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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, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________.
Commission File Number: 0-27120
KENSEY NASH CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 36-3316412
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
MARSH CREEK CORPORATE CENTER, 55 EAST UWCHLAN AVENUE, SUITE 204, EXTON,
PENNSYLVANIA 19341
(Address of principal executive offices and zip code)
Registrant's telephone number, including area code: (610) 524-0188
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 $7.75 on September 18, 1998 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 $57,809,358.
The number of shares outstanding of the registrant's Common Stock,
par value $.001, as of September 18, 1998 was 7,459,272.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the following document are incorporated by reference
into this report: Definitive Proxy Statement in connection with
the 1998 Annual Meeting of Stockholders
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PART I
ITEM 1. BUSINESS
COMPANY OVERVIEW
Kensey Nash Corporation ("the Company") was founded in Delaware in 1984
by Dr. Kenneth Kensey and Mr. John Nash to develop advanced proprietary medical
products for use in the diagnosis and treatment of cardiovascular diseases.
Initially, the Company focused on rotary technology designed to treat
cardiovascular disease. As a result of this initial work, the Company
identified a market for, and began developing, puncture closure devices. In the
late 1980s, the Company began intensifying its development of puncture closure
devices, including the Angio-Seal Device (the "Angio-Seal"), and filed its
first patent related to the Angio-Seal in 1987. In 1991, the Company entered
into a long-term strategic relationship with American Home Products Corporation
("AHP" or "Strategic Alliance Partner") by entering into United States and
foreign license agreements (together, the "License Agreements"). These
agreements provided research and development and clinical trial funding as well
as significant payments upon the achievement of certain milestones in the
Angio-Seal development. As a result of the Company's clinical trial work, the 8
French ("F") Angio-Seal received Pre-Market Approval ("PMA") from the U.S. Food
and Drug Administration ("FDA") in September 1996 and the European Community
("CE") Mark approval from the European Economic Community ("EEC") in September
1995, the latter of which permits the marketing of the Angio-Seal in EEC member
countries. In December 1997, AHP announced the sales of its subsidiary,
Sherwood-Davis & Geck, the operating company responsible for the sales,
marketing and manufacturing of the Angio-Seal device, to Tyco International
Ltd. ("Tyco"). Under the terms of the sale, the Company's agreements with AHP
were transferred to Tyco's subsidiary, The Kendall Company ("Kendall").
Accordingly, Kendall replaced AHP as the Company's Strategic Alliance Partner
in March 1998, upon finalization of the sale.
The Company has established three technology platforms; puncture
closure (the Angio-Seal), biomaterials (collagen and resorbable polymers) and
revascularization (the Aegis Vortex System) ("AVS"). The Company participates
in the puncture closure market primarily through its relationship with its
Strategic Alliance Partner. This partnership generates royalty income, research
and development funding and sales through the manufacture of clinical devices
and components for the Angio-Seal (see Relationship with Strategic Alliance
Partner).
The Company has significantly expanded its biomaterials business with
growth in research and development, manufacturing and increased OEM sales and
marketing efforts. The Company has a contract with its Strategic Alliance
Partner to supply a minimum of 50% of the collagen plug requirements until May
2000. However, to-date, the Company has been exclusive manufacturer of the
collagen plug for the Angio-Seal puncture closure device. In addition, the
Company manufactures collagen products for third parties for use as delivery
systems for various applications including bone growth proteins, artificial skin
for burn victims and drug delivery for products in various stages of clinical
trials. The Company has also been the exclusive manufacturer of the absorbable
polymer anchor component of the Angio-Seal. The Company will continue to be a
significant supplier of Angio-Seal anchor requirements through fiscal year 1999.
As a result of its absorbable polymer capabilities, the Company has expanded
into the orthopedic marketplace as an OEM supplier of specialized products.
The Company's revascularization platform has been established to
address a market opportunity in cardiology for the treatment of occluded
saphenous vein bypass grafts and in-stent restenosis. The Company is developing
a revascularization catheter utilizing its patent portfolio and in-house
expertise to address these life threatening medical conditions.
The Company wholly owns its Kensey Nash Holding Corporation subsidiary,
formed in 1992 to hold title to certain Company patents, which has no
operations.
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PUNCTURE SEALING MARKET OVERVIEW
Coronary artery disease, which affects millions of people each year, is
caused when organic material, known as plaque, develops on the inside walls of
the arteries that lead to the heart. The plaque build up can cause blood flow
restrictions, limiting oxygen to the heart, or complete obstructions, both of
which can cause severe chest pain and, ultimately, a heart attack. One of the
most common ways a physician will diagnose and treat coronary artery disease is
by performing a cardiovascular catheterization procedure. The physician gains
access to the heart by inserting a catheter into the femoral artery, located in
the groin area. Cardiovascular catheterization allows a physician to more
precisely assess the damage caused by the plaque to the artery and,
consequently, the heart. Peripheral vascular disease is assessed and treated
through similar catheterization procedures.
Currently, over 5.2 million diagnostic cardiac catheterization
procedures, commonly referred to as angiographies, are performed worldwide each
year. During an angiography procedure, a dye is injected into the coronary
arteries and viewed on an x-ray imaging system to determine the extent and
location of arterial blockages. Once the physician determines the extent of the
blockages, any number of therapeutic procedures may be performed, sometimes
through the same access puncture.
Typical therapeutic procedures include angioplasties, atherectomies,
and the placement of stents. An angioplasty is a procedure in which a balloon
is inserted into the artery and inflated to compress the blockage against the
arterial wall, enlarging the artery and increasing blood flow. An atherectomy
uses a miniature cutting system or a high speed rotating burr to debulk the
artery plaque. Recently, the placement of stents, used in conjunction with
these procedures, has become extremely popular and is one of the fastest
growing segments of this cardiovascular market. A stent is a metal device,
resembling a small coil, that is permanently implanted in an artery to support
the arterial wall and increase blood flow, therefore, reducing and delaying the
risk of the artery closing again (restenosis). In many of the therapeutic
procedures, such as atherectomies and the placement of stents, physicians use
high levels of anticoagulants (blood thinning therapies) and larger arterial
punctures, which often lead to increased bleeding and related puncture site
complications. Currently, there are an estimated 1.5 million total therapeutic
procedures performed worldwide each year. These procedures, due to their
potential puncture site complications, have created an increased awareness of
the need for arterial puncture closure devices.
Together, there are currently over 6.7 million diagnostic and
therapeutic cardiac catheterizations performed each year. Depending on the
procedure, and the size of the catheter necessary to perform the procedure, a
cardiac catheterization creates a puncture in the artery that typically ranges
in size from a 5F to a 10F. The Company believes the Angio-Seal Product Line
addresses the needs of both the diagnostic and therapeutic cardiac
catheterization markets.
BIOMATERIALS MARKET OVERVIEW
Biomaterials are substances of synthetic or natural origin which can
treat, augment or replace tissue, organs or functions of the body. There are
currently over 40 million medical treatments each year involving some form of
implantable biomaterial. Segments of the biomaterials market include wound
management, orthopedic implants and reconstructive surgery, drug delivery
systems, cardiovascular, dental, and blood transfusions. The Company's
biomaterials currently addresses several of these market segments, the largest
of which is orthopedics and wound management.
Orthopedics. Biomaterials can be used to repair or regenerate most
musculoskeletal tissues, including bone, cartilage, ligaments, meniscus, spinal
discs and tendons. The worldwide biomaterials or thopedic device market is
estimated to be a multi-billion dollar market. Collagen and polymers are among
the biomaterials currently used for musculoskeletal repair in the form of
bioresorbable fixation devices, bone replacement materials and bone growth
factors. Most of the top competitors in the orthopedics industry have ventured
into this new technology. These companies either have their own manufacturing
capabilities or look to third party manufacturers to bring their designs to the
market. The Company offers state-of the-art production capabilities and over a
decade of experience in
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developing and manufacturing medical products made from absorbable
biomaterials. These capabilities and experience have enabled the Company to
develop relationships with several of the top competitors in the orthopedics
market on the design, development and/or manufacture of orthopedic
applications.
Wound Management. The U.S. wound care market is a multi-billion dollar
industry currently dominated by conventional bandages and dressings and
surgical staples or sutures. There is a new generation of products which has
been triggered by recent developments in biomaterials, tissue engineering and
biotechnology. New products include genetically engineered topical drugs,
bioengineered artificial skin, wound healing devices and biosynthetic
dressings. Again, collagen and polymers are among the biomaterials being
integrated into the wound care market. The Company's products have been used as
an integral part of wound care products as diverse as hemostatic sponges,
topical wound dressings, bioengineered skin and drug delivery matrices.
REVASCULARIZATION MARKET OVERVIEW
Revascularization is the treatment of occluded coronary arteries, both
native and grafts. When a native coronary artery is totally occluded a coronary
artery bypass graft procedure ("CABG") is performed to circumvent the native
artery and restore bloodflow to the heart via the graft. The bypass graft is
typically harvested from the patient's leg (the saphenous vein) and the graft
is referred to as a saphenous vein graft ("SVG"). There are approximately
700,000 worldwide coronary artery bypass surgeries performed annually, the
majority of these surgeries involve three or more bypassed vessels. The SVGs
occlude over time and it is estimated between 15%-30% are occluded after one
year. The Company believes the total market for occluded SVGs to be
approximately 250,000 annual procedures with a market size of $300 million.
The current treatment options include pharmaceutical management, repeat
bypass surgery, percutaneous intervention and heart transplant. The Company
believes it has a unique device, the Aegis Vortex System, a percutaneous
interventional treatment, which targets the SVGs.
BUSINESS STRATEGY
The Company's primary goal is to establish the Angio-Seal Product Line
as the standard of care for closing arterial puncture sites associated with
cardiovascular catheterizations. The Company continues to expand and research
other technologies. The Company's goals are and will continue to be pursued
through the following strategy:
- Expand Angio-Seal Product Technology. The Company's approved 8F
Angio-Seal device seals arterial punctures 8F and smaller
and addresses the vast diagnostic market as well as balloon
angioplasty and stenting. The Company is currently expanding
its Angio-Seal Product Line by developing additional sizes of
the Angio-Seal, including 6F and 10F sizes. The 6F Angio-Seal
addresses the diagnostic and therapeutic market which may use
smaller puncture sites. The 10F Angio-Seal addresses the market
for therapeutic procedures which require larger puncture sizes.
The Company has begun clinical trials and, together with its
Strategic Alliance Partner, is aggressively pursuing all
necessary regulatory approvals for both the 6F and the 10F
Angio-Seal.
- Expand Collagen Business. While the Company's original purpose
in manufacturing collagen and absorbable polymer components is to
supply its Strategic Alliance Partner for the Angio-Seal Product
Line, the Company has developed significant expertise in the
processing, handling and manufacturing of bioresorbable materials.
The company manufactures several standard collagen products and has
made it a practice to customize materials to meet specific customer
specifications. The company's collagen has been used as an integral
part of products as diverse as hemostatic sponges, topical wound
dressings, bioengineered skin, bone regeneration and drug delivery
matrices.
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- Expand Polymer Business. Recent advances in biotechnology,
biomaterials and tissue engineering have made absorbable polymers one
of the fastest growing segments within the medical field,
particularly in orthopedics. The company provides a full array of
mold design, injection-molding and compression molding services for
absorbable polymers, tailored to meet the unique requirements of
medical product manufacturers. The Company intends to utilize its
expertise to build a position in the market as a supplier of
absorbable polymer and is currently working with several companies
that are leaders in the orthopedic market.
- Develop Revascularization Technology. The Company currently has
proprietary technology covered by issued patents related to the use
of revascularization technology for the treatment of cardiovascular
disease in the coronary arteries. The Company is developing this
technology for application in opening occluded coronary artery bypass
grafts and possibly in-stent restenosis. The Company believes it has
a unique device, the Aegis Vortex System, for treating this currently
unaddressed problem. Clinical trials are expected to commence in
fiscal year 1999.
- Develop Opportunities in Other Technology. The Company will
continue to focus its research and development capabilities on
developing new products that relate to its three technology
platforms: puncture closure, biomaterials and revascularization.
Using its expertise in these platforms, the Company believes products
will be developed with significant market potential.
PRODUCT OVERVIEW
The Company's existing and proposed products, their potential markets
and regulatory status are summarized as follows. See the text below for
additional details.
UNITED STATES INTERNATIONAL
PROPOSED REGULATORY REGULATORY STATUS
PRODUCT APPLICATIONS STATUS (1) (1)
---------------------------------------------------------------------------------------------------------
ANGIO-SEAL PRODUCT LINE
8F Angio-Seal Angiography, FDA approval CE Mark Approval
Sealing 8F or smaller angioplasty, received in received September 1995.
punctures. placement of stents September 1996.
and peripheral
radiology.
