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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: DECEMBER 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)
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<S> <C>
DELAWARE 36-3316412
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
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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 January 31, 1999, there were outstanding 7,459,460 shares of Common
Stock, par value $.001, of the registrant.
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KENSEY NASH CORPORATION
QUARTER ENDED DECEMBER 31, 1998
INDEX
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PAGE
PART I - FINANCIAL INFORMATION
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ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets
as of December 31, 1998 (Unaudited) and June 30, 1998........................ 3
Consolidated Statements of Operations
for the three and six months ended December 31,
1998 and 1997 (Unaudited)..................................................... 4
Consolidated Statements of Stockholders' Equity as of
December 31, 1998 (Unaudited) and June 30, 1998............................... 5
Consolidated Statements of Cash Flows
for the six months ended December 31, 1998 and 1997 (Unaudited)............... 6
Notes to Consolidated Financial Statements (Unaudited).......................... 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS..................................... 9
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.................................................. 14
SIGNATURES .......................................................... 15
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
KENSEY NASH CORPORATION
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
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<CAPTION>
DECEMBER 31, JUNE 30,
1998 1998
------------------- --------------------
ASSETS (Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 253,246 $ 1,407,684
Short-term investments 6,215,417 6,368,866
Trade receivables 2,115,884 1,369,960
Royalties receivable (Note 2) 1,531,180 645,784
Other receivables (including approximately $81,000 and $59,000 at
December 31, 1998 and June 30, 1998, respectively, due from employees) 489,670 225,424
Inventory (Note 3) 660,003 1,027,326
Prepaid expenses and other 243,996 200,169
---------------- ----------------
Total current assets 11,509,396 11,245,213
---------------- ----------------
PROPERTY, PLANT AND EQUIPMENT, AT COST:
Leasehold improvements 4,007,274 4,006,066
Machinery, furniture and equipment 3,878,452 3,599,827
Construction in progress 555,254 191,154
---------------- ----------------
Total property, plant and equipment 8,440,980 7,797,047
Accumulated depreciation (3,275,628) (2,843,785)
---------------- ----------------
Net property, plant and equipment 5,165,352 4,953,262
OTHER ASSETS:
Restricted investments (Note 4) 1,949,387 1,914,418
Property under capital leases, net 43,907 61,181
Acquired patents, net of accumulated amortization of $254,582 and $127,291
at December 31, 1998 and June 30, 1998, respectively 3,737,827 3,865,118
---------------- ----------------
Total other assets 5,731,121 5,840,717
---------------- ----------------
TOTAL $ 22,405,869 $ 22,039,192
================ ================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 808,380 $ 639,605
Accrued expenses 642,557 551,573
Current portion of line of credit, obligation under patent acquisition agreement
and capital lease obligations 698,779 577,891
Deferred revenue 53,100 53,120
---------------- ----------------
Total current liabilities 2,202,816 1,822,189
---------------- ----------------
DEFERRED REVENUE - ROYALTIES (Note 2) 1,294,360 1,979,580
LINE OF CREDIT, OBLIGATION UNDER PATENT ACQUISITION AGREEMENT
and OBLIGATION UNDER CAPITAL LEASES, long-term portion 2,018,878 2,373,960
---------------- ----------------
Total liabilities 5,516,054 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 December 31, 1998 and June 30, 1998
Common stock, $.001 par value, 25,000,000 shares authorized, 7,459,460 and
7,459,272 shares issued and outstanding at December 31, 1998 and June
30, 1998, respectively 7,459 7,459
Capital in excess of par value 37,599,026 37,597,381
Accumulated deficit (20,716,670) (21,741,377)
---------------- ----------------
Total stockholders' equity 16,889,815 15,863,463
---------------- ----------------
TOTAL $ 22,405,869 $ 22,039,192
================ ================
See notes to consolidated financial statements.
