KENSEY NASH CORP - 10-Q Quarterly Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended: DECEMBER 31, 2003

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
--- ---

Indicate by check mark whether the registrant is an accelerated filer
(as defined in rule 12b-2 of the Exchange Act ). Yes X No
--- ---

As of January 31, 2004, there were 11,334,973 outstanding shares of
Common Stock, par value $.001, of the registrant.

KENSEY NASH CORPORATION
QUARTER ENDED DECEMBER 31, 2003

INDEX

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS
KENSEY NASH CORPORATION
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------

See notes to consolidated financial statements.

3

KENSEY NASH CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
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See notes to consolidated financial statements.

4

KENSEY NASH CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------

See notes to consolidated financial statements.

5

KENSEY NASH CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
- --------------------------------------------------------------------------------

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 as of December 31, 2003, consolidated
statements of operations for the three and six months ended December 31,
2003 and 2002, consolidated statement of stockholders' equity for the six
months ended December 31, 2003 and consolidated statements of cash flows for
the six months ended December 31, 2003 and 2002 of Kensey Nash Corporation
(the Company) 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
December 31, 2003 and June 30, 2003, results of operations for the three and
six months ended December 31, 2003 and 2002, stockholders' equity for the
six months ended December 31, 2003 and for the year ended June 30, 2003 and
cash flows for the six months ended December 31, 2003 and 2002 have been
made.

Certain information and footnote 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 consolidated financial statements filed
with the Securities and Exchange Commission (SEC) in the Company's Annual
Report on Form 10-K for the fiscal year ended June 30, 2003. The results of
operations for the three and six month periods ended December 31, 2003 are
not necessarily indicative of operating results for the full year.

Certain reclassifications have been made to prior period balances to conform
to the current period presentation.

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. The Company was
incorporated in Delaware on August 6, 1984. Kensey Nash Holding Company,
incorporated in Delaware in January 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
European sales and marketing of the TriActiv(R) Balloon Protected Flush
Extraction System (the TriActiv) 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 presented.

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. The Company's
investment portfolio consists primarily of high quality U.S. government,
municipal and corporate obligations with maturities ranging from 2-14 years.
Also, the portfolio includes certain municipal variable rate demand
obligations that have maturities ranging from 7 to 30 years. These municipal
variable-rate demand obligations are putable weekly and callable on a
monthly

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basis. The portfolio includes only available for sale marketable securities
with secondary or resale markets. See Comprehensive Income below for the
treatment of unrealized holding gains and losses.

EXPORT SALES

There were $60,490 and $217,684 in export sales from the Company's U.S.
operations to unaffiliated customers in Europe in the three and six months
ended December 31, 2003, respectively. Export sales for the three and six
months ended December 31, 2002 were $22,190 and $188,746, 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. All product is shipped free on board shipping point. Revenue under
research and development contracts is recognized as the related expenses are
incurred. Royalty revenue is recognized as the related product is sold. The
Company recognizes 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 the Company of their total Angio-Seal sales
dollars for the month. Royalty payments are received within 45 days of the
end of each calendar quarter. Advance payments received for products or
services are recorded as deferred revenue and are recognized when the
product is shipped or services are performed.

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.

STOCK-BASED COMPENSATION

Stock-based compensation cost is accounted for under SFAS No. 123,
Accounting for Stock-Based Compensation (SFAS 123), which permits (i)
recognition of the fair value of stock-based awards as an expense, or (ii)
continued application of the intrinsic value method of Accounting Principles
Board Opinion No. 25, Accounting for Stock Issued to Employees (APB 25). The
Company accounts for its stock-based employee and director compensation
plans under the recognition and measurement principles of 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. The Company's policy is to
grant stock options with an exercise price equal to the fair market value of
the Company's common stock at the date of grant. Options granted to
non-employees, as defined under SFAS 123, are recorded as compensation
expense. The Company did not grant any options to non-employees during the
three months ended December 31, 2003. See Note 4 for options granted to
non-employees in July 2003 and October 2002.

