<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, 1999
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)
<TABLE>
<CAPTION>
<S> <C>
DELAWARE 36-3316412
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
</TABLE>
MARSH CREEK CORPORATE CENTER, 55 EAST UWCHLAN AVENUE, EXTON, PENNSYLVANIA
19341
(Address of principal executive offices and zip code)
Registrant's telephone number, including area code: (610) 524-0188
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
As of April 30, 1999, there were outstanding 7,469,460 shares of Common
Stock, par value $.001, of the registrant.
1
<PAGE> 2
KENSEY NASH CORPORATION
QUARTER ENDED MARCH 31, 1999
<TABLE>
<CAPTION>
INDEX
PAGE
PART I - FINANCIAL INFORMATION
<S> <C>
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets
as of March 31, 1999 (Unaudited) and June 30, 1998 ......... 3
Consolidated Statements of Operations
for the three and nine months ended March 31,
1999 and 1998 (Unaudited) ................................... 4
Consolidated Statements of Stockholders' Equity as of
March 31, 1999 (Unaudited) and June 30, 1998 ................ 5
Consolidated Statements of Cash Flows
for the nine months ended March 31, 1999 and 1998 (Unaudited) 6
Notes to Consolidated Financial Statements (Unaudited) ........ 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS .......................... 10
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K ....................................... 15
SIGNATURES ..................................................................... 16
</TABLE>
2
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
KENSEY NASH CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
MARCH 31, JUNE 30,
1999 1998
------------ ------------
ASSETS (Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 2,825,530 $ 1,407,684
Short-term investments 5,304,364 6,368,866
Trade receivables 2,520,527 1,369,960
Royalties receivable (Note 2) 1,262,646 645,784
Other receivables (including approximately $91,000 and $59,000 at
March 31, 1999 and June 30, 1998, respectively, due from employees) 374,609 225,424
Inventory (Note 3) 694,616 1,027,326
Prepaid expenses and other 352,817 200,169
------------ ------------
Total current assets 13,335,109 11,245,213
------------ ------------
PROPERTY, PLANT AND EQUIPMENT, AT COST:
Leasehold improvements 4,023,373 4,006,066
Machinery, furniture and equipment 4,357,717 3,599,827
Construction in progress 398,419 191,154
------------ ------------
Total property, plant and equipment 8,779,509 7,797,047
Accumulated depreciation (3,541,349) (2,843,785)
------------ ------------
Net property, plant and equipment 5,238,160 4,953,262
OTHER ASSETS:
Restricted investments (Note 4) 5,274,387 1,914,418
Property under capital leases, net 35,964 61,181
Acquired patents, net of accumulated amortization of $318,228 and $127,291
at March 31, 1999 and June 30, 1998, respectively 3,674,181 3,865,118
------------ ------------
Total other assets 8,984,532 5,840,717
------------ ------------
TOTAL $ 27,557,801 $ 22,039,192
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,004,193 $ 639,605
Accrued expenses 893,752 551,573
Current portion of debt, obligation under patent acquisition agreement
and capital lease obligations 561,877 577,891
Deferred revenue 15,250 53,120
------------ ------------
Total current liabilities 2,475,072 1,822,189
------------ ------------
DEFERRED REVENUE - ROYALTIES (Note 2) 1,084,592 1,979,580
DEBT, OBLIGATION UNDER PATENT ACQUISITION AGREEMENT
and OBLIGATION UNDER CAPITAL LEASES, long-term portion 6,060,638 2,373,960
------------ ------------
Total liabilities 9,620,302 6,175,729
------------ ------------
COMMITMENTS AND CONTINGENCIES (Note 4)
STOCKHOLDERS' EQUITY:
Preferred stock, $.001 par value, 100,000 shares authorized, no shares issued
or outstanding at March 31, 1999 and June 30, 1998
Common stock, $.001 par value, 25,000,000 shares authorized, 7,469,460 and
7,459,272 shares issued and outstanding at
March 31, 1999 and June 30, 1998, respectively 7,469 7,459
Capital in excess of par value 37,687,769 37,597,381
Accumulated deficit (19,757,739) (21,741,377)
------------ ------------
Total stockholders' equity 17,937,499 15,863,463
------------ ------------
TOTAL $ 27,557,801 $ 22,039,192
============ ============
</TABLE>
See notes to consolidated financial statements.