6F Angio-Seal(2) Angiography and Clinical trial phase. European and US
Sealing 6F or smaller certain therapeutic commercialization
punctures. procedures. scheduled to occur in
fiscal 1999.
10F Angio-Seal(2) Atherectomy, Clinical trial phase. European and US
Sealing 8F, 9F and placement of stents, commercialization
10F punctures. and ultrasound. scheduled to occur in
fiscal 1999.
Collagen Plug for Angio-Seal component. See above.(3) See above.(3)
Angio-Seal
Anchor Component for Angio-Seal component.
Angio-Seal See above.(3) See above.(3)
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UNITED STATES INTERNATIONAL
PROPOSED REGULATORY STATUS REGULATORY STATUS
PRODUCT APPLICATIONS (1) (1)
-------------------------------------------------------------------------------------------------------
BIOMATERIALS PRODUCTS
Medical grade collagen Topical wound Customers required to Customers required to gain
dressing; cultured gain regulatory regulatory approval for
skin product for approval for the end the end use of their
burn treatment; use of their product. product.
surgical wound
repair; drug
delivery systems.
Injection molded Repair of soft Customers required to Customers required to gain
absorbable polymer tissue and bone gain regulatory regulatory approval for
devices injury or defects. approval for the end the end use of their
use of their product. product.
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REVASCULARIZATION TECHNOLOGY
Rotary catheter - Opening occluded Preclinical; To be determined.
Aegis Vortex System coronary artery clinical trials
bypass grafts in expected to begin in
conjunction with fiscal year 1999.
stents.
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(1) See "Government Regulation".
(2) These sizes of the device are not included in the PMA for the Angio-Seal.
PMA supplements containing data from the ongoing clinical trials will need
to be filed and approved for these sizes before they can be commercially
marketed in the United States.
(3) The collagen plug and anchor are components for the different sizes of the
Angio-Seal. Because the FDA and foreign regulatory bodies generally approve
devices as complete systems, the regulatory status for each component for a
specific size device is equivalent to that of the specific size Angio-Seal.
ANGIO-SEAL
The Angio-Seal Technology. The Angio-Seal acts to close and seal femoral
artery punctures made during diagnostic and therapeutic cardiovascular
catheterizations. The device consists of four components: an absorbable anchor
that is seated securely against the inside surface of a patient's artery at the
point of puncture, an absorbable collagen plug that is applied adjacent to the
outside of the artery wall, an absorbable suture and a delivery system. The
delivery system consists 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 the puncture. The collagen induces the blood-clotting process at the
puncture site and the anchor is designed to encapsulate into the artery wall.
Based on the characteristics of the materials used, the anchor, collagen and
suture are all absorbed into the patient's body within 60 to 90 days after the
procedure. The Company believes that this mechanical (via the anchor) and
biochemical (via the collagen) seal offers physicians a method for closing
punctures with significant advantages over traditional manual or mechanical
compression methods and other competitive products.
How the Angio-Seal Is Used. The Angio-Seal is designed and clinically
proven to take a trained healthcare professional less than two minutes to place.
After a cardiovascular catheterization is completed and the introducer for the
procedure is ready to be removed, the insertion sheath and puncture locator
supplied with the Angio-Seal are inserted into the artery over the guide wire,
using standard introducer exchange techniques. The guide wire is then removed
and the anchor is inserted into the artery through the delivery system. The
delivery system is pulled back until the anchor is secured onto the inside
surface of the artery wall at the puncture site. As the delivery system is
withdrawn from the tissue surrounding the artery, the collagen plug is deployed
from the delivery system into the puncture tract adjacent to the outside of the
artery wall. When the
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delivery system is removed from the tissue surrounding the artery, the
Angio-Seal's anchor and suture act as a pulley to compress the collagen within
the puncture tract adjacent to the outside of the artery wall. The exposed
tamper tube is used to compress the collagen further. A spring is then attached
to the suture to maintain light pressure on the tamper tube. After 20 to 30
minutes, the spring and the tamper tube are removed and the suture is cut below
the skin.
Advantages of the Angio-Seal over Manual and Mechanical Compression..
Until recently, closing arterial punctures resulting from cardiovascular
catheterizations was generally limited to manual or mechanical compression of
the puncture site following the procedure. The Company believes, based on
results of clinical trials and published reports, that the Angio-Seal has the
following advantages over manual or mechanical compression:
- Reduced Time to Ambulation. Clinical studies have shown reductions in
the amount of time required for the removal of the introducer sheath
used during the procedure and reduced times to hemostasis. A PMA
supplement was approved in September 1997 allowing the Company to
expand the labeling of the Angio-Seal to include time-to-ambulation
data (mean time to ambulation for Angio-Seal of 1.4 hours verses 6.6
hours for manual compression).
- Reduced Staffing and Hospital Time. The reduction or elimination
of post-procedure manual compression, as well as reduced needs
for post-procedure examinations, may decrease the staff time
associated with the procedure and follow-up care and lead to more
efficient use of hospital personnel and space.
- Possible Reduction in Procedure Cost. The faster treatment time
and reduced staffing requirements should reduce the costs of the
typical cardiovascular catheterization. In addition, hospitals should
enjoy greater efficiency in catheterization lab scheduling, greater
flexibility in the use of physical space reserved for catheterization
patients and have the possibility for greater catheterization lab
throughput.
- Increased Patient Comfort. Patients generally regard the manual
compression following cardiovascular catheterization as the most
painful aspect of the procedure. The Angio-Seal device requires little
or no manual pressure, reducing the pain and discomfort associated
with current methods of puncture site hemostasis. In addition, it
eliminates the need for pressure dressings leading to less restriction
and discomfort for the patient.
- Greater Flexibility in Post Procedure Anticoagulation Therapy.
In highly anticoagulated patients, physicians typically discontinue
blood thinning therapy in order to effectively stop the bleeding at
the arterial puncture, despite the importance of the therapy in
minimizing the formation of blood clots. Based upon published results,
the Angio-Seal device provides fast, reliable hemostasis, independent
of heparin levels (a common anticoagulant therapy).
- Increased Blood Flow to the Leg. The Angio-Seal allows for
greater blood flow to the patient's leg during a cardiovascular
catheterization procedure than does manual compression, thereby
reducing the possibility of vessel blockages in the leg.
The Angio-Seal is currently the puncture closure device market leader
with almost 300,000 devices sold to-date. The Company believes that the
Angio-Seal offers advantages over the competing methodologies (see Competition)
in its ability to provide quickly and easily both a mechanical and biochemical
seal of arterial punctures.
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AEGIS VORTEX SYSTEM
System Technology. The Company is developing a product, the Aegis Vortex
System, for the percutaneous intervention of diseased SVGs. The AVS is being
designed to recanalize diseased vein grafts by debulking and aspirating the
occlusive material associated with diseased SVGs. A revolving tip breaks the
occluding material into small fragments while a balloon is placed distally to
prevent embolization of particulate generated during the revascularization
procedure. The particulate is removed by an extraction pump, which is included
in the system.
The current available treatment options include pharmaceutical
management, repeat bypass surgery, percutaneous intervention and heart
transplant. The AVS, a percutaneous interventional treatment, is designed to
improve clinical outcomes while reducing patient trauma and reducing cost. The
Company intends to start U.S. and international clinical trials in fiscal year
1999.
CLINICAL TRIALS AND REGULATORY STATUS
The Company obtained CE Mark approval from the EEC in September 1995 and
FDA approval in the United States in September 1996 for its 8F Angio-Seal
device.
In September 1997, the Company received a PMA supplement approval
allowing the Company to make additional labeling claims regarding early
ambulation in diagnostic angiography patients.
Initial clinical trials ("pilot studies") on both the 6F and 10F
Angio-Seal devices were completed in September 1997. The company began pivotal
studies immediately following completion of the pilot studies for the 6F and 10F
Angio-Seal. To date, the 6F pivotal study is being conducted at seven sites with
164 patients enrolled and the 10F pivotal study has 377 patients enrolled at
twelve sites. The Company has implemented design enhancements in conjunction
with the clinical studies. Both of these studies are expected to be completed
during fiscal year 1999.
In September 1998, the Company submitted an IDE to the FDA for its
revascularization product, the AVS. The Company expects clinical trials to
commence in fiscal year 1999.
RELATIONSHIP WITH STRATEGIC ALLIANCE PARTNER
The Company embarked on a long-term strategic relationship with AHP
beginning in 1991 which incorporated United States and foreign license
agreements (the License Agreements), a research and development agreement, a
collagen supply agreement and a credit agreement (collectively, the "Strategic
Alliance Agreements"). In December 1997, AHP announced the sale of its
subsidiary, Sherwood-Davis & Geck, the operating company responsible for the
sales, marketing and manufacturing of the Angio-Seal device, to Tyco
International Ltd. Under the terms of the sale, the Company's Strategic Alliance
Agreements with AHP were transferred to Tyco's subsidiary, The Kendall Company.
Accordingly, Kendall replaced AHP as the Company's Strategic Alliance Partner in
March 1998, upon finalization of the sale. The Company's relationship with its
Strategic Alliance Partner has enabled the Company to obtain critical funding to
research and develop the Angio-Seal, conduct clinical trials and gain regulatory
approval in the U.S. and Europe. This relationship provides access for the
Angio-Seal Product Line to the major worldwide markets.
The License Agreements. The License Agreements, entered into in September
1991, grant a worldwide exclusive license to the Company's Strategic Alliance
Partner to manufacture and market all current and future sizes of the Angio-Seal
Product Line for use in the cardiovascular system. The term "Angio-Seal" is a
trademark of the Strategic Alliance Partner. The Company retains the rights of
use for the puncture closure technology for other applications. Through fiscal
1997, the Company earned $13.5 million in licensing and milestone fees, as well
as received a $3 million royalty advance, from its Strategic Alliance Partner
pursuant to the terms of the license agreements.
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Under the License Agreements, the Company earns royalties based upon
the sales price of the Angio-Seal Product Line sold worldwide by its Strategic
Alliance Partner. These rates vary depending upon the level of units sold. In
November 1997, the Company also acquired a patent portfolio as well as the
rights of the seller under a pre-existing licensing agreement with AHP. As a
result of this acquisition the Company now receives royalties under its existing
Licensing Agreements as well as royalties formerly paid to the seller under a
separate licensing agreement (combined, the "Royalty Agreements"). The Royalty
Agreements provide for minimum royalty payments for five years following FDA
approval, which range from $450,000 in the first year to $4.1 million in the
fifth year. If the Strategic Alliance Partner fails to pay the minimum, the
Company is entitled to convert all of the Strategic Alliance Partner's rights
under the License Agreements from exclusive to non-exclusive. Such right of
conversion is the Company's sole remedy for the Strategic Alliance Partner's
failure to make any minimum royalty payment, and if it is exercised, the
Strategic Alliance Partner has no further obligation to make any minimum royalty
payments to the Company.
The term of each of the License Agreements extends to the last to
expire of the licensed patents and all continuations or supplements thereto. The
most recently issued patent for the Angio-Seal technology was issued in 1998,
although the Company has applied for, and expects to have issued, additional
patents in the future. The Strategic Alliance Partner may terminate the License
Agreements any time after the fifth royalty year 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 the Company, on a territory-by-territory basis, in an amount in
any one year not to exceed one-half of any royalties in any such territory for
such year.
The Research and Development Agreement. Pursuant to a research and
development agreement ("R&D Agreement") entered into with the Company's
Strategic Alliance Partner in November 1995 the Company has agreed to develop
additional sizes of and enhancements to the Angio-Seal Product Line, conduct
certain United States and selected foreign clinical trials of various sizes of
the Angio-Seal Product Line and to assist the Strategic Alliance Partner with
certain foreign trials. Under the R&D Agreement, the Strategic Alliance Partner
reimburses the Company for two-thirds of expenses incurred under these programs.
The Strategic Alliance Partner can terminate the R&D Agreement upon 60 days
notice. The termination of the R&D Agreement with the Strategic Alliance Partner
could have a material adverse effect on the operations of the Company. As of
June 30, 1998, the Company has earned $12.3 million in research and development
revenue from its Strategic Alliance Partner. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" included herein at
Item 7.
The Collagen Supply Agreement. Pursuant to an agreement entered into
with the Company's Strategic Alliance Partner in May 1995 (the "Collagen Supply
Agreement"), the Strategic Alliance Partner agreed to purchase at least 50% of
its collagen needs for the Angio-Seal on a per country basis (which amount
represents
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the Strategic Alliance Partner's "Minimum Purchase Requirement") for
the Angio-Seal from the Company for five years beginning May 31, 1995. The
Company is required to maintain a "safety stock inventory" of collagen in an
amount equal to two times the Strategic Alliance Partner's average monthly
collagen requirement based upon its projections. Either the Strategic Alliance
Partner or the Company may terminate the Collagen Supply Agreement upon thirty
days written notice.
