<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended: June 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________.
Commission File Number: 0-27120
KENSEY NASH CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 36-3316412
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
MARSH CREEK CORPORATE CENTER, 55 EAST UWCHLAN AVENUE, EXTON,
PENNSYLVANIA 19341
(Address of principal executive offices and zip code)
Registrant's telephone number, including area code: (610) 524-0188
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $.001 PER SHARE
(TITLE OF CLASS)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No___
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the registrant's voting stock (based upon
the per share closing price of $12.25 on September 22, 2000 and, in making such
calculation, registrant is not making a determination of the affiliate or
non-affiliate status of any holders of shares of Common Stock) was approximately
$128,129,181.
The number of shares outstanding of the registrant's Common Stock, par
value $.001 per share, as of September 22, 2000 was 10,459,525.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the following document are incorporated
by reference into this report:
Definitive Proxy Statement in connection with
the 2000 Annual Meeting of Stockholders
----------------------------------------------
1
<PAGE> 2
PART I
ITEM 1. BUSINESS
OVERVIEW
We are experts in designing, developing, manufacturing and processing
proprietary biomaterials products for the orthopedics, cardiology,
drug/biologics delivery and wound care markets. We also are a leader in
cardiovascular medical technology, specifically, arterial revascularization and
puncture closure devices. We are in clinical trials with the Aegis Vortex(TM)
System, a device designed to remove occlusive material from saphenous vein
grafts implanted during coronary bypass surgeries. Additionally, we were the
original designers, developers and manufacturers of the Angio-Seal(TM), a device
designed to seal and close femoral artery punctures made during diagnostic and
therapeutic cardiovascular catheterizations. We intend to leverage our
proprietary knowledge and expertise to develop new products and technologies and
to explore additional applications for our products.
In September 2000, we acquired THM Biomedical, Inc., a company focused on
developing tissue engineering devices for the repair and replacement of
musculoskeletal tissues. With this acquisition, we significantly broadened our
intellectual property portfolio in bioabsorbable materials and added to our
proprietary biomaterials technology platform with product applications in the
articular cartilage regeneration, bone regeneration, drug and growth factor
delivery and periodontal markets.
BIOMATERIALS MARKET OPPORTUNITY
Biomaterials, which are substances that treat, augment, or replace tissue,
organs or body functions, are used regularly as components and elements in a
wide variety of absorbable and permanent implants. Advances in materials
technology and a better understanding of the biological processes involved in
tissue formation and remodeling have led to the introduction of absorbable
biomaterials based products to address long-standing deficiencies of traditional
products and therapies. This trend has been observed in many markets, including
orthopedics, cardiology, drug/biologics delivery, wound care, surgery, dentistry
and urology. Generally, absorbable biomaterials based products have proven
attractive solutions for a number of reasons. First, physicians like to use an
implant which will not require a second surgery to remove the device. In
addition, the rate of resorption of products can be carefully engineered to
promote healing as the biomaterials based products work with the body's natural
healing response. Finally, absorbable biomaterials offer tremendous potential
for drug delivery. The ability to provide staged and sustained release of drugs
and biologics is a critical attribute of the growth in the use of absorbable
biomaterials based products.
The technological challenges involved in developing biomaterials products are
substantial. Developing products made from absorbable biomaterials requires an
understanding of the mechanical integrity, biocompatibility, resorption rates
and ability to sterilize these products without jeopardizing the material
properties.
OUR BIOMATERIALS TECHNOLOGY
Our expertise in biomaterials enables us to design, develop and manufacture
proprietary biomaterials products. These products are characterized by their
ability to be resorbed or incorporated in the body's own tissue. Our particular
expertise is in the properties, usage and processing of collagen, polymers,
ceramics and other absorbable materials. We believe that our biomaterials
technology gives us a competitive advantage because we are able to provide the
essential biomaterials building blocks to address specific product needs.
- Polymers. We are a leader in the design, development and
manufacture of absorbable polymer products. We use many
different types of polymers, in combination or as single
entities, to achieve the desired properties in a particular
product. We have developed several unique polymer based
materials, products and processes, which have a variety of
applications in implantable absorbable medical devices. We
offer our customers and partners a complete solution, including
product design and engineering, tool design, process
development, commercial manufacture and packaging
configuration.
2
<PAGE> 3
- Collagen and Other Naturally Occurring Materials. We design,
develop and manufacture products using naturally occurring
materials such as collagen, elastin, hyaluronic acid and
alginate, which have applications in a wide variety of
absorbable medical devices. We are experts in processing
collagen into diverse product formulations, including powders,
gels, pastes, sponges and structural matrices. We combine
collagen and other naturally occurring materials using our
proprietary processes, thereby creating new materials with
unique characteristics and diverse product applications.
We have completed extensive biocompatibility and viral
inactivation studies on our collagen products. We have
established, and currently maintain, device master files which
contain the data from these studies. Our device master files
allow customers who incorporate our collagen products into
their products to reference our device master files in their
regulatory submissions, thereby eliminating the extensive and
time consuming process of independently generating their own
data. We believe our ability to make our device master files
available to our customers provides us with a significant
competitive advantage.
- Ceramics Products. We are developing products using ceramic
materials in combination with other biomaterials that have
applications in bone grafting, spinal fusion, filling of bone
defects and fracture repair. We have ceramic experience
primarily with calcium phosphate salts such as hydroxyapatite.
These materials can be designed to replicate bone structure and
support new bone growth or as osteoconductive implants.
Ceramics are also useful for enhancing the material properties
of products, such as strength, when used in combination with
other biomaterials.
Our recent acquisition of THM Biomedical, Inc. and the related tissue
engineering technology broadens our biomaterials technology platform in the
orthopedics and drug delivery markets. This technology adds a series of
products, development programs and intellectual property related to porous
biodegradable regeneration matrices. Specifically, we now have products in
development for articular cartilage regeneration, bone growth scaffolds for
spinal and trauma applications, and for the delivery of drugs and growth
factors.
In addition, through this acquisition, we now have two commercialized products
in the periodontal field, Drilac(TM), a product which is indicated to prevent
dry socket following tooth extraction, and EpiGuide(TM), a barrier membrane used
in periodontal restorative procedures to prevent soft tissue cells from growing
into space reserved for bone.
OUR BIOMATERIALS STRATEGY
Our strategy is to expand our leadership position and expertise in biomaterials
products and technology. The components of our strategy are presented below.
- Develop New Proprietary Biomaterials Products. We are
leveraging our technology and expertise to develop new
proprietary biomaterials products. We are experts in polymers,
collagen and other absorbable materials, as well as in
processing these materials. In addition, we have particular
expertise in the use of biomaterials in the orthopedics,
cardiology, drug/biologics delivery and wound care markets. We
are using our expertise to develop new biomaterials products,
new formulations of existing biomaterials and new biomaterials
applications. For example, we are using our expertise in
absorbable polymers and cardiovascular devices to design and
develop a absorbable polymer matrix to deliver angiogenic
growth factors to promote the growth of new blood vessels for
use in myocardial revascularization procedures.
- Expand Our Existing Biomaterials Business. We intend to
aggressively expand our existing biomaterials business by
increasing sales to our current customers and attracting new
customers by providing proprietary, technologically superior
biomaterials products. We offer a complete range of services
including design, development, regulatory consulting,
manufacturing and package engineering. We will continue to
invest in new manufacturing technology and processes to meet
our customers' requirements, support product launches and
increase the demand for our biomaterials products.
Additionally, we will expand our marketing efforts to broaden
our customer base in the orthopedic, cardiology, drug/biologics
delivery and wound care markets.
3
<PAGE> 4
- Commercialize Biomaterials Products. We are increasing the
level of value we add to the services and products we sell to
our customers and believe we will be able to increase our
financial participation in the commercialization of these
services and products. We either manufacture our biomaterials
products and provide them to our customers for incorporation
into their products or manufacture a complete product
incorporating our biomaterials and provide the finished product
to our customers for distribution. Currently, we are
independently designing and developing biomaterials products
which may enhance the features and benefits of our customers'
products. In addition, we are independently developing new
proprietary products and exploring new commercial relationships
with customers to maximize our return on our increased
investment in these products. As we continue to increase our
investment in the development of new biomaterials and products,
we believe we will be able to retain an increased percentage of
the financial return associated with the commercialization of
products using our biomaterials technology.
- Pursue Strategic Acquisitions and Alliances. We will seek
strategic acquisitions and alliances which add complementary
technologies and expertise, broaden our intellectual property
portfolio and strengthen our competitive position in our
biomaterials business. We believe that our expertise in
biomaterials allows us to identify and attract these
opportunities.
OUR BIOMATERIALS PRODUCTS
We provide our customers with a variety of proprietary products ranging from
components to final packaged products which are then marketed and sold to end
users. We sell our biomaterials products to leading companies in each of the
markets listed below. The structure of our relationships with our customers
varies and includes development partnerships and manufacturing contracts. The
following table describes our biomaterials products, the markets they address
and their current status.
<TABLE>
<CAPTION>
BIOMATERIALS MARKETS BIOMATERIALS PRODUCTS PRODUCT STATUS
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Orthopedics:
Sports Medicine Meniscal Repair Tacks Commercial
Anterior Cruciate Ligament Repair Screws Commercial; additional products in
development and regulatory review
Rotator Cuff Repair Screws Commercial; additional products in
development and regulatory review
Cranio-maxillofacial Fixation Cranio-maxillofacial Repair Plates, Commercial; additional products in
Screws and Tacks development
Spinal Fixation Absorbable Growth Factor Delivery Commercial, international only;
Matrices clinical; additional products in
development
Trauma Fixation Bone Graft Substrates Development
Fracture Fixation Screws Development
--------------------------------------------------------------------------------------------------------------------
Cardiology:
Arterial Puncture Closure Absorbable Polymer Anchors Commercial
and Collagen Plugs for Angio-Seal
Vascular Grafts Vascular Graft Coatings Commercial, international only
Absorbable Vascular Grafts Research
Angiogenesis Angiogenic Growth Factors and Development
Pharmaceutical Delivery Matrices
Arterial Stents Advanced Intravascular Absorbable Development
Stents and Stent Covers
Anastomosis Vascular Graft Connection Systems Development
--------------------------------------------------------------------------------------------------------------------
Drug/Biologics Delivery:
Cervical Cancer and Dysplasia Drug Delivery Matrices Clinical
--------------------------------------------------------------------------------------------------------------------
</TABLE>
4
<PAGE> 5
<TABLE>
<CAPTION>
BIOMATERIALS MARKETS BIOMATERIALS PRODUCTS PRODUCT STATUS
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Wound Care:
Burn Treatments and Skin Collagen Tissue Engineering Substrates FDA approved for humanitarian use;
Defects used for Culturing Skin Cells clinical
Wound Dressings Collagen Incorporated into Topical Commercial
Wound Dressings
--------------------------------------------------------------------------------------------------------------------
</TABLE>
Product status definitions:
Commercial -- Product approved by the appropriate regulatory agency and
available for sale.
Clinical -- Product approved by the appropriate regulatory agency for human
clinical studies.
Development -- Product in-process which has demonstrated feasibility but has not
been approved for clinical trials or sale.
Research -- Product or therapy concept which has not advanced to the development
stage.
We have products that are commercially available for sale in the U.S. and
international markets, and products that are in various stages of development,
clinical trials or regulatory review. Additionally, we have biomaterials
research programs which we believe will provide us with opportunities to expand
our product offerings and strategic alliances.
Orthopedic Products. Applications in the orthopedic market for our biomaterials
products include sports medicine, as well as spinal and trauma fixation.
Orthopedic applications of biomaterials include repair, regeneration or
augmentation of musculoskeletal tissues, including bone, cartilage, ligaments,
spinal discs and tendons. We estimate the potential market for products we
manufacture, develop and market in these segments to be in excess of $600
million annually. Companies in this market often look to third parties to
develop and manufacture their product concepts into marketable products. Our
capabilities and expertise have enabled us to develop relationships with several
of the major orthopedic companies, which we provide with our biomaterials
products.
Many of our biomaterials products manufactured from absorbable materials are
designed to replace metallic devices used in the fixation and repair of
musculoskeletal tissues. Use of absorbable biomaterials eliminates the need for
a second surgery which is frequently necessary to remove non-absorbable metallic
implants like bone rods and pins. This benefit provides our customers with a
cost-effective alternative to traditional non-absorbable based products.
Sports Medicine. The primary application for biomaterials in the
sports medicine segment is soft tissue fixation. Soft tissue fixation
includes the repair of tendons and ligaments in the knee, such as the
meniscus and the anterior cruciate ligament, and in the shoulder, such
as the rotator cuff. The worldwide soft tissue fixation segment of the
sports medicine market was estimated to be approximately $360 million
for 1999 and is growing at an estimated 15% to 20% per year.
In soft tissue fixation, we have assisted in developing and
manufacturing three product lines marketed and sold by our customers.
Additionally, we have assisted in developing and will manufacture, six
new product lines for which our customers are awaiting regulatory
approval. These product lines include various types of absorbable
screws, tacks and other fixation devices.
Cranio-maxillofacial. Our biomaterial products address the repair of
the skull or bones of the face using absorbable tacks, screws and
plates. The potential worldwide market for our cranio-maxillofacial
applications was estimated to be $250 million for 1999. The
cranio-maxillofacial market is a subsegment of the trauma fixation
market.
We have assisted with the design and the development of, and are
manufacturing, a product line for cranio-maxillofacial repair marketed
and sold by one of our customers. We also are assisting with the
design and development of a new product line for another customer. In
addition, we are developing proprietary technologies that will have
applications in this segment and intend to commercialize these
technologies through arrangements similar to our existing customer
relationships.
Spinal Fixation. The primary application for our biomaterials in the
spinal fixation market is spinal fusion, a $405 million market in
1999. Spinal fusion devices are used to restore normal spinal disc
spacing and fuse adjacent vertebrae for the correction of a spine or
improvement in chronic back pain. We supply our proprietary collagen
products for use in coating spinal fusion cages manufactured, marketed
and sold by our customer.
5
<PAGE> 6
Trauma Fixation. Trauma fixation devices are used to repair broken
bones using nails, screws, plates, pins and bone growth stimulation
products. We are developing a product line with a customer
incorporating one of our proprietary biomaterials formulations. We
also are working with other customers to expand their product
offerings by providing our proprietary biomaterials products for
incorporation into their products. We are currently exploring the use
of our biomaterials products to deliver growth factors for
applications in trauma fixation.
Cardiology Products. Our biomaterials are used in arterial puncture closure
products and coatings for synthetic vascular grafts. The potential worldwide
arterial puncture closure market is estimated to be between $750 million and $1
billion, with the U.S. market accounting for approximately 75%. We manufacture
the absorbable polymer anchor and collagen plug components for the Angio-Seal.
We also supply our proprietary collagen to a customer for use as a synthetic
vascular graft coating. We are independently developing a absorbable polymer
matrix to deliver angiogenic growth factors to promote the growth of new blood
vessels for use in myocardial revascularization procedures. We are also
independently exploring the use of our biomaterials in an arterial stent, a
stent cover, an anastomosis connector and a vascular graft.
Drug/Biologics Delivery Products. Biomaterials are particularly useful for the
controlled release of drugs and other biologically active agents such as growth
factors. In these applications, the drug is deposited or incorporated into a
biomaterials delivery matrix. As the matrix dissolves or is degraded by the
body, the drug is gradually released. The use of a biomaterials matrix for drug
delivery permits a locally targeted, low-dose release profile, improving the
delivery of the drug. We supply a proprietary collagen matrix to a customer
which is developing a drug delivery system to treat cervical cancer and
dysplasia.
