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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended: SEPTEMBER 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From __________ to __________.
Commission File Number: 0-27120
KENSEY NASH CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 36-3316412
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
MARSH CREEK CORPORATE CENTER, 55 EAST UWCHLAN AVENUE, EXTON, PENNSYLVANIA 19341
(Address of principal executive offices and zip code)
Registrant's telephone number, including area code: (610) 524-0188
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No__
As of October 31, 2002, there were outstanding 10,759,068 shares of
Common Stock, par value $.001, of the registrant.
KENSEY NASH CORPORATION
QUARTER ENDED SEPTEMBER 30, 2002
INDEX
PAGE
----
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets
as of September 30, 2002 (Unaudited) and June 30, 2002 ............... 3
Consolidated Statements of Operations
for the three months ended September 30, 2002 and 2001 (Unaudited) ... 4
Consolidated Statements of Stockholders' Equity as of
September 30, 2002 (Unaudited) and June 30, 2002 ..................... 5
Consolidated Statements of Cash Flows
for the three months ended September 31, 2002 and 2001 (Unaudited) ... 6
Condensed Notes to Consolidated Financial Statements (Unaudited) ....... 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS .............................. 11
ITEM 3. LEGAL PROCEEDINGS .......................................................... 18
PART II - OTHER INFORMATION
ITEM 4. CONTROLS AND PROCEDURES .................................................... 19
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K ........................................... 19
SIGNATURES ............................................................................... 20
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
KENSEY NASH CORPORATION
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
SEPTEMBER 30,
2002 JUNE 30,
(UNAUDITED) 2002
------------- ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 19,044,184 $ 3,632,395
Investments 14,599,496 28,241,868
Trade receivables, net of allowance for doubtful accounts of $147,547
and $42,500 at September 30, 2002 and June 30, 2002, respectively 3,684,065 3,331,046
Royalties receivable 3,619,311 3,370,997
Officer loans 1,909,731 1,882,369
Other receivables (including approximately $58,000 and $45,000 at 153,997 274,620
September 30, 2002 and June 30, 2002, respectively, due from employees)
Inventory 2,876,318 2,518,924
Deferred tax asset, current portion 542,065 1,313,517
Prepaid expenses and other 1,148,045 1,160,834
------------ ------------
Total current assets 47,577,212 45,726,570
------------ ------------
PROPERTY, PLANT AND EQUIPMENT, AT COST:
Leasehold improvements 6,706,209 6,116,775
Machinery, furniture and equipment 12,373,635 11,229,083
Construction in progress 715,129 1,950,427
------------ ------------
Total property, plant and equipment 19,794,973 19,296,285
Accumulated depreciation (8,568,164) (7,985,357)
------------ ------------
Net property, plant and equipment 11,226,809 11,310,928
------------ ------------
OTHER ASSETS:
Restricted investments 2,113,072 2,113,072
Deferred tax asset, non-current portion 1,508,899 1,608,760
Acquired patents, net of accumulated amortization of $1,225,448 and
$1,159,692 at September 30, 2002 and June 30, 2002, respectively 2,870,918 2,936,674
Goodwill, net of accumulated amortization of $100,037 at September 30, 2002
and June 30, 2002 3,284,303 3,284,303
------------ ------------
Total other assets 9,777,192 9,942,809
------------ ------------
TOTAL $ 68,581,213 $ 66,980,307
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,544,615 $ 1,726,370
Accrued expenses 1,405,615 1,084,475
Current portion of debt and capital lease obligations 997,256 978,902
Deferred revenue 293,864 293,035
------------ ------------
Total current liabilities 4,241,350 4,082,782
------------ ------------
LONG TERM PORTION OF DEBT 1,074,181 1,330,484
------------ ------------
Total liabilities 5,315,531 5,413,266
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $.001 par value, 100,000 shares authorized, no shares issued
or outstanding at September 30, 2002 and June 30, 2002
Common stock, $.001 par value, 25,000,000 shares authorized, 10,752,097 and
10,748,455 shares issued and outstanding at
September 30, 2002 and June 30, 2002, respectively 10,752 10,748
Capital in excess of par value 67,328,422 67,289,436
Accumulated deficit (4,135,853) (5,585,885)
Accumulated other comprehensive income (loss) 62,361 (147,258)
------------ ------------
Total stockholders' equity 63,265,682 61,567,041
------------ ------------
TOTAL $ 68,581,213 $ 66,980,307
============ ============
See notes to consolidated financial statements.
3
KENSEY NASH CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
- --------------------------------------------------------------------------------
THREE MONTHS ENDED
SEPTEMBER 30,
-----------------------------
2002 2001
REVENUES:
Net sales $ 5,112,518 $ 4,593,179
Research and development 156,692 105,434
Royalty income 3,619,310 2,211,834
------------ ------------
Total revenues 8,888,520 6,910,447
------------ ------------
OPERATING COSTS AND EXPENSES:
Cost of products sold 2,388,454 2,185,323
Research and development 3,090,755 2,698,016
Selling, general and administrative 1,570,473 907,239
------------ ------------
Total operating costs and expenses 7,049,682 5,790,578
------------ ------------
INCOME FROM OPERATIONS 1,838,838 1,119,869
------------ ------------
OTHER INCOME:
Interest income 420,884 476,085
Interest expense (43,301) (60,624)
Other (109) (4,206)
------------ ------------
Total other income - net 377,474 411,255
------------ ------------
INCOME BEFORE INCOME TAXES 2,216,312 1,531,124
Income tax expense (766,280) (528,238)
------------ ------------
NET INCOME $ 1,450,032 $ 1,002,886
============ ============
BASIC EARNINGS PER SHARE $ 0.13 $ 0.10
============ ============
DILUTED EARNINGS PER SHARE $ 0.13 $ 0.09
============ ============
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 10,749,475 10,539,092
============ ============
DILUTED WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 11,254,700 11,112,732
============ ============
See notes to consolidated financial statements.