SALES AND MARKETING
The Strategic Alliance Partner (Kendall), is responsible for both
domestic and international sales of the Angio-Seal. European sales of the
Angio-Seal commenced on a limited basis in December 1994 following marketing
approval in France. The Angio-Seal received its CE Mark approval from the EEC in
September 1995, which permits marketing of the Angio-Seal in EEC member
countries, and U.S. FDA approval in September 1996. The Angio-Seal is currently
being sold in the U.S., Canada, the UK, Germany, Italy, France, Switzerland,
Australia, Saudi Arabia, Israel, Austria, Spain, Malta and the Netherlands by a
dedicated Kendall sales force. To date, there have been over 300,000 devices
sold to end users. Kendall plans on introducing the Angio-Seal in additional
countries around the world during 1999.
Kendall is selling the Angio-Seal through dedicated sales forces of 65
and 22 persons in the U.S. and Europe, respectively. Both the Company and
Kendall believe that dedicated sales forces are appropriate to cover the
concentrated market of cardiovascular catheterization facilities that perform
the majority of these procedures.
The Company has historically sold Angio-Seal subassemblies to its
Strategic Alliance Partner. The Company expects to continue to sell collagen and
anchor components to its Strategic Alliance Partner. See "Relationship with
Strategic Alliance Partner"
While the Company assists its Strategic Alliance Partner in training
and conducting clinical trials, the Strategic Alliance Partner has the sole
right to determine the worldwide marketing and pricing strategy for the
Angio-Seal Product Line.
As the Company develops new products, such as the Aegis Vortex System,
it will continue to explore a variety of means to market and sell such products
if and when they receive appropriate regulatory approvals. Such means include,
but are not limited to, contracting with distributors, developing its own sales
force and licensing products to third parties.
CUSTOMERS
Sales to the Company's Strategic Alliance Partner comprised 86%, 91%
and 81% in the years ended June 30, 1998, 1997 and 1996, respectively, of total
sales for the Company. The loss of the Strategic Alliance Partner as a customer
would have a material adverse impact on the Company.
THIRD-PARTY REIMBURSEMENT
The Company believes that continued sales growth of the Angio-Seal may
depend not only on its clinical efficacy and cost effectiveness, but also in
part on the availability of third-party reimbursement. Separate reimbursement
for the Angio-Seal is not expected to be available in the United States and
there can be no assurance that reimbursement for the Angio-Seal will be
available in international markets under either governmental or private
reimbursement systems. In the United States, healthcare providers, such as
hospitals and physicians, that purchase medical devices such as the Angio-Seal,
generally rely on third-party payers, principally federal Medicare, state
Medicaid and private health insurance plans, to reimburse all or part of the
cost of therapeutic and diagnostic cardiovascular catheterization procedures.
Reimbursement for
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cardiovascular catheterization procedures performed using devices that have
received FDA approval has generally been available in the United States. The
Company anticipates that in prospective payment systems, and in many managed
care systems used by private healthcare payers, the cost of the Company's
products will be incorporated into the overall cost of the procedure and that
there will be no separate additional reimbursement for the Company's products.
The Company anticipates the hospital administrators and physicians will justify
the additional cost of an arterial access site closure device by the attendant
cost savings and clinical benefits derived from the use of the Angio-Seal.
To date, the Company's Strategic Alliance Partner has focused on
obtaining reimbursement approvals in international markets. The main types of
reimbursement systems in international markets are government sponsored
healthcare and private insurance. Countries with government sponsored
healthcare, such as the United Kingdom, Italy and the Netherlands, have a
centralized, nationalized healthcare system. In most foreign countries, there
are also private insurance systems that may offer payments for alternative
therapies. Although not as prevalent as in the United States, health maintenance
organizations are beginning to appear in Europe, particularly in Spain.
Regardless of the type of reimbursement system, the Company believes that
physician advocacy of the Angio-Seal will be the key to obtaining third-party
reimbursement. The Company could be materially adversely affected by changes in
reimbursement policies of governmental or private health care payers.
MANUFACTURING, RAW MATERIALS AND SUPPLIES
The Company has developed manufacturing expertise in the assembly and
testing of technologically advanced medical products. The Company's
manufacturing activities to date have consisted primarily of producing the
Angio-Seal for use by clinical investigators and producing sub-assemblies of the
Angio-Seal for sale to customers in Europe.
The Company also currently manufactures and supplies 100% of the
bioresorbable components of the Angio-Seal, the collagen plug and resorbable
polymer anchor, to fulfill the Strategic Alliance Partner's requirements for the
Angio-Seal. The Company has a contract with its Strategic Alliance Partner to
supply a minimum of 50% of the collagen needs for the Angio-Seal on a
country-by-country basis through 2000. The Company is also the only approved
supplier of collagen approved for use in the Angio-Seal in the EEC. In the U.S.
the current Angio-Seal PMA includes the Company's absorbable anchor and collagen
plug. The anchor component of the Angio-Seal has been manufactured exclusively
by the Company and the Company will continue to provide a significant amount of
the anchor requirements through fiscal year 1999.
The Company purchases most raw materials, parts and peripheral
components used in its products. Although many of these supplies are
off-the-shelf items readily available from several supply sources, others are
custom-made for the Company to meet its specifications. The Company believes
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. The Company has generally been able to obtain adequate supplies of all
materials, parts and components in a timely manner from existing sources. When
this has not proven feasible, the Company has brought the production of those
critical parts under its own manufacturing control. However, the inability to
develop alternative suppliers for present and future needs, if required, or a
reduction or interruption in supply or a significant increase in the price of
materials, parts or components could adversely impact the Company's operations.
Several of the Company's raw materials are derived from natural sources and
carry the inherent risk of disease or contamination of source material. In those
areas in which natural raw material sourcing has presented the potential for
contamination, the Company has taken steps which it believes will assure itself
and its customers of the purity of these products. The validation of the purity
of these raw materials and/or the ability of the Company processes to inactivate
potential contaminants has been undertaken at significant expense by the Company
to preclude withdrawal or restriction of these products by regulatory agencies
in any country. The Company will, as a practice, continue to take these steps in
any area in which biological or other contaminants may compromise a raw material
supply.
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The Company's manufacturing facilities in Exton, Pennsylvania, contain separate
areas for Angio-Seal assembly, collagen manufacturing and polymer manufacturing.
In addition, the Company has its own capabilities in tool and die making,
injection molding, model making and laser welding, which allows it to engineer
and reengineer its products in development on site. The Company's FDA-registered
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. For this reason, the Company's
manufacturing facilities are subject to regulatory requirements and periodic
inspection by regulatory authorities. The Company has a separate in-house
quality control department that sets standards, monitors production, writes and
reviews operating procedures and protocols and performs final testing of samples
of devices and products manufactured by or for the Company. See "Government
Regulation."
The Company believes that its current manufacturing capabilities and
capacity are sufficient to produce its products to supplement its Strategic
Alliance Partner's manufacturing capabilities, supply the anchor and collagen
plug components and produce additional sizes of the Angio-Seal in initial
quantities at such time as the devices may be approved for sale in the United
States or elsewhere.
RESEARCH AND DEVELOPMENT
The Company's research and development and regulatory staff consisted
of 36 individuals as of September 18, 1998. Since signing the License Agreements
in September 1991, the Company's research and development effort has focused on
designing the Angio-Seal, supporting clinical trials, seeking regulatory
approval in the United States and Europe and establishing a technology base in
puncture closure devices. The Company continues to focus its research and
development efforts on creating additional sizes of the Angio-Seal Product Line
and product enhancements, a significant portion of which the Company expects to
be funded by its Strategic Alliance Partner. The Company is also concentrating
on the development of its revascularization technology, the AVS, for opening
occluded coronary artery bypass grafts and has other projects in the early
stages of development. The Company incurred total research and development
expenses of $5.5, $4.7 and $3.6 million in the fiscal years ended June 30, 1998,
1997 and 1996, respectively.
In addition to the resources dedicated to the product development
process, the Company has an internal regulatory affairs and clinical monitoring
staff, which has had and continues to have responsibility for establishing,
monitoring, collecting and analyzing data relating to clinical trials and works
closely with its Strategic Alliance Partner on gaining regulatory approvals for
additions to the Angio-Seal Product Line in the United States and, in some
instances, abroad.
COMPETITION
The primary competition for the Angio-Seal is the current standard of
care, manual pressure. Manual pressure is an inherently cumbersome procedure
which is costly, complicated and associated with high levels of patient
discomfort. Although the Company believes that the Angio-Seal competes favorably
with the application of manual and/or mechanical compression as a standard of
care, the acceptance of new methodologies and technologies is inherently
uncertain. In addition, the Company is aware of competitors trying to develop
noninvasive and/or pharmaceutical products which could render the Angio-Seal
Product Line technology obsolete. Many of these organizations, and certain other
medical device companies that may enter the markets in which the Company does or
will compete, are larger and have more extensive financial, technical,
managerial, research and development and marketing resources than the Company or
its Strategic Alliance Partner. The Company is aware of competitors who have
developed and commercialized devices to seal arterial punctures, including
Datascope, Perclose and Vascular Solutions. The Company is also aware of other
companies who are developing proposed products.
Datascope's VasoSeal vascular hemostasis device, approved by the FDA in
September 1995, works by delivering a collagen plug into the tissue tract
outside of the artery. Once positioned in the tissue tract, the
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biochemical interaction between collagen and blood platelets acts to create a
hemostatic seal at the puncture site. The VasoSeal requires measurement of the
collagen plug prior to delivery and does not have an anchor to prevent the
collagen from entering the artery. In August 1998 Datascope announced it had
received CE mark approval for a second generation device, VasoSeal ES. According
to Datascope, The VasoSeal ES eliminates the need to measure the collagen prior
to a procedure and is a one-size-fits-all device.
Perclose's Prostar and Techstar vascular surgical systems consist of
catheter-based instruments designed to mechanically suture arterial access sites
below the skin following cardiovascular catheterization procedures. The 9-11F
Prostar was approved by the FDA in April 1997 and PMA supplements for Perclose's
second generation devices, the Techstar (6-8F) and the Prostar Plus (8-10F) were
approved in November 1997 and January 1998, respectively.
A new entrant to the puncture closure market is Vascular Solutions, who
has developed a sealing device catheter, the Duett. The device employs a balloon
inserted over the guidewire into the femoral artery to temporarily close the
entry channel. A mixture of collagen and thrombin is then injected into the
puncture site to close the wound after a period of compression. The Duett
received CE Mark approval in July 1998 and the company commenced clinical
studies in the U.S. in August 1998.
The Angio-Seal is currently the puncture closure device market leader
with almost 300,000 devices sold to-date and believes that its continued
competitive success will depend upon several factors. These factors include its
ability to create and maintain technologically advanced proprietary medical
products, to obtain patents or other protection for these technologies and to
apply these technologies across several different product opportunities and
markets, to attract and retain high quality engineering and scientific
personnel, to obtain timely regulatory approvals when possible, and to
manufacture and market its products in a cost-effective manner whether through
internal means or through outside parties. See "Angio-Seal."
GOVERNMENT REGULATION
The medical devices marketed and manufactured by the Company and its
Strategic Alliance Partner are subject to extensive regulation by the FDA, and,
in some instances, by foreign governments. Pursuant to the Federal Food, Drug,
and Cosmetic Act of 1976, as amended, and the regulations promulgated thereunder
(the "Act"), the FDA regulates the clinical testing, 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 request repair, replacement or
refund of the cost of any device manufactured or distributed by the Company.
Noncompliance with applicable requirements on the part of the Company's
Strategic Alliance Partner with respect to the Angio-Seal, or by the Company,
could have a material adverse impact on the Company.
The Company obtained PMA approval on the Angio-Seal 8F device in
September 1996, the ownership of which was subsequently transferred to its
Strategic Alliance Partner. The Strategic Alliance Partner will be responsible
for all future amendments and PMA supplements for the Angio-Seal device,
including PMA supplements necessary to market the 6F and 10F size Angio-Seal
devices in the United States. However, there can be no assurance that the
Strategic Alliance Partner will be able to obtain necessary regulatory approvals
or clearances on the Angio-Seal Product Line on a timely basis or at all, and
delays in receipt of or failure to receive such approvals, the loss of
previously received approvals, or failure to comply with existing or future
regulatory requirements would have a material adverse impact on the Company's
business, financial condition and results of operation.