Wound Care Products. While the wound care market is currently dominated by
conventional bandages and dressings and surgical staples or sutures, there is a
new generation of products resulting from recent advances in biomaterials,
tissue engineering and biotechnology. We manufacture collagen which is
incorporated into an artificial skin product manufactured, marketed and sold by
our customer to treat burns and skin defects, a market of approximately $230
million in 1999. Additionally, we supply collagen for use in a topical wound
dressing manufactured, marketed and sold by our customer. We are independently
pursuing additional wound care applications for our biomaterials, including
surgical sealants and glues and adhesion prevention segments.
Surgery, Dentistry and Urology Products. Biomaterials are used in these market
segments in products ranging from absorbable sutures to tissue barriers to
stents. We intend to pursue the development of products for these markets.
THE AEGIS VORTEX SYSTEM
We are designing and developing the Aegis Vortex system to remove occlusive
material from saphenous vein grafts implanted during coronary artery bypass
surgeries. There are approximately 650,000 coronary bypass surgeries performed
annually worldwide and approximately half of all bypass grafts become diseased
or occluded within ten years of surgery. Saphenous vein grafts are used in
coronary bypass graft procedures as a replacement for the diseased or occluded
native artery to restore blood flow. The saphenous vein is removed from the
patient's leg and surgically implanted in place of the diseased or occluded
native artery. Current treatment options for diseased saphenous vein grafts
include drug therapy, device-based therapies (including angioplasty and the
placement of stents), repeat bypass surgery and transmyocardial
revascularization. There are significant risks involved with these treatments
ranging from continued progression of disease, heart attack and possible death.
We believe the use of the Aegis Vortex will reduce these risks for patients.
We believe the Aegis Vortex currently is the only device, in clinical trials or
commercially available, which offers all three of the following features:
- a catheter with a high-speed rotating tip advanced over a
guidewire that delivers fluid to the vessel; the tip rotates at
up to 150,000 revolutions per minute in order to dislodge and
break the occlusion into particles;
6
<PAGE> 7
- a distal protection balloon placed beyond the occlusion to
prevent debris from flowing downstream and potentially
causing a heart attack; and
- a controlled extraction system which removes the debris.
To operate the Aegis Vortex system, a guiding catheter is positioned at the
entrance to the graft. The guidewire, containing the distal protection balloon,
is advanced through the saphenous vein graft beyond the occlusion. The distal
protection balloon is inflated and the rotating tip catheter is advanced over
the guidewire and through the diseased or occluded graft. Saline and contrast
media are delivered into the graft from the catheter. The combination of the
rotating catheter tip and saline and contrast media create a vortex which
dislodges and breaks up the occlusive material. The particles and debris that
are dislodged by the rotating tip catheter are extracted through the lumen of
the guiding catheter. Adjunctive PTCA and/or stenting is then performed over
the balloon guidewire, with distal protection from the occlusion balloon; a
flush catheter is provided to flush any remaining debris from the graft.
We have completed an initial 17 patient pilot clinical trial of the Aegis
Vortex. We believe this trial demonstrated the safety and feasibility of the
Aegis Vortex in humans. We are incorporating design enhancements and planning
our pivotal trial protocol. We expect to submit an investigational device
exemption, or IDE, supplement to the FDA during the second quarter of fiscal
year 2001 to initiate additional trials of the device in the U.S. We anticipate
beginning a trial in Europe during the second quarter of fiscal year 2001 which
will be used as support for a CE Mark filing. The CE Mark is an international
symbol of adherence to quality assurance standards established by the European
Union and compliance with applicable European medical device directives.
We intend to commercialize the Aegis Vortex by building a direct sales and
marketing force in the interventional cardiology market or establishing a
strategic alliance with a leader in this market.
We intend to modify the design of the Aegis Vortex to address additional related
applications including the treatment of diseased native coronary and peripheral
arteries and the re-occlusion of stented arteries. We are currently evaluating
selected design modifications to address these applications.
THE ANGIO-SEAL
The Angio-Seal is a leader in the worldwide arterial puncture closure market
with over 870,000 devices sold as of June 30, 2000. We estimate the Angio-Seal
worldwide market share in 1999 was approximately 35%. We believe there are
approximately 6.5 million cardiovascular catheterization procedures performed
annually. The potential worldwide arterial puncture closure market is estimated
to be between $750 million and $1 billion, with the U.S. market accounting for
approximately 75%. We believe that current U.S. market penetration of arterial
puncture closure devices is approximately 25% and the international market
penetration is approximately 8%.
The Angio-Seal is a puncture closure device that acts to close and seal femoral
artery punctures made during diagnostic and therapeutic cardiovascular
catheterizations. The device consists of four components:
- an absorbable polymer anchor seated securely against the inside
surface of a patient's artery at the point of puncture;
- an absorbable collagen plug applied adjacent to the outside of
the artery wall;
- an absorbable suture; and
- a delivery system consisting of an insertion sheath, puncture
locator, guidewire, tamper tube and spring.
The anchor and suture act as a pulley to position the collagen into the puncture
tract adjacent to the outside of the artery wall, to seal and close the
puncture. A tamper tube is used to further position and secure the closure
device. The anchor, collagen and suture are all designed to be resorbed into the
patient's body within 60 to 90 days after the procedure. We believe that this
mechanical (via the anchor and collagen) and biochemical (via the collagen) seal
offers physicians a method for sealing and closing punctures with significant
advantages over traditional manual or mechanical compression methods, as well as
over other competitive products. We believe the
7
<PAGE> 8
Angio-Seal has several advantages over traditional manual or mechanical
compression procedures, including: reduced time to ambulation, reduced staffing
and hospital time, possible reduction in procedure costs, increased patient
comfort, greater flexibility in post-procedure blood thinning therapy and
increased blood flow to the leg.
The Angio-Seal is manufactured, marketed, sold and distributed by St. Jude
Medical. We receive a royalty on every Angio-Seal unit sold. In addition, we
have manufactured components for all Angio-Seal devices and augmented St. Jude
Medical's manufacturing of completed devices. In December 1999, St. Jude Medical
significantly expanded its U.S. sales and marketing efforts for the Angio-Seal.
In early 2000, the 6F Angio-Seal was approved for sale in the U.S. The 6F
device, the smallest and latest size of the Angio-Seal device, specifically
addresses arterial punctures created during diagnostic angiograms, which account
for approximately 70% of all cardiac catheterization procedures. In the
international market, the 6F device was approved in early 1999 and its sales
have increased significantly since the launch. We believe the impact of the
additional sales and marketing efforts, along with the 6F device U.S. launch and
new product enhancements planned by St. Jude Medical, will provide additional
growth opportunities for the Angio-Seal.
PATENTS AND PROPRIETARY RIGHTS
Our intellectual property covers technology in the fields of arterial puncture
closure, blood vessel location, arterial revascularization systems,
drug/biologics delivery products, wound care products, angiogenesis products and
surgical instruments. We protect our technology by, among other things, filing
patent applications for the patentable technologies that we consider material to
our business. Our first U.S. patent for the concept of sealing arterial
punctures was issued in 1988. As of September 22, 2000, we held 73 United States
patents and 79 foreign national patents and had several United States patents
and foreign national patent applications pending.
We also rely heavily on trade secrets and unpatented proprietary know-how which
we seek to protect through non-disclosure agreements with corporations,
institutions and individuals exposed to our proprietary information. As a
condition of employment, we require that all full-time and part-time employees
enter into an invention assignment and non-disclosure agreement.
We have licensed our United States and foreign patents for the Angio-Seal to St.
Jude Medical and are required to license all improvements for Angio-Seal to St.
Jude Medical. The license agreements with St. Jude Medical are exclusive and
worldwide, with rights to make, have made, use, sell, and have sold the
Angio-Seal, but are limited to the cardiovascular field of use only.
We will continue to aggressively protect any new manufacturing processes,
biomaterials products and technologies and medical products and devices. We
intend to broaden the scope of our intellectual property and consider our core
technologies to be critical to our future product development.
MANUFACTURING
We have developed unique manufacturing and processing capabilities for
absorbable collagen and polymers. We manufacture numerous absorbable
biomaterials products for use in applications including orthopedics, cardiology,
drug/biologics delivery and wound care. We have our own capabilities in tool and
die making, injection molding, extrusion, compounding, machining, model making
and laser welding, which allows us to engineer and reengineer our products in
development on site.
To date, our Angio-Seal manufacturing activities have consisted primarily of
producing Angio-Seal devices for use worldwide in clinical trials and partially
and fully completed commercial devices for sale in the U.S. and Europe.
Historically, we have manufactured two of the major absorbable components of the
Angio-Seal, the collagen plug and polymer anchor, to fulfill the worldwide
requirements of St. Jude Medical and our previous partners for Angio-Seal. St.
Jude Medical has the right to manufacture the absorbable polymer anchor and
intends to manufacture that component in the future. However, we anticipate we
will continue to be a source of anchor requirements through the third quarter of
fiscal year 2001. While we continue to supply St. Jude with the collagen
requirements for the Angio-Seal, our formal collagen supply agreement with St.
Jude expired in May 2000.
8
<PAGE> 9
Our FDA-registered manufacturing facility in Exton, Pennsylvania contains
separate areas for Angio-Seal assembly, absorbable collagen and polymer
manufacturing. Our manufacturing facility is equipped with multiple class
100,000 clean room facilities and is certified to the two international quality
standards, ISO 9001 and EN 46001. Certification is based on adherence to
established standards of quality assurance and manufacturing process control.
Our manufacturing facility is subject to regulatory requirements and periodic
inspection by regulatory authorities. We have a separate in-house quality
assurance department that sets standards, monitors production, writes and
reviews operating procedures and protocols and performs final testing of sample
devices and products manufactured by or for us.
We purchase most raw materials, parts and peripheral components used in our
products. Although many of these supplies are off-the-shelf items readily
available from several supply sources, others are custom-made to meet our
specifications. We believe that, in most of these cases, alternative sources of
supply for custom-made materials are available or could be developed within a
reasonable period of time.
RESEARCH AND DEVELOPMENT
Our research and development and regulatory and clinical staff consisted of 51
individuals at September 22, 2000. Our research and development efforts are
focused on the development of the Aegis Vortex and the continued development of
our biomaterials capabilities. We incurred total research and development
expenses of $5.3, $5.7 and $5.5 million in the fiscal years ended June 30, 2000,
1999 and 1998, respectively.
In addition to the resources dedicated to the product development process, we
have an internal regulatory affairs and clinical management staff responsible
for managing our clinical trials for the Aegis Vortex. Our staff worked closely
with our strategic partners to gain regulatory approvals for additions to the
Angio-Seal product lines in the U.S., the European Union and several other
countries.
OUR RELATIONSHIP WITH ST. JUDE MEDICAL
We have a strategic alliance with St. Jude Medical who manufactures, markets and
sells the Angio-Seal worldwide. The Angio-Seal has been sold in Europe since
1995 and in the U.S. since 1996. The Angio-Seal is now sold in the U.S., Europe,
Canada, Latin America and Australia, among other countries. As of June 30, 2000,
there have been over 870,000 devices sold to end users.
Under our license agreements, St. Jude Medical has exclusive rights to
manufacture, market and distribute all current and future sizes of the
Angio-Seal for cardiovascular use worldwide. We retain the rights to use our
puncture closure technology for other applications. We earn a royalty on each
Angio-Seal sold by St. Jude Medical. The royalty rates are based on aggregate
volume of Angio-Seals sold. We expect a reduction in our royalty rate during the
second quarter of fiscal year 2001. These royalty agreements provide for minimum
royalty payments for five years following FDA approval (ending September 30,
2001). If St. Jude Medical fails to pay the minimum royalty, the license
agreements become non-exclusive. This right of conversion is our sole remedy for
St. Jude Medical's failure to make any minimum royalty payment, and if it is
exercised, St. Jude Medical has no further obligation to make any minimum
royalty payments.
The term of the license agreements extends to the expiration date of the most
recently issued licensed patent, including all continuations or supplements. The
most recent patent for the Angio-Seal technology was issued in July 2000. We
have also applied for, and expect to have issued to us, additional patents. St.
Jude Medical may terminate the license agreements any time after the fifth
royalty year (ending September 30, 2001) for any reason upon 12 months notice.
If a license under any third-party patent is necessary to make, use or sell the
Angio-Seal product line, any payments and royalties for such third-party
license, and any related attorney's fees, will be deducted from payments due to
us, on a territory-by-territory basis, in an amount not to exceed in any one
year one-half of any royalties in any such territory for that year. "Angio-Seal"
is a trademark of St. Jude Medical.
9
<PAGE> 10
SALES AND MARKETING
As we develop and receive regulatory approval for new products, we will explore
a variety of means of commercializing these products. As a result, we may
contract with distributors, develop our own sales and marketing force and/or
license products to third parties. We have no experience hiring or training a
sales and marketing force and we may not be able to maintain a sales and
marketing force with technical expertise and the necessary supporting
distribution capabilities. In late 1999, we hired a director of sales and
marketing who s responsible for leading our expanded marketing and sales efforts
and further developing our future distribution strategy for the Aegis Vortex.
COMPETITION
The market for our various products is fragmented, competitive and rapidly
changing. We compete directly and indirectly for customers with a wide variety
of companies. We believe that the principal competitive factors for our products
include:
- the ability to obtain regulatory approvals;
- safety and effectiveness;
- performance and quality;
- marketing;
- distribution;
- pricing;
- cost effectiveness;
- customer service;
- the development or acquisition of proprietary products and
processes;
- the ability to attract and retain skilled personnel;
- improvements to existing technologies;
- reimbursement; and
- compliance with regulations.
We believe our products compete favorably with those of our competitors.
However, many of our existing competitors, as well as a number of potential new
competitors, have longer operating histories in these markets, greater name
recognition, larger customer bases and greater financial, technical and
marketing resources.
GOVERNMENT REGULATION
Our medical devices are subject to extensive regulation by the Food and Drug
Administration, or FDA, and by foreign governments. The FDA regulates the
clinical testing, design, manufacture, labeling, distribution and promotion of
medical devices. Noncompliance with applicable requirements can result in, among
other things, fines, injunctions, civil penalties, recall or seizure of
products, total or partial suspension of production, failure of the government
to grant pre-market clearance or pre-market approval for devices, withdrawal of
marketing approvals and criminal prosecution. The FDA also has the authority to
recall, request repair, replacement or refund of the cost of any device we
manufacture or distribute.
FDA premarket approval was granted for the Angio-Seal 8F device in September
1996 and for the 6F device in early 2000. St. Jude Medical is responsible for
all future FDA premarket approval application supplements for the Angio-Seal
device. The 8F Angio-Seal received CE Mark approval from the European Community
in September 1995. The 6F Angio-Seal received CE Mark approval in February 1999.
10
<PAGE> 11
The Angio-Seal is also available for sale in a number of other countries.
International sales of medical devices are subject to the regulatory agency
product registration requirements of each country in which they are sold. The
regulatory review process varies from country to country. Many countries also
impose product standards, packaging requirements, labeling requirements, price
restraints and import restrictions on devices. Delays in receipt of, or a
failure to receive approvals or clearances, or the loss of any previously
received approvals or clearances, could have a material adverse effect on our
business, financial condition and results of operations. In addition,
reimbursement coverage must be obtained in some countries.