3
<PAGE> 4
KENSEY NASH CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
------------------------------------------------------------
1999 1998 1999 1998
REVENUES (Notes 1 and 2):
<S> <C> <C> <C> <C>
Net sales $ 1,789,974 $ 1,602,429 $ 4,996,010 $ 3,338,785
Research and development 451,677 1,079,343 1,611,315 2,841,313
Royalty income (Note 2 and 8) 2,126,718 925,183 5,026,853 1,754,228
------------ ------------ ------------ ------------
Total revenues 4,368,369 3,606,955 11,634,178 7,934,326
------------ ------------ ------------ ------------
OPERATING COSTS AND EXPENSES:
Cost of products sold 1,274,399 994,604 3,713,322 2,851,323
Research and development 1,438,534 1,507,672 4,265,523 4,087,332
Selling, general and administrative 781,762 400,512 1,896,657 1,208,562
------------ ------------ ------------ ------------
Total operating costs and expenses 3,494,695 2,902,788 9,875,502 8,147,217
------------ ------------ ------------ ------------
INCOME (LOSS) FROM OPERATIONS 873,674 704,167 1,758,676 (212,891)
------------ ------------ ------------ ------------
OTHER INCOME:
Interest income 180,605 136,639 443,837 405,823
Interest expense (95,836) (31,183) (221,731) (66,690)
Other 488 99 2,856 4,292
------------ ------------ ------------ ------------
Total other income - net 85,257 105,555 224,962 343,425
------------ ------------ ------------ ------------
INCOME BEFORE INCOME TAXES 958,931 809,722 1,983,638 130,534
Provision for income taxes (Note 5)
------------ ------------ ------------ ------------
NET INCOME $ 958,931 $ 809,722 $ 1,983,638 $ 130,534
============ ============ ============ ============
EARNINGS PER COMMON SHARE and
EARNINGS PER COMMON SHARE - $ 0.13 $ 0.11 $ 0.27 $ 0.02
assuming dilution (Note 1) ============ ============ ============ ============
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING (Note 1) 7,513,359 7,699,505 7,478,887 7,504,584
============ ============ ============ ============
</TABLE>
See notes to consolidated financial statements.
4
<PAGE> 5
KENSEY NASH CORPORATION
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, 1997 7,198,251 $ 7,198 $ 34,203,807 $(22,084,059) $ 12,126,946
Exercise of stock options 61,021 61 556,174 556,235
Shares issued under Patent Acquisition
Agreement 200,000 200 2,837,400 2,837,600
Net income 342,682 342,682
------------ ------------ ------------ ------------ ------------
BALANCE, JUNE 30, 1998 7,459,272 7,459 37,597,381 (21,741,377) 15,863,463
Exercise of stock options 10,188 10 90,388 90,388
Net income 1,983,638 1,983,638
------------ ------------ ------------ ------------ ------------
BALANCE, MARCH 31, 1999 (Unaudited) 7,469,460 $ 7,469 $ 37,687,769 $(19,757,739) $ 17,937,499
============ ============ ============ ============ ============
</TABLE>
See notes to consolidated financial statements.
5
<PAGE> 6
KENSEY NASH CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
NINE MONTHS ENDED
MARCH 31,
-------------------------------
1999 1998
OPERATING ACTIVITIES:
<S> <C> <C>
Net income $ 1,983,638 $ 130,534
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization 913,718 689,774
Changes in assets and liabilities which provided (used) cash:
Accounts receivable (1,916,614) (1,541,249)
Prepaid expenses and other current assets (152,648) 108,929
Inventory 332,710 (438,058)
Accounts payable and accrued expenses 706,767 473,229
Deferred revenue (932,858) (369,106)
----------- ----------
Net cash provided by (used in) operating activities 934,713 (945,947)
----------- ----------
INVESTING ACTIVITIES:
Patent costs capitalized (69,539)
Additions to property, plant and equipment (982,462) (1,451,902)
Purchase of restricted investments (3,359,969)
Sale of investments 1,064,502 1,702,616
----------- ----------
Net cash (used in) provided by investing activities (3,277,929) 181,175
----------- ----------
FINANCING ACTIVITIES:
Principal payments under capital leases (28,560) (33,538)
Repayments of patent acquisition obligation (375,776) (125,000)
Proceeds from long-term debt 5,000,000 925,000
Repayments of long-term debt (925,000)
Exercise of stock options 90,398 541,857
----------- ----------
Net cash provided by financing activities 3,761,062 1,308,319
----------- ----------
INCREASE IN CASH AND CASH EQUIVALENTS 1,417,846 543,547
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 1,407,684 868,180
----------- ----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 2,825,530 $ 1,411,727
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 204,830 $ 66,690
=========== ===========
Cash paid for income taxes $ 30,000 $
=========== ===========
</TABLE>
See notes to consolidated financial statements
6
<PAGE> 7
KENSEY NASH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 -- CONSOLIDATED FINANCIAL STATEMENTS
BASIS OF PRESENTATION
The consolidated balance sheet at March 31, 1999, the consolidated
statements of operations for the three and nine months ended March 31,
1999 and 1998 and the consolidated statements of cash flows for the
nine months ended March 31, 1999 and 1998 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, 1999 and for all periods presented have been
made.
