 30, 2004 ............... -- --
Common stock, $.001 par value, 25,000,000 shares authorized,
11,514,808 and 11,511,806 shares issued and outstanding at
September 30, 2004 and June 30, 2004, respectively ................................... 11,515 11,512
Capital in excess of par value ........................................................... 78,571,692 78,497,472
Retained earnings ........................................................................ 19,306,920 16,151,233
Accumulated other comprehensive income (loss) ............................................ 108,842 (235,989)
------------- -------------
Total stockholders' equity ........................................................ 97,998,969 94,424,228
------------- -------------
TOTAL ...................................................................................... $ 103,739,802 $ 101,236,514
============= =============
See notes to condensed consolidated financial statements.
3
KENSEY NASH CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
- ------------------------------------------------------------------------------------------
Three Months Ended
September 30,
------------------------------
2004 2003
REVENUES:
Net sales ............................................. $ 10,106,632 $ 7,311,950
Research and development .............................. 253,292 235,301
Royalty income ........................................ 4,717,470 4,839,595
------------ ------------
Total revenues ............................... 15,077,394 12,386,846
------------ ------------
OPERATING COSTS AND EXPENSES:
Cost of products sold ................................. 4,046,504 3,342,131
Research and development .............................. 4,383,524 4,077,981
Selling, general and administrative ................... 2,474,189 1,960,090
------------ ------------
Total operating costs and expenses ........... 10,904,217 9,380,202
------------ ------------
INCOME FROM OPERATIONS .................................. 4,173,177 3,006,644
------------ ------------
OTHER INCOME:
Interest income ....................................... 309,818 290,200
Interest expense ...................................... (4,559) (20,170)
Other income .......................................... 29,688 2,323
------------ ------------
Total other income - net ..................... 334,947 272,353
------------ ------------
INCOME BEFORE INCOME TAX ................................ 4,508,124 3,278,997
Income tax expense ...................................... (1,352,437) (771,755)
------------ ------------
NET INCOME .............................................. $ 3,155,687 $ 2,507,242
============ ============
BASIC EARNINGS PER SHARE ................................ $ 0.27 $ 0.22
============ ============
DILUTED EARNINGS PER SHARE .............................. $ 0.26 $ 0.20
============ ============
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING .................................... 11,514,246 11,430,624
============ ============
DILUTED WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING .................................... 12,281,315 12,312,776
============ ============
See notes to condensed consolidated financial statements
4
KENSEY NASH CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------
Capital Accumulated
Common Stock in Excess Other
-------------------- of Par Retained Comprehensive Comprehensive
Shares Amount Value Earnings Income/(Loss) Income Total
------------- ------------ ------------- ------------- -------------
BALANCE, JUNE 30, 2003 11,366,975 $ 11,367 $ 76,356,345 $ 3,200,450 $ (18,374) $ 79,549,788
Exercise of stock options 285,331 286 3,386,148 3,386,434
Stock repurchase (See Note 6) (140,500) (141) (2,998,133) (2,998,274)
Tax benefit from exercise of stock options 1,708,479 1,708,479
Stock options granted to non-employee 11,378 11,378
Employee stock-based compensation 33,255 33,255
Net income 12,950,783 $ 12,950,783 12,950,783
Foreign currency translation adjustment 68,569 68,569 68,569
Change in unrealized loss on investments
(net of tax) (286,184) (286,184) (286,184)
------------
Comprehensive income $ 12,733,168
---------- -------- ------------ ------------ --------- ============ -----------
BALANCE, JUNE 30, 2004 11,511,806 $ 11,512 $ 78,497,472 $ 16,151,233 $(235,989) $ 94,424,228
---------- -------- ------------ ------------ --------- ------------
Exercise of stock options 28,002 28 323,837 323,865
Stock repurchase (See Note 6) (25,000) (25) (604,437) (604,462)
Tax benefit from exercise of stock options 177,688 177,688
Employee stock-based compensation 177,132 177,132
Net income 3,155,687 $ 3,155,687 3,155,687
Foreign currency translation adjustment 6,556 6,556 6,556
Change in unrealized gain on investments
(net of tax) 338,275 338,275 338,275
------------
Comprehensive income $ 3,500,518
---------- -------- ------------ ------------ --------- ============ ------------
BALANCE, SEPTEMBER 30, 2004 (Unaudited) 11,514,808 $ 11,515 $ 78,571,692 $ 19,306,920 $ 108,842 $ 97,998,969
========== ======== ============ ============ ========= ============
See notes to condensed consolidated financial statements.
5
KENSEY NASH CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
- -------------------------------------------------------------------------------------------------
Three Months Ended
September 30,
------------------------
OPERATING ACTIVITIES:
Net income ..................................................... $ 3,155,687 $ 2,507,242
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization ............................. 1,265,795 983,402
Employee stock-based compensation ......................... 177,132 -
Tax benefit from exercise of stock options ................ 177,688 410,319
Changes in assets and liabilities which provided (used) cash:
Accounts receivable ....................................... 384,893 1,399,056
Deferred tax asset ........................................ (3,425) (427,305)
Prepaid expenses and other current assets ................. (65,552) 684,981
Inventory ................................................. (340,216) (313,647)
Accounts payable and accrued expenses ..................... (761,067) 660,642
Deferred revenue .......................................... (91,239) 31,007
------------ ------------
Net cash provided by operating activities ......... 3,899,696 5,935,697
------------ ------------
INVESTING ACTIVITIES:
Purchase of land for new facility .............................. (3,245,972) -
Additions to property, plant and equipment ..................... (1,033,765) (1,433,265)
Additions to new facility construction in progress ............. (663,016) -
Purchase of proprietary rights ................................. (2,600,000) -
Sale of investments ............................................ 250,000 -
Purchase of investments ........................................ (4,188,227) (2,516,083)
------------ ------------
Net cash used in investing activities ............. (11,480,980) (3,949,348)
------------ ------------
FINANCING ACTIVITIES:
Repayments of long term debt ................................... (219,147) (203,453)
Stock repurchase ............................................... (604,462) -
Proceeds from exercise of stock options ........................ 323,865 1,196,098
------------ ------------
Net cash (used in) provided by financing activities (499,744) 992,645
------------ ------------
EFFECT OF EXHANGE RATE ON CASH ................................... 6,556 11,513
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS ................. (8,074,472) 2,990,507
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD ................... 14,615,633 15,040,857
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD ......................... $ 6,541,161 $ 18,031,364
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest ......................................... $ 4,559 $ 20,171
============ ============
Cash paid for income taxes ..................................... $ 1,935,000 $ -
============ ============
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING ACTIVITY:
Increase in prepaid expense related to
non-employee stock options (See Note 5) ................. $ - $ 11,378
============ ============
See notes to condensed consolidated financial statements.
6
KENSEY NASH CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 -- CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION
The condensed consolidated balance sheet as of September 30, 2004, condensed
consolidated statements of operations for the three months ended September
30, 2004 and 2003, condensed consolidated statement of stockholders' equity
for the three months ended September 30, 2004 and condensed consolidated
statements of cash flows for the three months ended September 30, 2004 and
2003 of Kensey Nash Corporation (the Company) have not been audited by the
Company's independent auditors. In the opinion of management, all
adjustments (which include only normal recurring adjustments) necessary to
present fairly the financial position at September 30, 2004 and June 30,
2004, results of operations for the three months ended September 30, 2004
and 2003, stockholders' equity for the three months ended September 30, 2004
and for the year ended June 30, 2004 and cash flows for the three months
ended September 30, 2004 and 2003 have been made.
The consolidated financial statements include the accounts of Kensey Nash
Corporation, Kensey Nash Holding Company and Kensey Nash Europe GmbH. All
intercompany transactions and balances have been eliminated. The Company was
incorporated in Delaware on August 6, 1984. Kensey Nash Holding Company,
incorporated in Delaware in January 1992, was formed to hold title to
certain Company patents and has no operations. Kensey Nash Europe GmbH,
incorporated in Germany in January 2002, was formed for the purpose of
European sales and marketing of the TriActiv(R) Balloon Protected Flush
Extraction System (the TriActiv) which was commercially launched in Europe
in May 2002.
Certain information and footnote disclosures normally included in the
Company's annual financial statements, prepared in accordance with
accounting principles generally accepted in the United States of America,
have been condensed or omitted. These condensed consolidated financial
statements should be read in conjunction with the financial statements and
notes thereto included in the Company's consolidated financial statements
filed with the Securities and Exchange Commission (SEC) in the Company's
Annual Report on Form 10-K for the fiscal year ended June 30, 2004. The
results of operations for the three month period ended September 30, 2004
are not necessarily indicative of operating results for the full year.
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 dates of the financial statements, as well as
the reported amounts of revenue and expense during the periods presented.
CASH, CASH EQUIVALENTS AND INVESTMENTS
Cash and cash equivalents represent cash in banks and short-term investments
having an original maturity of less than three months. Investments at
September 30, 2004 consisted primarily of high quality municipal and U.S.
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 marketable
securities with secondary or resale markets. The Company's entire investment
portfolio is reported at fair value with unrealized gains and losses
included in stockholders' equity (see Comprehensive Income).
7
In March 2004, the FASB ratified the Emerging Issues Task Force (EITF) Issue
03-1, The Meaning of Other-Than-Temporary Impairment and Its Application to
Certain Investments (EITF 03-1). EITF 03-1 requires certain quantitative and
qualitative disclosures for securities accounted for under SFAS No. 115,
Accounting for Certain Investments in Debt and Equity Securities, that are
impaired at the balance sheet date but for which an other-than-temporary
impairment has not been recognized. The disclosure requirements under EITF 03-1
were effective for fiscal years ending after December 15, 2003 and the
recognition and measurement requirements are effective for periods beginning
after June 15, 2004. The Company has included the required disclosures in these
financial statements. On September 30, 2004, the FASB issued FSP EITF Issue
03-1-1, which delayed the effective dates of paragraphs 10-20 of EITF Issue No.
03-1. The Company's adoption of the recognition and measurement requirements of
EITF 03-1 is not expected to have a material impact on the Company's financial
position or results of operations.