Generally, our biomaterials products are incorporated by our customers into
another product which receives FDA approval. We maintain device master files for
some of our biomaterials products containing information relating to the
specifications, manufacturing, biochemical characterization, biocompatibility
and viral safety of our biomaterials products. These files, in addition to our
technical expertise, help our clients in their regulatory approval process for
products incorporating our biomaterials.
We must obtain CE Mark approval and premarket approval from the FDA, as well as
all future premarket approval application supplements for the Aegis Vortex. We
expect to submit an IDE supplement to the FDA during the second quarter of
fiscal year 2001 to initiate additional trials of the device in the U.S.
When human clinical trials of a device are required in connection with our new
proprietary products and the device presents a significant risk, we must file an
IDE application with the FDA prior to commencing human clinical trials. The IDE
application must be supported by data, typically including the results of animal
and laboratory testing. If the IDE application is approved, human clinical
trials may begin at a specific number of investigational sites with a specific
number of patients, as approved by the FDA. The conduct of human clinical trials
is also subject to regulation by the FDA. Sponsors of clinical trials are
permitted to sell those devices distributed during the course of the trial
provided such compensation does not exceed recovery of the costs of manufacture,
research, development and handling. Similar approvals are required to conduct
clinical trials in foreign countries.
Any products we manufacture or distribute pursuant to FDA clearance or approvals
are subject to pervasive and continuing regulation by the FDA, including record
keeping requirements and reporting of adverse experiences with the use of the
device. As a device manufacturer, we are required to register our manufacturing
facility with the FDA; list our devices with the FDA; and are subject to
periodic inspections by the FDA and certain state agencies. The Federal Food,
Drug, and Cosmetic Act requires devices to be manufactured in accordance with
Quality System regulations which impose certain procedural and documentation
requirements with respect to manufacturing and quality assurance activities.
Labeling and promotional activities are subject to scrutiny by the FDA and, in
certain instances, by the Federal Trade Commission. The FDA actively enforces
regulations prohibiting marketing of products for unapproved uses.
Manufacturers are also subject to numerous federal, state and local laws
relating to such matters as safe working conditions, manufacturing practices,
environmental protection, fire hazard control and disposal of hazardous or
potentially hazardous substances. We may be required to incur significant costs
to comply with such laws and regulations in the future and any failure to comply
with such laws or regulations will have a material adverse effect upon our
ability to do business.
EMPLOYEES
As of September 22, 2000, we had 134 employees, including 69 employees in
operations, 51 employees in research and development and clinical and regulatory
affairs and 14 employees in finance and administration. As a result of our
recent acquisition of THM Biomedical, Inc., four of our employees are currently
located in Duluth, Minnesota. All of our remaining employees are located at our
facility in Exton, Pennsylvania. We believe that our success depends in a large
part on our ability to attract and retain employees in all areas of our
business.
ITEM 2. PROPERTIES
We lease approximately 47,000 square feet of executive offices, manufacturing
and research and development facilities in Exton, Pennsylvania, a suburb of
Philadelphia. Our lease expires in 2005, subject to renewal options. We
11
<PAGE> 12
believe that our facility is sufficient for our current operations. In addition,
as a result of our recent acquisition of THM Biomedical, Inc., we currently
lease 3,500 square feet of manufacturing and research and development facilities
in Duluth, Minnesota.
ITEM 3. LEGAL PROCEEDINGS
In March 1998, we, along with our former Angio-Seal strategic partner, filed a
patent infringement suit against Perclose, Inc., a competitor in the puncture
closure market. Upon their acquisition of the Angio-Seal license in March 1999,
St. Jude Medical, as part of the transaction, assumed certain rights and
responsibilities with respect to the lawsuit from our previous partner. In 1999,
we amended the complaint to add a second patent to the infringement suit. The
original and amended complaints, filed in the Eastern District of Pennsylvania,
claim that Perclose infringes our U.S. patent numbers 5,676,689 and 5,861,004.
These patents cover systems and methods related to sealing percutaneous
punctures. We seek damages and an order to permanently enjoin Perclose from
making, using or selling products that infringe these patents.
Perclose filed four counterclaims against us and our strategic partner's
predecessor in answer to the complaint. The first counterclaim seeks to declare
our patents invalid and not infringed. The additional counterclaims asserted by
Perclose allege that our claims are frivolous and assert various antitrust
counter-claims, including price discrimination, predatory pricing and attempted
monopolization of the puncture closure market. We are unable to predict the
final outcome of this suit or whether the resolution of this matter could
materially affect our results of operations, cash flows or financial position.
Abbott Laboratories acquired Perclose in November 1999.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
No matters were submitted to a vote of security holders in the fourth quarter of
fiscal 2000.
12
<PAGE> 13
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
Our common stock is quoted in the Nasdaq National Market under the symbol "KNSY"
and has been traded publicly since our initial public offering in December 1995.
The following table sets forth the high and low closing sale prices per share of
our common stock as reported by the Nasdaq National Market for the periods
indicated.
<TABLE>
<CAPTION>
HIGH LOW
FISCAL YEAR ENDED JUNE 30, 1998 ---- ---
<S> <C> <C>
First Quarter.................................. $ 16.00 $ 10.38
Second Quarter................................. 17.00 13.00
Third Quarter.................................. 24.25 14.00
Fourth Quarter................................. 23.63 8.88
Fiscal Year Ended June 30, 1999
First Quarter.................................. 9.88 7.13
Second Quarter................................. 11.00 5.75
Third Quarter.................................. 11.75 7.88
Fourth Quarter................................. 10.25 7.25
Fiscal Year Ended June 30, 2000
First Quarter.................................. 15.63 7.75
Second Quarter................................. 16.75 10.00
Third Quarter.................................. 21.38 12.50
Fourth Quarter................................. 18.88 9.19
</TABLE>
On September 22, 2000, the last reported sale price of our common stock in the
Nasdaq National Market was $12.25 per share. As of September 22, 2000, there
were 67 record owners and approximately 3,836 beneficial owners of our common
stock.
We have not declared or paid cash dividends and do not anticipate declaring or
paying any dividends on our common stock in the near future. Any future
determination as to the declaration and payment of dividends will be at the
discretion of our board of directors and will depend on then existing
conditions, including our financial conditions, results of operations,
contractual restrictions, capital requirements, business prospects, and such
other relevant factors.
13
<PAGE> 14
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected consolidated statement of operations and
consolidated balance sheet data for the fiscal years ended June 30, 2000, 1999,
1998, 1997, and 1996. The selected financial data for each such fiscal year
listed below has been derived from the consolidated financial statements of the
Company for those years, which have been audited by Deloitte & Touche LLP,
independent certified public accountants, whose report for fiscal years 2000,
1999, and 1998 is included elsewhere herein. The following data should be read
in conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and with the Consolidated Financial Statements and
related Notes and other financial information included herein.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JUNE 30,
-------------------------------------------------------------------
2000 1999 1998 1997 1996
------------ ---------- ---------- ---------- -----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Net sales $13,144 $ 7,168 $ 4,669 $ 3,661 $ 1,315
Research and development 59 1,894 3,642 2,843 1,576
Licensing and milestone fees 1,050
Royalty income and other 6,612 7,183(2) 3,008 353 76
------------ ---------- ---------- ---------- -----------
Total revenues 19,815 16,245 11,319 7,907 2,967
------------ ---------- ---------- ---------- -----------
Operating costs and expenses:
Cost of products sold 7,614 5,135 4,084 3,063 1,637
Research and development 5,340 5,668 5,524 4,695 3,581
Selling, general and administrative 2,634 2,585 1,762 1,823 2,132
Deferred compensation 1,493
Product return 574
------------ ---------- ---------- ---------- -----------
Total operating costs and expenses 15,588 13,388 11,370 9,581 9,417
------------ ---------- ---------- ---------- -----------
Income (loss) from operations 4,227 2,857 (51) (1,674) (6,450)
------------ ---------- ---------- ---------- -----------
Other income (expense):
Net interest income (expense) 522 317 390 435 (473)
Other 4 4 8 62
Insurance settlement 969 946
------------ ---------- ---------- ---------- -----------
Total other income (expense) - net 522 321 394 1,412 535
------------ ---------- ---------- ---------- -----------
Income (loss) before income taxes 4,749 3,178 343 (262) (5,915)
Income taxes
------------ ---------- ---------- ---------- -----------
Net income (loss) $ 4,749 $ 3,178 $ 343 $ (262) $(5,915)
============ ========== ========== ========== ===========
Basic earnings (loss) per common share $ 0.61 $ 0.43 $ 0.05 $(0.04) $ (1.00)
============ ========== ========== ========== ===========
Diluted earnings (loss) per common share $ 0.60 $ 0.43 $ 0.05 $(0.04) $ (1.00)
============ ========== ========== ========== ===========
Weighted average common shares outstanding 7,766 7,463 7,552 7,182 5,927(1)
============ ========== ========== ========== ===========
Diluted weighted average common shares outstanding 7,975 7,477 7,552 7,182 5,927(1)
============ ========== ========== ========== ===========
</TABLE>
<TABLE>
<CAPTION>
JUNE 30,
-------------------------------------------------------------------
2000 1999 1998 1997 1996
------------ ---------- ---------- ---------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and short-term investments $31,721 $ 9,669 $ 7,777 $ 7,351 $11,734
Inventory 902 749 1,027 736 413
Working capital equity 36,743 10,860 9,423 9,172 6,678
Total assets 51,183 28,215 22,039 16,593 19,743
Long-term obligations 2 6,013 2,374 574 81
Total stockholders' equity 49,404 18,901 15,863 12,127 12,001
</TABLE>
------------
(1) Includes 446,437 Common Stock equivalents issued within one year of the
public offering with exercise prices below the public offering price.
See Note 1 of Notes to the Consolidated Financial Statements.
(2) Includes one-time $1.5 million supplemental royalty payment from Strategic
Alliance Partner.
14
<PAGE> 15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
"Selected Consolidated Financial Data" and our financial statements and the
related notes included in this report.
OVERVIEW
We were founded in 1984 and our common stock became publicly traded in December
1995. We have been profitable in each of our last ten fiscal quarters.
Revenues
Our revenues consist of three components: net sales, research and development
revenue and royalty income.
Net Sales. Net sales is comprised of absorbable biomaterials products and
Angio-Seal devices manufactured by us.
Biomaterials. The biomaterials component of net sales represents the
sale of our biomaterials products to customers for use in the
following markets: orthopedics, cardiology, drug/biologics delivery
and wound care. Historically, our biomaterials sales have represented
primarily the absorbable collagen and polymer components of the
Angio-Seal device supplied to St. Jude Medical. We have experienced
significant sales growth in our biomaterials products in fiscal years
2000, 1999 and 1998 due to sales to new customers, increased sales to
existing customers, new product offerings and the expansion of our
marketing activities. We believe this growth will continue because of
greater acceptance by the medical community of biomaterials and
technological advances which have expanded the applications for our
biomaterials products.
Angio-Seal Devices. Historically, we supplied our strategic partner
with partially completed 8F Angio-Seal devices. In fiscal years 2000
and 1999, we supplied our partner with 6F Angio-Seal devices to
supplement their production requirements. Subsequent to year end, St.
Jude Medical transitioned the manufacturing of these devices to their
facility. We do not expect any revenue from the manufacture of
completed Angio-Seal devices in the future.
Research and Development Revenue. Historically, research and development revenue
has been derived solely from development work performed on the Angio-Seal. As
anticipated, the research and development activities have transitioned to St.
Jude Medical and no significant research and development revenue is expected in
the future.
Royalty Income. We receive a royalty on every Angio-Seal unit sold worldwide. We
anticipate sales of the Angio-Seal device will continue to grow, particularly
due to the recent launches of the 6F Angio-Seal in the U.S. and Europe. As a
result, royalty income will continue to be a significant source of revenue. The
anticipated increase in unit sales will be partially offset in the fiscal year
2001 by an anticipated reduction in our royalty rate, from 12% to 9%, in
accordance with our licensing agreements. We expect this rate reduction will
occur during the second quarter of fiscal year 2001.
Cost of Products Sold
We have experienced an overall increase in gross margin during the fiscal year
2000 as our net sales have increased and we have been able to spread our fixed
costs of manufacturing over a greater number of units. We anticipate our gross
margin will continue to improve as our sales levels increase and our product mix
becomes more favorable, reflecting the shift to higher margin sales of
biomaterials products and a reduction in sales of lower margin Angio-Seal
devices.
15
<PAGE> 16
Research and Development Expense
Research and development expense consists of expenses incurred for the
development of our proprietary technology such as the Aegis Vortex, absorbable
biomaterials products and technologies and other development programs. While
research and development on the Angio-Seal has become an insignificant portion
of our overall development costs, the progression of the Aegis Vortex into the
clinical trial phase and our continued development of proprietary biomaterials
products and technologies will offset this decrease. We anticipate research and
development expense will continue to increase as we pursue commercialization of
the Aegis Vortex as well as explore opportunities for our other technologies.
Selling, General and Administrative
Selling, general and administrative expenses include general and administrative
costs as well as costs related to the marketing of our products. During the
fiscal years 2000 and 1999, the costs of our patent litigation are also included
within selling, general and administrative expenses. We anticipate the marketing
component of selling, general and administrative expenses, which has been
insignificant in past fiscal years, will increase as we evaluate opportunities
for commercialization of the Aegis Vortex and expand the marketing efforts for
our biomaterials business.
RESULTS OF OPERATIONS
COMPARISON OF FISCAL 2000 AND 1999
Revenues. Revenues increased 22% to $19.8 million in the year ended June 30,
2000, or fiscal 2000, from $16.2 million in the year ended June 30, 1999, or
fiscal 1999. Net sales of products increased 83% to $13.1 million from $7.2
million for fiscal 2000 and 1999, respectively. Of this increase, $4.5 million
was attributable to an increase in sales of 6F Angio-Seal devices to St. Jude
Medical. The remaining $1.4 million was attributable to increased sales of
biomaterials products. We had been providing St. Jude Medical with 6F Angio-Seal
devices for the international and U.S. markets; however, St. Jude Medical has
now transitioned the manufacturing of these devices to their facility.
Research and Development Revenues. Research and development revenues decreased
97% to $60,000 from $1.9 million for fiscal 2000 and 1999, respectively. St.
Jude Medical has transitioned substantially all of the Angio-Seal research and
development in-house. We do not expect research and development revenues to be
significant in the future.
Royalty Income. Royalty income increased 16%, net of a $1.5 million supplemental
payment from our previous strategic partner in fiscal 1999, to $6.6 million from
$5.7 million in fiscal 2000 and 1999, respectively. Royalty units increased 14%
as approximately 354,000 Angio-Seal units were sold to end-users during fiscal
2000 compared to approximately 310,000 units sold during fiscal 1999. This unit
increase was due to St. Jude Medical's increased sales and marketing efforts,
primarily in the U.S., and sales of the new 6F device in the international
markets. The 6F device was introduced in the international markets in April 1999
and in the U.S. in late March 2000.
Cost of Products Sold. Cost of products sold increased 48% to $7.6 million in
fiscal 2000 from $5.1 million in fiscal 1999. However, gross margin increased to
42% from 28%. This increase reflected an allocation of overhead across a greater
sales volume, which resulted in a decrease in per unit costs.