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KENSEY NASH CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
================================================================================
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<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
=====================================================================
1998 1997 1998 1997
<S> <C> <C> <C> <C>
REVENUES (Notes 1 and 2):
Net sales $ 1,829,058 $ 1,202,295 $ 3,206,036 $ 1,736,356
Research and development 390,530 1,028,639 1,159,638 1,761,970
Royalty income 1,494,724 531,147 2,900,135 829,045
----------- ----------- ----------- ------------
Total revenues 3,714,312 2,762,081 7,265,809 4,327,371
----------- ----------- ----------- ------------
OPERATING COSTS AND EXPENSES:
Cost of products sold 1,160,550 1,040,629 2,438,923 1,856,719
Research and development 1,429,218 1,394,275 2,826,989 2,579,660
Selling, general and administrative 541,366 443,833 1,114,895 808,050
----------- ----------- ----------- ------------
Total operating costs and expenses 3,131,134 2,878,737 6,380,807 5,244,429
----------- ----------- ----------- ------------
INCOME (LOSS) FROM OPERATIONS 583,178 (116,656) 885,002 (917,058)
----------- ----------- ----------- ------------
OTHER INCOME:
Interest income 128,519 135,519 263,232 269,184
Interest expense (59,936) (20,923) (125,895) (35,507)
Other 2,367 2,552 2,368 4,193
----------- ----------- ----------- ------------
Total other income - net 70,950 117,148 139,705 237,870
----------- ----------- ----------- ------------
INCOME (LOSS) BEFORE INCOME TAXES 654,128 492 1,024,707 (679,188)
Provision for income taxes (Note 5) ----------- ------------ ----------- ------------
NET INCOME (LOSS) $ 654,128 $ 492 $ 1,024,707 $ (679,188)
=========== ============ =========== ============
EARNINGS (LOSS) PER COMMON SHARE and
EARNINGS (LOSS) PER COMMON SHARE - $ 0.09 $ .00 $ 0.14 $ (0.09)
assuming dilution (Note 1) =========== ============ =========== ============
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING (Note 1) 7,472,851 7,639,455 7,469,123 7,418,279
=========== ============ =========== ============
</TABLE>
See notes to consolidated financial statements.
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KENSEY NASH CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
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<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 188 -- 1,645 1,645
Net income 1,024,707 1,024,707
--------- ------------- ------------ ------------ ------------
BALANCE, DECEMBER 31, 1998 (Unaudited) 7,459,460 $ 7,459 $ 37,599,026 $(20,716,670) $ 16,889,815
========= ============ ============ ============ ============
</TABLE>
See notes to consolidated financial statements.
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KENSEY NASH CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
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<CAPTION>
SIX MONTHS ENDED
DECEMBER 31,
-----------------------------------------
1998 1997
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $ 1,024,707 $ (679,188)
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization 576,408 416,839
Changes in assets and liabilities which used cash:
Accounts receivable (1,895,566) (167,588)
Prepaid expenses and other current assets (43,827) 95,043
Inventory 367,323 (300,552)
Accounts payable and accrued expenses 259,759 437,589
Deferred revenue (685,240) (151,155)
----------- -----------
Net cash used in operating activities (396,436) (349,012)
----------- -----------
INVESTING ACTIVITIES:
Patent costs capitalized (69,539)
Additions to property, plant and equipment (643,933) (778,784)
Sale of investments 118,480 1,724,039
----------- -----------
Net cash (used in) provided by investing activities (525,453) 875,716
----------- -----------
FINANCING ACTIVITIES:
Principal payments under capital leases (19,302) (23,061)
Repayments of patent acquisition obligation (214,892)
Proceeds from long-term debt 575,000
Exercise of stock options 1,645 255,885
----------- -----------
Net cash (used in) provided by financing activities (232,549) 807,824
----------- -----------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (1,154,438) 1,334,528
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 1,407,684 868,180
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 253,246 $ 2,202,708
----------- -----------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 126,909 $ 5,239
=========== ===========
Cash paid for income taxes $ 14,000 $
=========== ===========
</TABLE>
See notes to consolidated financial statements.
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KENSEY NASH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 --CONSOLIDATED FINANCIAL STATEMENTS
BASIS OF PRESENTATION
The consolidated balance sheet at December 31, 1998, the consolidated
statements of operations for the three and six months ended December
31, 1998 and 1997 and the consolidated statements of cash flows for the
six months ended December 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 December 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 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 December 31, 1998 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 $110,105 and $34,550 for the three months
ended December 31, 1998 and 1997, respectively and $140,015 and $57,035
for the six months ended December 31, 1998 and 1997, 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 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 September
30, 1998, the Company had exceeded the first and second royalty year
(periods ended September 30, 1997 and September 30, 1998) Minimum
Royalties by $352,310 and $3,058,970, respectively. The deferred
revenue
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balance has been reduced by 50% of such total excess, to $1,294,360. 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 December 31, 1998.
NOTE 3 -- 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:
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<CAPTION>
DECEMBER 31, 1998 JUNE 30, 1998
<S> <C> <C>
Raw materials $ 607,690 $ 971,357
Work in process 52,313 55,969
----------- -----------
Total $ 660,003 $ 1,027,326
=========== ===========
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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 $1,815,952 at
December 31, 1998.