The following is a summary of available-for-sale securities at September 30,
2004 and June 30, 2004:
Quarter Ended September 30, 2004
---------------------------------------------------------------------
Amortized Gross Unrealized Estimated
------------------------------
Description Cost Gain Loss Fair Value
- ----------------------------------------- ----------------- -------------- --------------- ------------------
Municipal Obligations $ 46,108,645 $ 230,944 $ (117,792) $ 46,221,797
U.S. Government Agency Obligations 2,339,681 - (139,553) 2,200,128
U.S. Corporate Obligations 2,186,000 23,565 (807) 2,208,758
----------------- -------------- --------------- ------------------
Total Investments $ 50,634,326 $ 254,509 $ (258,152) $ 50,630,683
================= ============== =============== ==================
Year Ended June 30, 2004
---------------------------------------------------------------------
Amortized Gross Unrealized Estimated
------------------------------
Description Cost Gain Loss Fair Value
- ----------------------------------------- ----------------- -------------- --------------- ------------------
Municipal Obligations $ 42,249,426 $ 21,641 $ (391,248) $ 41,879,819
U.S. Government Agency Obligations 2,326,608 - (145,210) 2,181,398
U.S. Corporate Obligations 2,421,000 8,190 (9,553) 2,419,637
----------------- -------------- --------------- ------------------
Total Investments $ 46,997,034 $ 29,831 $ (546,011) $ 46,480,854
================= ============== =============== ==================
The majority of the above investments have maturities ranging from 2 to 13
years. Also, there are certain municipal variable-rate demand obligations that
have maturities ranging from 6 to 31 years. These municipal variable-rate demand
obligations are putable weekly and callable on a monthly basis. There were no
realized gains or losses on investments in the quarter ended September 30, 2004
and year ended June 30, 2004.
The investment securities shown below currently have fair values less than
amortized cost and therefore contain unrealized losses. The Company has
evaluated these securities and has determined that the decline in value is not
related to any company or industry specific event. At September 30, 2004, there
were approximately eleven out of fifty-four investment securities with
unrealized losses. The Company anticipates full recovery of amortized costs with
respect to these securities at maturity or sooner in the event of a more
favorable market interest rate environment. The lengths of time the securities
have been in a continuous unrealized loss position, aggregated by investment by
category, at September 30, 2004 were as follows:
8
Description Loss < 12 months Loss > 12 months Total
- ------------------------------------ ----------------------------- ------------------------------- ------------------------------
Gross Gross Gross
Estimated unrealized Estimated unrealized Estimated unrealized
Fair Value losses Fair Value losses Fair Value losses
-------------- ------------ --------------- -------------- --------------- ---------------
Municipal Obligations $ 4,577,521 $ (46,340) $ 1,684,300 $ (71,452) $ 6,261,821 $ (117,792)
U.S. Government Agency Obligations - - 2,339,681 (139,553) 2,339,681 (139,553)
U.S. Corporate Obligations 186,000 (807) - - 186,000 (807)
-------------- ------------ --------------- -------------- --------------- ---------------
Total Investments $ 4,763,521 $ (47,147) $ 4,023,981 $ (211,005) $ 8,787,502 $ (258,152)
============== ============ =============== ============== =============== ===============
EXPORT SALES
There were $125,750 and $157,194 in export sales from the Company's U.S.
operations to unaffiliated customers in Europe and Asia in the three months
ended September 30, 2004 and 2003, respectively.
REVENUE RECOGNITION
SALES REVENUE
The Company recognizes revenue under the provisions of Staff Accounting
Bulletin (SAB) No. 101, Revenue Recognition in Financial Statements
(SAB 101). Accordingly, sales revenue is recognized when the related
product is shipped. All product is shipped free-on-board shipping
point. 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 reduces sales revenue for estimated
customer returns and other allowances, including discounts. The Company
manufactures custom medical products for its customers which are
subject to return only for failure to meet customer specifications. The
Company had sales returns allowances and discounts of $30,669 and
$93,640 at September 30, 2004 and 2003, respectively.
RESEARCH AND DEVELOPMENT REVENUE
Revenue under research and development contracts is recognized as the
related expenses are incurred. All revenues recorded on this line item
are government programs under which the U.S. government funds the
research of high risk, enabling technologies. The programs reflected in
the statement of operations for the quarter ended September 30, 2004
and fiscal year 2004 are awards for the research of a synthetic
vascular graft which concluded in September of 2004 and a NIH breast
cancer drug delivery grant which concluded in October 2003.
ROYALTY INCOME
Royalty revenue is recognized as the related product is sold. The
Company recognizes substantially all of its royalty revenue at the end
of each month, in accordance with its St. Jude Medical and Orthovita
agreements, when the Company is advised by the respective party of the
total end-user product sales dollars for the month. Royalty payments
are received within 45 days of the end of each calendar quarter.
The Company receives a 6% royalty on every Angio-Seal unit sold by St.
Jude Medical, its licensee. The final contracted decrease in the
royalty rate, from 9% to 6%, occurred in April 2004 when four million
cumulative units had been sold. As of September 30, 2004 approximately
4.7 million Angio-Seal units had been sold.
The Company receives a royalty on all co-developed VITOSS FOAM product
sales by Orthovita. The royalty is pursuant to an agreement entered
into between the Company and Orthovita in March of 2003. The first
royalty was earned in February of 2004 when the first co-developed
product was commercially launched by Orthovita. In addition, in a
separate transaction, the Company acquired proprietary rights of a
third party to the VITOSS technology. This acquisition entitled the
Company to certain rights, including the economic rights, of the third
party. These economic rights included a royalty on all products
9
containing the VITOSS technology. The first royalty under this
transaction was earned for the quarter ended September 30, 2004, when
the transaction was completed.
EARNINGS PER SHARE
Earnings per share are calculated in accordance with SFAS No. 128, Earnings
per Share, which requires the Company to report both basic and diluted
earnings per share (EPS). Basic and diluted EPS are computed using the
weighted average number of shares of common stock outstanding, with common
equivalent shares from options included in the diluted computation when
their effect is dilutive. As of September 30, 2004 options to purchase
204,293 shares of our Common Stock at prices ranging from $28.56 to $34.36
per share were outstanding, but were not included in the computation of
diluted earnings per share because the exercise price of the options exceeds
the average market price and would have been antidilutive. As of September
30, 2003, options to purchase 1,467 shares of our Common Stock at a price of
$25.55 per share were outstanding, but were not included in the computation
of diluted earnings per share because the exercise price of the options
exceeds the average market price and would have been antidilutive.
STOCK-BASED COMPENSATION
Stock-based compensation cost is accounted for under SFAS No. 123,
Accounting for Stock-Based Compensation (SFAS 123), which permits (i)
recognition of the fair value of stock-based awards as an expense, or (ii)
continued application of the intrinsic value method of Accounting Principles
Board Opinion No. 25, Accounting for Stock Issued to Employees (APB 25). The
Company accounts for its stock-based employee and director compensation
plans under the recognition and measurement principles of APB 25. Under this
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 with an exercise price equal to the fair market value of
the Company's Common Stock at the date of grant. Options granted to
non-employees, as defined under SFAS 123, are recorded as compensation
expense. See Note 5 for options granted to non-employee outside consultants
in July 2003 and October 2002.
In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation - Transition and Disclosure - an amendment to FASB Statement
No. 123, Accounting for Stock-Based Compensation (SFAS 148). The Company
implemented the "disclosure only" provisions of SFAS No. 148 in the period
ended December 31, 2002. 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 of the options
at the grant date, consistent with the provisions of SFAS No. 123, as
amended by SFAS No. 148, the Company's fully-taxed net income and earnings
per share for the three months ended September 30, 2004 and 2003 would have
been reduced to the pro forma amounts below:
10
Three Months Ended
September 30,
---------------------------
2004 2003
Net income, as reported ................................................. $ 3,155,687 $ 2,507,242
Deduct: Total stock-based employee compensation expense determined
under fair value based method for all awards, net of related tax effects (557,766) (350,666)
----------- -------------
Pro forma net income .................................................... $ 2,597,921 $ 2,156,576
=========== =============
Earnings per share:
Basic - as reported .................................................. $ 0.27 $ 0.22
=========== =============
Basic - pro forma .................................................... $ 0.23 $ 0.19
=========== =============
Diluted - as reported ................................................ $ 0.26 $ 0.20
=========== =============
Diluted - pro forma .................................................. $ 0.21 $ 0.18
=========== =============
COMPREHENSIVE INCOME
The Company accounts for comprehensive income under the provisions of SFAS
No. 130, Reporting Comprehensive Income (SFAS 130). Accordingly, accumulated
other comprehensive income (loss) is shown in the consolidated statements of
stockholders' equity at September 30, 2004 and June 30, 2004, and is
comprised of net unrealized gains and losses on the Company's
available-for-sale securities and foreign currency translation adjustments.
The tax (expense) benefit of other comprehensive income for the three months
ended September 30, 2004 and for the fiscal year ended June 30, 2004 was
$(174,263) and $147,428, respectively.
GOODWILL
Goodwill represents the excess of cost over the fair value of the
identifiable net assets of THM Biomedical, Inc. (THM), a company acquired in
September 2000. Effective July 1, 2001, the Company adopted SFAS No. 141,
Business Combinations (SFAS 141) and SFAS No. 142, Goodwill and Other
Intangible Assets (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. Under SFAS 142, goodwill and intangible assets with
indefinite useful lives are no longer amortized, but are subject to annual
impairment tests. Intangible assets with definite useful lives continue to
be amortized over their respective useful lives.
There were no changes to the net carrying amount of goodwill for the three
month period ended September 30, 2004 from June 30, 2004. The Company
completed its initial required goodwill impairment test under SFAS 142 in
the first quarter of fiscal 2002. The most recent tests in fiscal 2004, 2003
and 2002 indicated that goodwill was not impaired.
PATENTS AND PROPRIETARY RIGHTS
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. The entire cost of
acquired patents is being amortized over the remaining period of economic
benefit, ranging from 5 to 10 years at September 30, 2004. The gross
carrying amount of such patents at September 30, 2004 was $4,096,366 with
accumulated amortization of $1,751,500. Amortization expense on these
patents was $65,757 for the three month period ended September 30, 2004.
Amortization expense on the Company's acquired patents is estimated at
$263,026 for each of the years ending June 30, 2005, 2006, 2007, 2008 and
2009.