Certain information and note disclosures normally included in the
Company's annual financial statements prepared in accordance with
generally accepted accounting principles have been condensed or
omitted. These consolidated financial statements should be read in
conjunction with the financial statements and notes thereto included in
the Company's June 30, 1998 consolidated financial statements filed
with the Securities and Exchange Commission on Form 10-K. The results
of operations for the period ended March 31, 1999 are not necessarily
indicative of operating results for the full year.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents represent cash in banks and short-term
investments having an original maturity of less than three months.
EXPORT SALES
Export sales from the Company's U.S. operations to unaffiliated
customers in Europe totaled $102,878 and $15,000 for the three months
ended March 31, 1999 and 1998, respectively and $242,893 and $72,035
for the nine months ended March 31, 1999 and 1998, respectively.
EARNINGS PER SHARE
Earnings per share are calculated in accordance with Statement of
Financial Accounting Standards ("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. All previously disclosed
earnings per share data have been recalculated to reflect the
provisions of SFAS No. 128.
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 million advance on future royalties under the Company's licensing
agreement (the "Licensing Agreement") with its Strategic Alliance
Partner. 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 million advance
will be reduced in each period by 50% of royalties
7
<PAGE> 8
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. At March 31, 1999, the Company had exceeded the first, second
and third royalty year (periods ended September 30, 1997, 1998 and
1999) Minimum Royalties by $352,310, $3,058,970 and $419,534,
respectively. The deferred revenue balance has been reduced by 50% of
such total excess, to $1,084,592. 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, 1999.
NOTE 3 -- INVENTORY
Inventory is stated at the lower of cost (determined by the average
cost method, which approximates first-in, first-out) or markets.
Inventory primarily includes the cost of material utilized in the
processing of the Company's products and is as follows:
<TABLE>
<CAPTION>
MARCH 31, 1999 JUNE 30, 1998
<S> <C> <C>
Raw materials $ 646,984 $ 971,357
Work in process 47,632 55,969
---------- ------------
Total $ 694,616 $1,027,326
========== ============
</TABLE>
NOTE 4 -- COMMITMENTS AND CONTINGENCIES
The Company has pledged $1,949,387 in investments as collateral to
secure certain bank loans to employees which were used by such
employees for the payment of taxes incurred by such employees as the
result of the receipt of Common Stock at the Company's IPO. 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 $1,823,967 at March
31, 1999.
As of March 31, 1999, the Company had $3,325,000 in investments, which
are restricted under a debt agreement with a bank (see Note 6).
NOTE 5 -- INCOME TAXES
As of June 30, 1998, the Company had net operating loss carryforwards
("NOLs") for federal and state tax purposes totaling $18.0 and $2.8
million, respectively. However, the Company anticipates that it will be
subject to the federal alternative minimum tax ("AMT") in the current
year. The Company's NOLs may only be utilized for AMT purposes to the
extent that the net operating loss does not exceed 90% of current
alternative minimum taxable income. The payment of the AMT ($30,000 for
the nine months ended March 31, 1999) has generated AMT tax credits
that are recorded as deferred tax assets.