In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation - Transition and Disclosure - an amendment to FASB Statement
No. 123, Accounting for Stock-Based Compensation (SFAS 148). The Company
implemented the "disclosure only" provisions of SFAS No. 148 in the quarter
ended December 31, 2002. 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 of the options
at the grant date, consistent with the provisions of SFAS No. 123, as
amended by SFAS No. 148, the Company's net income and earnings per share for
the three and six months ended December 31, 2003 and 2002 would have been
reduced to the pro forma amounts below:

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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 December 31, 2003 and June 30, 2003, 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 six months ended December 31, 2003 and
for the fiscal year ended June 30, 2003 was $97,106 and $68,073,
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. The most recent annual impairment test for the fiscal year
ended June 30, 2003 indicated that goodwill was not impaired. Intangible
assets with definite useful lives continue to be amortized over their
respective useful lives.

NEW ACCOUNTING PRONOUNCEMENTS

In January 2003, the FASB issued Financial Interpretation No. 46 (FIN 46),
Consolidation of Variable Interest Entities, an interpretation of Accounting
Research Bulletin 51, Consolidated Financial Statements. FIN 46 requires the
consolidation of entities that cannot finance their activities without the
support of other parties and that lack certain characteristics of a
controlling interest, such as the ability to make decisions about the
entity's activities via voting rights or similar rights. The entity that
consolidates the variable interest entity is the primary beneficiary of the
entity's activities. FIN 46 applies immediately to variable interest
entity's created after January 31, 2003, and must be applied in the first
period ending after December 15, 2003 for entities in which an enterprise
holds a variable interest entity that is acquired before February 1, 2003.
The Company is not affiliated with a variable interest entity and will adopt
the provisions of FIN 46 at such time as they become applicable to the
Company.

In December 2003, the FASB issued SFAS No. 132 (revised 2003), Employers'
Disclosures about Pensions and Other Postretirement Benefits - an amendment
of FASB Statements No. 87, 88, and 106 (SFAS 132 revised), which improves
financial statement disclosures for defined benefit plans. The change

9

replaces existing FASB disclosure requirements for pensions and requires
additional disclosures about the assets, obligations, cash flows, and net
periodic benefit cost of defined benefit pension plans and other defined
benefit postretirement plans. The project was initiated by the FASB in
response to concerns raised by investors and other users of financial
statements about the need for greater transparency of pension information.
The guidance is effective for fiscal years ending after December 15, 2003,
and for the first fiscal quarter of the year following initial application
of the annual disclosure requirements. The Company's adoption of SFAS 132
revised is not expected to have a material impact on the Company's financial
position or results of operation.

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 materials utilized in the processing of the
Company's products and was as follows:

NOTE 3 -- DEBT

On September 1, 2000, in conjunction with the acquisition of THM Biomedical,
the Company incurred a note payable in the amount of $4.5 million (the
Acquisition Obligation). The Acquisition Obligation was 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 $645,415 as of December
31, 2003, of which the entire amount was current at December 31, 2003.
During the quarter ended March 31, 2003, the Company repaid certain debt
holders, thereby reducing the Company's remaining quarterly installments to
$223,256 through September 30, 2004.

NOTE 4 -- CONSULTING CONTRACTS

In October 2002, the Company granted options to purchase 50,000 shares of
common stock to a physician pursuant to a five-year consulting agreement
related to the development of a carotid artery application for the TriActiv.

In July 2003, the Company granted options to purchase 1,500 shares of common
stock to a physician pursuant to a two-year consulting agreement related to
the development of orthopaedic applications for the Company's porous and
non-porous tissue fixation and regeneration devices and drug delivery
devices.

The Company calculated the fair value of these non-employee options in
accordance with SFAS No.123, as $375,550 and $11,378 for the October 2002
and July 2003 grants, respectively, using the Black-Scholes option-pricing
model. These amounts were recorded as prepaid consulting expense and
increases to additional paid in capital in the quarters ended December 31,
2002 and September 30, 2003, respectively. The prepaid expense is being
amortized to research and development expense over the terms of the
agreements. Accordingly, $20,200 and $40,400 was recorded as a component of
research and development expense for the three and six months ended December
31, 2003, respectively.

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NOTE 5 -- STOCK REPURCHASE PROGRAM

On October 23, 2003, the Company announced that its board of directors had
approved a program to repurchase up to 400,000 of its issued and outstanding
shares of Common Stock over six months from the date of the board approval.
The Company is financing the repurchases using its available cash.

In the second quarter of fiscal year 2004, the Company repurchased and
retired 140,500 shares of common stock under the program for approximately
$3.0 million.