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 ($14,000 for
the three months ended December 31, 1998) has generated AMT tax credits
that are recorded as deferred tax assets.
NOTE 6 -- SUBSEQUENT EVENTS
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 a $5 million tax exempt bond issue of the
Company, made through the local development authority, and made the
proceeds available to the Company under the Tax Free Loan. The proceeds
of the loan will be used for capital equipment financing through June
30, 2000 and to pay down the Company's existing balance under its $2
million term loan with the bank. The 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 November. The assets of the Company,
with the exception of the Company's patents, collateralize the loan.
On February 5, 1999, TYCO International Ltd., the Company's Strategic
Partner, announced the sale of the marketing and manufacturing rights
of the Angio-Seal product line to St. Jude Medical, Inc. Under the
purchase agreement, all of the Company's agreements with its current
Strategic Partner will be transferred to St. Jude Medical, Inc. in a
transaction which is expected to close by the end of March 1999.
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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.
The Company has expanded its capabilities in absorbable biomaterials.
The Company is currently manufacturing collagen products for third parties for
use as delivery systems for various 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 DECEMBER 31, 1998 COMPARED TO THREE MONTHS ENDED DECEMBER 31,
1997
Revenues for these periods consisted of net sales, research and
development revenue, and royalty income. Revenues increased 34% to $3,714,000 in
the three months ended December 30, 1998 from $2,762,000 in the three months
ended December 31, 1997. Net sales of products increased 52% to $1,829,000 from
$1,202,000 for the three months ended December 31, 1998 and 1997, respectively.
Research and development revenues decreased 62% to $391,000 from $1,029,000 for
the three months ended December 31, 1998 and 1997, respectively. The increase in
net sales was mainly attributable to an increase in Angio-Seal components sold
to the Company's Strategic Alliance Partner, as a result of increased demand in
the U.S. and European markets, as well as increases in sales of commercial
bioabsorbable OEM polymer and collagen products. The decrease in research and
development revenues related to decreased performance of contract research and
development for the Company's Strategic Alliance Partner as they assumed a more
active role in the Angio-Seal R&D programs and as the 6F product nears
commercialization.
Royalty income increased 181% to $1,495,000 from $531,000 in the three
months ended December 31, 1998 and 1997, respectively. Approximately 80,000
Angio-Seal units were sold to end-users in the quarter ending December 31, 1998
compared to 38,000 units sold in the quarter ending December 31, 1997. 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 an increase
in total royalty per unit
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resulting from the Patent Acquisition Agreement. As the Company's Strategic
Alliance Partner continues to increase production and enhance marketing efforts
for the Angio-Seal 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 12% to $1,161,000 in the three months
ended December 31, 1998 from $1,041,000 in the three months ended December 31,
1997. This increase reflects greater net sales of products offset by favorable
trends in gross margins.
Research and development expense, including regulatory and clinical
expense, increased 3% to $1,429,000 in the three months ended December 31, 1998
from $1,394,000 in the three months ended December 31, 1997. The Company
continues to assist in the development of the Angio-Seal and has expanded
development on its biomaterials products, including absorbable polymers and
collagen. In addition, the Company has significantly expanded its development
efforts in revascularization technology as it targets commencement of clinical
trials on the AVS in the second half of fiscal year 1999. The Company expects
research and development expense to continue at recent levels, if not slightly
increase, as it continues to assist its Strategic Partner in the development of
the Angio-Seal, investigates and develops new products, conducts clinical trials
and seeks regulatory approval for its proprietary products.
Selling, general and administrative expense increased 22% to $541,000
in the three months ended December 31, 1998 from $444,000 in the three months
ended December 31, 1997. This increase was primarily a result of legal expenses
incurred related to the Company's ongoing patent infringement suit as well as
one-time advisory fees incurred during the quarter.
Interest expense increased 186% to $60,000 in the three months ended
December 31, 1998 from $21,000 in the three months ended December 31, 1997. This
increase was due to the Company's balance under the line of credit increasing
from $500,000 to $2,000,000 as well as interest charges recorded in relation to
the obligation under the Company's Patent Acquisition Agreement. Interest income
decreased to $129,000 in the three months ended December 31, 1998 from $136,000
in the three months ended December 31, 1997 as a result of a slight decrease in
average total cash and investment balances.
SIX MONTHS ENDED DECEMBER 31, 1998 COMPARED TO SIX MONTHS ENDED DECEMBER 31,
1997
Revenues for these periods consisted of net sales, research and
development revenue, and royalty income. Revenues increased 68% to $7,266,000 in
the six months ended December 31, 1998 from $4,327,000 in the six months ended
December 31, 1997. Net sales of products increased 85% to $3,206,000 from
$1,736,000 for the six months ended December 31, 1998 and 1997, respectively.