NOTE 6 -- DEBT
On January 21, 1999 the Company entered into a $5 million tax-free
revolving credit and term loan agreement ("the Tax Free Loan") with a
bank. The bank purchased the Company's $5 million tax exempt bond
issue, which was made through the local development authority, and made
the proceeds available to the Company under the Tax Free Loan. Of the
$5 million proceeds, $925,000 was used to pay down the Company's
existing balance under its $2 million term loan. The remaining proceeds
of the Tax Free Loan are held by the bank in investments restricted for
the Company's capital equipment financing through June 30, 2000. As of
March 31, 1999, the restricted investment balance was $3,325,000. The
Tax Free Loan bears interest at the five year U.S. Treasury rate plus
1%, adjusted quarterly on the first day of each of February, May,
August and
8
<PAGE> 9
November. The assets of the Company, with the exception of the
Company's patents, collateralize the Tax Free Loan.
NOTE 7 -- 6F ANGIO-SEAL EUROPEAN COMMUNITY MARK APPROVAL
In February the Company announced European Community ("CE") Mark
Approval had been granted for its new 6F Angio-Seal puncture closure
device. CE Mark approval allows the sale of the device throughout the
European Union. This smaller version of the Company's 8F Angio-Seal,
currently marketed in both the US and Europe, is designed to seal
arterial punctures 6F and smaller and address the largest segment of
the puncture closure market.
NOTE 8 -- STRATEGIC ALLIANCE PARTNER
On March 16, 1999, St. Jude Medical, Inc. ("St. Jude") announced the
completion of its acquisition of the marketing and manufacturing rights
of the Angio-Seal Product Line from TYCO International Ltd. ("TYCO"),
the Company's previous Strategic Alliance Partner. Under the purchase
agreement, all of the Company's agreements with its Strategic Alliance
Partner will be transferred to St. Jude. Accordingly, St. Jude replaced
TYCO as the Company's Strategic Alliance Partner upon finalization of
the acquisition.
The Company received additional royalty payments (the "Supplemental
Royalty") from the previous owner of the Angio-Seal License Agreements,
TYCO, in the amount of $1.5 million. The Supplemental Royalty was to
compensate the Company for lost Angio-Seal sales and expenses incurred
during the ongoing transition of corporate ownership of the Angio-Seal
License Agreements to St. Jude. The payments were made in two equal
installments on March 29, 1999 and April 5, 1999. As such, the Company
has recorded the first payment of $750,000 as royalty income for the
quarter ending March 31, 1999.
9
<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
The Company is a medical device company which has established three
technology platforms: puncture closure (Angio-Seal), biomaterials (collagen and
absorbable polymers) and revascularization (the Aegis Vortex System) ("AVS").
The Company's operations are focused on the commercialization and continuing
development of its proprietary principal product, the Angio-Seal Product Line,
the continued expansion of its capabilities in biomaterials, and the development
of its revascularization catheter system, the AVS.
The Angio-Seal is a device 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
participates in the puncture closure market primarily through its relationship
with its Strategic Alliance Partner, from which it generates royalty income,
research and development funding and sales revenue through the manufacture of
clinical devices and components for the Angio-Seal.
On March 16, 1999, St. Jude Medical, Inc. ("St. Jude") announced the
completion of its acquisition of the marketing and manufacturing rights of the
Angio-Seal product line from TYCO International Ltd. ("TYCO"), the Company's
previous Strategic Alliance Partner. Under the purchase agreement, all of the
Company's agreements with its Strategic Alliance Partner will be transferred to
St. Jude. Accordingly, St. Jude replaced TYCO as the Company's Strategic
Alliance Partner upon finalization of the acquisition.
In February the Company announced European Community ("CE") Mark
Approval had been granted for its new 6F Angio-Seal puncture closure device. CE
Mark approval allows the sale of the device throughout the European Union. This
smaller version of the Company's 8F Angio-Seal, currently marketed in both the
US and Europe, is designed to seal arterial punctures 6F and smaller and
address the largest segment of the puncture closure market.
The Company has expanded its capabilities in absorbable biomaterials.
The Company is currently manufacturing collagen products for third parties for
use as delivery systems in numerous applications, including bone growth
proteins, artificial skin for burn victims and drug delivery, for products in
various stages of clinical trials. As a result of its absorbable polymer
capabilities, the Company has entered the orthopedic marketplace as an OEM
supplier of specialized products.
The Company's revascularization platform has been established to
address a market opportunity in cardiology for the treatment of occluded
saphenous vein bypass grafts. The Company is developing the AVS, utilizing its
patent platform and in-house expertise to address these medical conditions.
The following discussion and analysis should be read in conjunction
with the Consolidated Financial Statements and the notes thereto contained
elsewhere in this report.