The Company plans to continue to repurchase its shares for cash, from time
to time in the open market, through block trades or otherwise. The
repurchase program does not require the Company to purchase any specific
dollar value or number of shares. Any purchases under the program will
depend on market conditions and may be commenced or suspended at any time or
from time to time without prior notice.

NOTE 6 -- INCOME TAXES

As of June 30, 2003, the company had net operating loss (NOL) carryforwards
for state tax purposes totaling $20.0 million, which will expire through
2013. In addition, the Company had a foreign NOL of $0.3 million as of June
30, 2003, which will not expire.

During the quarter ended September 30, 2003, the Company recorded a
qualified research and development tax credit of approximately $310,000.
This was in addition to the $1.5 million tax credit recorded in the fourth
quarter of fiscal 2003. In connection with this research and development tax
credit, the Company recorded an additional $50,500 of professional service
fees as a component of selling, general and administrative expenses during
the quarter ended September 30, 2003.

NOTE 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. Effective October 1, 1999, the
Company implemented a 25% discretionary matching contribution, on up to 6%
of an employee's total compensation, for all employee contributions.
Employer contributions to the 401(k) plan for the three and six months ended
December 31, 2003 was $35,064 and $66,418, respectively. In the three and
six months ended December 31, 2002 employer contributions were $27,121 and
$52,933, respectively.

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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 our
audited consolidated financial statements contained in our Annual Report on Form
10-K for the fiscal year ended June 30, 2003.

OVERVIEW

We are a leader in cardiovascular medical technology and have 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, estimated to be a potential $700 million to $1 billion annual
market. The Angio-Seal device is designed to seal and close femoral artery
punctures made during diagnostic and therapeutic cardiovascular
catheterizations. St. Jude Medical, Inc. (St. Jude Medical) acquired the
worldwide license to the Angio-Seal device in March of 1999. St. Jude Medical
develops, manufactures, markets and distributes the product worldwide.

Additionally, we have developed the TriActiv(R) Balloon Protected Flush
Extraction System (the TriActiv), a device designed to provide embolic
protection during diseased saphenous vein graft (SVG) treatment. This market
opportunity is currently estimated at $300 million annually. The TriActiv was
commercially launched in Europe in May 2002 and is in clinical trials in the
United States. Future generations of the TriActiv currently in development and
in clinical trials are being designed to address additional markets. These
future applications are expected to include the treatment of diseased carotid
and native coronary arteries and acute myocardial infarction (AMI) (a heart
attack). Industry estimates indicate that the addition of these applications
broadens the potential market for the TriActiv platform to over $1 billion.

We also have significant experience in designing, developing, manufacturing and
processing proprietary biomaterials products for the orthopaedics (sports
medicine and spine), 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, which comprises
99% of total net sales, represents the sale of our biomaterials
products to customers for use in the following markets: orthopaedics
(sports medicine and spine), cardiology, drug/biologics delivery,
periodontal, general surgery and wound care. The two most significant
components of our biomaterials sales are the absorbable components of
the Angio-Seal supplied to St. Jude Medical and our orthopaedic product
sales. For fiscal 2003, the Angio-Seal components and orthopaedic
products represented 54% and 42% of our total biomaterial sales,
respectively. For the three and six months ended December 31, 2003, the
Angio-Seal components represented 39% and 41%, respectively, and
orthopaedic products represented 58% and 55%, respectively, of our
total biomaterials sales. The decline in the Angio-Seal components as a
percentage of total biomaterials sales is related to the on-going
transition of the manufacture of the absorbable polymer anchor from us
to St. Jude Medical (based on discussions with St. Jude Medical we
believe their current plans are for us to remain a supplier of
approximately 20%

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of the future anchor requirements for the Angio-Seal) offset by
increases in sales of the collagen component related to increased sales
volume of the Angio-Seal device. We will continue to supply the
collagen component of the device under a three year contract with St.
Jude Medical, which currently expires in December 2005. The increase in
our orthopaedic products' sales as a percentage of total biomaterials
sales is primarily related to the growth of sales to one customer,
Arthrex, Inc., a privately held orthopaedic products company, which
represented 36% of total biomaterials sales for the year ended June 30,
2003 and 53% and 49%, respectively, for the three and six months ended
December 31, 2003. We expect the growth in our overall biomaterials
sales, which was 25% and 33% in the three and six months ended December
31, 2003 over the comparable periods in 2002, will continue because of
greater acceptance by the medical community of biomaterials and
technological advances which have expanded the applications for our
biomaterials products. Due to this greater acceptance, we have been
able to expand our biomaterials customer and product base by initiating
new partnerships within the medical device industry as well as
expanding the product lines for our current customers.