The Angio-Seal received CE Mark approval from the EEC in September
1995, which permits marketing of the Angio-Seal in EEC member countries and it
is also available for sale in several other countries. International sales of
medical devices are subject to the regulatory agency product registration
requirements of each country. The regulatory review process varies from country
to country. Many
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countries also impose product standards, packaging requirements,
labeling requirements 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 the
Company's business, financial condition and results of operations.
Any products manufactured or distributed by the Company 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. Device manufacturers are required to register their
establishments and list their devices with the FDA and are subject to periodic
inspections by the FDA and certain state agencies. The Act requires devices to
be manufactured in accordance with Good Manufacturing Practices ("GMP")
regulations which impose certain procedural and documentation requirements upon
the Company and its Strategic Alliance Partner 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. Changes in existing requirements or adoption of new
requirements or policies could adversely affect the ability of the Company to
comply with regulatory requirements. Failure to comply with regulatory
requirements could have a material adverse impact on the Company's business,
financial condition and results of operations. There can be no assurance that
the Company will not be required to incur significant costs to comply with laws
and regulations in the future or that laws or regulations will not have a
material adverse impact upon the Company's business, financial condition or
results of operations.
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. There can be no assurance that
the Company or its Strategic Alliance Partner will not be required to incur
significant costs to comply with such laws and regulations in the future or that
such laws or regulations will not have a material adverse effect upon the
Company's or its Strategic Alliance Partner's ability to do business.
PATENTS AND PROPRIETARY RIGHTS
The Company's policy is to protect its technology by, among other
things, filing patent applications for the patentable technologies that it
considers material to the development of its business. The Company first filed
for patent protection for the concept of sealing arterial punctures in the
United States in 1987 and was first issued a United States patent in 1988. As of
August 31, 1998, the Company held 49 United States patents and 62 foreign
national patents and has pending several United States patents and foreign
national patent applications that cover various aspects of its technology. The
Company also has a number of files of potential patent application material at
its patent counsel's office. In addition, the Company holds the exclusive or
joint rights to inventions that result from a number of agreements among the
Company, leading medical institutions and their principal investigators. There
can be no assurance that patent applications filed by the Company will result in
the issuance of patents or that any patents or licenses now or hereafter held by
the Company will provide competitive advantages for the Company or its
licensees, or that these patents or licenses will not be challenged or
circumvented by competitors.
The Company also relies heavily on trade secrets and unpatented
proprietary know-how which the Company seeks to protect, in part through
non-disclosure agreements with all corporations, institutions, and individuals
that are exposed to the Company's proprietary information. It is the Company's
policy to require, as a condition of employment, that all full-time and
part-time employees enter into an assignment and non-disclosure agreement with
the Company. There can be no assurance that these and other agreements
specifically constructed to protect the Company will not be breached or that
others will not independently develop the same or similar technology.
There has been substantial litigation regarding patent and other
intellectual property rights in the medical device industry. Litigation, which
would result in substantial cost to and diversion of effort by the
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Company, may be necessary to enforce patents issued to the Company, to
protect trade secrets, know-how, or other proprietary rights owned by the
Company or to defend the Company against claimed infringement of the rights of
others and to determine the scope and validity of the proprietary rights of
others. Adverse determinations in litigation could subject the Company to
significant liabilities to third parties, could require the Company to seek
licenses from third parties and could prevent the Company and/or its licensees
from manufacturing, selling or using its products, any of which could have a
material adverse impact on the Company's business, financial condition and
result of operations. It is possible that the Company, in the course of new
product development and introduction, may need to acquire licenses to, or
contest the validity of, issued or pending patents of third parties relating to
the Company's technology or to products presently under license or under
development by the Company. There can be no assurance that any license required
under any such patent would be made available to the Company on acceptable
terms, if at all, or that the Company would prevail in such a patent dispute.
In March 1998, the Company, together with its Strategic Alliance
Partner, filed a patent infringement suit against Perclose, Inc. For more
information on this suit, see "Legal Proceedings".
The Company has licensed its United States and foreign patents for the
Angio-Seal to its Strategic Alliance Partner, and is obliged to license all
improvements for the same product to its Strategic Alliance Partner in the
future at no additional charge. The License Agreements are exclusive, 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, leaving all other fields of use
in the Company's possession. The licenses include rights to use related trade
secrets and know-how.
PRODUCT LIABILITY
The clinical testing, marketing and sale of human healthcare products
entails an inherent risk of product liability claims. There can be no assurance
that product liability claims will not be asserted against the Company or its
licensees. Although the Company maintains product and clinical trials liability
insurance in the aggregate amount of $12 million, there can be no assurance that
product liability claims will not exceed such insurance coverage limits, that
claims for coverage would not be denied or that such insurance will be available
in the future on commercially reasonable terms, if at all. The Company believes
that its Strategic Alliance Partner self insures for product liability claims.
There can be no assurance that liability claims made against its Strategic
Alliance Partner or other potential licensees will not result in any claims
against the Company
EMPLOYEES AND CONSULTANTS
As of September 18, 1998, the Company had 100 employees, including 51
in operations, 31 in research and development, 12 in finance and administration,
five in clinical and regulatory affairs and one in sales and marketing. All of
the Company's employees are located at the Company's facility in Pennsylvania.
The Company believes that its success is dependent in a large part on its
ability to attract and retain employees in all areas of its business.
The Company maintains continuing relationships with a number of
independent consultants that have contributed to the development of the
Company's products and work on specific development projects. These
relationships are integral to the continued success of the Company and the
generation of new products from the research and development departments.
The Company is dependent upon a number of key management and technical
employees. The loss of services of one or more key employees could have a
material adverse impact on the Company. None of the Company's employees are
covered by a collective bargaining agreement. The Company believes its
relationship with its employees is good.
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ITEM 2. PROPERTIES
The Company leases approximately 44,000 square feet of executive
offices, manufacturing and research and development facilities in Exton,
Pennsylvania, a suburb of Philadelphia. The lease expires in 2002, subject to
renewal options. The Company believes that the complex in which the current
facilities are located offers the necessary space for required expansion over
the foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
In March 1998, the Company, together with its Strategic Alliance
Partner, filed a patent infringement claim against Perclose, Inc. of Menlo Park,
California, a competitor in the puncture closure market. The suit, filed in the
Eastern District of Pennsylvania, claims that Perclose infringes the Company's
U.S Patent No. 5,676,689 (the "Patent"). The Patent covers 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 Patent.
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.
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 1998.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock is traded on the Nasdaq National Market
(Nasdaq symbol: KNSY). The approximate number of record holders and beneficial
shareholders of the Company's Common Stock at September 18, 1998 was 80 and
2,668, respectively. The Company has not paid any dividends since its inception
and does not intend to pay any dividends in the foreseeable future.
The range of high and low closing sale prices for the Common Stock is as
follows:
QUARTER ENDED HIGH LOW
- ------------- ---- ---
December 31, 1995 (from December 13, 1995) $13.50 $12.00
March 31, 1996 $16.75 $9.75
June 30, 1996 $17.25 $12.00
September 30, 1996 $15.75 $10.75
December 31, 1996 $18.25 $14.25
March 31, 1997 $15.55 $11.50
June 30, 1997 $13.75 $9.88
September 30, 1997 $16.00 $10.38
December 31, 1997 $17.00 $13.00
March 31, 1998 $24.25 $14.00
June 30, 1998 $23.63 $9.25
On September 18, 1998, the last reported sale price for the Common Stock was
$7.75.
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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, 1998, 1997, 1996, 1995, and 1994. 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 1998, 1997, and 1996 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.
FISCAL YEAR ENDED JUNE 30,
-------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
----------------- ------------------- -------------- ----------------- --------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
STATEMENT OF OPERATIONS DATA:
Revenues:
Net sales $ 4,669 $ 3,661 $ 1,315 $ 1,358 $ 365
Research and development 3,642 2,843 1,576 468 1,121
Licensing and milestone fees 1,050 - 2,700 2,750
Royalty income and other 3,008 353 76 41 -
----------------- ----------------- --------------- ----------------- --------------
Total revenues 11,319 7,907 2,967 4,567 4,236
----------------- ----------------- --------------- ----------------- --------------
Operating costs and expenses:
Cost of products sold 4,084 3,063 1,637 1,468 369
Research and development 5,524 4,695 3,581 3,034 4,230
Selling, general and administrative 1,762 1,823 2,132 1,850 2,115
Deferred compensation - - 1,493 1,182 45
Product return - - 574 - -
----------------- ----------------- --------------- ----------------- --------------
Total operating costs and expenses 11,370 9,581 9,417 7,534 6,759
----------------- ----------------- --------------- ----------------- --------------
Loss from operations (51) (1,674) (6,450) (2,967) (2,523)
----------------- ----------------- --------------- ----------------- --------------
Other income (expense):
Net interest income (expense) 390 435 (473) (1,081) (807)
Other 4 8 62 (164) (15)
Insurance settlement 969 946 - -
----------------- ----------------- --------------- ----------------- --------------
Total other income (expense) - 394 1,412 535 (1,245) (822)
net
----------------- ----------------- --------------- ----------------- --------------
Income (loss) before income taxes 343 (262) (5,915) (4,212) (3,345)
Income taxes - - - - -
----------------- ----------------- --------------- ----------------- ==============
Net income (loss) $ 343 $ (262) $ (5,915) $ (4,212) $ (3,345)
==============
================= ================= =============== =================
Income (loss) per common share $ 0.05 $ (0.04) $ (1.00) $ (0.92) $ (0.73)
================= ================= =============== ================= ==============
Weighted average common shares outstanding 7,552 7,182 5,927(1) 4,599(1) 4,587
================= ================= =============== ================== ===============
JUNE 30,
-------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
----------------- ------------------ --------------- ------------------ -------------
(IN THOUSANDS)
BALANCE SHEET DATA:
Cash and short-term investments $ 7,777 $ 7,351 $ 11,734 $ 8 $ 35
Inventory 1,027 736 413 436 275
Working capital equity (deficiency) 9,423 9,172 6,678 (14,044) (7,084)
Total assets 22,039 16,593 19,743 1,931 2,194
Long-term obligations 2,374 574 81 108 4,317
Total stockholders' equity 15,863 12,127 12,001 (16,095) (11,920)
(deficiency)
- ------------------
(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.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
The Company is a medical device company which has established three
technology platforms; puncture closure (the Angio-Seal), biomaterials (collagen
and resorbable polymers) and revascularization (the Aegis Vortex System)
("AVS"). The Company participates in the puncture closure market primarily
through its relationship with its Strategic Alliance Partner, which generates
royalty income, research and development funding and sales revenue through the
manufacture of clinical devices and components for the Angio-Seal.
The Company's operations are focused on the commercialization and
continuing development of its proprietary principal product, the Angio-Seal
Product Line, the continued expansion of its capabilities in biomaterials, and
the development of its revascularization catheter system, the Aegis Vortex
System. The Angio-Seal is a device for the sealing of arterial punctures created
during diagnostic and therapeutic cardiovascular procedures such as angiography,
angioplasty, atherectomy and the placement of stents.
The Company is currently manufacturing collagen products for third
parties for use as delivery systems for various applications including bone
growth proteins, artificial skin for burn victims and drug delivery for products
in various stages of clinical trials. As a result of its absorbable polymer
capabilities, the Company has expanded into the orthopedic marketplace as an OEM
supplier of specialized products.
The Company's revascularization platform has been established to
address a market opportunity in cardiology for the treatment of occluded
saphenous vein bypass grafts and in-stent restenosis. The Company is developing
a revascularization catheter system, the Aegis Vortex System, utilizing its
patent platform and in-house expertise to address these life threatening medical
conditions.
In December 1997, American Home Products Corporation ("AHP" or
"Strategic Alliance Partner") announced the sale of its subsidiary,
Sherwood-Davis & Geck, the operating company responsible for the sales,
marketing and manufacturing of the Angio-Seal device, to Tyco International,
Ltd. ("Tyco"). Under the terms of the sale, all of the Company's agreements with
AHP were transferred to Tyco's subsidiary, The Kendall Company ("Kendall").
Accordingly, Kendall replaced AHP as the Company's Strategic Alliance Partner in
March 1998, upon finalization of the sale. The Company's relationship with its
Strategic Alliance Partner has enabled it to obtain critical funding to research
and develop the Angio-Seal, conduct clinical trials and gain regulatory approval
in the U.S. and Europe. This relationship provides access for the Angio-Seal
Product Line to the major worldwide markets.
The following discussion and analysis should be read in conjunction
with the Consolidated Financial Statements and the notes thereto contained
elsewhere in this report.