THREE MONTHS ENDED MARCH 31, 1999 COMPARED TO THREE MONTHS ENDED MARCH 31, 1998
Revenues for these periods consisted of net sales, research and
development revenue and royalty income. Revenues increased 21% to $4,368,000 in
the three months ended March 31, 1999 from $3,607,000 in the three months ended
March 31, 1998. Net sales of products increased 12% to $1,790,000 from
$1,602,000 for the three months ended March 31, 1999 and 1998, respectively.
Research and development revenues decreased 58% to $452,000 from $1,079,000 for
the three months ended March 31, 1999 and 1998, respectively. The increase in
net sales was attributable to an increase in both 8F Angio-Seal components and
the addition of complete 6F Angio-Seal commercial devices as well as increased
sales of commercial bioabsorbable OEM polymer and collagen products. The
increases in
10
<PAGE> 11
sales of Angio-Seal components and devices, sold to the Company's Strategic
Alliance Partner, come as a result of increased demand for the 8F product in the
US and European markets, as well as the planned European launch of the new 6F
Angio-Seal device by the Company's Strategic Alliance Partner. The decrease in
research and development revenues is due to a reduction in research and
development activity as the new 6F Angio-Seal transitioned from research and
development to commercial launch. In addition, the Company was informed by its
Strategic Alliance Partner that it would perform ongoing research and
development in-house.
Royalty income increased 130% to $2,127,000 from $925,000 in the three
months ended March 31, 1999 and 1998, respectively. Approximately 72,000
Angio-Seal units were sold to end-users in the quarter ending March 31, 1999
compared to 51,000 units sold in the quarter ending March 31, 1998. The increase
in royalty income reflected increased demand in both the U.S. and European
markets versus the same quarter a year earlier as well as a $750,000
supplemental royalty payment received by the Company in March 1999 from the
previous owner of the Angio-Seal Licensing Agreements, TYCO. As the Company's
Strategic Alliance Partner continues to increase production and enhance
marketing efforts for the Angio-Seal product line in the United States and in
Europe, the Company expects royalty income to become an increasingly significant
source of revenue. Royalty rates are based on volume of units sold and are
equivalent in both the domestic and foreign licensing agreements with the
Company's Strategic Alliance Partner.
Cost of products sold increased 28% to $1,274,000 in the three months
ended March 31, 1999 from $995,000 in the three months ended March 31, 1998.
This increase reflects greater net sales of products in addition to unfavorable
product mix which resulted in an unfavorable gross margin trend.
Research and development expense, including regulatory and clinical
expense, decreased 5% to $1,439,000 in the three months ended March 31, 1999
from $1,508,000 in the three months ended March 31, 1998. This decrease in
expense is mainly attributable to the ongoing shift of development for the
Angio-Seal to the Company's Strategic Alliance Partner as well as the
commercialization of the 6F product. This decrease is offset by the Company's
expansion of development efforts on its biomaterials products, including
absorbable polymers and collagen. In addition, the Company continues its
development efforts in revascularization technology as it targets commencement
of clinical trials on the AVS. The Company expects research and development
expense to increase as it investigates and develops new products, conducts
clinical trials and seeks regulatory approval for its proprietary products.
Selling, general and administrative expense increased 95% to $782,000
in the three months ended March 31, 1999 from $401,000 in the three months ended
March 31, 1998. This increase was primarily a result of legal expenses incurred
related to the Company's ongoing patent infringement suit.
Interest expense increased 207% to $96,000 in the three months ended
March 31, 1999 from $31,000 in the three months ended March 31, 1998. This
increase was due to an increase in the Company's outstanding debt from
$1,425,000 at March 31, 1998 to $6,075,000 at March 31, 1999. Interest income
increased 32% to $181,000 in the three months ended March 31, 1999 from $137,000
in the three months ended March 31, 1998 as a result of an increase in average
total cash and investment balances.