11
In August 2004, the Company acquired the intellectual property rights of a
third party, an inventor of the VITOSS technology (the Inventor), for
$2,600,000 under an assignment agreement with the Inventor (the Assignment
Agreement). Under the Assignment Agreement, the Company receives all
intellectual property rights of the Inventor that had not previously been
assigned to Orthovita. Also under the Assignment Agreement, the Company
receives a royalty from Orthovita on the sale of all Orthovita products
containing the VITOSS technology, up to a total royalty to be received of
$4,035,782. The entire cost of these proprietary rights is being amortized
over the sixty month period the Company anticipates to receive the royalty
in relation to the proprietary rights. Amortization expense on these
proprietary rights was $179,310 for the three months ended September 30,
2004. Amortization expense on these proprietary rights is estimated at
$476,667 for the year ending June 30, 2005 and $520,000 for each of the
years ending June 30, 2006 through 2009.
NEW ACCOUNTING PRONOUNCEMENTS
In December 2003, the FASB issued SFAS No. 132 (revised 2003), Employers'
Disclosures about Pensions and Other Postretirement Benefits - an amendment
of FASB Statements No. 87, 88, and 106 (SFAS 132 revised), which improves
financial statement disclosures for defined benefit plans. The change
replaces existing FASB disclosure requirements for pensions and requires
additional disclosures about the assets, obligations, cash flows, and net
periodic benefit cost of defined benefit pension plans and other defined
benefit postretirement plans. The project was initiated by the FASB in
response to concerns raised by investors and other users of financial
statements about the need for greater transparency of pension information.
The guidance is effective for fiscal years ending after December 15, 2003,
and for the first fiscal quarter of the year following initial application
of the annual disclosure requirements. The Company's adoption of SFAS 132
revised provides enhanced disclosures of 401(k) matching contributions but
has no impact on the Company's financial position or results of operations.
NOTE 2 -- INVENTORY
Inventory is stated at the lower of cost (determined by the average cost
method, which approximates first-in, first-out) or market. Inventory
primarily includes the cost of material utilized in the processing of the
Company's products and is as follows:
September 30, June 30,
2004 2004
------------- -----------
Raw materials ...................... $ 3,128,419 $ 2,449,180
Work in process .................... 493,074 603,069
Finished goods ..................... 367,887 472,565
----------- -----------
Gross inventory .................... 3,989,380 3,524,814
Provision for inventory obsolescence (167,565) (43,215)
----------- -----------
Net inventory ...................... $ 3,821,815 $ 3,481,599
=========== ===========
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.
12
NOTE 3 -- ACCRUED EXPENSES
As of September 30, 2004 and June 30, 2004, accrued expenses consisted of
the following:
September 30, June 30,
2004 2004
----------- ----------
Accrued payroll and related compensation $1,283,313 $1,852,078
Current tax liability .................. 1,290,632 1,873,195
Other .................................. 867,492 910,966
---------- ----------
Total .................................. $3,441,437 $4,636,239
========== ==========
NOTE 4 -- DEBT
On September 1, 2000, in conjunction with the acquisition of THM Biomedical,
the Company incurred a note payable in the amount of $4.5 million (the
Acquisition Obligation). The Acquisition Obligation was due in equal
quarterly installments. As of September 30, 2004, the Company had repaid the
entire Acquisition Obligation and had no remaining debt.
NOTE 5 -- CONSULTING CONTRACTS
In October 2002, the Company granted options to purchase 50,000 shares of
common stock to a physician pursuant to a five-year consulting agreement
related to the development of a carotid artery application for the TriActiv
System.
In July 2003, the Company granted options to purchase 1,500 shares of common
stock to a physician pursuant to a two-year consulting agreement related to
the development of orthopaedic applications for the Company's porous and
non-porous tissue fixation and regeneration devices and drug delivery
devices.
The Company calculated the fair value of these non-employee options in
accordance with SFAS No.123, as $375,550 and $11,378 for the October 2002
and July 2003 grants, respectively, using the Black-Scholes option-pricing
model. These amounts were recorded as prepaid consulting expense and
increases to additional paid in capital in the quarters ended December 31,
2002 and September 30, 2003, respectively. The prepaid expense is being
amortized to research and development expense over the terms of the
agreements. Accordingly, $20,200 was recorded as a component of research and
development expense for each of the three month periods ended September 30,
2004 and 2003.
NOTE 6 -- STOCK REPURCHASE PROGRAM
On August 17, 2004, the Company announced that its board of directors had
reinstated a program to repurchase issued and outstanding shares of Common
Stock over a six month period from the date of the board reinstatement. The
reinstated plan calls for the repurchase of up to 259,500 shares, the
balance under the original plan approved in October 2003. As of September
30, 2004, the Company had repurchased and retired 25,000 shares of its
Common Stock under the reinstated plan at a cost of approximately $600,000
(an average market price of $24.14 per share). In October 2004, the Company
repurchased and retired an additional 174,867 shares at a cost of
approximately $4.5 million (an average market price of $25.94 per share),
leaving approximately 59,633 shares authorized for repurchase under the
current authorized plan. The Company is financing the repurchases using its
available cash.
The Company plans to continue to repurchase its shares for cash, from time
to time in the open market, through block trades or otherwise. The
repurchase program does not require the Company to purchase any specific
13
dollar value or number of shares. Any purchases under the program will
depend on market conditions and may be commenced or suspended at any time or
from time to time without prior notice.
The following table contains information about our purchases of our equity
securities during July, August, and September 2004:
Total number of Maximum Number
Average Price Shares Purchased of Shares that May
Total Number of Paid per as Part of a Publicly Yet Be Purchased
Period Shares Purchased Share Announced Program Under the Program
- ------------------------------------------------------------------------------------------------------------------------
July 1-31, 2004 - - - -
August 1-31, 2004 - - - -
September 1-30, 2004 25,000 $ 24.14 25,000 234,500
-------------------------------------------------------------------------------------------
Total 25,000 $ 24.14 25,000 234,500
===========================================================================================
NOTE 7 --INCOME TAXES
As of June 30, 2004, the Company had net operating loss (NOL) carryforwards
for state tax purposes totaling $20.0 million, which will expire through
2024. In addition, the Company had a foreign NOL of $300,000 at June 30,
2004, which will not expire.
During the fourth quarter of fiscal year 2003, the Company performed a
retrospective research and development tax credit study for fiscal years
1993 through 2003. The Company recorded the majority of the tax credit
resulting from this study ($1.5 million) in the fourth quarter of fiscal
2003. During the first quarter of fiscal 2004, the Company recorded an
additional portion of the research and development tax credit ($310,000) and
professional service fees as a component of selling, general and
administrative expenses ($50,500) related to this research and development
tax credit study.
NOTE 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, for all employee contributions.
Effective July 1, 2004, the Company revised its discretionary matching
contribution to 50%, on up to 6% of an employee's total compensation, for
all employee contributions. Employer contributions to the 401(k) plan for
the three months ended September 30, 2004 and 2003 were $91,914 and $31,354,
respectively.
NOTE 9 -- RESTRICTED STOCK
The Company may provide restricted stock grants under the Employee Plan
approved by the Company's stockholders. During fiscal 2004 and the first
quarter of fiscal 2005, the Company granted shares to the independent,
non-employee members of the Board of Directors and to executive officers of
the Company. Shares awarded under the plan vest in installments of up to
three years and unvested shares are forfeited upon termination of
employment. The Board of Directors shares vest in three equal annual
installments contingent upon the Company's achievement of certain earnings
per share targets, Company Common Stock price targets and continued service
of the board member on each anniversary of the date of grant. The executive
14
officer shares vest in three equal annual installments based solely on
continued employment with the Company. The Company made the following
grants to non-employee, independent directors and executive officers during
the period ended September 30, 2004 and fiscal year ended June 30, 2004:
September 30 June 30,
2004 2004
---------- ----------
Shares granted:
Independent, non-employee directors - 11,580
Executive officers ................ 55,500 -
---------- ----------
Total shares granted ................ 55,500 11,580
========== ==========
Fair value on the date of grant ..... $1,531,060 $ 253,950
========== ==========
The fair value disclosed above is based upon the closing price of the
Company's common stock on the date of grant.
Compensation expense related to all restricted stock grants is being
recorded over the three-year vesting period of these grants. For the three
months ended September 30, 2004 the Company recognized expense of $177,132
related to restricted share awards.
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis should be read in conjunction with our
consolidated financial statements and the related notes included in this report
and our audited consolidated financial statements and the related notes
contained in our Annual Report on Form 10-K for the fiscal year ended June 30,
2004, as filed with the Securities and Exchange Commission.
OVERVIEW
Kensey Nash Corporation is a leading medical technology company providing
innovative solutions, via novel technologies, for a wide range of medical
procedures. We have expanded our business model extensively over the last ten
years from vascular puncture closure and today provide an extensive range of
products into multiple medical markets, primarily cardiovascular, sports
medicine and spine, amongst others. As the inventor of the Angio-Seal(TM)
Vascular Closure Device (Angio-Seal), a device designed to seal and close
femoral artery punctures made during diagnostic and therapeutic cardiovascular
catheterizations, we were the first company to place an absorbable biomaterial
component into the human vascular system. As pioneers in the field of absorbable
biomaterials, we have developed significant experience, expertise and
competitive advantage in the design, development, manufacture and processing of
absorbable biomaterials for medical applications. Our most recent advance into
the cardiovascular market is the TriActiv(R) Balloon Protected Flush Extraction
System (the TriActiv), a device designed to provide embolic protection during
the treatment of diseased vessels. Again, we are on the forefront of an emerging
medical market as the adoption of embolic protection is projected to grow
rapidly due to its proven clinical benefits.
Our original success is rooted in the Angio-Seal, of which we were the original
designer, developer and manufacturer. St. Jude Medical, Inc. (St. Jude Medical)
acquired the worldwide license to the Angio-Seal device in March of 1999. The
Angio-Seal was commercialized in the U.S. in 1996 and is currently the worldwide
leader in the vascular closure device market. St. Jude Medical develops and
manufactures the product as well as markets and distributes the product
worldwide. We currently receive a 6% royalty on every Angio-Seal device sold to
the end-user and also sell to St. Jude Medical the collagen plug component of
the Angio-Seal. In addition, we are a secondary source for the anchor component,
which is primarily manufactured by St. Jude Medical. As specified in our
contract with St. Jude Medical, in April 2004 when the four millionth Angio-Seal
unit had been sold, the royalty rate was reduced to 6% from 9%. No further rate
reductions will occur.
We have utilized the knowledge gained during the development process of the
absorbable biomaterials components of the Angio-Seal, the anchor and the
collagen plug, as a springboard into the application of absorbable biomaterials
into multiple medical markets. Our history with these biomaterials has made us
experts in the design, development, manufacture and processing of proprietary
biomaterials products which we now apply to the fields of orthopaedics
(including sports medicine and spine), cardiology, drug/biologics delivery,
periodontal, general surgery and wound care. We have several strategic
partnerships and alliances through which our biomaterials products are developed
and marketed. We intend to continue to leverage our proprietary knowledge and
expertise in each of these markets to develop new products and technologies and
to explore additional applications for our existing products.