Research and Development Expense. Research and development expense decreased 6%
to $5.3 million in fiscal 2000 compared to $5.7 million in fiscal 1999. This
decrease was mainly attributable to the transition of substantially all of the
development for the Angio-Seal product line to St. Jude Medical. This decrease
was offset by our continued development efforts on the Aegis Vortex, including
clinical trial expenses. We also continued to expand our development efforts on
our biomaterials products. We expect research and development expense to
increase as we investigate and develop new products, conduct clinical trials and
seek regulatory approvals for our proprietary products.
Selling, General and Administrative. Selling, general and administrative expense
increased 2%, or $50,000, in fiscal 2000 from fiscal 1999. This increase was
primarily the result of increased sales and marketing efforts for the Aegis
Vortex and our biomaterials products offset by a decrease in litigation
expenses.
16
<PAGE> 17
Net Interest Income. Interest expense increased 30% to $430,000 in fiscal 2000
from $332,000 in fiscal 1999. This was due to the addition of a $5.0 million
financing agreement in January 1999, of which $925,000 was used to repay a
portion of the $2.0 million term loan. The remainder of the proceeds from the
$5.0 million financing agreement was used to fund leasehold improvements and
capital expansion. The financing agreement was repaid on June 1, 2000 with
proceeds from our secondary offering. Interest income increased 47% to $953,000
in fiscal 2000 from $649,000 in fiscal 1999 as a result of an increase in
average total cash and investment balances.
Other Non-Operating Income (Expense). Other non-operating expense was $1,000 for
fiscal 2000 compared to other non-operating income of $4,000 for fiscal 1999.
Other non-operating income (expense) for both periods represented primarily the
net gain or loss on the sale of fixed assets.
COMPARISON OF FISCAL 1999 AND 1998
Revenues. Revenues increased 44% to $16.2 million in fiscal 1999, from $11.3
million in the year ended June 30, 1998, or fiscal 1998. Net sales of products
increased 54% to $7.2 million from $4.7 million. Of this, $2.5 million was
attributable to increased sales of biomaterials products comprised of $1.8
million of biomaterials products sold to multiple customers and $700,000 of
increased sales of Angio-Seal components to St. Jude Medical. The remaining
increase was attributable to the sale of 6F Angio-Seal devices to St. Jude
Medical for the international market.
Research and Development Revenue. Research and development revenue decreased 48%
to $1.9 million from $3.6 million. The decrease was due to a reduction in
Angio-Seal research and development activity as the 6F Angio-Seal transitioned
from development to commercialization.
Royalty Income. Royalty income increased 139% to $7.2 million from $3.0 million
in fiscal 1999 and fiscal 1998, respectively. Of this increase, $2.7 million was
due to increased unit sales of Angio-Seal. Approximately 310,000 Angio-Seal
units were sold to end users in fiscal 1999 compared to approximately 178,000
units sold in fiscal 1998. The increase in Angio-Seal unit volume reflected the
launch of the 6F Angio-Seal in Europe in fiscal 1999 as well as increased demand
for the 8F Angio-Seal in both the U.S. and European markets in fiscal 1999
versus fiscal 1998. In addition, we received a $1.5 million supplemental royalty
payment in fiscal 1999.
Cost of Products Sold. Cost of products sold increased 26% to $5.1 million in
fiscal 1999 from $4.1 million in fiscal 1998. However, the gross margin
increased to 28% from 13%. The increase in gross margin reflects an allocation
of overhead across greater sales volume, which results in a decrease in per unit
costs, as well as increased sales of higher margin biomaterials products.
Research and Development Expense. Research and development expense increased 3%
to $5.7 million in fiscal 1999 from $5.5 million in fiscal 1998. This increase
was mainly attributable to increased development efforts on the Aegis Vortex as
we applied for and received our investigational device exemption, or IDE, from
the FDA and prepared for the initiation of clinical trials of the device. We
also expanded our development efforts in the area of absorbable biomaterials.
These increases in expense were offset by the ongoing transition of development
of the Angio-Seal product line to St. Jude Medical along with the 6F product
moving to commercialization.
Selling, General and Administrative. Selling, general and administrative expense
increased 47% to $2.6 million in fiscal 1999 from $1.8 million in fiscal 1998.
This increase was primarily a result of legal expenses in the amount of $640,000
related to our ongoing patent infringement suit. We incurred no legal expenses
related to this lawsuit in fiscal 1998.
Net Interest Income. Interest expense increased 121% to $332,000 in fiscal 1999
from $150,000 in fiscal 1998. This increase was due to the addition of a $5.0
million financing agreement in fiscal 1999, of which $925,000 was used to repay
a portion of the existing $2.0 million term loan. The remainder of the proceeds
from the $5.0 million financing agreement will be used to fund leasehold
improvements and for capital expansion. Interest income increased 20% to
$649,000 in fiscal 1999 from $540,000 in fiscal 1998 as a result of an increase
in average total cash and investment balances.
Other Non-Operating Income. Other non-operating income remained constant at
$4,000 for fiscal 1999 and fiscal 1998. Fiscal 1999 other non-operating income
represented primarily a net gain on the sale of fixed assets while fiscal 1998
represented miscellaneous nonrecurring items.
17
<PAGE> 18
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by our operating activities was $2.4 million and $2.9 million
during fiscal 2000 and 1999, respectively. In fiscal 2000, changes in asset and
liability balances resulted in a net $3.2 million use of cash, offset by net
income of $4.7 million and non-cash depreciation and amortization of $862,000.
In fiscal 1999, changes in asset and liability balances resulted in a net $1.5
million use of cash, offset by net income of $3.2 million and non-cash
depreciation and amortization of $1.2 million.
Our cash, cash equivalents and short-term investments were $31.7 million at June
30, 2000. In addition, we had $2.1 million in restricted investment accounts. We
have pledged $2.1 million in investments as collateral to secure bank loans made
to employees to pay taxes incurred by these employees when they received common
stock at the time of our initial public offering. In exchange for our pledging
this collateral, the employees have pledged their common stock to us as
collateral.
In May 2000, we completed a secondary offering of 2,700,000 shares of Common
Stock. In addition, the underwriters exercised a portion of their over allotment
option in June 2000 for an additional 259,000 shares of Common Stock. The net
proceeds of the secondary offering were $25.7 million. Of the proceeds, $6.1
million was used to repay outstanding indebtedness. We had a capital spending
plan for fiscal 2000, of which $2.1 million was expended primarily on machinery,
equipment and leasehold improvements. These expenditures were related to the
continued expansion of our manufacturing capabilities, principally for our
biomaterials product lines.
We received a $3.0 million royalty advance under our licensing agreement upon
receipt of FDA approval for the Angio-Seal in fiscal year 1997. This royalty
advance has been reduced in each period by 50% of the excess of royalty income
over minimum royalties stipulated within the licensing agreement. During fiscal
2000, the liability was retired.
In November 1997, we acquired patents in exchange for 200,000 shares of common
stock and a series of eight quarterly cash payments, which began 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 the legal and other related costs incurred to acquire
such patents. The present value of the cash payments, $1.1 million, was recorded
on the balance sheet as an obligation and was fully repaid during fiscal 2000.
We plan to continue to spend substantial amounts to fund clinical trials, to
gain regulatory approvals and to continue to expand research and development
activities, particularly for the Aegis Vortex and our biomaterials products. We
believe cash generated from operations will be sufficient to meet our operating
and capital requirements for the next twelve months.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our interest income and expense are sensitive to changes in the general level of
interest rates. In this regard, changes in interest rates affect the interest
earned on our cash, cash equivalents and investments as well as interest paid on
our debt.
Our investment portfolio consists primarily of high quality U.S. government
securities and certificates of deposit with an average maturity of one year or
less. We mitigate default risk by investing in what we believe are the safest
and highest credit quality securities and by monitoring the credit rating of
investment issuers. The portfolio includes only marketable securities with
active secondary or resale markets to ensure portfolio liquidity and there are
limitations regarding duration of investments. These available-for-sale
securities are subject to interest rate risk and decrease in market value if
interest rates increase. At June 30, 2000, our total portfolio consisted of
approximately $29.0 million of investments, all of which had maturities within
one year. Additionally, we generally hold securities until maturity. Therefore,
we do not expect our results of operations or cash flows to be materially
impacted due to a sudden change in interest rates. We have no outstanding debt
at June 30, 2000.
18
<PAGE> 19
RISK FACTORS
You should carefully consider the following risk factors, in addition to the
other information set forth in this report, before purchasing shares of common
stock of Kensey Nash. Each of these risk factors could adversely affect our
business, operating results and financial condition, as well as adversely affect
the value of an investment in our common stock. This investment involves a high
degree of risk.
RISKS RELATED TO OUR BUSINESS
IF OUR BIOMATERIALS PRODUCTS ARE NOT SUCCESSFUL, OUR OPERATING RESULTS AND
BUSINESS MAY BE SUBSTANTIALLY IMPAIRED.
The success of our existing biomaterials products, as well as any we develop in
the future, depends on a variety of factors, including our ability to continue
to manufacture, sell and competitively price these products and the acceptance
of these products by the medical profession. In addition, we may be required to
obtain regulatory approval for any future biomaterials products. We will require
substantial additional funds to develop and market our biomaterials products. We
expect to fund the growth of our biomaterials business out of our operating
income and cannot guarantee that this operating income will be sufficient to
develop new biomaterials products. To date, we have relied on strategic partners
or customers to market and sell our biomaterials products. We cannot assure you
that we will commercialize our products successfully either indirectly through
strategic partners or directly through the development of a sales force.
WE CANNOT ASSURE YOU THAT WE WILL BE ABLE TO OBTAIN THE NECESSARY REGULATORY
APPROVALS FOR THE AEGIS VORTEX.
We need to conduct additional human clinical trials for the Aegis Vortex. The
Aegis Vortex has not been approved for marketing by the FDA or by any
governmental entity outside of the United States. We will require substantial
additional funds to develop the product, conduct clinical trials and gain the
necessary regulatory approvals for the Aegis Vortex. Prior to granting approval,
the FDA may require clarification of information provided in our regulatory
submissions, more information or more clinical studies. If granted, FDA approval
may impose limitations on the uses for which our product may be marketed or how
our product may be marketed. Should we experience delays or be unable to receive
approval from the FDA, our operating results and business may be substantially
impaired.
A SUBSTANTIAL PORTION OF OUR REVENUES WILL CONTINUE TO COME FROM THE ANGIO-SEAL
WHICH IS MANUFACTURED, MARKETED AND DISTRIBUTED BY ST. JUDE MEDICAL.
To date, a significant portion of our revenues have been derived from Angio-Seal
sales. Under our license agreements with St. Jude Medical, Angio-Seal is
manufactured, marketed and sold on a worldwide basis by St. Jude Medical. Two of
our significant sources of revenue for the future are expected to be sales of
collagen to St. Jude Medical for use in the Angio-Seal devices and royalty
income from the sale of the Angio-Seal product line. Beginning June 1, 2000, St.
Jude Medical will no longer be obligated to buy collagen from us. Furthermore,
we expect a reduction in our royalty rate, from 12% to 9%, during the second
quarter of fiscal year 2001 in accordance with our license agreements. Our
success with Angio-Seal depends in part on the time, effort and attention that
St. Jude Medical devotes to the Angio-Seal product line and on their success in
manufacturing, marketing and selling the Angio-Seal product line. Under the
terms of our agreements with St. Jude Medical, we have no control over the
pricing and marketing strategy for the Angio-Seal product line. In addition, we
depend on St. Jude Medical to successfully maintain levels of manufacturing
sufficient to meet anticipated demand, abide by applicable manufacturing
regulations and seek reimbursement approvals. St. Jude Medical can terminate our
arrangement at any time after September 30, 2001 for any reason upon 12 months
notice. There can be no assurance that St. Jude Medical will successfully pass
future inspections of its manufacturing facility or adequately perform its
manufacturing, marketing and selling duties. Any such failure by St. Jude
Medical may negatively impact Angio-Seal sales and therefore reduce our
royalties and impair our operating results and business.
19
<PAGE> 20
WE DEPEND ON OUR CUSTOMERS TO MARKET AND OBTAIN REGULATORY APPROVALS FOR THEIR
BIOMATERIALS PRODUCTS.
We depend on the efforts of our biomaterials customers in marketing their
products which include our biomaterials components. There can be no assurance
that our customers' end use products which include our biomaterials components
will be commercialized successfully by our customers or that our customers will
otherwise be able to compete effectively in their markets. If our customers fail
to commercialize their products, our operating results and business may be
substantially impaired.
IF WE RECEIVE FDA APPROVAL, WE MAY NOT BE SUCCESSFUL COMMERCIALIZING THE AEGIS
VORTEX.
If the Aegis Vortex clinical trials are completed successfully and we obtain the
necessary governmental approvals, we will need to commercialize the product. We
cannot assure you that we will be able to find a suitable partner and/or develop
and train our own sales force to sell and market the Aegis Vortex. We do not
have a sales and marketing force nor do we have any experience hiring or
training a sales and marketing force. We may not be able to establish and
maintain an internal sales and marketing force with technical expertise and
supporting distribution capabilities. If we are unable to successfully
commercialize the Aegis Vortex, our growth prospects will be diminished.
WE MAY BE REQUIRED TO DELAY, REDUCE OR ELIMINATE SOME OR ALL OF OUR EFFORTS TO
DEVELOP AND MARKET THE AEGIS VORTEX IF WE FAIL TO OBTAIN ADDITIONAL FUNDING THAT
MAY BE REQUIRED TO SATISFY OUR FUTURE CAPITAL NEEDS.
We plan to continue to spend substantial funds to develop and market the Aegis
Vortex. Our future liquidity and capital requirements will depend upon numerous
factors, including the progress and success of our clinical trials, the timing
and cost involved in obtaining regulatory approvals, the timing and cost of
developing sales and marketing strategies, our ability to enter into strategic
alliances, manufacturing and research and development activities, the extent to
which the Aegis Vortex gains market acceptance and competitive developments. Any
additional required financing may not be available on satisfactory terms, if at
all. If we are unable to obtain financing, we may be required to delay, reduce
or eliminate some or all of our research and development activities or sales and
marketing efforts, in which case our operating results and business may be
substantially impaired.
THE MARKETS FOR OUR PRODUCTS ARE HIGHLY COMPETITIVE AND ARE LIKELY TO BECOME
MORE COMPETITIVE, AND OUR COMPETITORS MAY BE ABLE TO RESPOND MORE QUICKLY TO NEW
OR EMERGING TECHNOLOGIES AND CHANGES IN CUSTOMER REQUIREMENTS.
The existing markets for our current and proposed products are intensely
competitive. We expect competition to increase further as additional companies
begin to enter our markets and/or modify their existing products to compete
directly with ours. We compete with some of the largest players in the
biomaterials markets. If we are successful in commercializing the Aegis Vortex,
our competitors will include Boston Scientific Corporation, Johnson and Johnson,
Inc., Possis Medical, Inc., Percu-Surge Inc. and Interventional Technologies,
Inc., as well as other companies and other current and future therapies. The
primary competitors in the vascular sealing device market are Abbott
Laboratories (which owns Perclose, Inc.), Datascope Corp. and Vascular
Solutions, Inc.
Our competitors may have broad product lines which allow them to negotiate
exclusive, long-term supply contracts and offer comprehensive pricing for their
products. Broader product lines may also provide our competitors with a
significant advantage in marketing competing products to group purchasing
organizations and other managed care organizations that are increasingly seeking
to reduce costs through centralized purchasing. Greater financial resources and
product development capabilities may allow our competitors to respond more
quickly to new or emerging technologies and changes in customer requirements
that may render our products obsolete.
