<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended: MARCH 31, 1998
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, SUITE 204, EXTON,
PENNSYLVANIA 19341
(Address of principal executive offices and zip code)
Registrant's telephone number, including area code: (610) 524-0188
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No__
As of April 30, 1998, there were outstanding 7,457,743 shares of Common
Stock, par value $.001, of the registrant.
<PAGE> 2
KENSEY NASH CORPORATION
QUARTER ENDED MARCH 31, 1998
INDEX
PART I - FINANCIAL INFORMATION
<TABLE>
<CAPTION>
PAGE
<S> <C>
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets
as of March 31, 1998 (Unaudited) and June 30, 1997 .............. 3
Condensed Consolidated Statements of Operations
for the three months and nine months ended
March 31, 1998 and 1997 (Unaudited) .............................. 4
Condensed Consolidated Statements of Stockholders' Equity as of
March 31, 1998 (Unaudited) and June 30, 1997 ..................... 5
Condensed Consolidated Statements of Cash Flows
for the nine months ended March 31, 1998 and 1997 (Unaudited) .... 6
Notes to Condensed Consolidated Financial Statements (Unaudited) .. 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS ..................... 11
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS................................................ 15
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K ................................. 15
SIGNATURES ............................................................... 15
</TABLE>
2
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
KENSEY NASH CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
March 31, June 30,
1998 1997
-------------------------------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $1,411,727 $ 868,180
Short-term investments 5,285,555 6,482,624
Trade receivables, net 2,168,029 1,252,110
Other receivables (including approximately $66,200 and
$30,000 at March 31, 1998 and June 30, 1997, respectively,
due from employees) 1,056,998 431,668
Inventory (Note 3) 1,173,980 735,922
Prepaid expenses and other assets 186,303 295,232
----------- -----------
Total current assets 11,282,592 10,065,736
----------- -----------
PROPERTY, PLANT AND EQUIPMENT, AT COST
Leasehold improvements 3,288,245 3,207,005
Machinery, furniture and equipment 3,429,092 2,719,543
Construction in progress 718,727 57,614
----------- -----------
Total property, plant and equipment 7,436,064 5,984,162
Accumulated depreciation (2,572,379) (1,978,405)
----------- -----------
Net property, plant and equipment 4,863,685 4,005,757
----------- -----------
OTHER ASSETS:
Acquired patents less accumulated amortization of
$63,646 at March 31, 1998 (Note 7) 3,928,763
Restricted investments (Note 5) 1,914,418 2,419,965
Leased property under capital leases, less accumulated
amortization of $118,945 and $115,550 at March 31, 1998
and June 30, 1997, respectively 69,820 101,974
----------- -----------
Total other assets 5,913,001 2,521,939
----------- -----------
TOTAL $22,059,278 $16,593,432
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $890,405 $522,311
Accrued expenses 428,985 323,850
Current portion of line of credit and capital lease
obligations (Note 4) 304,392 42,702
Obligation under Patent Acquisition Agreement (Note 7) 295,934
Deferred revenue 26,500 5,000
----------- -----------
Total current liabilities 1,946,216 893,863
----------- -----------
DEFERRED REVENUE - ROYALTIES (Note 2) 2,609,394 3,000,000
OBLIGATION UNDER PATENT ACQUISITION AGREEMENT - long-term
portion (Note 7) 664,336
LINE OF CREDIT AND OBLIGATIONS UNDER CAPITAL
LEASES, long-term portion (Note 4) 1,202,395 572,623
----------- -----------
Total liabilities 6,422,341 4,466,486
----------- -----------
COMMITMENTS AND CONTINGENCIES (Note 5)
STOCKHOLDERS' EQUITY:
Preferred stock, $.001 par value, 100,000 shares authorized,
no shares issued or outstanding at March 31, 1998 and
June 30, 1997
Common stock, $.001 par value, 25,000,000 shares authorized,
7,457,453 and 7,198,251 shares issued and outstanding at
March 31, 1998 and June 30, 1997, respectively 7,458 7,198
Capital in excess of par value 37,583,004 34,203,807
Accumulated deficit (21,953,525) (22,084,059)
----------- -----------
Total stockholders' equity 15,636,937 12,126,946
----------- -----------
TOTAL $22,059,278 $16,593,432
=========== ===========
</TABLE>
See notes to condensed consolidated financial statements.