NINE MONTHS ENDED MARCH 31, 1999 COMPARED TO NINE MONTHS ENDED MARCH 31, 1998
Revenues for these periods consisted of net sales, research and
development revenue and royalty income. Revenues increased 47% to $11,634,000 in
the nine months ended March 31, 1999 from
11
<PAGE> 12
$7,934,000 in the nine months ended March 31, 1998. Net sales of products
increased 50% to $4,996,000 from $3,339,000 for the nine months ended March 31,
1999 and 1998, respectively. Research and development revenues decreased 43% to
$1,611,000 from $2,841,000 for the nine months ended March 31, 1999 and 1998,
respectively. The increase in net sales was attributable to an increase in both
8F Angio-Seal components and the addition of complete 6F Angio-Seal commercial
devices as well as increased sales of commercial bioabsorbable OEM polymer and
collagen products. The increases in sales of Angio-Seal components and devices,
sold to the Company's Strategic Alliance Partner, come as a result of increased
demand for the 8F product in the US and European markets, as well as the planned
European launch of the new 6F Angio-Seal device by the Company's Strategic
Alliance Partner. The decrease in research and development revenues is due to a
reduction in research and development activity as the new 6F Angio-Seal
transitioned from research and development to commercial launch. In addition,
the Company was informed by its Strategic Alliance Partner that it would perform
ongoing research and development in-house.
Royalty income increased 187% to $5,027,000 from $1,754,000 in the nine
months ended March 31, 1999 and 1998, respectively. Approximately 227,000
Angio-Seal units were sold to end-users in the nine months ending March 31, 1999
compared to 110,000 units sold in the nine months ending March 31, 1998. The
increase in royalty income reflected increased demand in both the U.S. and
European markets versus the same period a year earlier as well as an increase in
total royalty per unit resulting from the Patent Acquisition Agreement. In
addition, the Company received a $750,000 supplemental royalty payment in March
1999 from the previous owner of the Angio-Seal Licensing Agreements, TYCO. As
the Company's Strategic Alliance Partner continues to increase production and
enhance marketing efforts of the Angio-Seal product line in the United States
and in Europe, the Company expects royalty income to become an increasingly
significant source of revenue. Royalty rates are based on volume of units sold
and are equivalent in both the domestic and foreign licensing agreements with
the Company's Strategic Alliance Partner.
Cost of products sold increased 30% to $3,713,000 in the nine months
ended March 31, 1999 from $2,851,000 in the nine months ended March 31, 1998.
This increase reflects greater net sales of products, which resulted in
favorable trends in gross margins.
Research and development expense, including regulatory and clinical
expense, increased 4% to $4,266,000 in the nine months ended March 31, 1999 from
$4,087,000 in the nine months ended March 31, 1998. The Company continued to
assist in the development of the Angio-Seal and has expanded its development
efforts on biomaterials products, including absorbable polymers and collagen. In
addition, the Company has significantly expanded its development in
revascularization technology as it targets commencement of clinical trials on
the AVS. The Company expects research and development expense to increase as it
investigates and develops new products, conducts clinical trials and seeks
regulatory approval for its products.
Selling, general and administrative expense increased 57% to $1,897,000
in the nine months ended March 31, 1999 from $1,209,000 in the nine months ended
March 31, 1998. This increase was primarily a result of legal expenses incurred
related to the Company's ongoing patent infringement suit.
Interest expense increased 232% to $222,000 in the nine months ended
March 31, 1999 from $67,000 in the nine months ended March 31, 1998. This
increase was due to the Company's balance under the line of credit increasing
from $1,425,000 to $6,075,000 as well as interest charges recorded in relation
to the obligation under the Company's Patent Acquisition Agreement. Interest
income increased
12
<PAGE> 13
9%, to $444,000 in the nine months ended March 31, 1999, from $406,000 in the
nine months ended March 31, 1998 as a result of an increase in average total
cash and investment balances.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by the Company's operating activities during the nine
months ended March 31, 1999 was $935,000, while net cash used by the Company's
operating activities during the nine months ended March 31, 1998 was $946,000.
In the nine months ending March 31, 1999, changes in asset and liability
balances resulted in a $1,963,000 use of cash, which was offset by a net income
of $1,984,000 and non-cash depreciation and amortization of $914,000. Changes in
asset and liability balances resulted in a $1,766,000 use of cash offset by net
income of $131,000 in the nine months ending March 31, 1998. Depreciation and
amortization increased $224,000 in the nine months ended March 31, 1999 from the
nine months ended March 31, 1998.
Capital expenditures were $982,000 for the nine months ended March 31,
1999, primarily representing machinery and equipment and leasehold improvements
related to the continued expansion of the Company's manufacturing capabilities,
principally its collagen and polymer product lines.