Because a significant portion of our revenue depends on sales of medical devices
by our customers to the end user market, we are also affected by competition
within the markets for these devices. Competition within the medical device
market could also have an adverse effect on our business for a variety of
reasons, including that our customers may compete directly with larger, dominant
manufacturers with extensive product lines and greater sales, marketing and
distribution capabilities. We are also unable to control other factors that may
impact the commercialization of our components for end use products, such as
marketing and sales efforts and competitive pricing pressures within particular
markets.
20
<PAGE> 21
IF OUR PRODUCTS ARE NOT ACCEPTED BY THE MEDICAL COMMUNITY, OUR BUSINESS MAY
SUFFER.
The success of our existing products depends on continued acceptance of these
products by the medical community. The success of any products we develop in the
future will depend on the adoption of these products by our targeted markets. We
cannot predict how quickly, if at all, the medical community will accept our
future products or the extent to which our future products will be used. If we
encounter difficulties introducing future products into our targeted markets,
our operating results and business may be substantially impaired.
THE LOSS OF, OR INTERRUPTION OF SUPPLY FROM, KEY VENDORS COULD LIMIT OUR ABILITY
TO MANUFACTURE OUR PRODUCTS.
We purchase certain materials and components for our products from various
suppliers. Some of these components are custom made for us. Any loss of, or
interruption of supply from, key vendors may require us to find new vendors. We
could experience production or development delays while we seek new vendors
which could substantially impair our operating results and business.
WE MAY HAVE PROBLEMS MANUFACTURING AND DELIVERING OUR BIOMATERIALS PRODUCTS IN
THE FUTURE.
The biomaterials industry is an emerging area, using many materials which are
untested or whose properties are still not known. Consequently, from time to
time we may experience unanticipated difficulties in manufacturing and
delivering our biomaterials products to our customers. These difficulties may
include an inability to meet customer demand, delays in delivering products or
quality control problems with certain biomaterials products. Any such difficulty
to fulfill orders on a timely basis could materially and adversely affect our
operating results and business.
OUR USE OF HAZARDOUS MATERIALS EXPOSES US TO THE RISK OF MATERIAL ENVIRONMENTAL
LIABILITIES.
Because we use hazardous substances in our research and development and
manufacturing operations, we are potentially subject to material liabilities
related to personal injuries or property damages that may be caused by hazardous
substance releases or exposures at or from our facility. Decontamination costs,
other clean-up costs and related damages or liabilities could substantially
impair our business and operating results. We are required to comply with
increasingly stringent laws and regulations governing environmental protection
and workplace safety, including requirements governing the handling, storage and
disposal of hazardous substances.
ST. JUDE MEDICAL'S INTERNATIONAL SALES ARE SUBJECT TO A NUMBER OF RISKS THAT
COULD HARM FUTURE INTERNATIONAL SALES OF ANGIO-SEAL AND THEIR ABILITY TO
SUCCESSFULLY COMMERCIALIZE NEW PRODUCTS IN INTERNATIONAL MARKETS.
St. Jude Medical sells the Angio-Seal product line internationally and pays us a
royalty on each unit sold. Our royalties are subject to several risks,
including:
- the impact of recessions in economies outside the United States;
- unexpected changes in regulatory requirements, tariffs or other
trade barriers;
- weaker intellectual property rights protection in some countries;
- fluctuations in exchange rates;
- potentially adverse tax consequences; and
- political and economic instability.
The occurrence of any of these events could seriously harm St. Jude Medical's
future international sales and our ability to receive royalties from sales of
the Angio-Seal in international markets.
21
<PAGE> 22
OUR SUCCESS DEPENDS ON KEY PERSONNEL, THE LOSS OF WHOM COULD IMPAIR OUR
OPERATING RESULTS AND BUSINESS.
Our success depends, to a significant extent, upon the efforts and abilities of
Joseph W. Kaufmann, Douglas G. Evans and other members of senior management. The
loss of the services of one or more of these key employees could harm our
operating results and business. In addition, we will not be successful unless we
can attract and retain skilled personnel, particularly in the areas of research
and product development.
OUR FAILURE TO EXPAND OUR MANAGEMENT SYSTEMS AND CONTROLS TO SUPPORT ANTICIPATED
GROWTH OR INTEGRATE FUTURE ACQUISITIONS COULD SERIOUSLY HARM OUR OPERATING
RESULTS AND BUSINESS.
Our operations continue to grow and we expect this expansion to continue as we
execute our business strategy. Sustaining our growth has placed significant
demands on management and our administrative, operational, information
technology, manufacturing, financial and personnel resources. Accordingly, our
future operating results will depend on the ability of our officers and other
key employees to continue to implement and improve our operational, client
support and financial control systems, and effectively expand, train and manage
our employee base. We cannot assure you that any future acquisitions, or our
recent acquisition of THM Biomedical, Inc., can be successfully integrated into
our operations or be operated profitably. We may not be able to manage our
growth successfully. This inability to sustain or manage our growth could
seriously harm our operating results and business.
THE OWNERSHIP INTEREST OF OUR STOCKHOLDERS MAY BE DILUTED BY ANY FUTURE
ACQUISITIONS OR STRATEGIC ALLIANCES.
Our stockholders will depend upon the judgment of our management with respect to
any future acquisitions we make or strategic alliances we enter into. Our
management may decide to acquire other companies or finance strategic alliances
by issuing equity securities. As a result, you may experience dilution of your
ownership interest.
RISKS RELATED TO OUR INTELLECTUAL PROPERTY
IF WE ARE UNABLE TO PROTECT OUR PATENTS AND PROPRIETARY RIGHTS, OUR REPUTATION
AND COMPETITIVENESS IN THE MARKETPLACE MAY BE MATERIALLY DAMAGED.
We regard our patents, biomaterials trade secrets and other intellectual
property as important to our success. We rely upon patent law, trade secret
protection, confidentiality agreements and license agreements with St. Jude
Medical to protect our proprietary rights. We have registered certain of our
patents with applicable governmental authorities. Effective patent protection
may not be available in every country in which our products are made available,
and we have not sought protection for our intellectual property in every country
where our products may be sold. There can be no assurance that the steps we take
to protect our proprietary rights will be adequate or that third parties will
not infringe or otherwise violate our patents or similar proprietary rights.
We and St. Jude Medical are plaintiffs in a patent infringement lawsuit against
Perclose, which was acquired by Abbott Laboratories, and we are co-defendants
against counterclaims filed by Perclose in response to our complaint. We have
spent substantial resources on this litigation. Intellectual property litigation
in recent years has proven to be very costly and complex, and the outcome of
such litigation is difficult to predict.
WE MAY BE ACCUSED OF INFRINGING UPON THE PROPRIETARY RIGHTS OF OTHERS AND ANY
RELATED LITIGATION COULD MATERIALLY DAMAGE OUR OPERATING RESULTS AND BUSINESS.
An adverse determination in any intellectual property litigation or interference
proceedings brought against us could prohibit us from selling our products,
subject us to significant liabilities to third parties or require us to seek
licenses from third parties. The costs associated with these license
arrangements may be substantial and could include ongoing royalties.
Furthermore, the necessary licenses may not be available to us on satisfactory
terms, if at all. Adverse determinations in a judicial or administrative
proceeding or failure to obtain necessary licenses could prevent us from
manufacturing and selling our products.
WE DO NOT OWN OR CONTROL THE USE OF THE ANGIO-SEAL TRADEMARK.
The term Angio-Seal is a trademark of St. Jude Medical. All goodwill generated
by the marketing and sales of devices bearing the Angio-Seal trademark belongs
to St. Jude Medical and not to us. Should the St. Jude Medical
22
<PAGE> 23
license agreements terminate, we would not have the right to call any of our
products "Angio-Seal" unless we purchase or license the trademark from St. Jude
Medical. Without rights to the Angio-Seal trademark, we would have to market our
products under a different trademark. Moreover, upon the termination of the St.
Jude Medical license agreements, St. Jude Medical would have the right to
compete against us by selling collagen and puncture closure devices under the
Angio-Seal trademark. Thus, purchasers of puncture closure devices may be more
likely to recognize and purchase products labeled Angio-Seal regardless of
whether those devices originate from us.
RISKS RELATED TO OUR INDUSTRY
WE MAY FACE PRODUCT LIABILITY CLAIMS THAT COULD RESULT IN COSTLY LITIGATION AND
SIGNIFICANT LIABILITIES.
The manufacture and sale of medical products entail significant risk of product
liability claims. The medical device industry in general has been subject to
significant product liability litigation. Any product liability claims, with or
without merit, could result in costly litigation, reduced sales, significant
liabilities and diversion of our management's time, attention and resources. We
cannot be sure that our product liability insurance coverage is adequate or that
it will continue to be available to us on acceptable terms, if at all.
WE FACE UNCERTAINTY RELATING TO THIRD PARTY REIMBURSEMENT FOR OUR PRODUCTS.
We could be seriously harmed by changes in reimbursement policies of
governmental or private healthcare payors, particularly to the extent any
changes affect reimbursement for catheterization procedures in which our
products are used. If physicians, hospitals and other users of our products fail
to obtain sufficient reimbursement from healthcare payors for procedures in
which our products are used or adverse changes occur in governmental and private
third-party payors' policies toward reimbursement for these procedures, our
operating results and business may be substantially impaired.
OUR PRODUCTS AND MANUFACTURING ACTIVITIES ARE SUBJECT TO EXTENSIVE GOVERNMENTAL
REGULATION THAT COULD MAKE IT MORE EXPENSIVE AND TIME CONSUMING FOR US TO
INTRODUCE NEW AND IMPROVED PRODUCTS.
Our products and manufacturing activities are subject to extensive regulation by
a number of governmental agencies, including the FDA and comparable
international agencies. We are required to:
- obtain the approval of the FDA and international agencies
before we can market and sell new products;
- satisfy these agencies' requirements for all of our labeling,
sales and promotional materials in connection with our existing
products;
- comply with all applicable manufacturing regulations; and
- undergo rigorous inspections by these agencies.
Compliance with the regulations of these agencies may delay or prevent us from
introducing any new or improved products, including the Aegis Vortex.
Furthermore, we may be subject to sanctions, including temporary or permanent
suspension of operations, product recalls and marketing restrictions if we fail
to comply with the laws and regulations pertaining to our business.
We are also required to demonstrate compliance with the FDA's quality system
regulations. The FDA enforces its quality system regulations through
pre-approval and periodic post-approval inspections. These regulations relate to
product testing, vendor qualification, design control and quality assurance, as
well as the maintenance of records and documentation. If we are unable to
conform to these regulations, we will be required to locate alternative
manufacturers that do conform. Identifying and qualifying alternative
manufacturers may be a long, costly and difficult process and could seriously
harm our business.
23
<PAGE> 24
The FDA and international regulatory agencies may also limit the indications for
which our products are approved. These regulatory agencies may restrict or
withdraw approvals we have received if additional information becomes available
to support this action.
FORWARD-LOOKING STATEMENTS
This report includes forward-looking statements within the meaning of Section
27A of the Securities Act and Section 21E of the Exchange Act. We have based
these forward-looking statements largely on our current expectations and
projections about future events and financial trends affecting the financial
condition of our business. These forward-looking statements are subject to a
number of risks, uncertainties and assumptions about Kensey Nash, including,
among other things:
- general economic and business conditions, both nationally and
in our markets;
- our expectations and estimates concerning future financial
performance and financing plans;
- the impact of competition;
- anticipated trends in our business;
- existing and future regulations affecting our business;
- strategic alliances and acquisition opportunities; and
- other risk factors set forth under "Risk Factors" in this
report.
In addition, in this report, the words "believe", "may", "will", "estimate",
"continue", "anticipate", "intend", "expect" and similar expressions, as they
relate to Kensey Nash, our business or our management, are intended to identify
forward-looking statements.
We undertake no obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise
after the date of this report. In light of these risks and uncertainties, the
forward-looking events and circumstances discussed in this report may not occur
and actual results could differ materially from those anticipated or implied in
the forward-looking statements.
*****
Statements contained in this Form 10-K 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. We caution that a
number of important factors could cause our actual results for fiscal year 2001
and beyond to differ materially from those in any forward-looking statements
made by us or on our behalf. These important factors include, without
limitation, the success of our biomaterials products, our ability to obtain the
necessary regulatory approvals for, fund and commercialize the Aegis Vortex, the
success of St. Jude Medical in manufacturing, marketing and distributing the
Angio-Seal, the ability of our customers to market and obtain regulatory
approvals for their biomaterials products, the acceptance of our products by the
medical community, our ability to maintain key vendors and personnel,
competition in our markets, general business conditions in the healthcare
industry and general economic conditions. Our results of operations in any past
period should not be considered indicative of the results to be expected for
future periods. Fluctuations in operating results may also result in
fluctuations in the price of our common stock.
24
<PAGE> 25
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements, with the report of the independent auditors, listed in
Item 14, are included in this Annual Report on Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING FINANCIAL
DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information in response to this item is incorporated by reference from the
"Election of Directors", "Executive Officers", and "Compliance with Section
16(a) of the Exchange Act" sections of the Company's definitive Proxy Statement
in connection with its 2000 Annual Meeting of Stockholders scheduled to be held
on December 6, 2000 (the "2000 Proxy Statement"), which will be filed with the
Securities and Exchange Commission on or before November 1, 2000.
ITEM 11. EXECUTIVE COMPENSATION
Information in response to this item is incorporated by reference to the 2000
Proxy Statement captioned "Executive Compensation and Certain Transactions."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference to the
information under the captions "Security Ownership of Certain Shareholders" and
"Security Ownership of Management" in the 2000 Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference to the
information under the caption "Certain Transactions" in the 2000 Proxy
Statement.
*****
25
<PAGE> 26
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
14(A) 1. FINANCIAL STATEMENTS
The following financial statements of the Company and Report of Deloitte &
Touche LLP, Independent Auditors are included in this report:
Independent Auditors' Report
Consolidated Balance Sheets as of June 30, 2000 and 1999
Consolidated Statements of Operations for the Years Ended June 30,
2000, 1999 and 1998
Consolidated Statements of Stockholders' Equity for the Years Ended
June 30, 2000, 1999 and 1998
Consolidated Statements of Cash Flows for the Years Ended June 30,
2000, 1999 and 1998
Notes to Consolidated Financial Statements
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
Kensey Nash Corporation:
We have audited the accompanying consolidated balance sheets of Kensey
Nash Corporation and its subsidiary (the "Company") as of June 30, 2000
and 1999, and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the three years in the
period ended June 30, 2000. These financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that
we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly,
in all material respects, the financial position of the Company as of
June 30, 2000 and 1999, and the results of its operations and its cash
flows for each of the three years in the period ended June 30, 2000 in
conformity with accounting principles generally accepted in the United
States of America.