RESULTS OF OPERATIONS
FISCAL YEAR ENDED JUNE 30, 1998 COMPARED TO FISCAL YEAR ENDED JUNE 30, 1997
Revenues for these periods consisted of net sales, research and
development revenue, milestone fees and royalty income. Revenues increased 43%
to $11.3 million in the year ended June 30, 1998 ("fiscal 1998") from $7.9
million in the year ended June 30, 1997 ("fiscal 1997"). Net sales of products
and research and development revenue both increased 28% from the prior year
while royalty income increased 752%. The increase in net sales was mainly
attributable to an increase in Angio-Seal components sold to the Company's
Strategic Alliance Partner, as a result of increased demand in the U.S. and
European markets, as well as the expansion of the Company's third-party business
with other collagen and polymer customers. Approximately 178,000 Angio-Seal
units were sold to end-users in fiscal year 1998 compared to 26,000 in fiscal
1997. The increase in royalty income represented Angio-Seal royalties from a
full year of U.S. sales compared to nine months of sales in fiscal 1997, a
significant increase in demand in the U.S. and European markets and an increase
in total royalty per unit resulting from the Patent Acquisition Agreement (see
Note 5 of the Financial Statements). The increase in research and development
revenue related to contract
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research and development, including clinical trials, from the Strategic
Alliance Partner for additional sizes of and product enhancements to the
Angio-Seal Product Line. The $1.1 million milestone fee represented the final
milestone under the License Agreement and was earned by the Company upon receipt
of FDA approval in the first quarter of fiscal 1997.
Cost of products sold increased 33% to $4.1 million in fiscal 1998 from
$3.1 million in fiscal 1997. This increase reflected greater net sales of
products offset by manufacturing inefficiencies realized in the start-up phase
of production for the new sizes of the Angio-Seal, the 6F and 10F, and new
biomaterials products during the fiscal year.
Research and development expense, including regulatory and clinical
expenses, increased 18% to $5.5 million in fiscal 1998 from $4.7 million in
fiscal 1997. The Company expanded the development of additional Angio-Seal sizes
and biomaterials products, including resorbable polymers and collagen, and
increased clinical trial activity. In addition, the Company significantly
expanded its development in revascularization technology as it targets
commencement of clinical trials on the AVS in fiscal year 1999.
Selling, general and administrative expense decreased 3%, or $61,000,
in fiscal 1998 from fiscal 1997. This decrease was primarily due to a
reduction in certain outside professional fees.
Interest income decreased 14% to $540,000 in fiscal 1998 from $627,000
in fiscal 1997. The decrease was primarily attributable to cash equivalent and
investment balances in the first quarter of fiscal 1997, which included funds
used in the repayment of the Credit Agreement. Total cash and investment
balances have remained relatively constant since that time. Interest expense
decreased 22% to $150,000 for fiscal 1998 from $193,000 for fiscal 1997. This
decrease is also a result of the repayment of the Credit Agreement in October
1996 offset by amounts drawn under the Company's line of credit during the
current fiscal year and interest charges recorded in relation to the obligation
under the Company's Patent Acquisition Agreement.
During fiscal 1997, the Company received $1.3 million in final
settlement for the business interruption portion of their insurance claim
related to the roof collapse. Of this amount, $969,000 was recorded as other
income.
Other non-operating income decreased 47% from $8,000 in fiscal 1997 to
$4,000 in fiscal 1998. Fiscal 1997 other non-operating income represented
primarily a net gain on the sale of fixed assets while fiscal 1998 represented
miscellaneous nonrecurring items.
FISCAL YEAR ENDED JUNE 30, 1997 COMPARED TO FISCAL YEAR ENDED JUNE 30, 1996
Revenues for these periods consisted of net sales, research and
development revenue, milestone fees and royalty income. Revenues increased 167%
to $7.9 million in fiscal 1997 from $3.0 million in fiscal 1996. Net sales of
products increased 178% while research and development revenue increased 80% and
royalty income increased 363%. The increase in net sales was mainly attributable
to increases in resorbable component and subassembly sales to the Company's
Strategic Alliance Partner to support increased demand in the European market
and the launch of the 8F Angio-Seal product in the U.S. following FDA approval
in September 1996. The increase in research and development revenue related to
contract research and development, including clinical trials, from the Strategic
Alliance Partner for additional sizes of and product enhancements to the
Angio-Seal. The $1.1 million milestone fee represented the final milestone under
the License Agreement and was earned by the Company upon receipt of FDA approval
in the first quarter of fiscal 1997. The increase in royalty income represented
Angio-Seal royalties from a full year of European sales and the commencement of
U.S. sales compared to only nine months of European sales in fiscal 1996.
Cost of products sold increased 87% to $3.1 million in fiscal 1997 from
$1.6 million in fiscal 1996. The fiscal 1997 cost of products sold represented a
16% gross profit margin, a change in trend from a 24%
20
21
negative gross profit margin in fiscal 1996. This favorable trend resulted from
manufacturing efficiencies realized as production levels increased.
Research and development expense increased 31% to $4.7 million in
fiscal 1997 from $3.6 million in fiscal 1996. The Company expanded the
development of additional Angio-Seal sizes and biomaterials products, including
resorbable polymers and collagen, increased clinical trial activity and
continued development of its revascularization technology. Six additional
research and development employees were hired in fiscal 1997 as part of the
increased activity. Accordingly, research and development expenses as well as
related personnel costs increased in fiscal 1997.
Selling, general and administrative expense decreased 15% to $1.8
million in fiscal 1997 from $2.1 million in fiscal 1996. This decrease was
primarily due to the final recording of deferred compensation expense for
nonofficers and directors during fiscal 1996 to reflect settlement of certain
employee stock rights at the IPO.
Deferred compensation expense, officers and directors in fiscal 1996
represented the final recording of deferred compensation in December 1995 to
reflect settlement of certain employee stock rights in the IPO.
The product return charge of $574,000 in fiscal 1996 was due to the
withdrawal of two production lots, and subsequent inventory, as a result of
internal routine testing. This issue was resolved and there has been no further
impact of such withdrawal on the results of operations of the Company.
Interest income increased 30% to $627,000 in fiscal 1997 from $483,000
in fiscal 1996. The increase represented the interest earned on the cash
equivalent and investment balances remaining from the IPO which were held for an
entire year in fiscal 1997 compared to only six months in fiscal 1996. Interest
expense decreased 80% to $193,000 for fiscal 1997 from $956,000 for fiscal 1996.
This decrease is a result of the repayment of the Credit Agreement with the
Company's Strategic Alliance Partner upon receipt of FDA approval of the
Angio-Seal in September 1996. The remaining interest expense represented
interest on a $100,000 bank line of credit entered into in October 1996 and
increased to $500,000 in February 1997.
During fiscal 1997, the Company received $1.3 million as final
settlement for the business interruption portion of its insurance claim related
to the roof collapse. Of this amount, $288,000 had been recorded as a receivable
in fiscal 1996 and the remainder, net of adjuster fees, was recorded as a
component of other income in fiscal 1997. The Company received $1.2 million in
final settlement of the property damage portion of the insurance claim in fiscal
1996, of which $946,000 was recorded as a component of other income.
In fiscal 1997, the majority of the total other non-operating income of
$8,000 represented a net gain on the sale of fixed assets. In fiscal 1996, the
Company had other non-operating income of $62,000, resulting from non-recurring
items.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations since inception through the
sale of equity securities, licensing of technology, research and development
arrangements, debt and credit arrangements and product sales.
The Company generated cash from operations of $6,000 during fiscal 1998
compared to the cash flow from operations in fiscal 1997 of $2.9 million. This
change is primarily due to the $3.0 million royalty advance received under the
License Agreement upon receipt of FDA approval of the Angio-Seal in fiscal 1997.
This royalty advance was reduced throughout fiscal 1998 as the Company exceeded
minimum royalty stipulations under the Licensing Agreement. In addition, the
Company had income from operations of $343,000 in fiscal 1998 compared to a loss
from operations in fiscal 1997 of $262,000.
21
22
Capital expenditures were $1.8 million in fiscal 1998 which represented
primarily leasehold improvements and machinery and equipment related to the
continued expansion of the Company's manufacturing capabilities principally
related to its collagen and polymer product lines. Capital expenditures were
funded essentially through the Company's line of credit under which the Company
borrowed $1.5 million in fiscal 1998.
The Company's cash, cash equivalents and short-term investments were
$7.8 million at June 30, 1998. In addition, the Company has pledged $1.9 million
in investments (not included in the $7.8 million) as collateral to secure bank
loans made to certain employees for the payment of taxes incurred by such
employees as a result of their receipt of common stock at the time of the IPO.
In exchange for the Company's pledging this collateral, the employees have
pledged their common stock as collateral to the Company.
In October 1996, the Company paid $6.5 million in full settlement of
the Credit Agreement with its Strategic Alliance Partner. Also, during fiscal
1997, the Company received $500,000 under a bank line of credit. At June 30,
1997 the $500,000 remained outstanding accruing interest, payable monthly, at
the prime rate (8.5% at June 30, 1997). The line of credit was increased from a
$500,000 facility to a $2.0 million facility in September 1997 and converts to a
term loan payable in 60 equal installments beginning August 1, 1998.
In November 1997, the Company acquired patents under a Patent
Acquisition Agreement in exchange for 200,000 shares of common stock and a
series of eight quarterly cash payments, beginning on March 31, 1998, totaling
$1.2 million. The patents have been recorded on the balance sheet at the value
of the shares on the date of the agreement plus the present value of the $1.2
million cash and any legal and other related costs incurred to acquire such
patents. The present value of the cash payments ($1.1 million) was recorded
between short and long-term liabilities at December 31, 1997 and reduced to
$879,000 upon payment of the second installment on June 30, 1998.
The Company plans to continue to expend substantial resources in
funding clinical trials to gain regulatory approvals and make additional
marketing claims as well as to expand research and development activities for
the Angio-Seal, revascularization technology and biomaterials products.
The Company believes cash generated from operations as well as funds
available under financing arrangements with its bank will be sufficient to meet
the Company's operating and capital requirements for the next twelve months.
YEAR 2000 COMPLIANCE
The Company began work on the computer Year 2000 issue in fiscal year
1998 and expects to complete its efforts by the end of fiscal year 1999.
Software applications, hardware and related technologies have been, or are in
the process of being, upgraded or replaced to ensure that all systems are Year
2000 compliant. Replacing hardware or software in this fashion is considered a
normal cost of doing business and is being expensed or capitalized as
appropriate. The Company is also working with its significant suppliers and
customers to address any impact of their Year 2000 issues on the Company. The
Company does not warrant, however, that these companies' year 2000 compliance
activities will be completely successful. Management does not anticipate that
the costs of year 2000 compliance will have a material effect on the Company's
results of operations, cash flows, or financial position.
The Company anticipates that its results of operations will fluctuate
for the foreseeable future due to a number of factors. Such factors include the
Company's Strategic Alliance Partner's performance in the marketing,
manufacturing and distribution of the Angio-Seal Product Line, the timing of
future regulatory approvals in the United States and in countries outside of
Europe including Japan, the results of ongoing and planned clinical trials for
the Angio-Seal and other products, the acceptance of the Company's products in
the marketplace and competitive products generally and in particular those
designed for the sealing of arterial site punctures.
22
23
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. The Company
cautions that a number of important factors could cause the Company's actual
results for fiscal 1999 and beyond to differ materially from those in any
forward-looking statements made by, or on behalf of, the Company. These
important factors include, without limitation, the time, effort and priority
level that the Company's Strategic Alliance Partner and its successors attach to
the Angio-Seal and the Strategic Alliance Partner's ability to successfully
market and manufacture the Angio-Seal, the Company's ability to manufacture
Angio-Seal components, the results of ongoing clinical trials and timing of
additional regulatory approvals, announcements of technological innovations or
the introduction of new products by the Company or its competitors, competition
by rival developers of puncture closure devices, general business conditions in
the healthcare industry and general economic conditions. Results of operations
in any past period should not be considered indicative of the results to be
expected for future periods. Fluctuations in operating results may also result
in fluctuations in the price of the common stock.
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.
23
24
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 1998 Annual Meeting of Stockholders scheduled to be held
on December 2, 1998 (the "1998 Proxy Statement"), which will be filed with the
Securities and Exchange Commission on or before October 31, 1998.
ITEM 11. EXECUTIVE COMPENSATION
Information in response to this item is incorporated by reference to
the 1998 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 1998 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 1998 Proxy
Statement.