4
KENSEY NASH CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------
CAPITAL
COMMON STOCK IN EXCESS
----------------------------- OF PAR ACCUMULATED
SHARES AMOUNT VALUE DEFICIT
BALANCE, JUNE 30, 2001 10,509,431 $ 10,509 $ 63,974,745 $(10,196,713)
------------ ------------ ------------ ------------
Exercise of stock options 239,024 239 3,314,691
Net income 4,610,828
Foreign currency translation adjustment
Change in unrealized gain (loss) on investments
Comprehensive income
------------ ------------ ------------ ------------
BALANCE, JUNE 30, 2002 10,748,455 10,748 67,289,436 (5,585,885)
------------ ------------ ------------ ------------
Exercise of stock options 3,642 4 38,986
Net income 1,450,032
Foreign currency translation adjustment
Change in unrealized gain (loss) on investments
Comprehensive income
------------ ------------ ------------ ------------
BALANCE, SEPTEMBER 30, 2002 (Unaudited) 10,752,097 $ 10,752 $ 67,328,422 $ (4,135,853)
============ ============ ============ ============
ACCUMULATED
OTHER COMPREHENSIVE
COMPREHENSIVE INCOME/
(LOSS)/INCOME (LOSS) TOTAL
BALANCE, JUNE 30, 2001 $ (227,414) $ 53,561,127
------------ ------------
Exercise of stock options 3,314,930
Net income $ 4,610,828 4,610,828
Foreign currency translation adjustment 39,379 39,379 39,379
Change in unrealized gain (loss) on investments 40,777 40,777 40,777
------------
Comprehensive income $ 4,690,984
------------ ============ ------------
BALANCE, JUNE 30, 2002 (147,258) $ 61,567,041
------------ ------------
Exercise of stock options 38,990
Net income $ 1,450,032 1,450,032
Foreign currency translation adjustment 282 282 282
Change in unrealized gain (loss) on investments 209,337 209,337 209,337
------------
Comprehensive income $ 1,659,651
------------ ============ ------------
BALANCE, SEPTEMBER 30, 2002 (Unaudited) $ 62,361 $ 63,265,682
============ ============
See notes to consolidated financial statements.
5
KENSEY NASH CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
- --------------------------------------------------------------------------------
THREE MONTHS ENDED
SEPTEMBER 30,
------------------------------
2002 2001
OPERATING ACTIVITIES:
Net income $ 1,450,032 $ 1,002,886
Adjustments to reconcile net income to net cash used in
operating activities:
Depreciation and amortization 648,563 522,269
Changes in assets and liabilities which (used) provided cash:
Accounts receivable (508,072) 1,296,836
Deferred tax asset 871,313 674,774
Prepaid expenses and other current assets 12,789 179,787
Inventory (357,394) (283,538)
Accounts payable and accrued expenses 139,385 (591,529)
Deferred revenue 829 8,963
------------ ------------
Net cash provided by operating activities 2,257,445 2,810,448
------------ ------------
INVESTING ACTIVITIES:
Additions to property, plant and equipment (498,688) (675,317)
Purchase of investments (148,291) 8,735,000
Sale of investments 14,000,000 (7,315,984)
------------ ------------
Net cash provided by investing activities 13,353,021 743,699
------------ ------------
FINANCING ACTIVITIES:
Repayments of debt (237,949) (220,910)
Principal payments under capital leases (1,868)
Proceeds from exercise of stock options 38,990 762,312
------------ ------------
Net cash (used in) provided by financing activities (198,959) 539,534
------------ ------------
EFFECT OF EXCHANGE RATE ON CASH 282
INCREASE IN CASH AND CASH EQUIVALENTS 15,411,507 4,093,681
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 3,632,395 2,841,963
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 19,044,184 $ 6,935,644
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 43,301 $ 60,624
============ ============
Cash paid for income taxes $ $ 20,000
============ ============
See notes to consolidated financial statements.
6
KENSEY NASH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 --CONSOLIDATED FINANCIAL STATEMENTS
BASIS OF PRESENTATION
The consolidated balance sheet at September 30, 2002, the consolidated
statements of operations for the three months ended September 30, 2002 and
2001 and the consolidated statements of cash flows for the three months
ended September 30, 2002 and 2001 have been prepared by Kensey Nash
Corporation (the Company) and have not been audited by the Company's
independent auditors. In the opinion of management, all adjustments (which
include only normal recurring adjustments) necessary to present fairly the
financial position at September 30, 2002 and June 30, 2002 and, results of
operations and cash flows for the three months ended September 30, 2002 and
2001 have been made.
Certain information and note disclosures normally included in the Company's
annual financial statements, prepared in accordance with accounting
principles generally accepted in the United States of America, have been
condensed or omitted. These consolidated financial statements should be read
in conjunction with the financial statements and notes thereto included in
the Company's June 30, 2002 consolidated financial statements filed with the
Securities and Exchange Commission on Form 10-K. The results of operations
for the three month period ended September 30, 2002 is not necessarily
indicative of operating results for the full year.
PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Kensey Nash
Corporation, Kensey Nash Holding Company and Kensey Nash GmbH. 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. Kensey Nash
GmbH, incorporated in Germany in January 2002, was formed for the purpose of
sales and marketing of the TriActiv(TM) system, which was commercially
launched in Europe in May 2002.
The preparation of the consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
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 dates of the financial statements, as well as
the reported amounts of revenue and expense during the periods.
CASH, CASH EQUIVALENTS AND INVESTMENTS
Cash and cash equivalents represent cash in banks and short-term investments
having an original maturity of less than three months. Our investment
portfolio consists primarily of high quality U.S. government or corporate
securities and certificates of deposit with maturities between nine and
fifteen years. The portfolio includes only available for sale marketable
securities with active secondary or resale markets to ensure portfolio
liquidity. See Comprehensive Income below for the treatment of unrealized
holding gains and losses
EXPORT SALES
There were $166,556 and $159,772 in export sales from the Company's U.S.
operations to unaffiliated customers in Europe in the three months ended
September 30, 2002 and 2001, respectively.
REVENUE RECOGNITION
The Company recognizes revenue under the provisions of Staff Accounting
Bulletin (SAB) No. 101, Revenue Recognition in Financial Statements (SAB
101). Accordingly, sales revenue is recognized when the related product is
shipped F.O.B. Shipping Point. Revenue under research and development
contracts is recognized as the related costs are incurred. Advance payments
received for products or services are recorded as deferred revenue and are
recognized when the product is shipped F.O.B. Shipping Point or services are
performed.