The TriActiv System is a device designed to provide embolic protection during
the treatment of diseased vessels, with an initial application in diseased
saphenous vein grafts. The TriActiv system is a balloon embolic protection
device in a market populated or pursued by both balloon and filter devices.
While both approaches have advantages and disadvantages, we believe the unique
design of the TriActiv device as a system offers three key features: an embolic
protection balloon, a flush catheter and an active, controlled extraction
system, may offer the most complete and effective solution to embolic
protection. On July 28, 2004, we submitted a 510(k) application to the FDA for
16
commercial approval of the TriActiv System in the United States. In late
October, we received a comment letter from the FDA related to our 510(k)
application. We completed and filed our response with the FDA on November 8,
2004. We continue to anticipate approval from the FDA by the end of our second
quarter of fiscal 2005 and are planning a U.S. commercial launch in the third
quarter of fiscal 2005. In August 2004, we announced that we would be selling
and marketing the TriActiv System via a direct sales force. Future generations
of the TriActiv device, currently in development and in clinical trials, will
address additional markets. These future applications will potentially include
the treatment of diseased carotid, peripheral and native coronary arteries as
well as acute myocardial infarction (AMI) (a heart attack) and the removal of
thrombus during such treatment.
Revenues. Our revenues consist of three components: net sales, research and
development revenue and royalty income.
Net Sales. Net sales is comprised of sales of absorbable biomaterials products
and the TriActiv device.
Biomaterials. The biomaterials component of net sales, which comprises
99% of total net sales, represents the sale of our biomaterials
products to customers for use in the following markets: orthopaedics
(sports medicine and spine), cardiology, drug/biologics delivery,
periodontal, general surgery and wound care. The two most significant
components of our biomaterials sales are the absorbable components of
the Angio-Seal, supplied to St. Jude Medical, and our orthopaedic
product sales. Our orthopaedic product sales to date have consisted
primarily of sales to Arthrex, Inc. (Arthrex) and Orthovita, Inc.
(Orthovita). Arthrex is a privately-held orthopaedics company for
which we manufacture a wide array of sports medicine products.
Orthovita is a publicly held orthopaedic biomaterials company for
which we manufacture bone graft subsititute products used primarily in
the spine. Below is a table showing the trends in our Angio-Seal and
orthopaedic sales as a percentage of total biomaterial sales:
----------------------- -----------------------------------
THREE MONTHS ENDED
-----------------------------------
SALES OF: SEPTEMBER 30, SEPTEMBER 30,
2004 2003
----------------------- ---------------- ------------------
Angio-Seal Components 37% 42%
----------------------- ---------------- ------------------
Orthopaedic Products 57% 53%
----------------------- ---------------- ------------------
The decline in the Angio-Seal components as a percentage of our total
biomaterials sales from the first quarter of fiscal 2004 to the first
quarter of fiscal 2005 is related to the transition of the manufacture
of the absorbable polymer anchor to St. Jude Medical. Based on
discussions with St. Jude Medical, we believe their current plans are
for us to remain a supplier of approximately 15 to 20% of the future
anchor requirements for the Angio-Seal. We continue to supply a
minimum of 50% of the collagen component for the device under a
three-year contract with St. Jude Medical, which currently expires in
December 2005. The future of this portion of our biomaterials sales is
dependent upon the continued success of the Angio-Seal in the vascular
closure market. Today, it is estimated that the Angio-Seal has
approximately 60% of this market based on sales of 360,000 devices to
the end-user during the quarter ended September 30, 2004. The
Angio-Seal market share could be impacted by future competition in
this market or new technologies to address diagnostic or therapeutic
treatment of diseased coronary arteries.
Our orthopaedic sales increased $1.9 million in the first quarter of
fiscal 2005 to $5.7 million from $3.8 million in the first quarter of
fiscal 2004. The increase in our orthopaedic products sales from the
first quarter fiscal 2004 to the first quarter fiscal 2005 as a
percentage of total biomaterials sales was primarily related to sales
of bone graft subsititute products to Orthovita which began in the
third quarter of fiscal 2004 and totaled $2.3 million dollars in the
17
first quarter of fiscal 2005. We expect the growth in our overall
biomaterials sales, which was 38% in the three months ended September
30, 2004 over the comparable prior year period, will continue because
of greater acceptance by the medical community of biomaterials and
technological advances which have expanded the applications for our
biomaterials products. Due to this greater acceptance, we have been
able to expand our biomaterials customer and product base by
initiating new partnerships within the medical device industry as well
as expanding the product lines for our current customers. The growth
of the orthopaedic protion of our business is dependent on several
factors, including the success of our current partners in sports
medicine and spine, the continued acceptance of biomaterials-based
products in these two markets as well as expanded future acceptance,
and our ability to offer new products or technologies and attract new
partners in these markets. We are regularly evaluating our current
technologies and potential new technologies on which to base new
avenues of growth into the sports medicine and spine markets.
TriActiv. The TriActiv device was commercially launched in Europe in
the fourth quarter of fiscal 2002. We are selling directly to the
market in Germany and through distributors throughout the rest of
Europe. We currently have distribution agreements for sales in Ireland,
Switzerland, Austria, Italy, Netherlands and the United Kingdom. We are
in the process of identifying distributors for additional markets in
Europe and Asia. The TriActiv sales were less than 1% of our total
sales for the three months ended September 30, 2004 and 2003. We
anticipate sales of the TriActiv device will become a more significant
component of net sales during the second half of our fiscal year ended
June 30, 2005 and beyond as we gain new customers in the European
markets, introduce new versions and applications of the product and
launch the product in the U.S. market. We currently anticipate U.S.
commercial launch of the TriActiv device in the third quarter of fiscal
2005, through a small direct sales force, subject to regulatory
approval from the FDA.
The TriActiv System is a platform technology, offering not only our
initial application for the protection from embolization during
treatment of diseased saphenous vein grafts, but future applications
for the treatment of carotid artery disease and the removal of
thrombus, amongst others. Embolic protection is a relatively new
technology and is still subject to acceptance by the medical community,
particularly for future applications. In addition, because we intend to
commercially launch the device ourselves, against other large,
experienced medical device sales teams, we are challenged with the
development of a successful launch strategy which will differentiate
the TriActiv device from other competing products.
We received European Community approval (CE Mark) to market the
second-generation of the TriActiv device, the TriActiv(R) FX Embolic
Protection System (the TriActiv FX), in fiscal 2004. This second
generation device incorporates several important ease-of-use design
enhancements including an integrated, fully disposable flush and
extraction system, a new balloon inflator that simplifies catheter
exchanges during the procedure, and a monorail flush catheter to
enhance device usage and reduce procedure time. We have since made
additional changes to the FX System which required a new dossier
submission to the European Union. This submission is expected in
November 2004 and a European product launch is expected in our third
fiscal quarter of fiscal 2005.
Research and Development Revenue. Research and development revenue was derived
from a National Institute of Standards and Technology (NIST) grant in the three
months ended September 30, 2004 and from both the NIST grant and a National
Institute of Health (NIH) grant in the three months ended September 30, 2003. In
October 2001 we received the NIST grant, a $1.9 million grant over a three-year
period, under which we are researching a synthetic vascular graft, utilizing our
porous tissue matrix (PTM) technology. We continue to develop this technology,
however this grant funding concluded in September 2004 and we will receive no
additional funding for this grant. In January 2003, we received from NIH
$100,000 over a one-year period, under which we were researching sustained or
controlled release of chemotherapeutic drugs for the treatment of breast cancer
utilizing our PTM technology. This grant was completed in early fiscal 2004, but
18
we are continuing to independently develop this drug delivery technology for
commercial use and expectations of future grant applications.
Royalty Income. Our royalty income primarily consists of royalties received from
St. Jude Medical and Orthovita. Royalties from St. Jude Medical are received on
every Angio-Seal unit sold worldwide. We anticipate sales of the Angio-Seal will
continue to grow with continued procedure growth and as St. Jude Medical
continues to expand its sales and marketing efforts, including its continued
introduction of the Angio-Seal product line in the Japanese market, and releases
future generations of the Angio-Seal system. Our royalty rate as of September
30, 2003 was 9%. Under our License Agreeement with St. Jude Medical, there was a
final contracted decrease in the royalty rate, to 6%, upon reaching four million
cumulative units sold. This final rate reduction occurred in April 2004. We
currently believe continued Angio-Seal unit growth will partially offset this
33% decline in royalty rate for a net reduction in royalty income in fiscal 2005
from fiscal 2004 of approximately 10-15%. We therefore expect that royalty
income from the Angio-Seal will continue to be a significant source of revenue.
As of September 30, 2004, approximately 4,700,000 Angio-Seal units had been
sold.
In March 2003, we entered into an agreement with Orthovita under which we will
develop and commercialize products based on Orthovita's proprietary, ultra
porous VITOSS(TM) bone void filler material in combination with our proprietary
biomaterials. The products will have applications in the bone grafting and
spinal surgery markets. Under the agreement, the products will be co-developed,
we will manufacture the products and Orthovita will market and sell the products
worldwide. In addition, we receive a royalty on Orthovita's end-user sales of
all co-developed products.
In August 2004, in order to enhance the overall business relationship with
Orthovita, we acquired the proprietary rights of a third party, an inventor of
the VITOSS technology (the Inventor), for $2.6 million under an assignment
agreement with the Inventor (the Assignment Agreement). Under the Assignment
Agreement, the Company receives an additional royalty from Orthovita on the
end-user sales of all Orthovita products containing the VITOSS technology, up to
a total royalty to be received of $4,035,782.
Orthovita launched its initial bone grafting and spinal product line, VITOSS
scaffold FOAM strips and cylinders, in the third quarter of fiscal 2004 and the
second family of products, VITOSS scaffold FOAM flow in June 2004. We believe
the unique technology associated with the VITOSS FOAM products and the size and
strength of the spine market will result in the Orthovita component of our
royalty income becoming more significant over the next several quarters and
beyond.