*****
24
25
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, 1998 and 1997
Consolidated Statements of Operations for the Years Ended June 30,
1998, 1997 and 1996
Consolidated Statements of Stockholders' Equity for the Years Ended
June 30, 1998, 1997 and 1996
Consolidated Statements of Cash Flows for the Years Ended June 30,
1998, 1997 and 1996
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 (the "Company") as of June 30, 1998 and 1997, and the
related consolidated statements of operations, stockholders' equity and
cash flows for each of the three years in the period ended June 30,
1998. 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 generally accepted auditing
standards. 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 Kensey Nash
Corporation as of June 30, 1998 and 1997, and the results of its
operations and its cash flows for each of the three years in the period
ended June 30, 1998 in conformity with generally accepted accounting
principles.
DELOITTE & TOUCHE LLP
Philadelphia, Pennsylvania
August 3, 1998
25
26
KENSEY NASH CORPORATION
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
JUNE 30, JUNE 30,
ASSETS 1998 1997
CURRENT ASSETS:
Cash and cash equivalents $ 1,407,684 $ 868,180
Short-term investments 6,368,866 6,482,624
Trade receivables (Note 12) 1,369,960 1,252,110
Royalties receivable (Note 2 and 12) 645,784 165,022
Other receivables (including approximately $59,000 and $30,000 at
June 30, 1998 and 1997, respectively, due from employees) 225,424 266,646
Inventory (Note 1) 1,027,326 735,922
Prepaid expenses and other 200,169 295,232
----------- -----------
Total current assets 11,245,213 10,065,736
----------- -----------
PROPERTY, PLANT AND EQUIPMENT, AT COST (Note 1):
Leasehold improvements 4,006,066 3,207,005
Machinery, furniture and equipment 3,599,827 2,719,543
Construction in progress 191,154 57,614
----------- -----------
Total property, plant and equipment 7,797,047 5,984,162
Accumulated depreciation (2,843,785) (1,978,405)
----------- -----------
Net property, plant and equipment 4,953,262 4,005,757
----------- -----------
OTHER ASSETS:
Restricted investments (Note 9) 1,914,418 2,419,965
Property under capital leases, net (Note 4) 61,181 101,974
Acquired patents, net of accumulated amortization of $127,291
at June 30, 1998 (Note 5) 3,865,118
----------- -----------
Total other assets 5,840,717 2,521,939
----------- -----------
TOTAL $22,039,192 $16,593,432
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 639,605 $ 522,311
Accrued expenses 551,573 323,850
Current portion of line of credit, obligation under patent acquisition agreement
and capital lease obligations (Notes 4, 5 and 6) 577,891 42,702
Deferred revenue 53,120 5,000
----------- -----------
Total current liabilities 1,822,189 893,863
----------- -----------
DEFERRED REVENUE - ROYALTIES (Note 2) 1,979,580 3,000,000
LINE OF CREDIT, OBLIGATION UNDER PATENT ACQUISITION AGREEMENT
AND OBLIGATION UNDER CAPITAL LEASES, long-term portion (Notes 4, 5, and 6) 2,373,960 572,623
----------- -----------
Total liabilities 6,175,729 4,466,486
----------- -----------
COMMITMENTS AND CONTINGENCIES (Notes 2, 4, 9, 13 and 15)
STOCKHOLDERS' EQUITY:
Preferred stock, $.001 par value, 100,000 shares authorized,
no shares issued or outstanding at June 30, 1998 and 1997 (Note 14)
Common stock, $.001 par value, 25,000,000 shares authorized,
7,459,272 and 4,000,000 shares issued and outstanding at
June 30, 1998 and 1997, respectively (Notes 1, 13 and 15) 7,459 7,198
Capital in excess of par value (Notes 1, 3 and 13) 37,597,381 34,203,807
Accumulated deficit (21,741,377) (22,084,059)
----------- -----------
Total stockholders' equity 15,863,463 12,126,946
----------- -----------
TOTAL $22,039,192 $16,593,432
=========== ===========
See notes to consolidated financial statements.
26
27
KENSEY NASH CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------------------------------------------------
Year Ended June 30,
---------------------------------------------------
1998 1997 1996
REVENUES (Notes 1, 2 and 12):
Net sales $4,668,913.00 $3,661,323.00 $ 1,315,097.00
Research and development 3,641,492.00 2,842,433.00 1,575,405.00
Milestone fees 1,050,000.00 -
Royalty income 3,008,327.00 353,239.00 76,303.00
-------------- ------------- --------------
Total revenues 11,318,732.00 7,906,995.00 2,966,805.00
-------------- ------------- --------------
OPERATING COSTS AND EXPENSES:
Cost of products sold 4,083,543.00 3,062,670.00 1,636,902.00
Research and development 5,524,501.00 4,695,323.00 3,580,713.00
Selling, general and administrative
(Notes 3 and 11) 1,762,011.00 1,822,986.00 2,132,151.00
Deferred compensation, officers and directors
(Notes 3 and 13) 1,493,576.00
Product return (Note 10) - - 573,961.00
-------------- ------------- --------------
Total operating costs and expenses 11,370,055.00 9,580,979.00 9,417,303.00
-------------- ------------- --------------
LOSS FROM OPERATIONS (51,323.00) (1,673,984.00) (6,450,498.00)
OTHER INCOME (EXPENSE):
Interest income 539,577.00 627,184.00 482,935.00
Interest expense (149,977.00) (192,812.00) (956,416.00)
Insurance settlement (Note 11) 968,761.00 945,990.00
Other 4,405.00 8,375.00 62,416.00
-------------- ------------- --------------
Total other income - net 394,005.00 1,411,508.00 534,925.00
------------- ------------ -------------
INCOME (LOSS) BEFORE INCOME TAXES 342,682 (262,476) (5,915,573)
PROVISION FOR INCOME TAXES - - -
------------- ------------ -------------
NET INCOME (LOSS) $ 342,682.00 $ (262,476.00) $(5,915,573.00)
============== ============= ==============
INCOME (LOSS) PER COMMON SHARE
and INCOME (LOSS) PER COMMON SHARE -
assuming dilution (Notes 1 and 16) $ 0.05 $ (0.04) $ (1.00)
============= ============= ==============
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING (Note 1) 7,551,596.00 7,181,959.00 5,927,342.00
============= ============= ==============
See notes to consolidated financial statements.
27
28
KENSEY NASH CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
- ------------------------------------------------------------------------------------------------------------------------------------
CAPITAL
COMMON STOCK IN EXCESS NOTES
----------------------- OF PAR ACCUMULATED RECEIVABLE -
SHARES AMOUNT VALUE DEFICIT OTHER TOTAL
BALANCE, JUNE 30, 1995 4,000,000.00 $4,000.00 $ 4,000.00 $(15,906,010.00) $(197,296.00) $ (16,095,306.00)
Stock issued upon initial
public offering
(Note 1) 2,700,000.00 2,700.00 28,891,300.00 28,894,000.00
-
Net loss (5,915,573.00) (5,915,573.00)
-
Stock awards to consultants
(Notes 1 and 13) 16,667.00 17.00 199,983.00 200,000.00
-
Issuance of stock to
employees 423,493.00 423.00 4,596,549.00 4,596,972.00
-
Repayment of officer
borrowings (Note 3) (68,460.00) 197,296.00 128,836.00
-
Officers' bonus reversal (17,000.00) (17.00) (208,123.00) (208,140.00)
-
Prior officers' stock
appreciation rights
(Notes 1 and 13) 33,333.00 33.00 399,967.00 - - 400,000.00
------------ ---------- -------------- --------------- ------------ ---------------
BALANCE, JUNE 30, 1996 7,156,493.00 7,156.00 33,815,216.00 (21,821,583.00) - 12,000,789.00
-
Exercise of stock options
(Note 15) 41,758.00 42.00 388,591.00 388,633.00
Net loss - - - (262,476.00) - (262,476.00)
------------ ---------- -------------- --------------- ------------ ---------------
BALANCE, JUNE 30, 1997 7,198,251.00 7,198.00 34,203,807.00 (22,084,059.00) - 12,126,946.00
Exercise of stock options
(Note 15) 61,021.00 61.00 556,174.00 556,235.00
Shares issued under Patent
Acquisition Agreement
(Note 5) 200,000.00 200.00 2,837,400.00 2,837,600.00
Net income - - - 342,682.00 - 342,682.00
------------ ---------- -------------- --------------- ------------ ---------------
BALANCE, JUNE 30, 1998 7,459,272.00 $7,459.00 $37,597,381.00 $(21,741,377.00) $ - $ 15,863,463.00
============ ========== ============== =============== ============ ===============
See notes to consolidated financial statements.
28
29
KENSEY NASH CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
- ------------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED JUNE 30,
----------------------------------------------------
1998 1997 1996
OPERATING ACTIVITIES:
Net income (loss ) $ 342,682.00 $ (262,476.00) $(5,915,573.00)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization 1,043,890.00 725,944.00 500,453.00
(Gain) loss on sale of property, plant and equipment (7,036.00) 7,219.00
Deferred compensation 1,728,110.00
Interest expense not requiring cash 622,852.00
Changes in assets and liabilities which (used) provided cash:
Accounts receivable (557,390.00) 248,535.00 (1,769,320.00)
Prepaid expenses and other current assets 95,063.00 (35,326.00) (184,156.00)
Inventory (291,404.00) (323,079.00) 23,212.00
Accounts payable and accrued expenses 345,017.00 (394,089.00) (113,765.00)
Deferred revenue (972,300.00) 2,985,000.00 -
-------------- ------------- -------------
Net cash provided by (used in) operating activities 5,558.00 2,937,473.00 (5,100,968.00)
-------------- ------------- -------------
INVESTING ACTIVITIES:
Additions to property, plant and equipment (1,823,311.00) (2,320,877.00) (1,728,093.00)
Proceeds from sale of property, plant and equipment 20,057.00
Patent acquisition costs capitalized (69,539.00)
Sale of investments 10,709,918.00 11,476,618.00
Purchase of investments (10,090,613.00) (10,277,424.00) (10,101,783.00)
-------------- ------------- -------------
Net cash used in investing activities (1,273,545.00) (1,101,626.00) (11,829,876.00)
-------------- ------------- -------------
FINANCING ACTIVITIES:
Principal payments under capital leases (42,702.00) (49,183.00) (37,462.00)
Proceeds from notes payable and line of credit 1,500,000.00 500,000.00 1,037,327.00
Repayments of long-term debt and Patent Acquisition Obligation (206,042.00) (6,356,824.00) (6,769,454.00)
Net advance repayments (1,849,022.00)
Proceeds from initial public offering 29,091,296.00
Exercise of stock options 556,235.00 388,633.00 -
-------------- ------------- -------------
Net cash provided by (used in) financing activities 1,807,491.00 (5,517,374.00) 21,472,685.00
-------------- ------------- -------------
INCREASE (DECREASE) IN CASH 539,504.00 (3,681,527.00) 4,541,841.00
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 868,180.00 4,549,707.00 7,866.00
-------------- ------------- -------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 1,407,684.00 $ 868,180.00 $ 4,549,707.00
=============== ============== ==============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 139,411.00 $ 1,549,635.00 $ 321,639.00
=============== ============== ==============
Cash paid for income taxes $ - $ - $ -
=============== ============== ==============
SUPPLEMENTAL SCHEDULE OF NONCASH FINANCING ACTIVITIES:
Capital lease obligations of $39,353 and $17,420 were incurred during the
years ended June 30, 1997 and 1996, respectively, when the Company entered
into new equipment leases (see Note 4).
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.
29
30
KENSEY NASH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1998, 1997 AND 1996
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS - Kensey Nash Corporation (the "Company") designs, develops and
manufactures, both individually and in conjunction with third parties,
medical devices for use primarily in the cardiovascular and orthopedic
markets. The Company's primary product, the Angio-Seal, is an absorbable
medical device for the sealing of arterial punctures created during
cardiovascular procedures such as angiography, angioplasty, atherectomy
and the placement of stents. 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, 1998 and 1997. The fair value of short-term investments is
based on quoted market prices.
INVESTMENTS - Investments at June 30, 1998 consist of short-term
Certificates of Deposit, Government Bonds and U.S. Treasury Bills. 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
which are included as restricted investments (see Note 9).
Available-for-sale securities are reported at fair value with unrealized
gains and losses included in stockholders' equity (at June 30, 1998,
amortized cost approximates fair value). Realized gains and losses are
included in interest income.
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:
June 30,
-------------------------
1998 1997
Raw materials $ 971,357 $ 649,262
Work in process 55,969 86,660
---------- ----------
Total $1,027,326 $ 735,922
========== ==========
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31
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.
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 15 to 16 years at June 30, 1998.
REVENUE RECOGNITION - Revenue under research and development contracts is
recognized as the related costs are incurred; licensing fees and milestone
payments under the Strategic Alliance Agreements (see Note 2) are
recognized when the earnings process is complete; and revenue for sales is
recognized when the related product is shipped.