The Company receives a royalty on every Angio-Seal(TM) unit sold by St. Jude
Medical, our licensee. This royalty was historically 12% and became 9% in
October 2000 when a cumulative 1,000,000 units had been sold. We
7
recognize the royalty revenue, in accordance with the Licensing Agreement
between the Company and St. Jude Medical, at the end of each month when St.
Jude Medical advises us of their total Angio-Seal sales dollars for the
month. Royalty payments are received within 45 days of the end of each
calendar quarter.
EARNINGS PER SHARE
Earnings per share are calculated in accordance with SFAS No. 128, Earnings
per Share, which requires the Company to report both basic and diluted
earnings per share (EPS). Basic and diluted EPS are computed using the
weighted average number of shares of common stock outstanding, with common
equivalent shares from options included in the diluted computation when
their effect is dilutive.
COMPREHENSIVE INCOME
The Company accounts for comprehensive income under the provisions of SFAS
No. 130, Reporting Comprehensive Income (SFAS 130). Accordingly, accumulated
other comprehensive income (loss) is shown in the consolidated statements of
stockholders' equity at September 30, 2002 and June 30, 2001, and is
comprised of unrealized gains and losses on the Company's available-for-sale
securities and foreign currency translation adjustments. The tax effect of
other comprehensive income for the three months ended September 30, 2002 and
for the fiscal year ended June 30, 2002 was $107,840 and $(110,497),
respectively.
GOODWILL
Goodwill represents the excess of cost over the fair value of the
identifiable net assets of THM Biomedical, Inc. (THM), a company acquired in
September 2000. Effective July 1, 2001, the Company adopted SFAS No. 141,
Business Combinations (SFAS 141) and SFAS No. 142, Goodwill and Other
Intangible Assets (SFAS 142). SFAS 141 requires that the purchase method of
accounting be used for all business combinations subsequent to June 30, 2001
and specifies criteria for recognizing intangible assets acquired in a
business combination. Under SFAS 142, goodwill and intangible assets with
indefinite useful lives are no longer amortized, but are subject to annual
impairment tests. Intangible assets with definite useful lives will continue
to be amortized over their respective useful lives. The early adoption of
SFAS 142 did not result in the reclassification of any intangible assets,
changes in the amortization periods for those intangible assets with
definite lives or the impairment of any intangible assets.
NEW PRONOUNCEMENTS
The FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations
(SFAS 143) and SFAS No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets (SFAS 144), which were effective for the Company's fiscal
year beginning July 1, 2002. The adoption of these two statements did not
have a material impact on the company's financial position or operations.
In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections (SFAS 145). The Company has not yet completed its analysis of
the effects of adopting this statement on its consolidated financial
position or results of operation. The Company's adoption of SFAS 145 is not
expected to have a material effect on the Company's financial position or
operations.
In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities (SFAS 146), which requires that a liability
for a cost associated with an exit or disposal activity be recognized when
the liability is incurred rather than at the date of a commitment to an exit
or disposal plan and nullifies EITF 94-3. SFAS 146 applies to exit or
disposal activities initiated after December 31, 2002. SFAS 146 is not
expected to have a material impact on the Company's financial position or
operations.
In October 2002, The FASB issued SFAS No. 147, Accounting for Certain
Acquisitions of Banking or Thrift Institutions, and FASB Interpretation
No.9, Applying APB Opinions No. 16 and 17 When a Savings and Loan
Association or a Similar Institution is Acquired in a Business Combination
Accounted for by the Purchase Method. SFAS 147 is not expected to have a
material impact on the Company's financial position or operations.
8
NOTE 2 -- 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:
SEPTEMBER 30, JUNE 30,
2002 2002
------------- ----------
Raw materials $2,458,854 $2,193,438
Work in process 417,464 325,486
---------- ----------
Total $2,876,318 $2,518,924
========== ==========
NOTE 3 -- THM ACQUISITION
On September 1, 2000 the Company acquired THM, a developer of porous,
biodegradable, tissue-engineering devices for the repair and replacement of
musculoskeletal tissues, for approximately $10.5 million plus acquisition
costs of approximately $239,000. The transaction was financed with $6.6
million of the Company's cash and a note payable to the shareholders of THM
in the amount of $4.5 million (the Acquisition Obligation). The Acquisition
Obligation is due in equal quarterly installments of $281,250 beginning on
December 31, 2000 and ending on September 30, 2004. Accordingly, the present
value of the cash payments (discounted based upon the Company's then
available borrowing rate of 7.5%) of $3,833,970 was recorded as a liability
on the Company's consolidated financial statements, with a remaining balance
of $2,071,436 and $2,309,386 at September 30, 2002 and June 30, 2002,
respectively.
The acquisition has been accounted for under the purchase method of
accounting and THM's results of operations are included in those of the
Company since the date of acquisition. The purchase price has been allocated
to the assets acquired and liabilities assumed based on their estimated fair
values on the date of acquisition. The allocation resulted in goodwill of
approximately $3.4 million. The following is a summary of the allocation (in
thousands):
Assets $ 400
Accrued expenses and other liabilities (702)
In-process research and development 7,594
Excess of cost over net assets acquired (goodwill) 3,384
--------
$ 10,676
========
A significant portion of the purchase price was identified as acquired
in-process research and development (IPR&D). The valuation of IPR&D was
performed in an independent appraisal using proven valuation procedures and
techniques and represents the estimated fair market value based on
risk-adjusted cash flows related to the IPR&D programs. The IPR&D consists
of four primary research and development programs that are expected to reach
completion between late 2002 and 2005. At the date of acquisition, the
development of these programs had not yet reached technological feasibility
and the IPR&D had no alternative future uses. Accordingly, these costs were
immediately expensed in the consolidated statement of operations as of the
acquisition date.
The following unaudited pro-forma financial information assumes that the
acquisition had occurred as of the beginning of the period presented:
9
FISCAL YEAR ENDED
06/30/01
-----------------
Total revenue $ 24,437,976
==============
Net income $ 4,829,563
==============
Basic earnings per share $ 0.46
==============
Diluted earnings per share $ 0.46
==============
The pro forma fiscal year 2001 includes an IPR&D charge of $7.6 million.