Cost of Products Sold. The gross margin on sales increased to 60% in the three
months ended September 30, 2004 compared to 54% in the three months ended
September 30, 2003. We have experienced higher volume of our sales of
biomaterials products and greater manufacturing efficiencies, which has lowered
our unit costs in many of our product lines. We anticipate the gross margin on
our biomaterials products will remain at or close to this level with increases
in sales volume and efficiencies gained in new product lines. These improvements
could potentially be offset by initial margins on the TriActiv product line in
the second half of fiscal 2005, our first year of commercial production for the
U.S. We anticipate a 58% to 60% gross margin on sales for fiscal 2005, which is
heavily reliant on the product mix of our sales, specifically the TriActiv
device sales which will slightly offset the biomaterials margins until the
manufacturing process matures and volumes increase.
Research and Development Expenses. Research and development expense consists of
expenses incurred for the development of our proprietary technologies, such as
the TriActiv System, absorbable and nonabsorbable biomaterials products and
technologies and other development programs, including expenses under the NIST
program. In December 2001, we began our TriActiv U.S. pivotal clinical study,
the PRIDE study, a randomized trial with a potential 80 sites in the U.S and
Europe. We completed enrollment in the PRIDE study during March 2004. We
enrolled a total of 894 patients in the study, including roll-in patients, at 68
sites in the U.S. and 10 sites in Europe. Submission of data from the trial to
the FDA for 510(k) approval occurred in July 2004. In late October, we announced
19
that we had received a comment letter, a letter in which the FDA asks questions
or requests additional information related to our submission, from the FDA. We
have prepared and submitted our response to the FDA and continue to expect
approval for the TriActiv system by the end of our second fiscal quarter ending
December 31, 2005. We plan to initiate a U.S. registry on a next generation
TriActiv device, the TriActiv FX, in our second half of fiscal 2005. The study
is a planned 100 to 120 patient study at 20 sites in the U.S. We cannot make any
assurances as to the successful completion of these trials or subsequent
regulatory approval for the TriActiv System or for future applications in the
U.S. or in Europe.
Clinical efforts in pursuit of FDA approval and continuing development of the
TriActiv System, as well as our continued development of proprietary
biomaterials products and technologies, require significant research and
development expenditures. We anticipate research and development expense will
continue to increase as we pursue commercialization of the TriActiv System in
the U.S., and explore opportunities for other indications related to the
TriActiv System as well as our other technologies, including the continued
development of proprietary biomaterials technologies. While we believe research
and development expenditures will increase in dollars, we believe that they will
decrease as a percentage of total revenue as our revenue continues to grow.
Research and development expense was 29% of total revenues for the three months
ended September 30, 2004 compared to 33% of total revenue for the three months
ended September 30, 2003.
Selling, General and Administrative. Selling, general and administrative
expenses include general and administrative costs, including activities of our
finance, human resource and business development departments, as well as costs
related to the sales and marketing of our products. The general and
administrative component of selling, general and administrative expenses has
increased over the same period in 2004. This increase is a result of the overall
growth of our business, specifically in personnel expenses, as well as expenses
incurred related to compliance with new SEC and corporate governance
regulations.
The sales and marketing component of selling, general and administrative
expenses consists of marketing expenses in the U.S., related primarily to the
U.S. commercialization efforts of the TriActiv device, and sales and marketing
efforts at our German subsidiary. We have a subsidiary in Germany, Kensey Nash
Europe GmbH, where we have established a European sales and marketing team. This
team consisted of three clinical specialists and four sales people as of
September 30, 2004. We will continue to add personnel to this team as we believe
is required to meet our clinical and sales goals. This team is selling the
product direct in the German market and supports our distributor relationships
in the rest of Europe.
Our sales and marketing expenses have only increased slightly in the first
quarter of fiscal 2005 over the same period in fiscal 2004. This increase
related to increased marketing efforts as we move toward commercialization of
the TriActiv in the U.S. offset in large part by a decrease in clinical study
expenses in support of third party reimbursement of TriActiv in Europe. We
anticipate sales and marketing expenses will increase as we await U.S.
regulatory approval of the TriActiv, prepare for U.S. launch of the product and
ultimately launch the product in the third quarter of fiscal 2005. If we are
granted approval from the FDA, we plan to market and sell the device in the U.S.
using a small direct sales team with an anticipated market launch in the third
quarter of fiscal 2005. Our initial estimates of the cost of a direct sales plan
would increase selling expense in fiscal 2005 by $2.5 million to $3.0 million,
including personnel and marketing expenses, over fiscal 2004. We also continue
to expand our marketing efforts for our biomaterials business.
Income Tax Expense. We estimate that our effective tax rate for the fiscal 2005
will be approximately 30%, which includes estimates of our current year research
and development tax credit as well as non-taxable interest income.
20
CRITICAL ACCOUNTING POLICIES
Our "critical accounting policies" are those that require application of
management's most difficult, subjective or complex judgments, often as a result
of the need to make estimates about matters that are inherently uncertain and
may change in future periods. It is not intended to be a comprehensive list of
all of our significant accounting policies. In many cases, the accounting
treatment of a particular transaction is specifically dictated by generally
accepted accounting principles, with no need for management's judgment in their
application. There are also areas in which the selection of an available
alternative policy would not produce a materially different result. We have
identified the following as our critical accounting policies: revenue
recognition, accounting for stock-based compensation, allowance for doubtful
accounts, inventory valuation and income taxes.
Revenue Recognition. We recognize revenue under the provisions of Staff
Accounting Bulletin (SAB) No. 101, Revenue Recognition in Financial Statements
(SAB 101).
Sales Revenue. Accordingly, sales revenue is recognized when the related
product is shipped. Advance payments received for products or services
are recorded as deferred revenue and are recognized when the product is
shipped or services are performed. All of our shipments are Free on
Board (F.O.B.) shipping point. We reduce sales for estimated customer
returns, discounts and other allowances, if applicable. Our products are
custom manufactured for our customers and are subject to return only for
failure to meet customer specification.
Research and Development Revenue. Revenue under research and development
contracts is recognized as the related expenses are incurred. All
revenues recorded on this line item are government programs under which
the U.S. government funds the research of high risk, enabling
technologies.
Royalty Revenue. Royalty revenue is recognized as the related product is
sold. We recognize substantially all of our royalty revenue at the end
of each month, in accordance with our customer agreements. (See Note 1
to the Condensed Consolidated Financial Statements - Revenue
Recognition).
Accounting for Stock-Based Compensation. We account for stock-based compensation
costs under SFAS No. 123, Accounting for Stock-Based Compensation, as amended by
SFAS No. 148, which permits (i) recognition of the fair value of stock-based
awards as an expense, or (ii) continued application of the intrinsic value
method of Accounting Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees (APB 25). We account for our stock-based employee and
director compensation plans under the recognition and measurement principles of
APB 25. Under this intrinsic value method, compensation cost represents the
excess, if any, of the quoted market price of our common stock at the grant date
over the amount the grantee must pay for the stock. Our policy is to grant stock
options at the fair market value at the date of grant. Therefore, we have not
recognized any compensation expense for options granted to employees. We account
for stock-based awards to non-employees using the fair value method in
accordance with SFAS No. 123, which requires using the Black-Scholes
option-pricing model to determine the fair value of the option at the original
grant date. Options granted to non-employees, as defined under SFAS No. 123, (as
amended by SFAS No. 148) and Emerging Issues Task Force (EITF) 96-18 Accounting
for Equity Instruments that are Issued to Other Than Employees for Acquiring or
in Conjunction with Selling, Goods or Services, are recorded as an expense over
the contractual service period. We granted options to non-employee, outside
consultants during fiscal 2003 and 2004. See Note 5 to the financial statements
for information regarding options granted to non-employees in July 2003 and
October 2002.
Allowance for Doubtful Accounts. Our allowance for doubtful accounts is
determined using a combination of factors to ensure that our trade receivables
balances are not overstated due to uncollectibility. We maintain a bad debt
reserve for all customers based on a variety of factors, including the length of
21
time receivables are past due, trends in overall weighted average risk rating of
the total portfolio, significant one-time events and historical experience with
each customer. Also, we record additional reserves for individual accounts when
we become aware of a customer's inability to meet its financial obligations to
us, such as in the case of bankruptcy filings or deterioration in the customer's
operating results or financial position. If circumstances related to specific
customers change, our estimates of the recoverability of receivables would be
adjusted. We believe our allowance at September 30, 2004 was sufficient to cover
all existing accounts receivable.
Inventory Valuation. Our inventory is stated at the lower of cost or market.
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.
Income Taxes. Our estimated effective tax rate includes the impact of certain
estimated research and development tax credits and non-taxable interest income.
Material changes in, or differences from, our estimates could impact our
estimate of our effective tax rate.
RESULTS OF OPERATIONS
COMPARISON OF THREE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
The following table summarizes our operating results for the three months ended
September 30, 2004 compared to the three months ended September 30, 2003.
- ----------------------------- ---------------------------------------------------------------- ---------------------
THREE MONTHS ENDED PERCENT CHANGE FROM
----------------------------------------------------------------
($ MILLIONS) SEPTEMBER 30, % OF TOTAL SEPTEMBER 30, % OF TOTAL PRIOR PERIOD TO
2004 REVENUES 2003 REVENUES CURRENT PERIOD
============================= ================== ============ ================= ============== =====================
REVENUES:
============================= ================== ============ ================= ============== =====================
Total Revenues $15.1 100% $12.4 100% 22%
============================= ================== ============ ================= ============== =====================
Net Sales $10.1 67% $7.3 59% 38%
- ----------------------------- ------------------ ------------ ----------------- -------------- ---------------------
Research & Development $0.3 2% $0.2 2% 8%
Revenue
- ----------------------------- ------------------ ------------ ----------------- -------------- ---------------------
Royalty Income $4.7 31% $4.8 39% (3%)
============================= ================== ============ ================= ============== =====================
EXPENSES:
============================= ================== ============ ================= ============== =====================
Cost of Products Sold $4.0 27% $3.3 27% 21%
- ----------------------------- ------------------ ------------ ----------------- -------------- ---------------------
Research & Development $4.4 29% $4.1 33% 7%
Expense
- ----------------------------- ------------------ ------------ ----------------- -------------- ---------------------
Selling, General &
Administrative Expense $2.5 16% $2.0 16% 26%
- ----------------------------- ------------------ ------------ ----------------- -------------- ---------------------
Interest Income $0.3 2% $0.3 2% 7%
- ----------------------------- ------------------ ------------ ----------------- -------------- ---------------------
Total Revenues. Total revenues increased 22% to $15.1 million in the three
months ended September 30, 2004 from $12.4 million in the three months ended
September 30, 2003.