EXPORT SALES - Export sales from the Company's U.S. operations to
unaffiliated customers in Europe totaled $72,035, $1,637,583 and $867,542
for the years ended June 30, 1998, 1997 and 1996, respectively.
INCOME TAXES - The Company accounts for income taxes under the provisions
of SFAS No. 109, Accounting for Income Taxes. (See Note 8).
INITIAL PUBLIC OFFERING - On December 13, 1995 the Company sold 2.7
million shares of Common Stock in an initial public offering (the "IPO").
The net proceeds from the IPO (approximately $29.1 million) have been and
will continue to be used primarily for research and development, including
clinical trials; expansion of the Company's manufacturing capabilities;
repayment of certain indebtedness; and working capital and general
corporate purposes.
A charge of approximately $1.2 million was recorded in the year ended June
30, 1996 resulting from the settlement of the Company's Employee Stock
Rights (see Note 13). In conjunction therewith, 456,493 shares of Common
Stock were issued to settle the awards above and certain notes receivable.
EARNINGS PER SHARE - Effective for 1998, 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. All
previously disclosed earnings per share data have been recalculated to
reflect the provisions of SFAS No. 128 (see Note 16).
For the year ended June 30, 1996, the weighted average common shares
outstanding has been increased by 446,437 shares, which is the number of
common stock equivalents issued within one year of the IPO with exercise
prices below the IPO price.
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
31
32
stock. The Company's policy is to grant stock options at the fair market
value at the date of grant (see Note 15).
NEW ACCOUNTING PRONOUNCEMENTS - In June 1997, the Financial Accounting
Standards Board ("FASB") issued SFAS No. 130, Reporting Comprehensive
Income, which establishes standards for reporting and classifying
components of comprehensive income in the financial statements. In June
1997, the FASB also issued SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information. This statement establishes standards
for providing disclosures related to products and services, geographic
area and major customers. The Company will adopt these statements in its
fiscal year 1999 financial statements as required. Implementation of these
standards is not expected to have a material effect on the Company's
financial statements, but may require additional financial statement
disclosures.
PRESENTATION - Certain items in the 1997 and 1996 consolidated financial
statements have been reclassified to conform with the presentation in the
1998 consolidated financial statements.
2. STRATEGIC ALLIANCE AGREEMENTS
The Company had entered into a strategic alliance with American Home
Products ("AHP" or "Strategic Alliance Partner") which incorporated United
States and foreign license agreements (together, the "License
Agreements"), a research and development agreement, a collagen supply
agreement and a credit agreement (see Note 6) (collectively, the
"Strategic Alliance Agreements"). In December 1997, AHP announced the sale
of its subsidiary Sherwood, Davis & Geck ("SD&G"), the operating company
responsible for sales, marketing and manufacturing of the Angio-Seal
device, to Tyco International Ltd. ("Tyco"). Under the terms of the sale,
the Company's Strategic Alliance Agreements with AHP were transferred to
Tyco's subsidiary, The Kendall Company ("Kendall"). Accordingly, Kendall
replaced AHP as the Company's Strategic Alliance Partner in March 1998,
upon finalization of the sale.
THE LICENSE AGREEMENTS - On September 4, 1991, the Company entered into
the License Agreements with its Strategic Alliance Partner to develop the
Angio-Seal. Under the provisions of these agreements, both parties are
responsible for the further development of the product and the Strategic
Alliance Partner has exclusive rights to manufacture and market all
current and future sizes of the Angio-Seal worldwide.
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 U.S. Food and Drug Administration ("FDA") approval.
The Company has received "licensing and milestone fees," totaling $11.0
million, as set forth in the License Agreements. The final milestone
payment of $1.05 million was received upon the pre-market approval by the
FDA to produce and market the Angio-Seal in the United States on September
30, 1996. In addition, a $3.0 million advance was received on future
royalties, which, as stipulated in the License Agreements, will 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 will be received
as cash proceeds by the Company. At June 30, 1998, the Company had
exceeded the first and second royalty year (periods ended September 30,
1997 and September 30, 1998) Minimum Royalties by $352,310 and $1,688,530,
respectively. The deferred revenue balance has been reduced by 50% of such
total excess, to $1,979,580. As the Company cannot reasonably estimate the
excess, if any, of future royalty payments over the Minimum Royalty in
each year, the entire balance has been classified as long-term at June 30,
1998.
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33
AHP also provided the Company with operating advances which were repaid
with the proceeds of the IPO in the year ended June 30, 1996.
THE RESEARCH AND DEVELOPMENT AGREEMENT - The Company and its Strategic
Alliance Partner have an agreement whereby such partner funds certain
ongoing research and development costs incurred by the Company. The
Company contributes one-third of such research and development costs while
the Strategic Alliance Partner contributes the remaining two-thirds. Prior
to the IPO, the Strategic Alliance Partner funded the Company's portion of
such costs. Such amounts were repaid with proceeds from the IPO and the
Company has taken no further advances from such partner.
THE COLLAGEN SUPPLY AGREEMENT - Pursuant to an agreement with the
Strategic Alliance Partner, the Company manufactures collagen to be used
in the Angio-Seal. The agreement contains a minimum purchase requirement
from the Company for five years beginning May 31, 1995.
3. RELATED PARTY TRANSACTIONS
The Company earned interest income of $9,322 for the fiscal year ended
June 30, 1996 on certain notes receivable from a former officer of the
Company which was repaid at the date of the IPO. Such amount had been
classified as a component of stockholders' equity as it was collateralized
primarily by common stock and common stock equivalents.
For the fiscal year ended June 30, 1996, the Company incurred $785,524
(of which $496,580 was offset against proceeds of the IPO) in legal fees
with a law firm which serves as the Company's general counsel for all
corporate legal affairs. Certain current and former partners of such firm
had interests in an investment partnership that owned 50,000 shares of
the outstanding Common Stock of the Company. The shares were sold during
the fiscal year ended June 30, 1997.
See Note 13 for a discussion of related party transactions with certain
former officers and transactions related to employee stock rights issued
to current and former officers and an outside director.
4. LEASES
At June 30, 1998, future minimum annual rental commitments under
non-cancelable lease obligations are as follows:
CAPITAL OPERATING
LEASES LEASES
----------------------------
YEAR ENDING JUNE 30:
1999 $ 45,262 $ 329,838
2000 25,078 356,244
2001 11,055 360,844
2002 1,950 367,285
2003 154,953
--------- ----------
Total minimum lease payments 83,342 $1,569,164
========= ==========
Amount representing interest
(at rates ranging from 7.25%
to 10.25%) (10,722)
---------
Present value of net minimum
lease payments 72,623
Current portion (37,814)
---------
Long-term portion $ 34,809
=========
33
34
Capital leases are for various types of equipment, as follows:
June 30,
------------------------
CLASSES OF PROPERTY 1998 1997
Office equipment $ 38,280 $ 38,280
Computer equipment 9,600 60,264
Other equipment 118,980 118,980
Accumulated amortization (105,679) (115,550)
--------- ---------
Total $ 61,181 $ 101,974
========= =========
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.
The majority of rent expense is for the Company's facility in Exton,
Pennsylvania. The Company also has various office and manufacturing
equipment operating leases. Rent expense for the fiscal years ended June
30, 1998, 1997 and 1996 was approximately $326,000, $275,000 and $279,000,
respectively.
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, effective January 1, 1998, the Company is entitled to earn
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 will make cash payments totaling $1.2
million for the transfer of ownership of the patents. The cash portion is
payable in eight quarterly installments (four $125,000 payments followed
by four $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 of 8.5%) was recorded as a liability on the
Company's financial statements, with a remaining balance of $879,228 at
June 30, 1998 (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
LINE OF CREDIT - In August 1997, the Company increased its $500,000
revolving credit and term loan agreement (the "Revolver") to $2.0 million.
The Revolver bears interest at the prime rate (8.5% at June 30, 1998) and
calls for interest only payments until August 1, 1998 at which time it
converts to a term loan due in 60 monthly installments of principal and
interest. The Revolver is collateralized by a first security interest in
the equipment purchased with the proceeds, as well as certain other large
equipment of the Company. At June 30, 1998, the Company had borrowed $2.0
million under the Revolver. Subsequent to year end, the Company refinanced
$925,000 of the outstanding balance under the Revolver with a $5.0 million
financing agreement with a bank (the "Bond Agreement") (see Note 18). The
term date on the remaining $1,075,000 under the Revolver was extended to
August 1, 1999 and the interest rate modified to 8.0%. Accordingly, all
amounts due under the Revolver have been classified as long-term at June
30, 1998.
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35
THE CREDIT AGREEMENT - The Company had a $5 million Credit Agreement with
its Strategic Alliance Partner. The outstanding balance of $6,517,348,
including interest of $1,517,348, was repaid in October 1996 following
receipt of FDA approval on September 30, 1996.
Amounts outstanding under the Company's Revolver and Patent Acquisition
Agreement are shown in the following table.
JUNE 30,
------------------------
1998 1997
Patent Acquisition Agreement $ 879,228
Revolver 2,000,000 $500,000
---------- --------
Total 2,879,228 500,000
Current portion (540,077)
---------- --------
Long-term $2,339,151 $500,000
========== ========
The annual debt maturities are approximately $540,077, $536,234, $353,750,
$400,000 and $400,000 for the years 1999 through 2003, respectively.
7. RETIREMENT PLAN
The Company has a 401(k) Salary Reduction Plan and Trust (the "401(k)
Plan") in which all employees that are at least 21 years of age are
eligible to participate. Contributions to the 401(k) Plan are made by
employees through an employee salary reduction election. Company
contributions are discretionary. The Company has not made any
contributions to the 401(k) Plan to date.
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 1998 the Company has not provided for current income taxes due to the
utilization of NOLs for tax purposes The difference between the Company's
income tax expense (benefit) and the income tax expense (benefit) computed
using the U.S. federal income tax rate were as follows:
1998 1997 1996
Net income (loss) before income taxes $ 342,682 $ (262,476) $ (5,915,573)
============ ============ =============
Tax provision at U.S. statutory rate 123,121 (94,491) (2,129,606)
State income tax provision, net of federal benefit 17,066 (13,098) (295,187)
Reconciliation to actual tax rate:
Non-deductible meals and entertainment 13,328 9,158
Timing differences (80,880) (158,174)
Utilization of net operating loss carryforwards (72,635)
Creation of net operating loss carryforwards 256,605 2,424,793
------------- ------------ -------------
$ $ $
============= ============ =============
Significant component of the Company's deferred taxes are as follows:
JUNE 30,
---------------------------
1998 1997
Accrual for:
Vacation $ 102,958 $ 120,403
Bonuses 75,000
Basis difference - patents 381,627 479,264
Basis difference - fixed assets (50,520) 99,741
Prepaid insurance (46,884) (97,009)
Inventory 170,870
Other 7,491 10,000
---------- ----------
565,542 687,399
Effective tax rate 40.59% 40.59%
---------- ----------
Deferred tax asset 229,553 279,015
NOL carryforwards (expiring
between 1998 and 2012) 6,322,911 6,315,906
---------- ----------
6,552,464 6,594,921
(6,552,464) (6,594,921)
---------- ----------
Less valuation allowance $ 0 $ 0
========== ==========
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36
The Company's entire deferred tax asset is offset by a valuation allowance
due to the uncertainty surrounding future earnings. At June 30, 1998, the
Company had NOL carryforwards for federal and state tax purposes totaling
$18.0 and $2.8 million, respectively. A portion of the NOL may be subject
to various statutory limitations as to its usage.
9. COMMITMENTS AND CONTINGENCIES
The Company has pledged $1,914,418 in investments as collateral to secure
certain bank loans to employees which were used by such employees for the
payment of taxes incurred as the result of the receipt of Common Stock in
settlement of the Employee Stock Rights (see Note 13). In exchange for the
Company pledging collateral for such loans, each affected employee has
pledged their Common Stock as collateral to the Company. The balance
outstanding on such employee loans was $1,818,697 at June 30, 1998.
10. PRODUCT RETURN
In January 1996, as a result of internal routine testing, the Company and
AHP withdrew two production lots from sale in Europe, although neither the
Company nor AHP had received any complaints concerning the product. After
further testing on the withdrawn production lots, it was determined as a
precautionary measure to withdraw the remaining inventory at AHP's
European facility. In connection with this withdrawal, the Company
recognized a pretax charge of $573,961 in its consolidated statements of
operations during the year ended June 30, 1996. Corrective action was
taken to resolve this issue, production resumed after the reconstruction
of the damaged facility (see Note 11), and there was no further impact of
such withdrawal on the consolidated financial statements of the Company.
11. INSURANCE SETTLEMENT
On January 8, 1996, the Company's facility sustained significant damage
from a roof collapse resulting from a major snowstorm. The production of
the Company's products was halted until the destroyed facilities could be
reconstructed. Construction was completed in late March 1996 and
production resumed at such time.