These pro forma results are based on certain assumptions and estimates. The
pro forma results do not necessarily represent results that would have
occurred if the acquisition had taken place at the beginning of the
specified periods, nor are they indicative of the results of future combined
operations.
NOTE 4 -- OFFICER LOANS
The Company has granted loans to a current officer of the Company totaling
$1.8 million, which were for personal use and are collateralized by the
officer's stock. Interest on the loans ranges from 5.75% to 7% and is based
on the prime rate of interest. Total interest income earned by the Company
on these loans for the three months ended September 30, 2002 and 2001 was
$27,362 and $18,631, respectively and has been capitalized into the loan
balance. No additional amounts were loaned in the three months ended
September 30, 2002. Interest and principal on the loans are due at the
earlier of the sale of a portion of the officer's stock or March 2003. Under
the Sarbanes-Oxley Act of 2002, these loans may not be renewed or extended
after their due date.
NOTE 5 -- COMMITMENTS AND CONTINGENCIES
As of September 30, 2002, the Company has pledged $2,113,072 in investments
as collateral to secure certain bank loans to officers which were used by
such officers for the payment of taxes incurred as the result of the receipt
of Common Stock at the Company's initial public offering in December 1995.
In exchange for the Company pledging collateral for such loans, each
affected officer has pledged their Common Stock as collateral to the
Company. The loans are repayable at the sooner of the sale of the officer's
stock or December 2002. The balance outstanding on such officer loans was
$2,046,317 at September 30, 2002.
NOTE 6 -- INCOME TAXES
As of June 30, 2002, the Company had net operating loss (NOL) carryforwards
for federal and state tax purposes totaling $1.9 and $20.0 million,
respectively. A portion of the NOL carryforwards may be subject to various
statutory limitations as to its usage.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis should be read in conjunction with our
financial statements and the related notes included in this report and the
Company's June 30, 2002 consolidated financial statements filed with the
Securities and Exchange Commission on Form, 10-K.
OVERVIEW
Kensey Nash is a leader in cardiovascular medical technology and has significant
experience and expertise in the design, development, manufacture and processing
of absorbable biomaterials for medical applications. The Angio-Seal(TM) Vascular
Closure Device (Angio-Seal), of which we were the original designer, developer
and manufacturer, is currently the leader in the arterial puncture closure
device market, a potential $600 million to $1 billion market. The Angio-Seal is
designed to seal and close femoral artery punctures made during diagnostic and
therapeutic cardiovascular catheterizations. We licensed the Angio-Seal to St.
Jude Medical, Inc. who manufactures, markets and distributes the product
worldwide. Additionally, we developed the TriActiv(TM) Balloon Protected Flush
Extraction System (the TriActiv), a device designed to provide distal protection
during saphenous vein graft treatment. This market opportunity is currently
estimated at $300 to $500 million. The TriActiv was commercially launched in
Europe in May 2002 and is in clinical trials in the United States. In addition,
we have significant experience in designing, developing, manufacturing and
processing proprietary biomaterials products for the orthopaedics, cardiology,
drug/biologics delivery, periodontal, general surgery and wound care markets. We
intend to continue to leverage our proprietary knowledge and expertise in all of
these markets to develop new products and technologies and to explore additional
applications for our existing products.
Revenues. Our revenues consist of three components: net sales, research and
development revenue and royalty income.
Net Sales. Net sales is comprised of sales of absorbable biomaterials products
and the TriActiv.
Biomaterials. The biomaterials component of net sales represents the
sale of our biomaterials products to customers for use in the
following markets: orthopaedics, cardiology, drug/biologics delivery,
periodontal, general surgery and wound care. In 1997, our biomaterials
sales were comprised almost 100% of the absorbable collagen and
polymer components of the Angio-Seal supplied to our strategic
alliance partner. Since that time, we have experienced significant
sales growth in our biomaterials products as we have brought in new
customers, increased sales to those customers over the past five
years, assisted in the development of new product offerings and
expanded our marketing activities. For fiscal 2002, the Angio-Seal
components represented only 42% of our total biomaterial sales. For
the three months ended September 30, 2002, the Angio-Seal components
represented 57% of our total biomaterials sales. We believe the growth
in our overall biomaterials sales, which was 11% in the three months
ended September 30, 2002 over the same period in 2001, will continue
because of greater acceptance by the medical community of biomaterials
and technological advances which have expanded the applications for
our biomaterials products.
TriActiv. The TriActiv was commercially launched in Europe in the
fourth quarter of fiscal 2002. While TriActiv sales were less than 1%
of our total sales for the three months ended September 30, 2002, we
anticipate the TriActiv will become a more significant component of
net sales during the remainder of fiscal 2003 as we gain new accounts
in the European markets. We anticipate commercial launch of TriActiv
in the U.S. in the second half of fiscal 2004.
Research and Development Revenue. Research and development revenue in the three
months ended September 30, 2002 was derived from two National Institute of
Standards & Technology (NIST) grants. Under the first grant, we are researching
cartilage regeneration utilizing our porous tissue matrix (PTM) technology. This
grant will conclude in our second quarter of fiscal 2003. In addition, in
October 2001, we received a second NIST grant, under which we
11
are researching a synthetic vascular graft also utilizing our porous tissue
matrix (PTM) technology. This project will continue through early fiscal year
2005.
Royalty Income. We receive a royalty on every Angio-Seal unit sold worldwide. We
anticipate sales of the Angio-Seal will continue to grow as St. Jude Medical
continues to expand its sales and marketing efforts and releases future
generations of the Angio-Seal and as market adoption of vascular closure devices
increases. As a result, we expect that royalty income will continue to be a
significant source of revenue. Our current royalty rate is 9%. The original rate
of 12% was contractually reduced from 12% to 9%, in accordance with our
licensing agreements during the quarter ended December 31, 2000, when a
cumulative one million Angio-Seal units had been sold. There will be one further
decrease in the royalty rate, to 6%, upon reaching four million cumulative units
sold. Based on current Angio-Seal sales as well as current and anticipated
market growth trends, we anticipate this next reduction will occur in our fiscal
year 2005.