3
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KENSEY NASH CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
- ----------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
-------------------- -------------------------
1998 1997 1998 1997
<S> <C> <C> <C> <C>
REVENUES (Notes 1 and 2):
Net sales $1,602,429 $1,229,495 $3,338,785 $2,721,650
Research and development 1,079,343 744,885 2,841,313 2,106,357
Milestone fees 1,050,000
Royalty income 925,183 52,702 1,754,228 189,566
---------- ---------- ---------- ----------
Total revenues 3,606,955 2,027,082 7,934,326 6,067,573
---------- ---------- ---------- ----------
OPERATING COSTS AND EXPENSES:
Cost of products sold 994,604 883,226 2,851,323 2,153,181
Research and development 1,507,672 1,222,902 4,087,332 3,417,790
Selling, general and administrative 400,512 423,582 1,208,562 1,412,551
---------- ---------- ---------- ----------
Total operating costs and expenses 2,902,788 2,529,710 8,147,217 6,983,522
---------- ---------- ---------- ----------
INCOME (LOSS) FROM OPERATIONS 704,167 (502,628) (212,891) (915,949)
---------- ---------- ---------- ----------
OTHER INCOME (EXPENSE):
Insurance settlement 968,761
Interest income 136,639 133,733 405,823 461,069
Interest expense (31,183) (5,640) (66,690) (178,491)
Other 99 91 4,292 8,108
---------- ---------- ---------- ----------
Total other income - net 105,555 128,184 343,425 1,259,447
---------- ---------- ---------- ----------
NET INCOME (LOSS) $809,722 ($374,444) $130,534 $343,498
=========== =========== ========== ==========
EARNINGS (LOSS) PER COMMON SHARE and
EARNINGS PER COMMON SHARE -
assuming dilution (Note 1) $0.11 ($0.05) $0.02 $0.05
=========== =========== ========== ==========
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE> 5
KENSEY NASH CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Capital
Common Stock in Excess
----------------- of Par Accumulated
Shares Amount Value Deficit Total
<S> <C> <C> <C> <C> <C>
BALANCE, JUNE 30, 1996 7,156,493 $7,156 $33,815,216 $ (21,821,583) $ 12,000,789
Exercise of stock options 41,758 42 388,591 388,633
Net loss (262,476) (262,476)
--------- ------ ----------- -------------- ------------
BALANCE, JUNE 30, 1997 7,198,251 7,198 34,203,807 (22,084,05) 12,126,946
Exercise of stock options 59,492 60 541,797 541,857
Shares issued under Patent Acquisition
Agreement (Note 7) 200,000 200 2,837,400 2,837,600
Net income 130,534 130,534
--------- ------ ----------- -------------- ------------
BALANCE MARCH 31, 1998 (Unaudited) 7,457,743 $7,458 $37,583,004 $ (21,953,525) $15,636,937
========= ====== =========== ============== ============
</TABLE>
See notes to condensed consolidated financial statements.