The Company maintains both property damage and business interruption
insurance. The Company recovered $1,186,619 (net of a $1,000 deductible)
as final settlement for property damage in fiscal year 1996. Of the
settlement amount, $240,629 represented reimbursable losses and expenses
of the Company related to the facility damage. This amount and the
remaining $945,990 are presented net in the selling, general and
administrative ("S,G&A") expenses and as a separate component of other
income, respectively, in the consolidated statement of operations for the
year ended June 30, 1996.
The Company also recovered $1,309,882 (net of a $1,000 deductible) as
final settlement for business interruption in December 1996. Of this
amount, $287,742 in continuing fixed payroll costs and related benefits
incurred during the reconstruction period were offset against the related
cost of products sold, SG&A expense and research and development expense
in the consolidated statements of operations for the year ended June 30,
1996 ($199,642, $29,073 and $59,027, respectively). The remaining $968,761
(net of adjuster fees) has been recorded as a component of other income as
a separate line item on the consolidated statement of operations for the
year ended June 30, 1997.
12. 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 the Company's Strategic Alliance Partner (89% and 100% of
trade and royalty receivables, respectively, at June 30, 1998) (see Note
2). The Company performs ongoing credit evaluations on the
36
37
remainder of its customers' financial conditions but does not require
collateral to support customer receivables. For the years ended June 30,
1998, 1997 and 1996, revenues from the Strategic Alliance Partner
represented the following percentages of total revenues of the Company:
PERCENTAGE OF TOTAL REVENUE
FOR THE YEAR ENDED JUNE 30,
----------------------------------
1998 1997 1996
Sales 86% 91% 81%
R&D Revenue (see Note 2) 96% 98% 99%
Milestone Fees (see Note 2) 100%
Royalty Income (see Note 2) 100% 100% 100%
13. CERTAIN COMPENSATION AND EMPLOYMENT AGREEMENTS
EMPLOYMENT AGREEMENTS WITH CERTAIN OFFICERS - The Company has entered into
employment agreements with certain of its officers which provide for
aggregate annual base salaries of $730,000 through June 1999.
EMPLOYEE STOCK RIGHTS - The Company had certain Stock Appreciation Plans,
Phantom Stock Plans and Stock Award Obligations (together the "Employee
Stock Rights") which were settled in full and the related plans canceled
upon completion of the IPO.
Under the Stock Appreciation Plans, 100,000 units, each equivalent to one
share of common stock at a value of $8.00, had been awarded in the fiscal
year ended June 1995 to former officers of the Company without cost. Upon
closing of the IPO, the benefit paid to participants was 33,333 shares of
common stock (equivalent to the excess of the offering price of $12 per
share over the unit value of $8.00 per share). Related compensation
expense of $400,000 was recorded for the year ended June 30, 1996.
Under the Phantom Stock Plans, 439,478 units, each equivalent to one share
of common stock, had been awarded to employees of the Company (including
305,000 to current and former officers and directors). At the IPO,
compensation expense of $2,082,518 related to these shares was recorded
(of which $1,493,576 related to officers and directors.)
Expense related to the issuance of previously granted stock awards to
certain consultants of the Company (valued at $200,000), was recorded as a
component of S,G&A expense for the year ended June 30, 1996.
14. 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, 1998 and 1997, no shares of Preferred Stock were
outstanding. The Company has no present intention to issue shares of
Preferred Stock.
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15. 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 1.2 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, 1998, awards consist
solely of stock options as summarized in the table below.
During 1995, the Company adopted the Nonemployee 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 60,000
shares available for option grants.
The Directors' Plan provides for (i) the grant of an option to purchase
5,000 shares of Common Stock to each participant on the Directors' Plan's
effective date and (ii) a grant of an option to purchase 5,000 shares of
Common Stock on the date of each regular annual stockholder meeting after
the effective date to each participant upon such date and either is
continuing as a nonemployee director subsequent to the meeting or who is
elected at such meeting to serve as a nonemployee 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, 1998, 1997 and 1996, is as follows:
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39
EMPLOYEE PLAN DIRECTORS' PLAN
----------------------- -------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
SHARES PRICE SHARES PRICE
----------------------- -------------------------
Balance at June 30, 1995 636,000 8.58
Granted 167,600 13.71 15,000 $12.00
------- ---------
Balance at June 30, 1996 803,600 9.66 15,000 12.00
Granted 2,000 14.88 7,500 14.88
Cancelled (11,349) 12.53
Exercised (41,758) 9.31 -
------- ---------
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
======= =========
Exercisable portion 562,579 9.47 17,502 12.41
======= =========
Available for future grant 217,679 22,500
======= =========
Weighted-average fair value of options
granted during the year ended June 30,
1997 $ 9.80 $ 11.08
======= =========
1998 $ 8.24 $ 11.53
======= =========
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:
Year Ended June 30,
--------------------
1998 1997
Dividend yield 0% 0%
Expected volatility 65%-70% 68%-75%
Risk-free interest rate 5.72% 6.4%
Expected lives:
Employee Plan 7.75 5
Directors Plan 7.75 7
The following table summarizes significant option groups outstanding at June
30, 1998 and related weighted average exercise price and remaining contractual
life information as follows:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------- ------------------------------
WEIGHTED WEIGHTED
RANGE OF REMAINING AVERAGE AVERAGE
EXERCISE NUMBER AT CONTRACTUAL EXERCISE NUMBER AT EXERCISE
PRICES JUNE 30, 1998 LIFE PRICE JUNE 30, 1998 PRICE
- ------------------- ------------------- ----------- -------- ------------------- --------
$8.00 - $9.375 541,048 6.81 $8.58 463,675 $8.58
$11.75 - $13.375 337,994 8.57 12.40 103,487 13.18
$14.875 - $16.25 38,000 8.57 15.73 12,919 15.55
------------- --------------
917,042 580,081
============= ==============
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
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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:
JUNE 30, 1998 JUNE 30, 1997 JUNE 30, 1996
---------------------------- --------------------------- ---------------------------
AS REPORTED PRO FORMA AS REPORTED PRO FORMA AS REPORTED PRO FORMA
----------- --------- ----------- --------- ----------- ---------
Net (loss) $342,682 ($664,398) ($262,476) ($818,363) ($5,915,573) ($5,972,087)
Income (loss) per share $0.05 ($0.09) ($0.04) ($0.11) ($1.00) ($1.01)
Subsequent to year end, the Company granted 128,500 stock options under the
Employee Plan at an option price equal to the fair market value of the
Company's stock on the date of grant (August 28, 1998) of $7.63 per share.
16. 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. The
reconcilation is not shown for the years ended June 30, 1997 and 1996 as any
common share equivalents are antidilutive.
YEAR ENDED JUNE 30, 1998
------------------------------------------------
PER SHARE
INCOME SHARES AMOUNT
------------------------------------------------
BASIC EPS
Income available to common shareholders $ 342,682 7,342,683 $ 0.05
EFFECT OF DILUTIVE SECURITIES ========
Options - 208,913
DILUTED EPS -------------- ---------
Income available to common shareholders
including assumed conversions $ 342,682 7,551,596 $ 0.05
============== ========= ========
17. QUARTERLY FINANCIAL DATA (UNAUDITED)
The summarized quarterly results of operations of the Company for the years
ended June 30, 1998 and June 30, 1997 are presented below:
YEAR ENDED JUNE 30, 1998
-------------------------------------------------------------------
1ST 2ND 3RD 4TH
QUARTER QUARTER QUARTER QUARTER
-------------- ----------- -------------- ------------
Operating revenues $ 1,565,290 $ 2,762,081 $ 3,606,955 $ 3,384,406
Operating costs and expenses $ 2,365,692 $ 2,878,737 $ 2,902,788 $ 3,222,838
Net (loss) income $ (679,680) $ 492 $ 809,722 $ 212,148
(Loss) income per share $ (0.09) $ - $ 0.11 $ 0.03
YEAR ENDED JUNE 30, 1997
-------------------------------------------------------------------
1ST 2ND 3RD 4TH
QUARTER QUARTER QUARTER QUARTER
-------------- ----------- -------------- ------------
Operating revenues $ 2,328,109 $ 1,712,382 $ 2,027,082 $ 1,839,422
Operating costs and expenses $ 2,114,459 $ 2,339,353 $ 2,529,710 $ 2,597,457
Net income (loss) $ 220,713 $ 497,229 $ (374,444) $ (605,974)
Income (loss) per share $ 0.03 $ 0.07 $ (0.05) $ (0.08)
Quarterly and total year earnings per share are calculated independently based
on the weighted average number of shares outstanding during each period.
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18. 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.
The suit, filed in the Eastern District of Pennsylvania, claims that
Perclose infringes the Company's U.S Patent No. 5,676,689 (the "Patent").
The Patent covers 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 Patent.
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. Accordingly no amount has been recorded at June 30,
1998 related to resolution of the Perclose matter.
19. SUBSEQUENT EVENT
Subsequent to year end, the Company entered into the Bond Agreement, an
agreement backed by tax-exempt bonds issued by the local county
development authority. The Bond Agreement bears interest at one percent
above the five year Treasury Rate, adjusted quarterly. The Company
refinanced $925,000 of the outstanding balance under the Revolver with a
portion of the proceeds (see Note 6). The remaining $4,075,000 available
under the Bond Agreement will be drawn by the Company for equipment
purchases and facility expansion. The Bond Agreement calls for twenty-four
monthly consecutive interest only payments followed by 60 monthly
installments of principal and interest and is collateralized by a first
security interest in the equipment purchased with the proceeds, as well
as a second security interest in the other assets of the Company.
*****
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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
--------- -----------
3.1* Form of Amended and Restated Certificate of Incorporation of the Company.
3.2* Form of Amended and Restated Bylaws of the Company.
4.1* Specimen stock certificate representing Common Stock.
10.1* Kensey Nash Corporation Employee Stock Incentive Plan and form of Stock Option Agreement.
10.2* Kensey Nash Corporation Nonemployee Directors' Stock Option Plan and form of Stock Option Agreement.
10.3* Form of Directors' Indemnification Agreement.
10.4* Employment Agreement dated March 24, 1995, by and between the Company and Joseph W. Kaufmann.
10.5* Employment Agreement dated July 1, 1993, by and between the Company and Kenneth R. Kensey, M.D.
10.6* Employment Agreement dated July 1, 1993, by and between the Company and John E. Nash, P.E.
10.7* Employment Agreement dated March 24, 1995, by and between the Company and Douglas G. Evans, P.E. and
First Amendment to Employment Agreement dated October 1, 1995.
10.8* Collagen Component Supply Agreement dated May 31, 1995, by and between the Company and Quinton
Instrument Company.
10.9* Credit Agreement dated as of May 3, 1993, by and between the Company and American Home Products
Corporation, as amended.
10.10* License Agreement (United States) dated September 4, 1991, by and between the Company and American Home
Products Corporation.
10.11* License Agreement (Foreign) dated September 4, 1991, by and between the Company and American Home
Products Corporation.
10.12* Research and Development Agreement dated November 19, 1995, by and between the Company and American
Home Products Corporation.
10.13* Amendment No. 1 to Credit Agreement dated November 30, 1993, by and between the Company and American
Home Products Corporation.
10.14* Amendment No. 2 to Credit Agreement dated as of August 1, 1995, by and between the Company and
American Home Products Corporation.
27.1 Financial Data Schedule
- --------------------------
* This exhibits is incorporated by reference to the exhibit with the same
Exhibit Number in the Company's Registration Statement on Form S-1,
Registration Statement No. 33-98722.
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14(b). REPORTS ON FORM 8-K
The Company filed Form 8-K on December 8, 1997 to report it had
acquired certain patents, relating to puncture closure technology, and, in
return, issued shares of common stock, reporting Items 5, 7 and 9.
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, 1998.
KENSEY NASH CORPORATION
By: /s/ JOSEPH W. KAUFMANN
-----------------------
Joseph W. Kaufmann
Chief Executive Officer and President
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, 1998.
SIGNATURE TITLES
/s/ JOSEPH W. KAUFMANN Chief Executive Officer (Principal Executive
- ------------------------------ Officer), President, Chief Financial Officer
Joseph W. Kaufmann (Principal Financial and Accounting Officer),
Secretary and Director
/s/ JOHN E. NASH, P.E. Vice Chairman of the Board and Executive
- ------------------------------ Vice President
John E. Nash, P.E.
/s/ KENNETH R. KENSEY, M.D. Chairman of the Board of Directors
- ------------------------------
Kenneth R. Kensey, M.D.
/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
- ------------------------------
Wendy F. DiCicco, CPA
/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.
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