Cost of Products Sold. We have experienced an overall increase in gross margin
during the three months ended September 30, 2002, reflecting the higher volume
of our biomaterials products. This increased volume from both our existing
customers and new customers has resulted in manufacturing efficiencies. The
volume increase also results in our fixed costs being spread over a greater
number of units. We anticipate the gross margin on our biomaterials products
will continue to improve with continued increased sales volume. This increase in
gross margin will be partially offset by lower gross margins associated with
initial sales of the TriActiv, as we expect margins on the initial TriActiv
sales to be minimal due to the start-up nature of the manufacturing process. As
a result of this product mix, for fiscal 2003, we believe our total gross
margin, across all product lines, will be only slightly improved over fiscal
2002. As volumes increase and the manufacturing process matures for the
TriActiv, we expect the gross margin on TriActiv to increase.
Research and Development Expense. Research and development expense consists of
expenses incurred for the development of our proprietary technologies such as
the TriActiv system, absorbable biomaterials products and technologies and other
development programs, including expenses under the NIST programs. In December
2001, we began our TriActiv U.S. pivotal clinical study, a planned 500-800
patient randomized trial at up to 50 sites around the U.S. We anticipate trial
enrollment will continue through the end of fiscal year 2003. We anticipate
research and development expense will continue to increase as we pursue
commercialization of the TriActiv system in the United States, as well as
explore opportunities for our other technologies, including the continued
development of proprietary biomaterials technologies.
Selling, General and Administrative Expense. Selling, general and administrative
expenses include general and administrative costs, as well as costs related to
the sales and marketing of our products. The costs of our patent litigation are
also included within selling, general and administrative expenses. The sales and
marketing component of selling, general and administrative expenses has
increased as we have commercialized the TriActiv in Europe and move toward
commercialization of the TriActiv in the U.S. In January 2002, we received CE
Mark approval from the European regulatory authority for the TriActiv, which
allows commercial sale of the product in the European Union. Effective January
2002, we established a subsidiary in Germany, Kensey Nash Europe GmbH, and hired
a Vice President of European sales. We have begun to establish a European sales
and marketing team and will continue to add personnel to this team as we are
selling the TriActiv directly to the market in Germany. We will be using
distributors to market the product throughout the rest of Europe. We have
entered into distribution agreements for sales in the United Kingdom, Ireland,
Switzerland, and Austria as of September 30, 2002 and are in the process of
identifying distributors for the rest of Europe. We anticipate sales and
marketing expenses will continue to increase as we expand our European sales
team and prepare for U.S. commercial launch. We also continue to evaluate
opportunities for commercialization of the TriActiv in the United States and to
expand the marketing efforts for our biomaterials business.
CRITICAL ACCOUNTING POLICIES
Revenue Recognition. We recognize revenue under the provisions of Staff
Accounting Bulletin (SAB) No. 101, Revenue Recognition in Financial Statements
(SAB 101). Accordingly, sales revenue is recognized when the related product is
shipped F.O.B. Shipping Point. Revenue under research and development contracts
is recognized as the
12
related costs are incurred. Royalty revenue is recognized as the related product
is sold. Advance payments received for products or services are recorded as
deferred revenue and are recognized when the product is shipped F.O.B. Shipping
Point or services are performed.
Stock-Based Compensation. We account for stock-based compensation costs under
SFAS No. 123, Accounting for Stock-Based Compensation (SFAS 123), which permits
continued application of the intrinsic value method of Accounting Principles
Board Opinion No. 25, Accounting for Stock Issued to Employees (APB 25). Under
the intrinsic value method, compensation cost represents the excess, if any, of
the quoted market price of the Company's common stock at the grant date over the
amount the grantee must pay for the stock. Our policy is to grant stock options
at the fair market value at the date of grant. Therefore, we have not recognized
any compensation expense for options granted to employees. Options granted to
non-employees, as defined under SFAS 123, would be recorded as compensation
expense. The Company did not grant any options to non-employees during the three
months ended September 30, 2002 and 2001.
Research and Development Expenses. Research and development charges, including
clinical trials expense, are expensed as incurred.
RESULTS OF OPERATIONS
COMPARISON OF THREE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
Total Revenues. Total revenues increased 29% to $8.9 million in the three months
ended September 30, 2002 from $6.9 million in the three months ended September
30, 2001. Net sales of products increased 11% to $5.1 million from $4.6 million
for the three months ended September 30, 2002 and 2001, respectively. Net sales
for the three months ended September 30, 2002 consisted almost entirely of
biomaterials sales, as TriActiv sales were only 1% of total sales. Sales for the
three months ended September 30, 2001 consisted entirely of biomaterials sales.
Research and Development Revenues. Research and development revenues increased
49% to $157,000 from $105,000 for the three months ended September 30, 2002 and
2001, respectively. Prior year revenues were generated under the NIST articular
cartilage development grant. The increase over the prior year primarily reflects
the addition of a second NIST grant for synthetic vascular graft research which
was obtained in October 2001 and generated $51,000 in revenue for the three
months ended September 30, 2002.
Royalty Income. Royalty income increased 64% to $3.6 million from $2.2 million
in the three months ended September 30, 2002 and 2001, respectively. This
increase reflects a greater number of units sold as well as an increase in
average selling price for the Angio-Seal. Royalty units increased 54% as
approximately 214,000 Angio-Seal units were sold to end-users during the three
months ended September 30, 2002 compared to approximately 139,000 units sold
during the three months ended September 30, 2001. This unit increase was due to
St. Jude Medical's increased sales and marketing efforts including the launch in
January 2002 of the STS platform, a new generation of the Angio-Seal product
line, in January 2002 and continued strong sales of the entire Angio-Seal
product line in the worldwide market.
Cost of Products Sold. Cost of products sold increased 9% to $2.4 million in the
three months ended September 30, 2002 from $2.2 million in the three months
ended September 30, 2001. While overall cost of products sold increased, gross
margin also increased 1%, from 52% to 53%, in the three months ended September
30, 2001 and 2002, respectively, reflecting the high margins on our biomaterials
products and continued allocation of overhead across increased sales volumes.