5
<PAGE> 6
KENSEY NASH CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
- -----------------------------------------------------------
<TABLE>
<CAPTION>
Nine Months Ended
March 31,
-----------------------------
1998 1997
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $130,534 $343,498
Adjustments to reconcile net income to net cash (used in)
provided by operating activities:
Depreciation and amortization 689,774 449,207
Changes in assets and liabilities which (used) provided cash:
Accounts receivable (1,541,249) 361,512
Prepaid expenses and other current assets 108,929 (55,987)
Inventory (438,058) (285,489)
Accounts payable and accrued expenses 473,229 (601,028)
Deferred revenue (369,106) 2,910,349
---------- ----------
Net cash (used in) provided by operating activities (945,947) 3,122,062
---------- ----------
INVESTING ACTIVITIES:
Patent costs capitalized (69,539)
Additions to property, plant and equipment (1,451,902) (1,792,082)
Sale of investments 1,702,616 2,756,605
---------- ----------
Net cash provided by investing activities 181,175 964,523
---------- ----------
FINANCING ACTIVITIES:
Principal payments under capital leases (33,538) 1,890
Repayment of Patent Acquisition Obligation (125,000)
Repayments of long term debt (6,356,824)
Proceeds from long term debt 925,000 100,000
Exercise of stock options 541,857 385,893
---------- ----------
Net cash provided by (used in) financing activities 1,308,319 (5,869,041)
---------- ----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 543,547 (1,782,456)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 868,180 4,549,707
---------- ----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $1,411,727 $2,767,251
---------- ----------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $66,690 $1,535,315
---------- ----------
Cash paid for income taxes $ $
---------- ----------
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITIES:
During the quarter ended December 31, 1997, the Company issued 200,000 shares of common stock in conjunction with the Patent
Acquisition Agreement (Note 7).
</TABLE>
See notes to condensed consolidated financial statements.
6
<PAGE> 7
KENSEY NASH CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 --CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
BASIS OF PRESENTATION
The condensed consolidated balance sheet at June 30, 1997 and the condensed
consolidated statement of stockholders' equity at June 30, 1997 have been
condensed from the audited financial statements at that date. The
condensed consolidated balance sheet at March 31, 1998, the condensed
consolidated statements of operations for the three and nine months ended
March 31, 1998 and 1997 and the condensed consolidated statements of cash
flows for the three and nine months ended March 31, 1998 and 1997 have been
prepared by Kensey Nash Corporation (the "Company") and have not been
audited by the Company's Independent Auditors. In the opinion of
management, all adjustments (which include only normal recurring
adjustments) necessary to present fairly the financial position, results of
operations and cash flows at March 31, 1998 and for all periods presented
have been made.
Certain information and note disclosures normally included in the Company's
annual financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. These condensed
consolidated financial statements should be read in conjunction with the
financial statements and notes thereto included in the Company's June 30,
1997 consolidated financial statements filed with the Securities and
Exchange Commission on Form 10-K. The results of operations for the period
ended March 31, 1998 are not necessarily indicative of operating results
for the full year.
NET INCOME (LOSS) PER SHARE
The Financial Accounting Standards Board ("FASB") has issued Statement of
Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share",
which changes the computation and presentation of earnings per share. The
Company was required to adopt this standard during its quarter ended
December 31, 1997. For the three and nine months ended March 31, 1998 and
1997, basic and diluted EPS are computed using the weighted average number
of shares of common stock outstanding. Common equivalent shares from
options are included in the diluted computation when their effect is
dilutive.
The following table shows the reconciliation between the numerators and
denominators for the basic and diluted EPS calculations, where income is
the numerator and the weighted average number of shares is the denominator.
The reconciliation is not shown for the three months ended March 31, 1997,
as any common share equivalents are antidilutive.
<TABLE>
<CAPTION>
Three Months Ended March 31,
-------------------------------
1998
-------------------------------
Per
Share
Income Shares Amount
--------------------------------
<S> <C> <C> <C>
BASIC EPS
Income available to
common shareholders $809,722 7,440,681 $0.11
=====
EFFECT OF DILUTIVE SECURITIES
Options - 258,824
--------- ---------
DILUTED EPS
Income available to common
shareholders including
assumed conversions $809,722 7,699,505 $0.11
========= ========= =====
</TABLE>
7
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<TABLE>
<CAPTION>
Nine Months Ended March 31, Nine Months Ended March 31,
---------------------------------- -------------------------------------
1998 1997
---------------------------------- ------------------------------------
Per Per
Share Share
Income Shares Amount Income Shares Amount
----------- ---------- --------- ----------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS
Income available to
common shareholders $ 130,534 7,304,125 $ 0.02 $ 343,498 7,176,589 $ 0.05
======= =======
Effect of Dilutive Securities
Options - 200,459 - 149,742
----------- --------- ---------- --------
Diluted EPS
Income available to common
shareholders including
assumed conversions $ 130,534 7,504,584 $ 0.02 $ 343,498 7,326,331 $ 0.05
========== ========= ======= ========== ========== =======
</TABLE>
CASH AND CASH EQUIVALENTS
Cash and cash equivalents represent cash in banks and short-term investments
having an original maturity of less than three months.