Net Sales. Net sales of products increased 38% to $10.1 million for the
three months ended September 30, 2004 from $7.3 million for the three
months ended September 30, 2003, as we continued to increase sales to
existing customers and expand sales to new customers. This increase was
22
primarily attributable to increased sales of our cardiology biomaterial
products and our orthopaedic products, specifically our bone graft
subsititute products. Orthopaedic sales increased 49% to $5.7 million in
the three months ended September 30, 2004 from $3.8 million for the three
months ended September 30, 2003. Cardiology biomaterial sales increased by
22% to $3.8 million from $3.1 million for the three months ended September
30, 2004 and 2003. This increase related to sales of the collagen plug
component of the Angio-Seal product, which increased $1.2 million, or 51%
over the prior year comparable period, offset the expected decrease in
sales of the polymer anchor component of the Angio-Seal. Sales of the
anchor component declined to $229,000 from $736,000 for the three months
ended September 30, 2004 and 2003, respectively. As evidenced in our first
quarter of fiscal 2005, we anticipate several factors will compensate for
the decline in sales of this one component. We expect these factors will
include the growth in our spine products, growth in sales of the collagen
plug component of the Angio-Seal, growth in sales to our other existing
biomaterials customers and the addition of new customers. Sales levels of
our sports medicine products throughout the remainder of fiscal 2005 are
estimated to remain relatively consistent with the levels experienced in
the first quarter of fiscal 2005. Net sales for the three months ended
September 30, 2004 and September 30, 2003 consisted almost entirely of
biomaterials sales, as the TriActiv sales were less than 1% of total sales
in both periods.
Research and Development Revenues. Research and development revenues
increased 8% to $253,000 from $235,000 for the three months ended
September 30, 2004 and 2003, respectively. The revenues for the three
months ended September 30, 2004 consisted of amounts generated under our
NIST synthetic vascular graft grant. The slight increase from the prior
year primarily reflected an increase in reimbursements under the synthetic
vascular graft grant, which generated $253,000 in revenue for the three
months ended September 30, 2004 compared to $183,000 for the three months
ended September 30, 2003. This increase was attributable to expenses
associated with pre-clinical studies, which are a significant component of
the total reimbursement under the grant. Specifically, in our first
quarter fiscal 2005, revenues generated from such study activities were
$148,000 compared to $94,000 in the first quarter of fiscal 2004. The NIH
breast cancer drug delivery grant, which was received in January 2003,
contributed $52,000 in revenue in the three months ended September 30,
2003 and $0 in revenue for the three months ended September 30, 2004, as
the project concluded in October 2003.
The following table summarizes the research and development revenue as of
September 30, 2004 compared to September 30, 2003:
- -------------------------------------- ------------------- ------------------ -------------------------
SEPTEMBER 30, SEPTEMBER 30, PERCENTAGE CHANGE FROM
GRANT 2004 2003 FY 04 TO FY 05
- -------------------------------------- ------------------- ------------------ -------------------------
NIST Vascular Graft $253,000 $183,000 38%
- -------------------------------------- ------------------- ------------------ -------------------------
NIH Breast Cancer Drug Delivery $ 0 $ 52,000 (100%)
- -------------------------------------- ------------------- ------------------ -------------------------
TOTAL R&D REVENUE $253,000 $235,000 8%
====================================== =================== ================== =========================
Royalty Income. Royalty income decreased 3% to $4.7 million from $4.8
million in the three months ended September 30, 2004 and 2003,
respectively.
This decrease was due to the decrease in the Angio-Seal contracted royalty
rate from 9% to 6% in April 2004. Angio Seal royalties decreased from $4.8
million to $4.1 million in the first quarters of fiscal 2004 and 2005,
respectively. The decrease in the royalty rate was offset by a greater
number of units sold as well as an increase in the average selling price
for the Angio-Seal. This increase in the average selling price was
partially due to favorable exchange rates. Royalty units increased 25% as
approximately 360,000 Angio-Seal units were sold to end-users during the
three months ended September 30, 2004 compared to approximately 288,000
units sold during the three months ended September 30, 2003. We believe
that the increase in units were due to St. Jude Medical's continued sales
and marketing efforts, which have resulted in greater market share and
overall increased adoption of vascular closure devices in the market.
23
Partially offsetting the Angio-Seal royalty income decrease, royalty
income also included royalties from Orthovita under the March 2003
manufacturing, development and supply agreement between our two companies.
This royalty is received on all end-user sales of co-developed VITOSS
products by Orthovita. The first royalty was earned in the third quarter
of fiscal 2004 when Orthovita commercially launched the first co-developed
products. Additionally, we acquired proprietary rights from a third party
inventor of the VITOSS technology. Under this agreement the Company
receives an additional royalty from Orthovita on the end-user sales of all
Orthovita products containing the VITOSS technology. The first payment was
earned in the quarter ended September 30, 2004. (See Note 1 to the
Condensed Consolidated Financial Statements - Patents and Proprietary
Rights). Total royalty income from Orthovita was approximately $571,000
for the first quarter of fiscal 2005.
Cost of Products Sold. Cost of products sold increased 21% to $4.0 million in
the three months ended September 30, 2004 from $3.3 million in the three months
ended September 30, 2003. Gross margin on sales increased 600 basis points in
the three months ended September 30, 2004 to 60% compared to 54% in the three
months ended September 30, 2003. The increase in gross margin reflects the
higher margins on our biomaterials products attributable in part to higher
volumes, which resulted in manufacturing efficiencies, as well as continued
allocation of overhead across greater sales volumes, resulting in a decrease in
per unit costs. We expect that over the 2005 fiscal year these margins will be
offset by the TriActiv device and new products, which should have slightly lower
margins until the manufacturing processes mature and volumes grow.
Research and Development Expenses. Research and development expenses increased
7% to $4.4 million in the three months ended September 30, 2004 compared to $4.1
million in the three months ended September 30, 2003. While research and
development expenditures continued to increase in absolute dollars, they
decreased as a percentage of total revenue to 33% from 29% for the first
quarters of fiscal years 2004 and 2005, respectively. Expense increases were
primarily due to our development efforts on our biomaterials products, including
our work under the NIST grant. Biomaterials and other proprietary technologies
spending increased $212,000, or 14%, to $1.8 million as of September 30, 2004
from $1.6 million as of September 30, 2003 related primarily to increases in
personnel costs of $150,000, legal and consulting costs of $36,000 and facility
costs, including rent, electric and depreciation, of $29,000 all of which
supported our continued development of new products and processes for our
current and prospective customers. Research and development expenses related to
the TriActiv system increased $93,000, or 4%, to $2.6 million in the three
months ended September 30, 2004 from $2.5 million in the three months ended
September 30, 2003. Expense increases occurred in personnel costs ($428,000),
product design costs related to the TriActiv system ($242,000), patent counsel
fees and other consulting costs ($106,000), and facility costs, including rent,
electric and depreciation ($143,000), all of which supported the growth in the
development efforts on future generations of the TriActiv system. These cost
increases were largely offset by an $865,000 decrease in clinical trial costs
due to the conclusion of the PRIDE clinical trial in March 2004. We expect
research and development expenses to increase as we investigate and develop new
products, conduct clinical trials and seek regulatory approvals for our
proprietary products.
Selling, General and Administrative Expense. Selling, general and administrative
expense increased 26% to $2.5 million in the three months ended September 30,
2004 from $2.0 million in the three months ended September 30, 2003. This was
primarily the result of general and administrative expenses, which increased
$514,000 to $1.5 million in the three months ended September 30, 2004 from $1.0
million in the three months ended September 30, 2003, primarily attributable to
a $332,000 increase in personnel expense. In addition, we had a $140,000
increase in bad debt expense, primarily the result of a $110,000 reserve for a
potential bad debt write off.
Sales and marketing expenses remained consistent at $950,000 in the three months
ended September 30, 2004 and 2003. The TriActiv European sales and marketing
costs decreased slightly, by $21,600, due to a decrease in expenses related to a
marketing clinical study in support of third party reimbursement of the TriActiv
device in Europe. These clinical study expenses decreased $86,000 to $61,000 in
24
the three months ended September 30, 2004 from $148,000 in the three months
ended September 30, 2003. The study is expected to conclude by December 2004.
This decrease was partially offset by an increase in personnel expenses of
$49,000. Offsetting the slight decline in European sales and marketing costs,
U.S. marketing expenses increased slightly, by $22,100. This increase related to
exhibition expenses as well as marketing efforts associated with the
commercialization of the TriActiv system in the U.S.
Net Interest Income. Interest expense decreased 77% to $5,000 in the three
months ended September 30, 2004 from $20,000 in the three months ended September
30, 2003. This decrease was the result of a lower average debt principal
balance. Interest income increased by 7% to $310,000 in the three months ended
September 30, 2004 from $290,000 in the three months ended September 30, 2003.
This increase was consistent with the increase in our cash and investment
balances, which increased by 6% from the comparable period.
LIQUIDITY AND CAPITAL RESOURCES
Our cash, cash equivalents and investments were $57.2 million at September 30,
2004, a decrease of $3.9 million from our balance of $61.1 million at June 30,
2004, the end of our prior fiscal year. In addition, our working capital was
$69.9 million at September 30, 2004, a decrease of $2.8 million from our working
capital of $72.7 million at June 30, 2004.
OPERATING ACTIVITIES
Net cash provided by our operating activities was $3.9 million in the three
months ended September 30, 2004. For the three months ended September 30, 2004,
we had net income of $3.2 million, a tax benefit from the exercise of stock
options of $178,000, non-cash employee stock-based compensation of $177,000, and
non-cash depreciation and amortization of $1.3 million. Cash used as a result of
changes in asset and liability balances was $877,000. The decrease in cash
related to the change in assets and liabilities was primarily due to an increase
in inventory ($340,000) and decrease in our accounts payable and accrued
expenses ($761,000) as well as in deferred revenue ($91,000). This was partially
offset by a decrease in accounts receivable, which provided cash of $385,000.
The inventory increase was primarily due to stocking of one of our primary raw
materials to take advantage of a quantity price reduction. The decrease in
accounts payable and accrued expenses related to our bonus payment to employees
in September and a federal tax payment made in September 2004. These payments
were offset by increases to our accrued tax liability for future estimated
federal tax payments and an increase in our trade accounts payable balance
related to our continued growth. Decreases in accounts receivable related to the
timing of customer payments in addition to the recording of a $110,000 reserve
for a potential bad debt write off.