The Company's cash, cash equivalents and short-term investments were
$8,130,000 at March 31, 1999. In addition, the Company has $5,274,000 in
restricted investment accounts (not included in the $8,130,000). The Company has
pledged $1,949,000 in investments 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 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 also has $3,325,000 in
investments restricted for capital spending through June 30, 2000.
In January 1999, the Company entered into a $5 million tax-free
revolving credit and term loan agreement ("the Tax Free Loan") with a bank. The
bank purchased the Company's $5 million tax exempt bond issue, which was made
through the local development authority, and made the proceeds available to the
Company under the Tax Free Loan. The Company had a $2,000,000 term loan payable
in 60 equal installments beginning February 1, 2000. A portion of this term loan
was repaid with the proceeds of the Tax Free Loan. The remaining proceeds of the
Tax Free Loan will be used to finance the Company's capital financing needs
through June 30, 2000. The Company received a $3,000,000 royalty advance under
the License Agreement upon receipt of FDA approval of the Angio-Seal in fiscal
year 1997. This royalty advance continues to be reduced as the Company exceeded
minimum royalty stipulations under the Licensing Agreement.
In November 1997, the Company acquired patents under a Patent
Acquisition Agreement in exchange for 200,000 shares of common stock and a
series of eight quarterly cash payments, beginning on March 31, 1998, totaling
$1.2 million. The patents were 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. The remaining balance at March 31,
1999 is $503,000.
The Company anticipates that its results of operations will fluctuate
for the foreseeable future due to a number of factors. Such factors include the
Company's Strategic Alliance Partner'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
13
<PAGE> 14
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 to fund
clinical trials to gain regulatory approvals and continue to expand research and
development activities particularly for its revascularization technology and
biomaterials products.
The Company believes cash generated from operations as well as funds
available under financing arrangements with its bank will be sufficient to meet
the Company's operating and capital requirements for the next twelve months.
YEAR 2000 COMPLIANCE
The Company began work on the computer Year 2000 issue in fiscal year
1998 and expects to complete its efforts by the end of fiscal year 1999.
Software applications, hardware and related information and non-information
technologies have been, or are in the process of being, upgraded or replaced to
ensure that all systems are Year 2000 compliant. Replacing hardware or software
in this fashion is considered a normal cost of doing business and is being
expensed or capitalized as appropriate. The Company is also working with its
significant suppliers and customers to address any impact of their Year 2000
issues on the Company. The Company does not warrant, however, that these
companies' year 2000 compliance activities will be completely successful.
Management does not anticipate that the costs of year 2000 compliance will have
a material effect on the Company's results of operations, cash flows or
financial position. The Company does not presently expect that its operations
will be materially affected by problems with its computer systems or those of
third parties with whom it deals.
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 year 1999 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 the Company's Strategic Alliance Partner and its successors attach to
the Angio-Seal and the Strategic Alliance Partner'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
of puncture closure devices in general, 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 6. EXHIBITS AND REPORTS ON FORM 8-K.
A. Exhibits.
None
B. Reports on Form 8-K.
None
C. Financial Data Schedule
15
<PAGE> 16
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 17, 1999 By: /s/ Wendy F. DiCicco
-----------------------------
Wendy F. DiCicco
Chief Financial Officer
16
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-Mos
<FISCAL-YEAR-END> Jun-30-1999
<PERIOD-START> Jul-01-1998
<PERIOD-END> Mar-31-1999
<CASH> 2,825,530
<SECURITIES> 8,629,364
<RECEIVABLES> 4,157,782
<ALLOWANCES> 0
<INVENTORY> 694,616
<CURRENT-ASSETS> 16,660,109
<PP&E> 8,779,509
<DEPRECIATION> 3,541,349
<TOTAL-ASSETS> 27,557,801
<CURRENT-LIABILITIES> 2,475,072
<BONDS> 0
0
0
<COMMON> 7,469
<OTHER-SE> 17,937,499
<TOTAL-LIABILITY-AND-EQUITY> 27,557,801
<SALES> 4,996,010
<TOTAL-REVENUES> 11,634,178
<CGS> 3,713,322
<TOTAL-COSTS> 9,875,502
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 221,731
<INCOME-PRETAX> 1,983,638
<INCOME-TAX> 0
<INCOME-CONTINUING> 1,983,638
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,983,638
<EPS-PRIMARY> 0.27
<EPS-DILUTED> 0.27
</TABLE>