INVESTMENTS
Investments at March 31, 1998 and June 30, 1997 consist of short-term
Certificates of Deposit, Government Bonds and U.S. Treasury Bills. In
accordance with SFAS No. 115, Accounting for Certain Investments in Debt and
Equity Securities, the Company has classified its entire investment
portfolio as available-for-sale securities except for those pledged as
collateral which are included in restricted investments (see Note 5).
Available-for-sale securities are reported at fair value with unrealized
gains and losses included in stockholders' equity (at March 31, 1998,
amortized cost approximates fair market value). Realized gains and losses
are included in interest income.
EXPORT SALES
Export sales from the Company's U.S. operations to unaffiliated customers in
Europe totaled $15,000 and $809,289 for the three months ended March 31,
1998 and 1997, respectively and $72,035 and $1,333,869 for the nine months
ended March 31, 1998 and 1997, respectively.
PATENTS
Due to the long development cycle for patents, the Company is unable to
measure the recoverability of costs when incurred; therefore, such costs are
expensed as incurred. However, the patents acquired in November 1997 under
the Patent Acquisition Agreement (Note 7) are being amortized over their
remaining period of economic benefit.
NOTE 2 -- DEFERRED REVENUE - ROYALTIES
Upon receipt of pre-market approval for the 8 French ("F") size Angio-Seal
device (the "Angio-Seal") from the Food and Drug Administration (the "FDA")
on September 30, 1996, the Company received a $3.0 million advance on future
royalties under the Company's licensing agreement (the "Licensing
Agreement") with Sherwood Medical, d.b.a. The Kendall Company ("Sherwood").
Such advance has been recorded as deferred revenue. The Licensing Agreement
provides for certain minimum royalty payments ("Minimum Royalty") during the
first five years after receiving FDA approval (each royalty year begins on
October 1 and ends on September 30). As stipulated in the Licensing
Agreement, the $3.0 million advance will be reduced in each period by 50% of
royalties earned in excess of the Minimum Royalty in any royalty year. The
remainder of royalties earned will be received as cash proceeds by the
Company.
8
<PAGE> 9
At September 30, 1997 and March 31, 1998, the Company had exceeded the first
and second royalty year (periods ended September 30, 1997 and 1998,
respectively) Minimum Royalties by $352,310 and $428,902, respectively. The
deferred revenue balance has been reduced by 50% of such total excess, to
$2,609,394 at March 31, 1998. As the Company cannot reasonably estimate
the excess, if any, of future royalty payments over the Minimum Royalty in
each year, the entire balance has been classified as long-term at March 31,
1998.
NOTE 3 -- INVENTORY
Inventory primarily includes the cost of material utilized in the
processing of the Company's products. Inventory is as follows:
<TABLE>
<CAPTION>
MARCH 31, 1998 JUNE 30, 1997
-------------- -------------
<S> <C> <C>
Raw Materials $1,115,918 $649,262
Work in Process 58,062 86,660
---------- --------
Total $1,173,980 $735,922
========== ========
</TABLE>
NOTE 4 -- LINE OF CREDIT
In February 1997, the Company replaced a $100,000 revolving credit and
term loan agreement bearing interest at a fixed rate of 8.75% with a
$500,000 revolving credit and term loan agreement ("the Revolver")
bearing interest at the prime rate of interest (8.5% at March 31,
1998). The Revolver called for interest only payments until December 1,
1997 at which time it converted to a term loan due in 60 monthly
installments of principal and interest. In October 1997, the Revolver
was increased to $2.0 million and the date on which it converts to a term
loan was extended to August 1, 1998. The Revolver is collateralized by
the business assets of the Company. At March 31, 1998, the Company had
borrowed $1,425,000 under the Revolver.