INVESTING ACTIVITIES
Cash used in investing activities was $11.5 million for the three month period
ended September 30, 2004. This was the result of purchase and redemption
activity within our investment portfolio in addition to the $2.6 million
acquisition of proprietary rights (See Note 1 to the Condensed Consolidated
Financial Statements - Patents and Proprietary Rights). In addition, during the
period we had investments of $250,000 mature or be called. We subsequently
purchased new investments with these proceeds as well as invested an additional
$4.0 million of our cash and/or cash equivalents, for total investment purchases
of $4.2 million. See Note 1 to the condensed consolidated financial statements
included in this quarterly report for a description of our available-for sale
securities. See the discussion below of cash used in purchasing property, plant
and equipment.
We have a $25.0 million capital spending plan for fiscal 2005, of which
approximately $20 million will be expended on our new facility (see discussion
below), and the remainder will be expended to continue to expand our research
and development and manufacturing capabilities and upgrade our MIS technology
infrastructure.
In the first quarter of fiscal 2005, we purchased land and started construction
of our new facility. The new facility will be located in the general vicinity of
our existing facility. Long term, the proposed building site could accommodate a
25
220,000 square foot facility and thus provide for our future growth and
continued expansion. Our construction plan has three phases. Phase one is the
construction of a 160,000 square foot building shell and the fit-out of 90,000
square feet of space for our manufacturing and quality assurance operations.
Phase one began in our first fiscal quarter of 2005, and will continue for a
period of eighteen to twenty four months and have a total estimated cost of $25
million, including the land purchase. Phase two would increase the total
building size to 175,000 square feet and is anticipated to be complete by the
end of five years. The second phase would allow the complete transition of all
our personnel and operations to the new facility. Phase three would complete the
building to the maximum of 220,000 square feet, when necessary. We intend to
finance the construction of this building from current available cash on hand or
liquid investments.
FINANCING ACTIVITIES
The exercise of stock options provided cash of $324,000 for the three months
ended September 30, 2004. We believe that option exercises will continue through
fiscal 2005 due to the current market price of our common stock compared to the
average exercise price of outstanding options.
DEBT
On September 1, 2000, we incurred an obligation in the amount of $4.5 million in
conjunction with the acquisition of THM Biomedical, Inc. The obligation was due
in equal quarterly installments. As of September 30, 2004 the entire obligation
was paid in full. No debt remains on our balance sheet.
STOCK REPURCHASE PROGRAM
On August 17, 2004, we announced that our board of directors had reinstated a
program to repurchase issued and outstanding shares of Common Stock over six
months from the date of the board reinstatement. The reinstated plan calls for
the repurchase of up to 259,500 shares, the balance under the original plan
approved in October 2003. As of September 30, 2004, we had repurchased and
retired 25,000 shares of common stock under the current program at a cost of
approximately $600,000, or an average market price of $24.14 per share. In
October 2004, we repurchased an additional 174,867 shares of common stock under
the program at a cost of approximately $4.5 million or an average market price
of $25.94 per share. We financed all of these repurchases using our available
cash.
We plan to continue to repurchase our shares for cash, from time to time in the
open market, through block trades or otherwise. The repurchase program does not
require us to purchase any specific dollar value or number of shares. Any
purchases under the program will depend on market conditions and may be
commenced or suspended at any time or from time to time without prior notice.
RESEARCH AND DEVELOPMENT TAX CREDIT
During the fourth quarter of fiscal year 2003, we performed a retrospective
research and development tax credit study for fiscal years 1993 through 2003. We
recorded the majority of this tax credit ($1.5 million) in the fourth quarter of
fiscal 2003. During the first quarter of our fiscal 2004, we recorded an
additional portion of the research and development tax credit ($310,000) and
professional service fees as a component of selling, general and administrative
expenses ($50,500) related to this research and development tax credit study.
GENERAL
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.
In addition to the potential cash requirements associated with our announced
reinstatement of the stock repurchase plan (see above), we will continue the
construction of our new facility to support the continued growth of our
biomaterials business and expected commercial launch of the TriActiv System, as
discussed above. If approved by the FDA, we plan to market and sell the TriActiv
System in the U.S. through a small, dedicated direct sales force initially
comprised of approximately ten salespeople. Our initial estimates of the cost of
a direct sales plan would increase selling expense in fiscal 2005 over fiscal
2004 by $2.5 million to $3.0 million, including personnel and marketing
26
expenses. We believe our current cash and investment balances, in addition to
cash generated from operations, will be sufficient to meet our operating,
financing and capital requirements through at least the next 12 months. We also
believe our cash and investment balances will be sufficient on a longer term
basis, however, it will depend on numerous factors, including market acceptance
of our existing and future products; the successful commercialization of
products in development and costs associated with that commercialization;
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, sales, and marketing 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.
The terms of any future equity financing we undertake may be dilutive to our
stockholders and the terms of any debt financing may contain restrictive
covenants that 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 available to us, or
will be available to us on acceptable terms' should such a need arise.
Our estimate of the time periods for which our 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 below under the caption "Risks
Factors" below.
RISK FACTORS
You should carefully consider the risks, uncertainties and other factors
described below, in addition to the other information set forth in this report,
because they could materially and adversely affect our business, operating
results, financial condition, cash flows and prospects as well as adversely
affect the value of an investment in our common stock.
RISKS RELATED TO OUR BUSINESS
WE MAY NOT BE ABLE TO OBTAIN THE NECESSARY REGULATORY APPROVALS FOR THE TRIACTIV
SYSTEM IN THE UNITED STATES.
The FDA has not approved the TriActiv System for marketing. 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 growth prospects will be
diminished.
ALTHOUGH WE HAVE RECEIVED CE MARK APPROVAL AND EVEN IF WE RECEIVE FDA APPROVAL,
WE MAY NOT BE SUCCESSFUL COMMERCIALIZING THE TRIACTIV SYSTEM THROUGH A DIRECT
SALES FORCE.
If the TriActiv System obtains the necessary governmental approvals, we will
need to commercialize the product. We may not be able to successfully develop
and train our own sales force to sell and market the TriActiv System. We
recently began to build a sales and marketing force, but had no prior experience
hiring or training a sales and marketing force. We may not be able to expand and
maintain an internal sales and marketing force with technical expertise and
supporting distribution capabilities. If we are unable to successfully
commercialize the TriActiv device, our growth prospects will be diminished.
27
WE DERIVE A SUBSTANTIAL MAJORITY OF OUR REVENUES FROM ONLY TWO CUSTOMERS.
A substantial majority of our total revenues are derived from only two
customers. Royalty income from, and sales of biomaterials to, St. Jude Medical
associated with the Angio-Seal represented approximately 58% of our total
revenue for fiscal 2004 while sales of biomaterials products to Arthrex, a
distributor of orthopaedic products, represented approximately 30% of total
revenues. It is not possible for us to predict the future level of demand for
our products that will be generated by these customers or the future demand for
the Angio-Seal from customers of St. Jude Medical. Our customer concentration
exposes us to the risk of changes in the business condition of either our major
customers and to the risk that the loss of a major customer would adversely
affect our results of operations. Our relationship with these customers is
subject to change at any time.
WE ANTICIPATE THAT A SUBSTANTIAL PORTION OF OUR REVENUES WILL CONTINUE TO COME
FROM THE ANGIO-SEAL, WHICH IS MANUFACTURED, MARKETED AND DISTRIBUTED BY ST. JUDE
MEDICAL.
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. 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 for any
reason upon 12 months notice. At such time, all sales and marketing,
manufacturing and distribution rights to the Angio-Seal would be returned to us.
St. Jude Medical may not 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.
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, but this operating income may not 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 through our planned
development of a sales force.
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 that include our biomaterials components. There can be no assurance
that our customers' end-use products that 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.
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 markets for our current and proposed products are fragmented, intensely
competitive, subject to rapid change and sensitive to new product introductions
and enhancements. We expect that the competitive environment for our products
will become more intense as additional companies enter our markets and as new
techniques and technologies are adopted. Our biomaterials and medical devices
compete directly and indirectly for customers with a range of products and
technologies produced by a wide variety of companies, as well as other processes
and procedures which do not require the use of our products or those of our
28
competitors. 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.
Our biomaterials products compete with the products of many of the larger
companies in the industry. In the vascular sealing device market, our products
compete with products sold by Datascope Corporation, Perclose, Inc. (a
subsidiary of Abbott Laboratories) and Vascular Solutions, Inc., amongst other
smaller competitors. The majority of vascular sealing is performed through
manual compression, which represents our primary competition. The TriActiv
System is currently only commercially available in Europe where our competitors
include Boston Scientific Corporation, Johnson and Johnson, Inc., Medtronic,
Inc. (which owns Percu-Surge, Inc.) and Guidant Corporation, among others. If we
are successful in commercializing the TriActiv System in the U.S., we anticipate
the competitors will be the same companies against which we are competing in
Europe, as well as others.
Our competitors may have broader 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 OR IF OUR PRODUCTS ARE
REPLACED BY NEW TECHNOLOGIES, OUR BUSINESS MAY SUFFER.
The success of our existing products depends on continued acceptance of these
products by the medical community. We cannot predict whether or not our products
will continue to be accepted and if that acceptance will be sustained to over
the long term. 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. In addition, new technologies and
techniques may be developed which may render our current products, along with
those under development, obsolete.
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.
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.
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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 AND OUR INTERNATIONAL SALES ARE SUBJECT TO A NUMBER OF RISKS
THAT COULD HARM FUTURE INTERNATIONAL SALES OF ANGIO-SEAL AND OUR 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. We also sell the TriActiv device, as well as some of
our other products, in the international markets. Our royalties from
international sales of the Angio-Seal product line by St. Jude Medical and our
revenues from our other international sales are subject to several risks,
including:
o the impact of recessions in economies both within and outside the
United States;
o unexpected changes in regulatory requirements, tariffs or other trade
barriers;
o weaker intellectual property rights protection in some countries;
o fluctuations in exchange rates;
o potentially adverse tax consequences; and
o political and economic instability.
The occurrence of any of these events could seriously harm St. Jude Medical's or
our future international sales.
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, Wendy F. DiCicco 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 may not be able to manage our growth successfully.
ANY ACQUISITIONS THAT WE UNDERTAKE COULD BE DIFFICULT TO INTEGRATE, DISRUPT OUR
BUSINESS, DILUTE STOCKHOLDER VALUE AND HARM OUR OPERATING RESULTS.