DELOITTE & TOUCHE LLP
Philadelphia, Pennsylvania
August 9, 2000
26
<PAGE> 27
KENSEY NASH CORPORATION
CONSOLIDATED BALANCE SHEETS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
JUNE 30, JUNE 30,
ASSETS 2000 1999
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 24,117,502 $ 1,189,083
Short-term investments 7,603,308 8,479,617
Trade receivables, net of allowance for doubtful accounts of $0
and $19,000 at June 30, 2000 and 1999, respectively 2,219,739 2,247,050
Royalties receivable 1,993,260 742,143
Officer loans 954,110 264,535
Other receivables (including approximately $53,000 and $62,000 at
June 30, 2000 and 1999, respectively, due from employees) 258,367 170,181
Inventory 902,118 748,698
Prepaid expenses and other 471,666 320,106
------------ ------------
Total current assets 38,520,070 14,161,413
------------ ------------
PROPERTY, PLANT AND EQUIPMENT, AT COST
Leasehold improvements 5,666,083 4,023,373
Machinery, furniture and equipment 5,586,159 4,840,529
Construction in progress 354,551 676,836
------------ ------------
Total property, plant and equipment 11,606,793 9,540,738
Accumulated depreciation (4,390,796) (3,801,514)
------------ ------------
Net property, plant and equipment 7,215,997 5,739,224
------------ ------------
OTHER ASSETS:
Restricted investments 2,081,651 4,675,725
Property under capital leases, net 9,944 28,368
Acquired patents, net of accumulated amortization of $636,454 and
$381,873 at June 30, 2000 and 1999, respectively 3,355,953 3,610,536
------------ ------------
Total other assets 5,447,548 8,314,629
------------ ------------
TOTAL $ 51,183,615 $ 28,215,266
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,290,101 $ 1,446,800
Accrued expenses 460,551 863,458
Current portion of debt, obligation under patent acquisition agreement
and capital lease obligations 10,374 600,398
Deferred revenue - royalties and other 16,300 390,846
------------ ------------
Total current liabilities 1,777,326 3,301,502
------------ ------------
DEBT and OBLIGATION UNDER CAPITAL
LEASES, long-term portion 1,933 6,012,863
------------ ------------
Total liabilities 1,779,259 9,314,365
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $.001 par value, 100,000 shares authorized, no shares issued
or outstanding at June 30, 2000 and 1999
Common stock, $.001 par value, 25,000,000 shares authorized, 10,455,499 and
7,470,710 shares issued and outstanding at June 30, 2000 and 1999, respectively 10,455 7,470
Capital in excess of par value 63,690,042 37,697,452
Accumulated deficit (13,813,455) (18,562,619)
Accumulated other comprehensive income (482,686) (241,402)
------------ ------------
Total stockholders' equity 49,404,356 18,900,901
------------ ------------
TOTAL $ 51,183,615 $ 28,215,266
============ ============
</TABLE>
See notes to consolidated financial statements.
27
<PAGE> 28
KENSEY NASH CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
------------------------------------------------
2000 1999 1998
<S> <C> <C> <C>
REVENUES:
Net sales $ 13,143,813 $ 7,168,103 $ 4,668,913
Research and development 59,857 1,894,350 3,641,492
Royalty income 6,611,685 7,182,969 3,008,327
------------ ------------ ------------
Total revenues 19,815,355 16,245,422 11,318,732
------------ ------------ ------------
OPERATING COSTS AND EXPENSES:
Cost of products sold 7,614,068 5,135,311 4,083,543
Research and development 5,340,021 5,667,668 5,524,501
Selling, general and administrative 2,634,358 2,584,766 1,762,011
------------ ------------ ------------
Total operating costs and expenses 15,588,447 13,387,745 11,370,055
------------ ------------ ------------
INCOME (LOSS) FROM OPERATIONS 4,226,908 2,857,677 (51,323)
------------ ------------ ------------
OTHER INCOME (EXPENSE):
Interest income 952,772 649,435 539,577
Interest expense (429,949) (331,969) (149,977)
Other (567) 3,615 4,405
------------ ------------ ------------
Total other income - net 522,256 321,081 394,005
------------ ------------ ------------
NET INCOME $ 4,749,164 $ 3,178,758 $ 342,682
============ ============ ============
BASIC EARNINGS PER SHARE $ 0.61 $ 0.43 $ 0.05
============ ============ ============
DILUTED EARNINGS PER SHARE $ 0.60 $ 0.43 $ 0.05
============ ============ ============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 7,766,184 7,462,723 7,551,596
============ ============ ============
DILUTED WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 7,975,439 7,476,939 7,551,596
============ ============ ============
</TABLE>
See notes to consolidated financial statements.
28
<PAGE> 29
KENSEY NASH CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CAPITAL
COMMON STOCK IN EXCESS
----------------------- OF PAR ACCUMULATED
SHARES AMOUNT VALUE DEFICIT
<S> <C> <C> <C> <C>
BALANCE, JUNE 30, 1997 7,198,251 $ 7,198 $34,203,807 $(22,084,059)
Exercise of stock options 61,021 61 556,174
Shares issued under Patent Acquisition Agreement 200,000 200 2,837,400
Net income 342,682
---------- ------- ----------- ------------
BALANCE, JUNE 30, 1998 7,459,272 7,459 37,597,381 (21,741,377)
---------- ------- ----------- ------------
Exercise of stock options 11,438 11 100,071
Net income 3,178,758
Comprehensive loss
Comprehensive income
---------- ------- ----------- ------------
BALANCE, JUNE 30, 1999 7,470,710 7,470 37,697,452 (18,562,619)
---------- ------- ----------- ------------
Shares issued upon Secondary Offering 2,959,000 2,959 25,745,766
Exercise of stock options 25,789 26 246,824
Net income 4,749,164
Comprehensive loss
Comprehensive income
---------- ------- ----------- ------------
BALANCE, JUNE 30, 2000 10,455,499 $10,455 $63,690,042 $(13,813,455)
========== ======= =========== ============
</TABLE>
<TABLE>
<CAPTION>
ACCUMULATED
OTHER COMPREHENSIVE
COMPREHENSIVE INCOME /
LOSS (LOSS) TOTAL
<S> <C> <C> <C>
BALANCE, JUNE 30, 1997 $12,126,946
Exercise of stock options 556,235
Shares issued under Patent Acquisition Agreement 2,837,600
Net income $ 342,682 342,682
========== -----------
BALANCE, JUNE 30, 1998 15,863,463
-----------
Exercise of stock options 100,082
Net income $3,178,758 3,178,758
Comprehensive loss $(241,402) (241,402) (241,402)
----------
Comprehensive income $2,937,356
--------- ========== -----------
BALANCE, JUNE 30, 1999 (241,402) 18,900,901
--------- -----------
Shares issued upon Secondary Offering 25,748,725
Exercise of stock options 246,850
Net income $4,749,164 4,749,164
Comprehensive loss (241,284) (241,284) (241,284)
----------
Comprehensive income $4,507,880
--------- ========== -----------
BALANCE, JUNE 30, 2000 $(482,686) $49,404,356
========= ===========
</TABLE>
See notes to consolidated financial statements.
29
<PAGE> 30
KENSEY NASH CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
--------------------------------------------------
2000 1999 1998
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income $ 4,749,164 $ 3,178,758 $ 342,682
Adjustments to reconcile net income (loss) to net cash
provided by operating activities -
Depreciation and amortization 862,289 1,253,844 1,043,890
Changes in assets and liabilities which (used) provided cash:
Accounts receivable (2,001,567) (1,182,741) (557,390)
Prepaid expenses and other current assets (151,560) (119,937) 95,063
Inventory (153,420) 278,628 (291,404)
Accounts payable and accrued expenses (559,606) 1,119,080 345,017
Deferred revenue (374,546) (1,641,854) (972,300)
------------ ------------ ------------
Net cash provided by operating activities 2,370,754 2,885,778 5,558
------------ ------------ ------------
INVESTING ACTIVITIES:
Additions to property, plant and equipment (2,066,055) (1,743,691) (1,823,311)
Patent acquisition costs capitalized (69,539)
Sale of investments 635,025 4,491,096 10,709,918
Purchase of investments (6,886,937) (10,090,613)
------------ ------------ ------------
Net cash used in investing activities (1,431,030) (4,139,532) (1,273,545)
------------ ------------ ------------
FINANCING ACTIVITIES:
Principal payments under capital leases (22,501) (37,814) (42,702)
Proceeds from Term Loan and Financing Agreement 5,000,000 1,500,000
Repayments of long-term debt and Patent Acquisition Obligation (6,578,453) (1,300,776) (206,042)
Purchase of restricted investments (132,265) (4,075,000)
Sale of restricted investments 2,726,339 1,348,661
Proceeds from Secondary Offering 25,748,725
Proceeds from exercise of stock options 246,850 100,082 556,235
------------ ------------ ------------
Net cash provided by financing activities 21,988,695 1,035,153 1,807,491
------------ ------------ ------------
INCREASE (DECREASE) IN CASH 22,928,419 (218,601) 539,504
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 1,189,083 1,407,684 868,180
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 24,117,502 $ 1,189,083 $ 1,407,684
============ ============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 465,082 $ 310,762 $ 139,411
============ ============ ============
Cash paid for income taxes $ $ $
============ ============ ============
</TABLE>
SUPPLEMENTAL SCHEDULE OF NONCASH FINANCING ACTIVITIES:
During the year ended June 30, 1998, the Company issued 200,000 shares of
common stock in conjunction with the Patent Acquisition Agreement and incurred
a related obligation in the amount of $1,085,270 (see Note 5).
See notes to consolidated financial statements.
30
<PAGE> 31
KENSEY NASH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2000, 1999 AND 1998
--------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS - Kensey Nash Corporation (the "Company") has developed, or assisted in
developing, and is manufacturing absorbable biomaterials products for leading
companies in the orthopedic, cardiology, drug/biologics delivery and wound care
markets for incorporation into their products. The Company also independently or
on behalf of its customers designs and develops various new absorbable
biomaterials products for all of these markets.
The Company also is a leader in the development and manufacturing of
cardiovascular medical technology devices for arterial revascularization and
arterial puncture closure. The Company is developing the Aegis Vortex(TM), a
device designed to remove occlusive material from saphenous vein grafts
implanted during coronary bypass surgeries. A pilot clinical trial for the Aegis
Vortex has been completed and the Company intends to commercialize the device.
Additionally, the Company is the original designer, developer and manufacturer
of the Angio-Seal(TM), a leading product in arterial puncture closure, which is
manufactured, marketed and sold by St. Jude Medical, Inc. This device is
designed to seal and close femoral artery punctures made during diagnostic and
therapeutic cardiovascular catheterizations. The Company was incorporated in
Delaware on August 6, 1984.
PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION - The consolidated
financial statements include the accounts of Kensey Nash Corporation and Kensey
Nash Holding Company. All intercompany transactions and balances have been
eliminated. Kensey Nash Holding Company, incorporated in Delaware on January 8,
1992, was formed to hold title to certain Company patents and has no operations.
The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles necessarily requires management to make
estimates and assumptions. These estimates and assumptions, which may differ
from actual results, will affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the financial
statements, as well as the reported amounts of revenue and expense during the
period.
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.
FAIR VALUE OF FINANCIAL INSTRUMENTS - The carrying amounts of financial
instruments including cash and cash equivalents, short-term investments,
accounts receivable, accounts payable and debt approximated fair value as of
June 30, 2000 and 1999. The fair value of short-term investments is based on
quoted market prices.
INVESTMENTS - Investments at June 30, 2000 consist of short-term Certificates of
Deposit and Government Bonds. In accordance with Statement of Financial
Accounting Standards ("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 or restricted as to use which are included as restricted investments
(see Note 9). The Company's entire investment portfolio is reported at fair
value with unrealized gains and losses included in stockholders' equity (see
"Comprehensive Income"). Realized gains and losses are included in interest
income.
COMPREHENSIVE INCOME - Effective July 1, 1998 the Company adopted SFAS No. 130,
Reporting Comprehensive Income ("SFAS 130"), which establishes new rules for the
reporting and display of comprehensive income and its components. Accumulated
other comprehensive loss, shown in the consolidated statements of shareholders'
equity at June 30, 2000, 1999 and 1998, is solely comprised of
31
<PAGE> 32
unrealized losses on the Company's available-for-sale securities. There was no
unrealized gain or loss in the year ended June 30, 1998. The tax effect for 2000
and 1999 other comprehensive income was not significant.
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:
<TABLE>
<CAPTION>
JUNE 30,
----------------------
2000 1999
<S> <C> <C>
Raw materials $ 823,570 $ 666,271
Work in process 78,548 82,427
--------- ---------
Total $ 902,118 $ 748,698
========= =========
</TABLE>
PROPERTY, PLANT AND EQUIPMENT - Property, plant and equipment consists primarily
of machinery and equipment and leasehold improvements and is recorded at cost.
Maintenance and repairs are expensed as incurred. Machinery, furniture and
equipment is depreciated using the straight-line method over its useful life
ranging from five to seven years. Leasehold improvements are amortized using the
straight-line method over the lesser of the term of the lease or useful life of
the asset.
IMPAIRMENT OF LONG-LIVED ASSETS - Long-lived assets are reviewed for impairment
whenever events or circumstances indicate that the carrying amount of an asset
may not be recoverable. If the undiscounted expected future cash flows to be
generated by the related asset are less than the carrying value of the asset,
the Company measures the amount of the impairment by comparing the carrying
amount of the asset to its fair value. The estimation of fair value is generally
measured by discounting expected future cash flows at the rate the Company
borrows.
ACCOUNTS RECEIVABLE ALLOWANCE - The Company had trade receivable allowances of
$0 and $19,000 at June 30, 2000 and 1999. The Company established trade
receivable allowances of $0 and $59,376, wrote off amounts totaling $239 and
$40,376 in the years ended June 30, 2000 and 1999, respectively. These amounts
are included in selling, general and administrative expense for the years ended
June 30, 2000 and 1999.
PATENTS - The costs of internally developed patents are expensed when incurred
due to the long development cycle for patents and the Company's inability to
measure the recoverability of these costs when incurred. The cost of acquired
patents is being amortized over the remaining period of economic benefit,
ranging from 13 to 14 years at June 30, 2000.
REVENUE RECOGNITION - Sales revenue is recognized when the related product is
shipped. Revenue under research and development contracts is recognized as the
related costs are incurred.
INCOME TAXES - The Company accounts for income taxes under the provisions of
SFAS No. 109, Accounting for Income Taxes (see Note 8).
EARNINGS PER SHARE - Earnings per share are calculated in accordance with SFAS
No. 128, Earnings per Share which requires the Company to report both basic and
diluted earnings per share ("EPS"). Basic and diluted EPS are computed using the
weighted average number of shares of common stock outstanding, with common
equivalent shares from options included in the diluted computation when their
effect is dilutive (see Note 14).
STOCK-BASED COMPENSATION - Stock-based compensation cost is accounted for under
SFAS No. 123, Accounting for Stock-Based Compensation, which permits continued
application of the intrinsic value method of Accounting Principles Board Opinion
No. 25, Accounting for Stock Issued to Employees. Under the intrinsic value
method, compensation cost represents the excess, if any, of the quoted market
price of the Company's common stock at the grant date over the amount the
grantee must pay for the stock. The Company's policy is to grant stock options
at the fair market value at the date of grant (see Note 13).
32
<PAGE> 33
SECONDARY OFFERING - On May 23, 2000 the Company sold 2,700,000 shares of common
stock in a secondary public offering (the "Secondary Offering"). On June 22,
2000 the underwriters elected to exercise their over-allotment option for an
additional 259,000 shares. The net proceeds from the Secondary Offering
(approximately $25.7 million) have been and will continue to be used primarily
for research and development of the Aegis Vortex, including clinical trials;
repayment of certain indebtedness (see Note 6); and general corporate purposes,
including capital expenditures and potential strategic acquisitions.