NOTE 5 -- COMMITMENTS AND CONTINGENCIES
The Company has pledged $1,914,418 in investments as collateral to secure
certain bank loans to employees which were used by such employees for the
payment of taxes incurred as the result of the receipt of Common Stock in
settlement of certain employee stock rights. In exchange for the Company
pledging collateral for such loans, each affected employee has pledged
their Common Stock as collateral to the Company. The balance outstanding
on such employee loans was $1,818,697 at March 31, 1998.
NOTE 6 -- INCOME TAXES
As of June 30, 1997, the Company had net operating loss carryforwards for
federal and state tax purposes totaling $18.3 and $1.2 million,
respectively. As such, no provision has been made for income taxes for
the three and nine months ended March 31, 1998.
NOTE 7 -- PATENT ACQUISITION
On November 10, 1997, the Company acquired a portfolio of puncture
closure patents and patent applications as well as the rights of the
seller under a pre-existing licensing agreement. As a result of the
Company's acquisition of such rights, effective January 1, 1998, the
Company is entitled to earn royalty fees, formerly paid to the seller,
for each Angio-Seal device sold. These royalties are in addition to the
royalties already earned by the Company under its own License Agreement
with Sherwood.
Under the terms of the agreement, the Company issued 200,000 shares of
Common Stock and will make cash payments totaling $1.2 million for the
transfer of ownership of the patents. The cash portion is payable in
eight quarterly installments (four $125,000 payments followed by four
9
<PAGE> 10
$175,000 payments), beginning on March 31, 1998. Accordingly, the
present value of the cash payments was recorded as a liability on the
Company's financial statements and reduced at March 31, 1998 upon payment
of the first installment. The patents are valued at the share price on
the date of the agreement (November 10, 1997) plus the present value of
the cash payments and any legal and related costs incurred to acquire
these patents. The asset will be amortized over the remaining period of
economic benefit.
10
<PAGE> 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
The Company is a medical device company focused on the
commercialization and continuing development of a line of absorbable
medical devices for the sealing of arterial punctures created during diagnostic
and therapeutic cardiovascular procedures such as angiography, angioplasty,
atherectomy and the placement of stents. The Company's proprietary principal
product, the 8F Angio-Seal device, has been designed to provide a safe,
effective and rapid method of sealing arterial punctures. The Company is
developing other sizes of the Angio-Seal, including 6F and 10F sizes (together
with Angio-Seal, the "Angio-Seal Product Line"), to address broader market
applications. In addition to its involvement with the Angio-Seal Product Line,
the Company manufactures its proprietary collagen and absorbable polymers for
use by third parties and has significantly expanded its design and
manufacturing capabilities in both technologies. The Company is also
developing a rotary catheter for application in opening occluded bypass grafts
and in-stent restenosis.
The Company has a strategic relationship with Sherwood Medical, d.b.a
The Kendall Company ("Sherwood"), whereby Sherwood has the worldwide
marketing and manufacturing rights to the Angio-Seal Product Line. The 8F
Angio-Seal was approved for sale in Europe (CE Mark) in September 1995 and in
the United States in September 1996. The Angio-Seal is also being sold in
Canada, Australia, Saudi Arabia and Israel.
THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO THREE MONTHS ENDED
MARCH 31, 1997
Revenues for these periods consisted of net sales, research and
development revenue and royalty income. Revenues increased 78%, to $3,607,000,
in the three months ended March 31, 1998 from $2,027,000 in the three months
ended March 31, 1997. Net sales of products increased 30%, to $1,602,000, from
$1,229,000 for the three months ended March 31, 1998 and 1997, respectively.