Research and Development Expense. Research and development expense increased 15%
to $3.1 million in the three months ended September 30, 2002 compared to $2.7
million in the three months ended September 30, 2001. This increase was
attributable to our continued development efforts on the TriActiv, including
clinical trial expenses. Research and development expenses as a percentage of
revenue decreased from 39% to 35% for the three month period ended September 30,
2001 and September 30, 2002, respectively. Research and development expenses
related to the TriActiv increased $154,000, or 8%, to $2.0 million in the three
months ended September 30, 2002 from $1.8 million in
13
the three months ended September 30, 2001. We also continued to expand our
development efforts on our biomaterials products including our work under the
NIST grants. Biomaterials spending increased $246,000, or 28%, to $1.1 million
in the three months ended September 30, 2002 from $871,000 in the three months
ended September 30, 2001.
Selling, General and Administrative Expense. Selling, general and administrative
expense increased 73% to $1.6 million in the three months ended September 30,
2002 from $907,000 in the three months ended September 30, 2001. This increase
was primarily the result of increased sales and marketing expenses, which
increased $411,000 to $668,000 in the three months ended September 30, 2002 from
$257,000 in the three months ended September 30, 2001. This increase related
primarily to European sales and marketing efforts on the TriActiv. In addition,
general and administrative expenses increased $251,000, to $902,000, in the
three months ended September 30, 2002 from $651,000 in the three months ended
September 30, 2001. This was attributable to several factors including a
$105,000 increase in the allowance for doubtful accounts representing primarily
a reserve for a receivable from a company which has filed for bankruptcy. This
reserve represented approximately 50% of the customer's balance at the time they
filed for bankruptcy. In addition, personnel costs increased $112,000 and
professional services and public company expenses, including audit and legal
fees, investor relations and SEC filing fees increased $31,000. Personnel
increases were in support of our continued sales and research and development
growth and professional service and public company expenses increased as a
result of new SEC and governmental regulations in addition to our continued
growth.
Net Interest Income. Interest expense decreased 29% to $43,000 in the three
months ended September 30, 2002 from $61,000 in the three months ended September
30, 2001. This decrease was the result of a lower principal balance on the THM
Biomedical acquisition obligation as we continue to make the required quarterly
payments. Interest income decreased by 12% to $421,000 in the three months ended
September 30, 2002 from $476,000 in the three months ended September 30, 2001.
Although our cash and investment balances have increased, this has been offset
by lower interest rates.
Other Income (Expense). Other non-operating expense was $100 and $4,200 for the
three months ended September 30, 2002 and 2001, respectively and represent
losses on the disposals of fixed assets.
Net Income. Net income increased to $1.5 million in the three months ended
September 30, 2002 from a net income of $1.0 million in the three months ended
September 30, 2001. Net income for the three months ended September 30, 2002 was
the result of $2.2 million of income before income taxes and a $766,000 charge
for income taxes. Net income for the three months ended September 30, 2001 was
the result of $1.5 million of income before income taxes and a $528,000 charge
for income taxes.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by our operating activities was $2.3 million and $2.8 million
in the three months ended September 30, 2002 and 2001, respectively. In the
three months ended September 30, 2002, changes in asset and liability balances
provided $159,000 of cash, in addition to net income of $1.5 million and
non-cash depreciation and amortization of $649,000. In the three months ended
September 30, 2001, changes in asset and liability balances provided $1.3
million of cash, in addition to net income of $1.0 million and non-cash
depreciation and amortization of $522,000.
Our cash, cash equivalents and short-term investments were $33.6 million at
September 30, 2002. In addition, we had $2.1 million in restricted investment
accounts. We have pledged this $2.1 million in investments as collateral to
secure bank loans made to officers to pay taxes incurred by these employees when
they received common stock at the time of our initial public offering. In
exchange for our pledging this collateral, the employees have pledged their
common stock to the company as collateral.
We have a $5.1 million capital spending plan for fiscal 2003, of which $499,000
has been spent on machinery, equipment, furniture and fixtures and leasehold
improvements through September 30, 2002. These expenditures are related to the
continued expansion of our manufacturing capabilities for our biomaterials and
TriActiv product lines.
14
We have a $2.1 million obligation to the shareholders of THM Biomedical, Inc., a
company we acquired in September 2000. The obligation is due in equal quarterly
installments of $281,250, which began on December 31, 2000 and end on September
30, 2004.
We plan to continue to spend substantial amounts to fund clinical trials, to
gain regulatory approvals and to continue to expand research and development
activities, particularly for the TriActiv and our biomaterials products. We
believe our current cash and investment balances in addition to cash generated
from operations will be sufficient to meet our operating and capital
requirements through at least fiscal 2003. Our future capital requirements and
the adequacy of available funds will depend, however, on numerous factors,
including market acceptance of our existing and future products; the successful
commercialization of products in development; progress in our product
development efforts; the magnitude and scope of such efforts; progress with
pre-clinical studies, clinical trials and product clearance by the FDA and other
agencies; the cost and timing of our efforts to expand our manufacturing
capabilities; the cost of filing, prosecuting, defending and enforcing patent
claims and other intellectual property rights; competing technological and
market developments; and the development of strategic alliances for the
marketing of certain of our products. There can be no assurance that we will
record profits in future periods.
The terms of any future equity financing may be dilutive to our stockholders and
the terms of any debt financing may contain restrictive covenants which limit
our ability to pursue certain courses of action. Our ability to obtain financing
is dependent on the status of our future business prospects, as well as
conditions prevailing in the relevant capital markets. No assurance can be given
that any additional financing will be made available to us or will be available
on acceptable terms should such a need arise. Our estimate of the time periods
for which our cash and cash equivalents will be adequate to fund operations is a
forward looking statement within the meaning of Private Securities Litigation
Reform Act of 1995 and is subject to risks and uncertainties. Actual results may
differ materially from those contemplated in such forward-looking statements. In
addition to those described above, factors which may cause such a difference are
set forth under the caption "Risks Related to Our Business " as well as in our
annual report on form 10-K generally.