NEW ACCOUNTING PRONOUNCEMENTS - SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, as amended, establishes new accounting and
reporting standards for derivative financial instruments and for hedging
activities. It requires an entity to recognize all derivatives as either assets
or liabilities in the balance sheet, depending on the Company's rights or
obligations under the applicable derivative contract, and to measure those
instruments at fair value. Adoption of the new method of accounting for
derivatives and hedging activities, which is required as of July 1, 2000, is not
expected to have a material impact on the Company's financial position or
operations.
PRESENTATION - Certain items in the 1999 and 1998 consolidated financial
statements have been reclassified to conform with the presentation in the 2000
consolidated financial statements.
2. STRATEGIC ALLIANCE AGREEMENTS
The Company has a strategic alliance with St. Jude Medical, Inc. ("St. Jude")
which incorporates United States and foreign license agreements (together, the
"License Agreements"). The Company also had a research and development agreement
and a collagen supply agreement (collectively, these three agreements are the
"Strategic Alliance Agreements") which have expired (see Research and
Development and the Collagen Supply Agreement, below). The Strategic Alliance
Agreements were formerly with The Kendall Company ("Kendall"), a subsidiary of
Tyco International, Ltd. ("Tyco"). In November 1998, Kendall announced the sale
of the Angio-Seal License Agreements to St. Jude. Under the terms of the sale,
the Company's Strategic Alliance Agreements with Kendall were transferred to St.
Jude. The Company's current or previous alliance partner will be referred to as
the Strategic Alliance Partner throughout.
THE LICENSE AGREEMENTS - Under the License Agreements, St. Jude has exclusive
rights to manufacture and market all current and future sizes of the Angio-Seal
worldwide. Also under the License Agreements, the Company receives royalty
payments based upon a percentage of the revenues generated from the sale of the
Angio-Seal. The License Agreements also provide for certain minimum royalty
payments ("Minimum Royalty") during the first five years after receiving US Food
and Drug Administration ("FDA") approval.
The Company received a $3.0 million advance on future royalties, which, as
stipulated in the License Agreements, was to be reduced in each royalty year
(the period beginning on October 1st and ending on September 30th) by 50% of
royalties earned in excess of the Minimum Royalty in that year. The remainder of
royalties earned was received as cash proceeds by the Company. At June 30, 1999,
the Company had exceeded the first, second and third royalty year (periods ended
September 30, 1997, 1998 and 1999) Minimum Royalties by $5,233,809,
cumulatively. The deferred revenue balance had been reduced by 50% of such total
excess, to $388,096. This amount was reduced to $0 during the year ended June
30, 2000.
During 1999, 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 recorded the $1.5 million as royalty income
for the year ended June 30, 1999.
THE RESEARCH AND DEVELOPMENT AGREEMENT - The Company and its Strategic Alliance
Partner had an agreement whereby such partner funded certain ongoing research
and development costs incurred by the Company. The Company contributed one-third
of such research and development costs while the Strategic
33
<PAGE> 34
Alliance Partner contributed the remaining two-thirds. This agreement has
expired and St. Jude will be performing any remaining development work on the
Angio-Seal product line, although the Company still performs contract research
and development for St. Jude upon request.
THE COLLAGEN SUPPLY AGREEMENT - Pursuant to an agreement with St. Jude, the
Company manufactured collagen to be used in the Angio-Seal. The agreement
contained a minimum purchase requirement from the Company, the price of which
fluctuated based on size and cumulative quantities sold, for five years ended
May 31, 2000. Although the agreement has expired, the Company continues to
supply St. Jude with the collagen requirements for the Angio-Seal.
3. LEASES
At June 30, 2000, future minimum annual rental commitments under non-cancelable
lease obligations are as follows:
<TABLE>
<CAPTION>
CAPITAL LEASES OPERATING LEASES
-------------- ----------------
<S> <C> <C>
YEAR ENDING JUNE 30:
2001 $11,055 $ 387,446
2002 1,947 394,328
2003 413,481
2004 437,077
2005 460,673
------- -----------
Total minimum lease payments 13,002 $ 2,093,005
===========
Amount representing interest (at rates ranging
from 7.25% to 10.25%) (695)
-------
Present value of net minimum lease payments 12,307
Current portion (10,374)
-------
Long-term portion $ 1,933
=======
</TABLE>
Rent expense for operating leases consists solely of rent for the Company's
facility in Exton, Pennsylvania. Rent expense for the fiscal years ended June
30, 2000, 1999 and 1998 was approximately $366,000 $360,000 and $326,000,
respectively.
The carrying value of equipment under capital leases was $9,944 and $28,368 at
June 30, 2000 and 1999, respectively.
Such assets are amortized over periods ranging from three to five years, which
represent the lesser of the term of the lease or useful life of the asset.
4. OFFICER LOANS
The Company has loans to a current officer of the Company totaling $900,000
which are collateralized by the officer's stock. Interest on the loans ranges
from 7% to 9.5% and was based on the prime rate of interest at the time the
advances were made. Total interest income earned by the Company on these loans
was $39,575, $9,174 and $4,750 for the years ended June 30, 2000, 1999 and 1998,
respectively. Interest and principal on the loans are due at the earlier of the
sale of a portion of the officer's stock or June 26, 2001.
34
<PAGE> 35
5. PATENT ACQUISITION AGREEMENT
On November 10, 1997, the Company entered into an agreement (the "Patent
Acquisition Agreement") to acquire 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 Patent Acquisition Agreement, beginning
January 1, 1998, the Company earns royalty fees, formerly paid to the sellers,
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 its
Strategic Alliance Partner.
Under the terms of the Patent Acquisition Agreement, the Company issued 200,000
shares of common stock and made cash payments totaling $1.2 million for the
transfer of ownership of the patents. The cash portion was payable in eight
quarterly installments (four $125,000 payments followed by four $175,000
payments), beginning on March 31, 1998. Accordingly, the present value of the
cash payments (discounted based upon the Company's available borrowing rate at
the time of the transaction of 8.5%) was recorded as a liability on the
Company's financial statements. The final quarterly payment was made on December
31, 1999 reducing the balance to $0 at June 30, 2000 (see Note 6). The acquired
patents are valued at the share price on the date of the Patent Acquisition
Agreement plus the present value of the cash payments and the legal and related
costs incurred to acquire the patents.
6. DEBT
FINANCING AGREEMENT - In January 1999, the Company entered into a $5.0 million
financing agreement with a bank (the "Financing Agreement"). Under the terms of
the Financing Agreement, the bank purchased the Company's $5.0 million
tax-exempt bond issue (the "Bond Issue"), which was provided through the local
development authority. The Financing Agreement bore interest at the five year
Treasury rate plus 1%, adjusted quarterly (6.25% at June 30, 1999) and calls for
twenty-four interest only payments followed by sixty monthly installments of
principal and interest. The Financing Agreement was collaterilized by the assets
of the Company. The Financing Agreement was repaid on June 1, 2000 with the
proceeds of the Secondary Offering.
The Company used $925,000 of the proceeds of the Bond Issue to pay down the
balance under its existing revolving credit and term loan agreement (the "Term
Loan"). The remaining proceeds of the Bond Issue were placed into a certificate
of deposit (the "CD") from which withdrawals were restricted for capital
expenditure purposes only. The balance of the CD at June 30, 1999 was $2,726,339
and was included in restricted investments due to the capital expenditure
restriction placed on its use. During the year ended June 30, 2000, the Company
had withdrawn the remainder of the proceeds for capital expansion, reducing the
balance of the CD to $0.
TERM LOAN - In January 1999, the Company paid down its existing $2.0 million
revolving credit and term loan agreement with the proceeds of the Financing
Agreement. The remaining $1,075,000 Term Loan bore interest at a fixed rate of
8.0% and called for interest only payments until February 1, 2000 at which time
it converted to a term loan due in 60 monthly installments of principal and
interest. The Term Loan was repaid on June 1, 2000 with the proceeds of the
Secondary Offering.
Amounts outstanding under the Company's Term Loan, Financing Agreement and
Patent Acquisition Agreement (see Note 5) are shown in the following table.
<TABLE>
<CAPTION>
2000 1999
<S> <C> <C>
Term Loan $ $ 1,075,000
Financing Agreement 5,000,000
Patent Acquisition Agreement 503,453
----------- -----------
Total -- 6,578,453
Current portion (577,900)
----------- -----------
Long-term $ -- $ 6,000,553
=========== ===========
</TABLE>
7. RETIREMENT PLAN
35
<PAGE> 36
The Company has a 401(k) Salary Reduction Plan and Trust (the "401(k) Plan") in
which all employees that are at least 21 years of age are eligible to
participate. Contributions to the 401(k) Plan are made by employees through an
employee salary reduction election. Company contributions are discretionary.
Effective October 1, 1999, the Company implemented a 25% matching contribution,
on up to 6% of an employee's total compensation, on all employee contributions.
8. INCOME TAXES
The Company accounts for income taxes under SFAS No. 109, which generally
provides that deferred tax assets and liabilities be recognized for temporary
differences between the financial reporting basis and the tax basis of the
Company's assets and liabilities and expected benefits of utilizing net
operating loss ("NOL") carryforwards. The impact on deferred taxes of changes in
tax rates and laws, if any, applied to the years during which temporary
differences are expected to be settled are reflected in the financial statements
in the period of enactment.
For 2000 the Company has not provided for current income taxes due to the
utilization of NOLs for tax purposes. The differences between the Company's
income tax expense (benefit) and the income tax expense (benefit) computed using
the US federal income tax rate were as follows:
<TABLE>
<CAPTION>
JUNE 30,
---------------------------------------------
2000 1999 1998
<S> <C> <C> <C>
Net income before income taxes $ 4,749,164 $ 3,178,758 $ 342,682
----------- ----------- -----------
Tax provision at U.S. statutory rate 1,612,590 1,080,729 123,121
State income tax provision, net of federal benefit 17,066
Reconciliation to actual tax rate:
Non-deductible meals and entertainment 10,892 13,062 13,328
Timing differences (80,880)
Utilization of net operating loss carryforwards (1,623,482) (1,093,791) (72,635)
----------- ----------- -----------
$ $ $
=========== =========== ===========
</TABLE>
Significant components of the Company's deferred taxes are as follows:
<TABLE>
<CAPTION>
June 30,
--------------------------------
2000 1999
Accrual for:
<S> <C> <C>
Vacation $ 102,536 $ 92,536
Basis difference - patents 189,419 316,965
Basis difference - fixed assets (184,209) 167,730
Prepaid insurance (65,196) (76,345)
Inventory 205,945 193,145
Other (14,028) 22,486
----------- -----------
234,467 716,517
Effective tax rate 40.59% 40.59%
----------- -----------
Deferred tax asset 95,170 290,834
NOL carryforwards (expiring between 2001 and 2012) 4,646,537 5,417,799
----------- -----------
4,741,707 5,708,633
Less valuation allowance (4,741,707) (5,708,633)
----------- -----------
$ 0 $ 0
----------- -----------
</TABLE>
Substantially all of the Company's deferred tax asset is offset by a valuation
allowance due to the uncertainty surrounding future earnings. At June 30, 2000,
the Company had NOL carryforwards for federal and state tax purposes totaling
$11.3and $10.0 million, respectively. A portion of the NOL may be subject to
various statutory limitations as to its usage.
36
<PAGE> 37
9. COMMITMENTS AND CONTINGENCIES
The Company has pledged $2,081,651 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 at the
Company's Initial Public Offering in December 1995. 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 $2,010,676 at June 30, 2000.
10. CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist primarily of cash and cash equivalents,
short-term investments and accounts receivable. The Company places its cash,
cash equivalents and short-term investments with high quality financial
institutions and has established guidelines relative to diversification and
maturities that maintain safety and high liquidity. With respect to trade and
royalty receivables, such receivables are primarily with St. Jude (60% and 100%
of trade and royalty receivables, respectively, at June 30, 2000) (see Note 2).
The Company performs ongoing credit evaluations on the remainder of its
customers' financial conditions but does not require collateral to support
customer receivables.
11. CERTAIN COMPENSATION AND EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with certain of its officers
which provide for aggregate annual base salaries of $676,962 through June 30,
2001.
12. PREFERRED STOCK
The Company has an authorized class of undesignated Preferred Stock consisting
of 100,000 shares with a $.001 par value. The Board of Directors may authorize
the issuance of Preferred Stock which ranks senior to the common stock with
respect to the payment of dividends and the distribution of assets on
liquidation. In addition, the Board of Directors is authorized to fix the
limitations and restrictions, if any, upon the payment of dividends on Common
Stock to be effective while any shares of Preferred Stock are outstanding. The
Board of Directors, without stockholder approval, can issue Preferred Stock with
voting and conversion rights, which could adversely affect the voting power of
the holders of Common Stock. At June 30, 2000 and 1999 no shares of Preferred
Stock were outstanding. The Company has no present intention to issue shares of
Preferred Stock.
13. STOCK OPTION PLANS
During 1995, the Company adopted the Employee Incentive Compensation Plan (the
"Employee Plan"), a flexible plan that provides the Employee Plan Committee (the
"Committee") broad discretion to award eligible participants with stock-based
and performance-related incentives as the Committee deems appropriate. The
persons eligible to participate in the Employee Plan are officers, employees and
consultants of the Company who, in the opinion of the Committee, contribute to
the growth and success of the Company.
The Compensation Committee of the Board of Directors oversees the Committee and
may grant nonqualified stock options, incentive stock options or a combination
thereof to the participants. The Employee Plan provides for a total of 2.2
million shares available for option grants. Options granted will provide for the
purchase of Common Stock at prices determined by the Compensation Committee, but
in no event less than fair market value on the date of grant. As of June 30,
2000, awards consist solely of stock options as summarized in the table below.
During 1995, the Company adopted the Non-employee Directors' Stock Option Plan
(the "Directors' Plan"). The Directors' Plan grants nonqualified stock options
for the purchase of Common Stock to directors who are not employees. The
Directors' Plan provides for a total number of 210,000 shares available for
option grants.
37
<PAGE> 38
Each non-employee director was granted an option to purchase 5,000 shares of
Common Stock on the Directors' Plan's effective date. In addition, the
Director's plan provides for the grant of an option to purchase 7,500 shares of
Common Stock on the date of each regular annual stockholder meeting after the
effective date to each participant upon such date. The participant must either
be continuing as a non-employee director subsequent to the meeting or have been
elected at such meeting to serve as a non-employee director. Options granted
under the Directors' Plan must provide for the purchase of Common Stock at fair
market value on the date of grant.
Under both plans, the options are exercisable over a maximum term of ten years
from the date of grant and vest over periods of zero to four years based on the
grant date.