Research and development revenues increased 45%, to $1,079,000, from $745,000
for the three months ended March 31, 1998 and 1997, respectively. Royalty
income increased 1655%, to $925,000, in the three months ended March 31, 1998
from $53,000 in the three months ended March 31, 1997. The increases in net
sales and royalty income were both directly attributable to increased worldwide
demand for the Angio-Seal in the third quarter of fiscal 1998 compared to the
same period a year earlier. Approximately 51,000 Angio-Seal devices were sold
to end-users during the quarter ended March 31, 1998 compared to approximately
6,000 in the quarter ended March 31, 1997. The increased demand resulted in
higher Angio-Seal component sales to Sherwood, for use in the manufacture of
the device, as well as increased royalty income. As the Company's total
royalty per unit has increased resulting from the Patent Acquisition Agreement
and as the Company and Sherwood increase production and continue to market the
Angio-Seal in Europe and in the United States, the Company expects royalty
income to become an increasingly significant source of revenue. Royalty rates
are based on volume of units sold and are comparable in both the domestic and
foreign licensing agreements with Sherwood. The increase in research and
development revenues related to increased activity in contract research and
development revenue from Sherwood for the clinical trial program and for
additional sizes of and product enhancements to the Angio-Seal Product Line.
Cost of products sold increased 13% to $995,000 in the three months ended
March 31, 1998 from $883,000 in the three months ended March 31, 1997. This
increase reflected greater net sales of products, consisting primarily of
components to Sherwood, resulting in an overall gross margin improvement due to
volume efficiencies.
Research and development expense, including regulatory and clinical
expense, increased 23% to $1,508,000 in the three months ended March 31, 1998
from $1,223,000 in the three months ended March
11
<PAGE> 12
31, 1997. This increase was primarily due to greater clinical trial
costs and outside expenses in conjunction with the development of the
Angio-Seal Product Line as well as increased activity within the rotary
technology program and additional product development programs. The Company
expects research and development expense to continue at recent levels as it
continues development on additional sizes of the Angio-Seal, investigates and
develops new products and manufacturing techniques, conducts clinical trials
and seeks regulatory approval for its products.
Selling, general and administrative expense decreased 5% to $401,000 in
the three months ended March 31, 1998 from $424,000 in the three months ended
March 31, 1997. This decrease was primarily due to a reduction in certain
outside professional fees.
Interest expense increased to $31,000 in the three months ended March 31,
1998 from $6,000 in the three months ended March 31, 1997. This increase
relates to the balance outstanding under the Company's revolving credit and
term loan agreement which increased from $100,000 at March 31, 1997 to
$1,425,000 at March 31, 1998. Interest income increased slightly to $137,000
from $134,000 in the three months ended March 31, 1998 compared to the three
months ended March 31, 1997. The increase was due to maintenance of the
Company's investment levels and favorable rates on investments held.
NINE MONTHS ENDED MARCH 31, 1998 COMPARED TO NINE MONTHS ENDED MARCH
31, 1997
Revenues for these periods consisted of net sales, research and
development revenue, milestone fees and royalty income. Revenues increased 31%
to $7,934,000 in the nine months ended March 31, 1998 from $6,068,000 in the
nine months ended March 31, 1997. Net sales of products increased 23% to
$3,339,000 from $2,722,000 for the nine months ended March 31, 1998 and 1997,
respectively. Research and development revenues increased 35% to $2,841,000
from $2,106,000 for the nine months ended March 31, 1998 and 1997,
respectively. Royalty income increased 825% to $1,754,000 from $190,000 in the
nine months ended March 31, 1998 and 1997, respectively. The increases in net
sales and royalty income are both directly attributable to increased worldwide
demand for the Angio-Seal in the nine months ended March 31, 1998 from the same
period a year earlier. There were approximately 110,000 Angio-Seal devices sold
by Sherwood to end-users during the nine months ended March 31, 1998 compared
to approximately 14,000 in the nine months ended March 31, 1997. This increase
in worldwide product demand translated into higher Angio-Seal component sales
to Sherwood, for use in the manufacture of the device, and increased royalty
income. As the Company and Sherwood increase production and continue to market
the Angio-Seal in Europe and in the United States, the Company expects royalty
income to become an increasingly significant source of revenue. Royalty rates
are based on volume of units sold and are comparable in both the domestic and
foreign licensing agreements with Sherwood. The increase in research and
development revenues related to increased activity in contract research and
development from Sherwood for the clinical trial program and for additional
sizes of and product enhancements to the Angio-Seal Product Line. The $1.05
million milestone fee in the nine months ended March 31, 1997 represents the
final milestone under the License Agreement with Sherwood which was earned by
the Company upon receipt of FDA premarket approval of the Angio-Seal.