Research and development revenues decreased 34% to $1,160,000 from $1,762,000
for the six months ended December 31, 1998 and 1997, respectively. The increase
in net sales was mainly attributable to an increase in Angio-Seal components
sold to the Company's Strategic Alliance Partner, as a result of increased
demand in the U.S. and European markets, as well as increases in sales of
commercial bioabsorbable OEM polymer and collagen products. The decrease in
research and development revenues relates to decreased performance of contract
research and development for the Company's Strategic Alliance Partner as they
assumed a more active role in the Angio-Seal R&D programs and as the 6F product
nears commercialization.
Royalty income increased 250% to $2,900,000 from $829,000 in the six
months ended December 31, 1998 and 1997, respectively. Approximately 155,000
Angio-Seal units were sold to end-users in the six months ending December 31,
1998 compared to 60,000 units sold in the six months ending December 31, 1997.
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. As the
Company's Strategic Alliance Partner continues to increase
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production and enhance marketing efforts of the Angio-Seal 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 31% to $2,439,000 in the six months
ended December 31, 1998 from $1,857,000 in the six months ended December 31,
1997. This increase reflects greater net sales of products offset by favorable
trends in gross margins.
Research and development expense, including regulatory and clinical
expense, increased 10% to $2,827,000 in the six months ended December 31, 1998
from $2,580,000 in the six months ended December 31, 1997. The Company continues
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 in the second half of fiscal year 1999. The Company expects research and
development expense to continue at recent levels, if not slightly increase, as
it continues to assist in the development of the Angio-Seal, investigates and
develops new products, conducts clinical trials and seeks regulatory approval
for its products.
Selling, general and administrative expense increased 38% to $1,115,000
in the six months ended December 31, 1998 from $808,000 in the six months ended
December 31, 1997. This increase was primarily a result of legal expenses
incurred related to the patent infringement suit against Perclose, Inc. which
was initiated in March 1998 as well as one-time advisory fees incurred during
the quarter.
Interest expense increased 255% to $126,000 in the six months ended
December 31, 1998 from $36,000 in the six months ended December 31, 1997. This
increase was due to the Company's balance under the line of credit increasing
from $500,000 to $2,000,000 as well as interest charges recorded in relation to
the obligation under the Company's Patent Acquisition Agreement. Interest income
decreased slightly, to $263,000 in the six months ended December 31, 1998, from
$269,000 in the six months ended December 31, 1997. Total average cash and
investment balances have remained fairly consistent.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in the Company's operating activities during the six
months ended December 31, 1998 and 1997 was $396,000 and $349,000, respectively.
In the six months ending December 31, 1998, changes in asset and liabilities
resulted in a $1,998,000 use of cash, which was offset by a net income of
$1,025,000. In comparison, changes in asset and liabilities resulted in a
$87,000 use of cash and the Company had a net loss of $679,000 in the six months
ending December 31, 1997. Depreciation and amortization increased $160,000 in
the six months ended December 31, 1998 from the six months ended December 31,
1997.
Capital expenditures were $644,000 for the six months ended December
31, 1998, primarily representing leasehold improvements and machinery and
equipment 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
$6,469,000 at December 31, 1998. In addition, the Company has pledged $1,949,000
in investments (not included in the $6,469,000) 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 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.
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The Company has a $2,000,000 bank revolving line of credit that
converts to a term loan payable in 60 equal installments beginning January 1,
2000. A portion of this loan will be repaid with the proceeds of a $5 million
tax-free loan which was obtained by the Company subsequent to December
31, 1998. 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 December
31, 1998 is $664,000.
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 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 make additional marketing
claims and to continue to expand research and development activities for the
Angio-Seal, 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.
SALE OF ANGIO-SEAL PRODUCT LINE
On February 5, 1999, TYCO International Ltd., the Company's Strategic
Partner, announced the sale of the marketing and manufacturing rights of the
Angio-Seal product line to St. Jude Medical, Inc. Under the purchase agreement,
all of the Company's agreements with its current Strategic Partner will be
transferred to St. Jude Medical, Inc. and the transaction is expected to close
by the end of March 1999.
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
12
<PAGE> 13
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.
13
<PAGE> 14
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
14
<PAGE> 15
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: February 16, 1999 By: /s/ Wendy F. DiCicco
---------------------------
Wendy F. DiCicco
Chief Financial Officer
15
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