ACQUISITION OF THM BIOMEDICAL, INC. AND IN-PROCESS RESEARCH AND DEVELOPMENT
CHARGE
On September 1, 2000, we acquired THM Biomedical, Inc. (THM), a developer of
porous, biodegradable, tissue-engineering devices for the repair and replacement
of musculoskeletal tissues, for approximately $10.5 million plus acquisition
costs of approximately $228,000. The transaction was financed with $6.6 million
in cash and a note payable to the shareholders of THM in the amount of $4.5
million (the Acquisition Obligation). The Acquisition Obligation is due in equal
quarterly installments of $281,250 which began on December 31, 2000 and end on
September 30, 2004. Accordingly, the present value of the cash payments
(discounted based upon our available borrowing rate of 7.5%) of $3.9 million was
recorded as a liability on the Company's financial statements, with a remaining
balance of $2.1 million and $2.3 million at September 30, 2002 and June 30,
2002, respectively.
In fiscal 2001, the $7.6 million IPR&D charge represented the estimated fair
value of purchased in-process technology which has not yet reached technological
feasibility and has no alternative future use and was comprised of the following
projects: Articular Cartilage ($5.4 million), Bone Fusion ($389,000), Other Bone
Applications ($261,000), and Drug Delivery ($1.5 million). Each of the four
projects utilizes the core open-cell poly lactic acid (OPLA) technology, a
porous tissue matrix (PTM) technology developed by THM. PTM technology
facilitates wound healing in both bone and soft tissue and is bioabsorbable at
controlled rates for specific functions and tissues. Each of the IPR&D projects
utilizes these properties of the PTM technology to address its respective
market. For example, the articular cartilage project uses the PTM technology as
the foundation for an articular cartilage repair and regrowth product. The total
IPR&D value was determined by estimating the stage of completion of each IPR&D
project at the date of the acquisition, estimating the costs to develop each
IPR&D project into commercially viable products, estimating the resulting net
cash flows from such projects, and discounting the net cash flows back to their
present values. The discount rate in each project takes into account the
uncertainty surrounding the successful development and commercialization of the
purchased in-process technology.
The stage of completion for all projects ranged from 48% to 72% as of the
acquisition date with the weighted average completion rate of approximately 56%.
As of that date, the estimated costs to bring the projects under development to
technological feasibility and through clinical trials were approximately $7.3
million.
15
Since the date of the acquisition, as planned, we have primarily devoted our
development efforts of PTM technology to the articular cartilage and other bone
applications and have expended approximately $985,000 on such efforts through
September 30, 2002. In addition, we received 510(k) approval for a proprietary
PTM based product, ImproVise(TM), an absorbable cement flow restrictor for use
in certain orthopaedic surgical procedures. In addition, we are seeking
regulatory approval for a second proprietary PTM based product with application
in the orthopaedics market.
The net cash flows from IPR&D projects were based on management's best estimates
of revenue, cost of sales, research and development costs, general and
administrative costs, and income taxes from such projects. These estimates were
determined considering our historical experience and industry trends and
averages. Sales of products incorporating these technologies are expected to
commence between fiscal 2003 and fiscal 2005, depending on the project, with
projected revenue growth rates in the 50% range in the immediate years following
worldwide market launch, declining to the 5% range as each market nears
maturity. These projections were based on our best estimates of market size and
growth, expected trends in technology and the nature and expected timing of new
product introductions by us and our competitors. The cash flows from revenues in
each period are reduced by related expenses, capital expenditures, the cost of
working capital and an assigned contribution to the core technology serving as a
foundation for the research and development.
The discount rates used in discounting the net cash flows from purchased
in-process technology were 80% for articular cartilage, 85% for bone fusion, 78%
for other bone applications and 83% for drug delivery. These discount rates for
each project were determined upon consideration of the stage of completion of
the project, the assumptions, nature and timing of the remaining efforts for
completion and risks and uncertainties of the PROJECT.
Substantial further research and development, pre-clinical testing and clinical
trials will be required to determine the technical feasibility and commercial
viability of the products under development. There can be no assurance such
efforts will be successful. If these projects are not successfully developed,
our revenue and profitability may be adversely affected in future periods. We
are continuously monitoring our development projects and believe that the
assumptions used in the valuation of purchased in-process technology reasonably
estimate the future benefits attributable to such purchased in-process
technology. No assurance can be given that actual results will not deviate from
those assumptions in future periods.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our interest income and expense are sensitive to changes in the general level of
interest rates. In this regard, changes in interest rates affect the interest
earned on our cash, cash equivalents and investments.
Our investment portfolio consists primarily of high quality U.S. government and
corporate securities and certificates of deposit with maturities ranging from
nine to fifteen years. We mitigate default risk by investing in what we believe
are the safest and highest credit quality securities and by monitoring the
credit rating of investment issuers. The portfolio includes only marketable
securities with active secondary or resale markets to ensure portfolio
liquidity, and there are limitations regarding duration of investments. These
available-for-sale securities are subject to interest rate risk and decrease in
market value if interest rates increase. At September 30, 2002, our total
portfolio consisted of approximately $16.7 million of investments, with
maturities ranging from nine to fifteen years. While our investments may be sold
at anytime because the portfolio includes available for sale marketable
securities with active secondary or resale markets to ensure portfolio
liquidity, we generally hold securities until the earlier of their call date or
their maturity. Therefore, we do not expect our results of operations or cash
flows to be materially impacted due to a sudden change in interest rates. We
have $2.1 million in outstanding debt at September 30, 2002, related to the
acquisition of THM.
FORWARD-LOOKING STATEMENTS AND FACTORS THAT MAY AFFECT FUTURE RESULTS
This report includes forward-looking statements within the meaning of Section
21E of the Securities Exchange Act of 1934. We have based these forward-looking
statements largely on our current expectations and projections about future
events and trends affecting our business. In this report, the words "believe",
"may", "will", "estimate", "continue", "anticipate", "intend", "expect", "plan"
and similar expressions, as they relate to Kensey Nash, our business or our
management, are intended to identify forward-looking statements, but they are
not exclusive means of identifying them.
16
A number of risks, uncertainties and other factors could cause our actual
results, performance, financial condition, cash flows, prospects and
opportunities to differ materially from those expressed in, or implied by, the
forward-looking statements. These risks, uncertainties and other factors
include, among other things:
- general economic and business conditions, both nationally and in our
markets;
- our expectations and estimates concerning future financial
performance and financing plans;
- the impact of competition;
- anticipated trends in our business;
- existing and future regulations affecting our business;
- strategic alliances and acquisition opportunities; and
- other risk factors set forth under "Risk Factors" above.