A summary of the stock option activity under both plans for the years ended June
30, 2000, 1999 and 1998, is as follows:
<TABLE>
<CAPTION>
EMPLOYEE PLAN DIRECTORS' PLAN
-------------------------- -------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
SHARES PRICE SHARES PRICE
----------- --------- ---------- ----------
<S> <C> <C> <C> <C>
Balance at June 30, 1997 752,493 $ 9.64 22,500 $ 12.96
Granted 201,100 11.69 15,000 16.25
Cancelled (13,030) 11.84
Exercised (61,021) 9.12 --
---------- ----------
Balance at June 30, 1998 879,542 10.12 37,500 14.28
Granted 816,650 8.56 15,000 8.88
Cancelled (40,924) 10.47
Exercised (11,438) 9.59 --
---------- ----------
Balance at June 30, 1999 1,643,830 9.34 52,500 12.73
---------- ----------
Granted 14,000 14.95 75,000 13.25
Cancelled (16,936) 9.32 --
Exercised (25,789) 16.03 --
========== ==========
Balance at June 30, 2000 1,615,105 9.39 127,500 13.04
========== ==========
Exercisable portion 1,023,491 9.60 37,503 13.29
========== ==========
Available for future grant 444,889 82,500
========== ==========
Weighted-average fair value of options
granted during the year ended June 30,
1998 $ 8.24 $ 11.53
========== ==========
1999 $ 5.78 $ 6.00
========== ==========
2000 $ 10.25 $ 9.08
========== ==========
</TABLE>
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted average
assumptions used for grants:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
------------------------------------------
2000 1999 1998
<S> <C> <C> <C>
Dividend yield 0% 0% 0%
Expected volatility 50% - 80% 50% - 81% 65% - 70%
Risk-free interest rate 6.13% 5.77% 5.7%
Expected lives:
Employee Plan 6.94 7.61 7.75
Directors Plan 6.94 7.61 7.75
</TABLE>
38
<PAGE> 39
The following table summarizes significant option groups outstanding at June 30,
2000 and related weighted average exercise price and remaining contractual life
information as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------ -----------------------------------
RANGE OF REMAINING WGHTD AVG WGHTD AVG
EXERCISE NUMBER AT CONTRACTUAL EXERCISE NUMBER AT EXERCISE
PRICES JUNE 30, 2000 LIFE PRICE JUNE 30, 2000 PRICE
--------------------- ------------------ -------------- -------------- ------------------- ---------------
<S> <C> <C> <C> <C> <C>
$ 7.625 - $ 9.375 1,313,346 7.14 $ 8.58 782,375 $ 8.58
$ 11.75 - $13.375 383,259 7.14 12.60 247,617 12.59
$14.875 - $ 16.25 46,000 7.16 15.74 31,002 15.70
------------ -----------
1,742,605 1,060,994
============ ===========
</TABLE>
The Company has adopted the disclosure only provisions of SFAS No. 123,
Accounting for Stock Based Compensation. Accordingly, no compensation cost has
been recognized for the Company's two stock option plans. Had compensation cost
for the plans been determined based on the fair market value at the grant date
for awards, consistent with the provisions of SFAS No. 123, the Company's net
loss and earnings per share would have been reduced to the proforma amounts
below:
<TABLE>
<CAPTION>
JUNE 30, 2000 JUNE 30, 1999 JUNE 30, 1998
------------------------------- ------------------------------- -------------------------------
AS REPORTED PRO FORMA AS REPORTED PRO FORMA AS REPORTED PRO FORMA
---------------- -------------- ---------------- -------------- --------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Net income (loss) $4,749,164 $2,469,406 $3,178,758 $1,698,182 $342,682 $(664,398)
Income (loss) per share $ 0.60 $ 0.31 $ 0.43 $ 0.23 $ 0.05 $( 0.09)
</TABLE>
14. EARNINGS PER SHARE
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.
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30, 2000
-----------------------------------------------
PER SHARE
INCOME SHARES AMOUNT
-----------------------------------------------
<S> <C> <C> <C>
BASIC EPS
Income available to common shareholders $4,749,164 7,766,184 $ 0.61
======
EFFECT OF DILUTIVE SECURITIES
Options -- 209,255
---------- ---------
DILUTED EPS
Income available to common shareholders
including assumed conversions $4,749,164 7,975,439 $ 0.60
========== ========= ======
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30, 1999 YEAR ENDED JUNE 30, 1998
----------------------------------------------- ----------------------------------
PER SHARE PER SHARE
INCOME SHARES AMOUNT INCOME SHARES AMOUNT
----------------------------------------------- ----------------------------------
<S> <C> <C> <C> <C> <C> <C>
BASIC EPS
Income available to common shareholders $ 3,178,758 7,462,723 $ 0.43 $ 342,682 7,342,683 $ 0.05
====== ======
EFFECT OF DILUTIVE SECURITIES
Options -- 14,216 -- 208,913
----------- --------- --------- ---------
DILUTED EPS
Income available to common shareholders
including assumed conversions $ 3,178,758 7,476,939 $ 0.43 $ 342,682 7,551,596 $ 0.05
=========== ========= ====== ========= ========= ======
</TABLE>
15. SEGMENT REPORTING
Effective July 1, 1998, the Company adopted SFAS No. 131, Disclosures about
Segments of an Enterprise and Related Information. SFAS No. 131 requires the
Company to use the "management approach" for identifying operating segments and
establishes annual and interim reporting standards for these operating
39
<PAGE> 40
segments. The statement also establishes standards for related disclosures about
products and services and geographic areas. The Company's operations and
products have been aggregated into a single reportable segment, as permitted
under SFAS No. 131, since they have similar economic characteristics, production
processes, types of customers and distribution methods.
The Company's primary products include Biomaterials and Puncture Closure (the
Angio-Seal). Puncture Closure products primarily represents Angio-Seal device
sales to St. Jude. Under Biomaterials products, the Company designs and/or
manufactures and markets various absorbable polymer and collagen products for
use in numerous applications including orthopedic, cardiology, drug/biologics
delivery and wound care. The Company also receives royalty revenue from the sale
of Angio-Seal units by its Strategic Alliance Partner and research and
development revenue reimbursed for certain research and development expenses.
Net sales by product line and a reconciliation to total revenue is as follows:
<TABLE>
<CAPTION>
REVENUE FOR THE YEAR ENDED JUNE 30,
--------------------------------------------
2000 1999 1998
<S> <C> <C> <C>
Puncture Closure $ 5,486,977 $ 1,127,641 $ 1,248,293
Biomaterials 7,656,836 6,040,462 3,420,620
----------- ----------- -----------
Net Sales 13,143,813 7,168,103 4,668,913
Research and development 59,857 1,894,350 3,641,492
Royalty income 6,611,685 7,182,969 3,008,327
----------- ----------- -----------
Total Revenue $19,815,355 $16,245,422 $11,318,732
=========== =========== ===========
</TABLE>
For the years ended June 30, 2000, 1999 and 1998, revenues from the Strategic
Alliance Partner represented the following percentages of total revenues of the
Company:
<TABLE>
<CAPTION>
PERCENTAGE OF TOTAL REVENUE
FOR THE YEAR ENDED JUNE 30,
-------------------------------------------
2000 1999 1998
<S> <C> <C> <C>
Net sales 66% 66% 86%
Research and development (see Note 2) 100% 100% 96%
Royalty Income (see Note 2) 100% 100% 100%
</TABLE>
The Company's revenues from external customers are summarized below. Revenues
are attributed to a country based on the location of the customer. No one
country other than the US represented more than 10% of the Company's revenues.
In addition, all of the Company's long-lived assets are located in the US.
<TABLE>
<CAPTION>
REVENUES FOR THE YEAR ENDED JUNE 30,
--------------------------------------------
2000 1999 1998
<S> <C> <C> <C>
United States $ 19,583,759 $ 15,911,292 $ 11,246,697
Other foreign countries 231,596 334,130 72,035
------------ ------------ ------------
Total $ 19,815,355 $ 16,245,422 $ 11,318,732
============ ============ ============
</TABLE>
16. QUARTERLY FINANCIAL DATA (UNAUDITED)
The summarized quarterly results of operations of the Company for the years
ended June 30, 2000 and June 30, 1999 are presented below:
40
<PAGE> 41
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30, 2000
---------------------------------------------------------------
1ST 2ND 3RD 4TH
QUARTER QUARTER QUARTER QUARTER
--------------- --------------- --------------- --------------
<S> <C> <C> <C> <C>
Operating revenues $ 3,819,120 $ 4,542,606 $ 5,401,714 $ 6,051,915
Operating costs and expenses $ 3,284,295 $ 3,761,452 $ 4,157,430 $ 4,385,269
Net income $ 643,141 $ 876,151 $ 1,312,684 $ 1,917,188
Basic and diluted earnings
per share $ 0.09 $ 0.12 $ 0.17 $ 0.22
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30, 1999
---------------------------------------------------------------
1ST 2ND 3RD 4TH
QUARTER QUARTER QUARTER QUARTER
--------------- --------------- --------------- --------------
<S> <C> <C> <C> <C>
Operating revenues $ 3,551,497 $ 3,714,312 $ 4,368,369 $ 4,611,244
Operating costs and expenses $ 3,249,673 $ 3,131,134 $ 3,494,695 $ 3,512,243
Net income $ 370,579 $ 654,128 $ 958,931 $ 1,195,120
Basic and diluted
earnings per share $ 0.05 $ 0.09 $ 0.13 $ 0.16
</TABLE>
Quarterly and total year earnings per share are calculated independently based
on the weighted average number of shares outstanding during each period.
17. LITIGATION
In March 1998, the Company, together with its Strategic Alliance Partner, filed
a patent infringement claim against Perclose, Inc. of Menlo Park, California
("Perclose"), a competitor in the puncture closure market. In 1999, the Company
amended the claim to add a second patent to the infringement suit. The original
and amended suits, filed in the Eastern District of Pennsylvania, claim that
Perclose infringes the Company's US Patent Nos. 5,676,689 and 5,861,004
(together, the "Patents"). The Patents cover a system and method for sealing a
puncture in a blood vessel (e.g. the femoral artery). The Company seeks damages
and an order to permanently enjoin Perclose from making, using or selling
product that infringes the Patents.
Perclose filed four counterclaims in answer to the complaint. The first
counterclaim seeks to declare the Patent invalid and not infringed; the second
and third counterclaims maintain that the Company committed antitrust
violations; and the fourth counterclaim asserts that the Company committed
unfair competition. Management is unable to predict the final outcome of the
suit or whether the resolution of the matter could materially affect the
Company's results of operations, cash flows, or financial position. The Company
has expensed legal costs, as a component of selling, general and administrative
expenses, as services have been incurred.
18. SUBSEQUENT EVENTS
Subsequent to year end, the Company acquired the assets and assumed certain
liabilities of THM Biomedical, Inc., a bioabsorbable tissue engineering device
development company, for a purchase price of $11.1 million. The purchase price
consists of a $6.6 million cash payment at closing and $1,125,000 annually for
the subsequent four years. The annual amounts are due in quarterly payments of
$281,250 beginning on December 31, 2000. The transaction will be accounted for
under the purchase method. The purchase price will be allocated amongst assets
acquired and liabilities assumed, $400,224 and $702,351, respectively, with the
remainder being allocated to in-process research and development and goodwill.
*****
41
<PAGE> 42
14(A) 2. FINANCIAL STATEMENT SCHEDULES
All schedules have been omitted because they are not applicable or not
required.
14(A) 3. EXHIBITS
Exhibit # Description
--------- -----------
1.1* Form of Underwriting Agreement
1.2* Form of Irrevocable Power of Attorney of Selling Stockholder
1.3* Form of Letter of Transmittal and Custody Agreement
2.1** Asset Purchase Agreement dated September 1, 2000 by and
among Kensey Nash Corporation, THM Acquisition Sub, Inc.,
THM Biomedical, Inc. and the stockholders of THM Biomedical,
Inc.
3.1*** Amended and Restated Certificate of Incorporation of Kensey
Nash
3.2*** Amended and Restated Bylaws of Kensey Nash
4.1*** Specimen stock certificate representing Kensey Nash common
stock
5.1* Opinion of Katten Muchin Zavis
10.1*** Kensey Nash Corporation Second Amended and Restated Employee
Incentive Compensation Plan and form of Stock Option
Agreement
10.2**** Kensey Nash Corporation Third Amended and Restated
Nonemployee Directors' Stock Option Plan and form of Stock
Option Agreement
10.3*** Form of Directors' Indemnification Agreement
10.4* Employment Agreement dated July 1, 1998, by and between
Kensey Nash and Joseph W. Kaufmann
10.5* Employment Agreement dated April 1, 1999, by and between
Kensey Nash and Wendy F. DiCicco
10.6* Employment Agreement dated December 1, 1998, by and between
Kensey Nash and John E. Nash, P.E.
10.7* Employment Agreement dated July 16, 1998, by and between
Kensey Nash and Douglas G. Evans, P.E.
10.8*** Collagen Component Supply Agreement dated May 31, 1995, by
and between Kensey Nash and Quinton Instrument Company
10.9* Employment Agreement dated April 1, 1999, by and between
Kensey Nash and Julie N. Broderick
10.10*** License Agreement (United States) dated September 4, 1991,
by and between Kensey Nash and American Home Products
Corporation
10.11*** License Agreement (Foreign) dated September 4, 1991, by and
between Kensey Nash and American Home Products Corporation
10.12* Tenant Lease dated November 19, 1996, by and between Kensey
Nash and Marsh Creek Associates One and Lease Amendment
dated January 3, 2000
23.1* Consent of Deloitte & Touche LLP
23.2* Consent of Katten Muchin Zavis (included in opinion filed as
Exhibit 5.1)
24.1* Form of Power of Attorney
27.1 Financial Data Schedule
* This exhibit is incorporated by reference to the exhibit with the same
Exhibit Number in our Registration Statement on Form S-3, Registration
Statement No. 333-35494.
** This exhibit is incorporated by reference to the exhibit with the same
Exhibit Number in our Current Report on Form 8-K filed with the SEC on
September 15, 2000.
42
<PAGE> 43
*** This exhibit is incorporated by reference to the exhibit with the same
Exhibit Number in our Registration Statement on Form S-1, Registration
Statement No. 33-98722.
**** This exhibit is incorporated by reference to Exhibit A of our
definitive Proxy Statement filed with the SEC on November 4, 1999.
All other schedules are omitted because they are not required, are not
applicable or the information is scheduled in our financial statements or notes
thereto.
43
<PAGE> 44
14(B). REPORTS ON FORM 8-K
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, on the 28th day of
September, 2000.
KENSEY NASH CORPORATION
By: /S/ WENDY F. DICICCO
---------------------------
Wendy F. DiCicco
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below by the following persons on behalf of the Registrant and
in the capacities indicated on the 28th day of September 2000.
SIGNATURE TITLES
/s/ JOSEPH W. KAUFMANN
------------------------------- Chief Executive Officer (Principal Executive
Joseph W. Kaufmann Officer), President, Secretary and Director
/s/ JOHN E. NASH, P.E. Vice President of New Technologies and Director
-------------------------------
John E. Nash, P.E.
/s/ DOUGLAS G. EVANS, P.E. Chief Operating Officer, Assistant Secretary
------------------------------- and Director
Douglas G. Evans, P.E.
/s/ WENDY F. DICICCO, CPA Chief Financial Officer (Principal Accounting
------------------------------- and Financial Officer)
Wendy F. DiCicco, CPA
/s/ KENNETH R. KENSEY, M.D. Director
-------------------------------
Kenneth R. Kensey, M.D.
/s/ ROBERT J. BOBB Director
-------------------------------
Robert J. Bobb
/s/ HAROLD N. CHEFITZ Director
-------------------------------
Harold N. Chefitz
/s/ WALTER R. MAUPAY, JR. Director
-------------------------------
Walter R. Maupay, Jr.
/s/ C. MCCOLLISTER EVARTS, M.D. Director
-------------------------------
C. McCollister Evarts, M.D.
/s/ STEVEN J. LEE Director
-------------------------------
Steven J. Lee
44