Cost of products sold increased 32% to $2,851,000 in the nine months ended
March 31, 1998 from $2,153,000 in the nine months ended March 31, 1997. This
increase reflected greater net sales of products offset by manufacturing
inefficiencies realized in the start-up phase of production for the new sizes
of the Angio-Seal, the 6F and 10F during the fiscal year.
Research and development expense, including regulatory and clinical
expense, increased 20% to $4,087,000 in the nine months ended March 31, 1998
from $3,418,000 in the nine months ended March 31, 1997. This increase was
primarily due to an increase in personnel costs and outside expenses in
conjunction with the development of the Angio-Seal Product Line, including the
clinical trial program, rotary technology and the expanding biomaterials
business. The Company expects research and
12
<PAGE> 13
development expense to continue at recent levels as it develops
additional sizes of the Angio-Seal, investigates and develops new products and
manufacturing techniques, conducts clinical trials and seeks regulatory
approval for its products.
Selling, general and administrative expense decreased 14% to $1,209,000 in
the nine months ended March 31, 1998 from $1,413,000 in the nine months ended
March 31, 1997. This decrease was primarily due to a reduction in certain
outside professional fees.
Interest expense decreased 63% to $67,000 in the nine months ended March
31, 1998 from $178,000 in the nine months ended March 31, 1997. This decrease
was due to the repayment of the Sherwood Credit Agreement in October 1996 in
connection with receipt of FDA approval of the Angio-Seal offset by amounts
drawn under the Company's line of credit during the current fiscal year.
Interest income decreased to $406,000 in the nine months ended March 31, 1998
from $461,000 in the nine months ended March 31, 1997. The decrease was due to
a decline in investment balances primarily attributable to the repayment of the
Sherwood Credit Agreement as well as capital expenditures and funding for the
Company's normal operating activities.
During the nine months ended March 31, 1997, the Company received
$1,310,000 in final settlement of the business interruption portion of their
insurance claim of which $969,000 was recorded as other income.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in the Company's operating activities during the nine months
ended March 31, 1998 was $946,000 compared to $3,122,000 provided by operating
activities in the nine months ended March 31, 1997. This fluctuation was
primarily due to the receipt of $3,000,000 in advance royalties from Sherwood
in the nine months ended March 31, 1997. In addition, changes in asset and
liability balances and non-cash adjustments for depreciation resulted in cash
used in operations of $1,076,000 for the nine months ended March 31, 1998
compared to $132,000 (net of the deferred revenue line item) for the nine
months ended March 31, 1997. One additional factor was the decrease in net
income to $131,000 from $343,000 for the periods ended March 31, 1998 and
March 31, 1997, respectively.
Capital expenditures were $1,452,000 for the nine months ended March 31,
1998, primarily related to the expansion of the Company's manufacturing and
development capabilities.
The Company has borrowed an additional $925,000 under its $2.0 million
revolving credit and term loan agreement. The Company has $575,000 remaining
available credit under this facility which it intends to utilize to fund
further capital expenditures and facility expansion.