We undertake no obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise
after the date of this report. Our results of operations in any past period
should not be considered indicative of the results to be expected for future
periods. Fluctuations in operating results may also result in fluctuations in
the price of our common stock.
RISKS RELATED TO OUR BUSINESS
There are many risk factors that could adversely affect our business, operating
results and financial condition. These risk factors, described in detail in our
Annual Report on Form 10-K, include but are not limited to:
- - successful commercialization of the TriActiv system in the European Union;
- - our ability to obtain regulatory approval for the TriActiv system in the
United States;
- - subsequent to regulatory approval in the U.S., the successful
commercialization of the TriActiv system;
- - our reliance on revenues from the Angio-Seal product line;
- - the performance of St. Jude Medical as the manufacturer, marketer and
distributor of the Angio-Seal product;
- - our dependence on the continued growth and success of our biomaterials
products;
- - our dependence on our biomaterials customers for marketing and obtaining
regulatory approval for their products;
- - our ability to obtain any additional required funding for future development
and marketing of the TriActiv product as well as our biomaterials products;
- - the competitive markets for our products and our ability to respond more
quickly than our competitors to new or emerging technologies and or changes
in customer requirements;
- - the acceptance of our products by the medical community;
- - our dependence on key vendors and key personnel;
- - the use of hazardous materials which could expose us to future environmental
liabilities;
- - our failure to expand our management systems and controls to support
anticipated growth;
- - the ownership of our stockholders may be diluted by future acquisitions or
strategic alliances;
- - risks related to our intellectual property, including patent and proprietary
rights and trademarks; and
- - risks related to our industry including potential for litigation, ability to
obtain reimbursement for our products and our products exposure to extensive
government regulation.
Statements contained in this Form 10-Q that are not historical facts are
forward-looking statements that are made pursuant to the Safe Harbor provisions
of the Private Securities Litigation Reform Act of 1995. We caution that a
number of important factors could cause our actual results for fiscal year 2003
and beyond to differ materially from those in any forward-looking statements
made by us or on our behalf. These important factors include, without
17
limitation, the success of our biomaterials products, our ability to obtain the
necessary regulatory approvals for, fund and commercialize the TriActiv system,
the success of St. Jude Medical in manufacturing, marketing and distributing the
Angio-Seal product line, the ability of our customers to market and obtain
regulatory approvals for their biomaterials products, the acceptance of our
products by the medical community, our ability to maintain key vendors and
personnel, competition in our markets, general business conditions in the
healthcare industry and general economic conditions. Our results of operations
in any past period should not be considered indicative of the results to be
expected for future periods. Fluctuations in operating results may also result
in fluctuations in the price of our common stock.
ITEM 3. LEGAL PROCEEDINGS
We, along with St. Jude Medical, filed a patent infringement suit against
Perclose, Inc., a competitor in the puncture closure market. The original suit,
filed in 1998, along with a subsequent amendment filed in 1999, both filed in
Federal District Court for the Eastern District of Pennsylvania, claim that
Perclose infringes our U.S. patent numbers 5,676,689 and 5,861,004. These
patents cover systems and methods related to sealing percutaneous punctures. We
seek damages and an order to permanently enjoin Perclose from making, using or
selling products that infringe these patents. In November, 1999, Abbott
Laboratories acquired Perclose.
Perclose filed four counterclaims against our suit in answer to the complaint.
The first counterclaim seeks to declare our patents invalid and not infringed.
The additional counterclaims asserted by Perclose allege that our claims are
frivolous and assert various antitrust counter-claims, including price
discrimination, predatory pricing and attempted monopolization of the puncture
closure market.
The U.S. District Court, Eastern District of Pennsylvania, entered a Markman
hearing Order regarding claims interpretation, in favor of the defendant
Perclose. The judge denied our Motion for Reconsideration on August 21, 2001,
and the parties stipulated a Final Judgement, which was entered on October 19,
2001. On November 15, 2001, we filed a timely Notice of Appeal, thereby
initiating an appeal in the Court of Appeals for the Federal circuit. Briefs
have been filed by both sides and we now await oral argument which is
anticipated to take place in late 2002.
We are unable to predict the final outcome of this suit or whether the
resolution of this matter could materially affect our results of operations,
cash flows or financial position.
18
PART II - OTHER INFORMATION
ITEM 4. CONTROLS AND PROCEDURES
(a) The Chief Executive Officer and the Chief Financial Officer of the
Company (its principal executive officer and principal financial officer,
respectively) have concluded, based on their evaluation as of a date within 90
days prior to the date of the filing of this Report, that the Company's
disclosure controls and procedures are effective to ensure that information
required to be disclosed by the Company in the reports filed or submitted by it
under the Securities Exchange Act of 1934, as amended, is recorded, processed,
summarized and reported within the time periods specified in the SEC's rules and
forms, and include controls and procedures designed to ensure that information
required to be disclosed by the Company in such reports is accumulated and
communicated to the Company's management, including the President and Chief
Executive Officer and the Chief Financial Officer of the Company, as appropriate
to allow timely decisions regarding required disclosure.
(b) There were no significant changes in the Company's internal controls or
in other factors that could significantly affect these controls subsequent to
the date of such evaluation.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
A. Exhibits.
99.1 Certification of Chief Executive Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
99.2 Certification of Chief Executive Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
B. Reports on Form 8-K.
None
19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
KENSEY NASH CORPORATION
Date: November 14, 2002 By: /s/ Wendy F. DiCicco
------------------------------
Wendy F. DiCicco
Chief Financial Officer
CERTIFICATION
I, Joseph W. Kaufmann, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Kensey Nash
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Dated: November 14, 2002
/s/ Joseph W. Kaufmann
-----------------------------------------
Joseph W. Kaufmann
Chief Executive Officer, President and Secretary
20
I, Wendy F. DiCicco, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Kensey Nash
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Dated: November 14, 2002
/s/ Wendy F. DiCicco, CPA
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Wendy F. DiCicco, CPA
Chief Financial Officer
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