We may acquire or make investments in complementary businesses, technologies,
services or products if appropriate opportunities arise. The process of
integrating any acquired business, technology, service or product into our
business and operations may result in unforeseen operating difficulties and
expenditures. Integration of any acquired company also may consume much of our
management's time and attention that could otherwise be available for ongoing
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development of our business. Moreover, the anticipated benefits of any
acquisition may not be realized. Furthermore, we may be unable to identify,
negotiate or finance future acquisitions successfully. Future acquisitions could
result in potentially dilutive issuances of equity securities or the incurrence
of debt, contingent liabilities or amortization expenses related to goodwill and
other intangible assets.
WE ARE BUILDING A NEW MANUFACTURING FACILITY AND WILL TRANSITION 100% OF OUR
MANUFACTURING CAPABILITIES TO THIS NEW FACILITY. IF WE ENCOUNTER DIFFICULTIES IN
THE TRANSITION PHASE, WE MAY LOSE REVENUE, AND WE MAY BE UNABLE TO MAINTAIN OUR
CUSTOMER RELATIONSHIPS.
We manufacture all of the products we sell at our existing location in Exton,
Pennsylvania. We have purchased land and are currently constructing a new
manufacturing facility near of our existing facility. We plan to transfer all of
our manufacturing processes to this new facility in our second quarter of fiscal
2006. If the transition is delayed, we may have inadequate manufacturing
capabilities to meet all of our customers' requirements. If we are unable to
manufacture our customers' products, or are unable to meet their production
requirements, in our existing or new facility for any reason, we may lose
revenue and/or may not be able to maintain our relationships with our customers.
Although we carry business interruption insurance to cover lost revenue and
profits, this insurance would only cover losses experienced in the existing
facility or new facitliy, once completed but does not cover transition delays
or complications. In addition, our business interruption insurance would not
compensate us for the loss of opportunity and potential adverse impact on
relations with our existing customers resulting from our inability to produce
products for them.
OUR FUTURE OPERATING RESULTS ARE DIFFICULT TO PREDICT AND MAY VARY SIGNIFICANTLY
FROM QUARTER TO QUARTER.
Our operating results have varied significantly from quarter to quarter in the
past and are likely to vary substantially in the future as a result of a number
of factors, some of which are not in our control, including:
o market perception and acceptance of our customer's products;
o our efforts to increase sales of our biomaterials products;
o our efforts to gain FDA approval and commercialize the TriActiv
device;
o our efforts to gain CE Mark and FDA approval for future
generations of the TriActiv device;
o the loss of significant orders;
o changes in our relationship with St. Jude Medical;
o our establishment of strategic alliances or acquisitions;
o timely implementation of new and improved products;
o delays in obtaining regulatory approvals;
o increased competition; and
o litigation concerning intellectual property rights in the medical
device industry.
You should not rely upon our results of operations for any particular quarter as
an indication of our results for a full year or any other quarter.
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.
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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. Although 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. The steps we take to protect our
proprietary rights may not be adequate to ensure that third parties will not
infringe or otherwise violate our patents or similar proprietary rights.
WE MAY BE ACCUSED OF INFRINGING UPON THE PROPRIETARY RIGHTS OF OTHERS AND ANY
RELATED LITIGATION COULD MATERIALLY DAMAGE OUR OPERATING RESULTS AND BUSINESS.
Third parties may claim that we have violated their intellectual property
rights. 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. Any of these claims, with or without
merit, could subject us to costly litigation and divert the attention of key
personnel.
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 clinical testing, manufacture and sale of medical products involve an
inherent risk that human subjects in clinical testing or consumers of the
products may suffer serious bodily injury or death due to side effects or other
unintended negative reactions to our products. Accordingly, the clinical
testing, manufacture and sale of our 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 payers, particularly to the extent any
changes affect reimbursement for catheterization procedures in which our
Angio-Seal products are used. Physicians, hospitals and other users of our
products may fail to obtain sufficient reimbursement from healthcare payers for
procedures in which our products are used or adverse changes may occur in
governmental and private third-party payers' policies toward reimbursement for
these procedures.
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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:
o obtain the approval of the FDA and international agencies before we
can market and sell new products;
o satisfy these agencies' requirements for all of our labeling, sales
and promotional materials in connection with our existing products;
o comply with all applicable manufacturing regulations; and
o 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.
RISKS RELATED TO OUR SECURITIES
THE TRADING PRICE OF OUR COMMON STOCK IS LIKELY TO FLUCTUATE SUBSTANTIALLY IN
THE FUTURE.
The trading price of our common stock may fluctuate widely as a result of a
number of factors, some of which are not in our control, including:
o our ability to meet or exceed our own forecasts or expectations of
analysts or investors;
o quarter to quarter variations in our operating results;
o announcements regarding clinical activities or new products by us or
our competitors;
o general conditions in the medical device industry;
o changes in our own forecasts or earnings estimates by analysts;
o our partners ability to meet or exceed the forecasts or expectations
of analysts or investors;
o price and volume fluctuations in the overall stock market,
which have particularly affected the market prices of many
medical device companies; and
o general economic conditions.
33
In addition, the market for our stock has experienced, and may continue to
experience, price and volume fluctuations unrelated or disproportionate to our
operating performance. As a result, you may not be able to sell shares of our
common stock at or above the price at which you purchase them. In the past,
following periods of volatility in the market price of a company's securities,
securities class action litigation has often been instituted against that
company. If any securities litigation is initiated against us, with or without
merit, we could incur substantial costs, and our management's attention and
resources could be diverted from our business.
FUTURE SALES OF OUR COMMON STOCK IN THE PUBLIC MARKET BY MANAGEMENT AND OTHER
STOCKHOLDERS WITH SIGNIFICANT HOLDINGS COULD CAUSE OUR STOCK PRICE TO FALL.
Sales of a substantial number of shares of our common stock in the public market
by management or other significant stockholders or the perception that such
sales could occur, could cause the market price of our common stock to decline
or adversely affect our future ability to raise capital through an offering of
equity securities.
OUR SECOND AMENDED AND RESTATED CERTIFICATE OF INCORPORATION AND DELAWARE LAW
MAY DISCOURAGE AN ACQUISITION OF OUR COMPANY.
Provisions of our second amended and restated certificate of incorporation and
Delaware law could make it more difficult for a third party to acquire us, even
if doing so would be beneficial to our stockholders.
FORWARD-LOOKING STATEMENTS
This report includes forward-looking statements within the meaning of Section
21E of the Securities Exchange Act of 1934. We have based these forward-looking
statements largely on our current expectations and projections about future
events and trends affecting our business. In this report, the words "believe,"
"may," "will," "estimate," "continue," "anticipate," "intend," "expect," "plan"
and similar expressions, as they relate to Kensey Nash, our business or our
management, are intended to identify forward-looking statements, but they are
not exclusive means of identifying them.
A number of risks, uncertainties and other factors could cause our actual
results, performance, financial condition, cash flows, prospects and
opportunities to differ materially from those expressed in, or implied by, the
forward-looking statements. These risks, uncertainties and other factors
include, among other things:
o general economic and business conditions, both nationally and in our
markets;
o the impact of competition;
o anticipated trends in our business;
o existing and future regulations affecting our business;
o strategic alliances and acquisition opportunities; and
o other risk factors set forth under "Risk Factors" above.
Except as expressly required by the federal securities laws, 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. 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 3. 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.
Our investment portfolio consists primarily of high quality U.S. government,
municipal and corporate securities with maturities ranging from 2 to 13 years.
Also, the portfolio includes certain municipal variable rate demand obligations
that have maturities ranging from 6 to 31 years. These municipal variable-rate
demand obligations are putable weekly and callable on a monthly basis. We
mitigate default risk by investing in what we believe are safe and high credit
quality securities and by monitoring the credit rating of investment issuers.
Our portfolio includes only marketable securities with secondary or resale
markets. We have an audit committee approved investment strategy which provides
guidance on the duration and types of our investments. These available-for-sale
securities are subject to interest rate risk and decrease in market value if
interest rates increase. At September 30, 2004, our total portfolio consisted of
approximately $50.6 million of investments. While our investments may be sold at
anytime because the portfolio includes available-for-sale marketable securities
with secondary or resale markets, 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.
ITEM 4. CONTROLS AND PROCEDURES
We carried out an evaluation, under the supervision and with the participation
of our management, including our Chief Executive Officer and Chief Financial
Officer, of the design and operation of our disclosure controls and procedures.
Based on this evaluation, our Chief Executive Officer and Chief Financial
Officer concluded that, as of September 30, 2004, our disclosure controls and
procedures were effective to provide reasonable assurance that the information
required to be disclosed by us in the reports filed or submitted under the
Securities Exchange Act of 1934 is recorded, processed, summarized and reported
within the time periods specified in the SEC's rules and forms.
There was not any change in the our internal control over financial reporting
during the quarter ended September 30, 2004 that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.
Any control system, no matter how well designed and operated, can provide only
reasonable (not absolute) assurance that its objectives will be met.
Furthermore, no evaluation of controls can provide absolute assurance that all
control issues and instances of fraud, if any, have been detected.
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PART II - OTHER INFORMATION
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
The following table contains information about our purchases of our equity
securities during July, August, and September 2004:
Total number of Maximum Number
Average Price Shares Purchased of Shares that May
Total Number of Paid per as Part of a Publicly Yet Be Purchased
Period Shares Purchased Share Announced Program Under the Program
- -------------------------------------------------------------------------------------------------------------
July 1-31, 2004 - - - -
August 1-31, 2004 - - - -
September 1-30, 2004 25,000 $ 24.14 25,000 234,500
---------------------------------------------------------------------------------------
Total 25,000 $ 24.14 25,000 234,500
=======================================================================================
On August 17, 2004, we announced publicly that our board of
directors had reinstated a program to repurchase issued and outstanding shares
of our Common Stock over a six month period from the date of the board
reinstatement, which will expire in February 2005. The reinstated plan calls for
the repurchase of up to 259,500 shares.
ITEM 6. EXHIBITS.
31.1 Certification of Chief Executive Officer pursuant to Exchange Act
Rule 13a-14(a).
31.2 Certification of Chief Financial Officer pursuant to Exchange Act
Rule 13a-14(a).
32.1 Certification of Chief Executive Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
KENSEY NASH CORPORATION
Date: November 9, 2004 By: /s/ Wendy F. DiCicco, CPA
--------------------------------------------
Wendy F. DiCicco, CPA
Chief Financial Officer
(Principal Financial and Accounting Officer)
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