The Company's cash, cash equivalents and short-term investments were
$6,697,000 at March 31, 1998. In addition, the Company has pledged $1,914,000
in investments (not included in the $6,697,000) as collateral to secure bank
loans made to employees for the payment of taxes incurred by such employees as
a result of their receipt of Common Stock in settlement of the employee stock
rights at the time of the IPO. In exchange for the Company's pledging this
collateral, the employees have pledged their Common Stock as collateral to the
Company.
The Company acquired patents under a Patent Acquisition Agreement in
exchange for 200,000 shares of common stock and a series of quarterly cash
payments totaling $1.2 million. The patents have been recorded on the balance
sheet at the value of the shares on the date of the agreement plus the present
value of the $1.2 million cash and any legal and other related costs incurred
to acquire such patents. The present value of the cash payments ($1.1 million)
was recorded between short and long-term liabilities at December 31, 1997 and
reduced to $960,000 upon payment of the first installment on March 31, 1998.
13
<PAGE> 14
The Company anticipates that its results of operations will fluctuate for
the foreseeable future due to a number of factors. Such factors include
Sherwood's performance in the marketing, manufacturing and distribution of the
Angio-Seal Product Line, the timing of future regulatory approvals in the
United States and in countries outside of Europe including Japan, the results
of ongoing and planned clinical trials for the Angio-Seal and other products,
the acceptance of the Company's products in the marketplace and competitive
products generally and in particular those designed for the sealing of arterial
site punctures.
The Company plans to continue to expend substantial resources in funding
clinical trials to gain regulatory approvals and make additional marketing
claims as well as to expand research and development activities for the
Angio-Seal, rotary technology and biomaterials products.
The Company believes the IPO proceeds combined with cash generated from
operations will be sufficient to meet the Company's operating and capital
requirements for the next twelve months.
During the fiscal year, American Home Products Corporation ("AHP") sold
its Sherwood subsidiary, the operating company responsible for the sales and
marketing and manufacturing of the Angio-Seal device, to Tyco International,
LTD ("Tyco"). Tyco has informed Kensey Nash that it does not intend to alter
its plans for the operations of the Angio-Seal business unit. The Company does
not believe the sale of Sherwood to Tyco will have a material impact on its
future operations.
Statements contained in this Form 10-Q that are not historical facts are
forward-looking statements that are made pursuant to the Safe Harbor provisions
of the Private Securities Litigation Reform Act of 1995. The Company cautions
that a number of important factors could cause the Company's actual results for
fiscal 1998 and beyond to differ materially from those in any forward-looking
statements made by, or on behalf of, the Company. These important factors
include, without limitation, the time, effort and priority level that Sherwood
and its successors attach to the Angio-Seal and Sherwood's ability to
successfully market and manufacture the Angio-Seal, the Company's ability to
manufacture Angio-Seal components, the results of ongoing clinical trials and
timing of additional regulatory approvals, announcements of technological
innovations or the introduction of new products by the Company or its
competitors, competition by rival developers of puncture closure devices,
general business conditions in the healthcare industry and general economic
conditions. 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 the Common
Stock.
14
<PAGE> 15
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On March 27, 1998, the Company filed suit in U.S. District Court, Eastern
District of Pennsylvania claiming patent infringement by Perclose, Inc. The
subject patent, United States Patent No. 5,676,689, entitled "Hemostatic
Puncture Closure System Including Vessel Location Device and Method of Use",
concerns a proprietary positioning system, developed by Kensey Nash to
ascertain that a puncture closure device is located properly in the artery. In
the suit, Kensey Nash seeks to permanently enjoin Perclose from further sales
of their products that infringe on the patent and seek payment by Perclose,
Inc., of monetary damages suffered by Kensey Nash as a result of the
infringement.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
A. Exhibits.
None
B. Reports on Form 8-K.
None
C. Financial Data Schedule
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: May 15, 1998 By: /s/ Joseph W. Kaufmann
--------------------------------------
Joseph W. Kaufmann
President, Chief Executive Officer and
Chief Financial Officer
15
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