TriActiv. The TriActiv was commercially launched in Europe in the
fourth quarter of fiscal 2002. We are selling direct to the market in
Germany and through distributors throughout the rest of Europe. We had
entered into distribution agreements for sales in the United Kingdom,
Ireland, Switzerland, Austria, and Italy as of December 31, 2003 and
are in the process of identifying distributors for additional markets
in Europe and Asia. While the TriActiv sales were less than 1% of our
total sales for the three and six months ended December 31, 2003, we
anticipate the TriActiv will become a more significant component of net
sales in the fourth quarter of fiscal 2004 and beyond as we gain new
customers in the European markets, introduce new versions and
applications of the product and launch the product in the U.S. market.
We currently anticipate commercial launch of the TriActiv in the U.S.
by the end of the first quarter of fiscal 2005.

We received European Community approval (CE Mark) to market the second
generation TriActiv device, the TriActiv(R) FX Embolic Protection
System (the TriActiv FX), in November 2003. This second generation
device incorporates several important ease of use design enhancements
including an integrated, fully disposable flush and extraction system,
a new balloon inflator that simplifies catheter exchanges during the
procedure, and a monorail flush catheter to enhance device usage and
reduce procedure time. We expect to initiate marketing of the TriActiv
FX in the first quarter of fiscal 2005.

Research and Development Revenue. Research and development revenue was derived
from a National Institute of Standards and Technology (NIST) grant and a
National Institute of Health (NIH) grant in the three and six months ended
December 31, 2003. In November 1999, we received our first NIST grant. Since
that time we have been awarded a second NIST grant and an NIH grant. Under the
first NIST grant, a $1.2 million grant over a three year period, we were
researching cartilage regeneration utilizing our porous tissue matrix (PTM)
technology. Although we continue to independently develop this technology, we
received all remaining funds under this grant in our second quarter of fiscal
2003. In October 2001 we received the second NIST grant, a $1.9 million grant
over a three year period, under which we are researching a synthetic vascular
graft, also utilizing our PTM technology. This project is expected to continue
through early fiscal 2005. In January 2003, we received the NIH grant, a
$100,000 grant over a one year period, under which we are researching sustained
or controlled release of chemotherapeutic drugs for the treatment of breast
cancer utilizing our PTM technology. This grant was completed in early fiscal
2004. As with the NIST grant for cartilage regeneration, we are continuing to
develop this drug delivery technology for commercial use and to support our
expectations for future grant applications.

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,

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including its launch of the Angio-Seal product line in the Japanese market, and
releases future generations of the Angio-Seal system, including its recent
launch of the Self Tightening Suture (STS) Plus version of the device in the
U.S. and Europe. 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
License Agreements during the fiscal 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. We anticipate that this final rate reduction will occur early in the
fourth quarter of our fiscal 2004. As of December 31, 2003 approximately 3.6
million Angio-Seal units had been sold.

Cost of Products Sold. We have experienced an increase in gross margin during
the three and six months ended December 31, 2003 over the comparable periods in
2002, reflecting the higher volume of our sales of biomaterials products. This
increased volume has resulted in greater manufacturing efficiencies and lower
unit costs. We anticipate the gross margin on our biomaterials products will
continue to improve with continued increases in sales volume. This increase in
gross margin will be partially offset by lower gross margins associated with the
TriActiv, as we expect margins on early sales to be lower than the biomaterials
margins due to the start-up nature of the manufacturing process and low volume.
As a result of this change in product mix for fiscal 2004, we believe our total
gross margin will be only slightly improved over fiscal 2003. As volumes
increase and the manufacturing process matures for the TriActiv, we expect the
gross margin on the product and overall company gross margins to increase.

Research and Development Expenses. Research and development expenses consist of
expenses incurred for the development of our proprietary technologies, such as
the TriActiv, absorbable and nonabsorbable biomaterials products and
technologies and other development programs, including expenses under the NIST
and NIH programs. In December 2001, we began our TriActiv U.S. pivotal clinical
study, a planned 500-800 patient randomized trial at up to 80 sites around the
U.S as well as sites in Europe. We anticipate completion of enrollment in the
trial and subsequent submission to the Food and Drug Administration (FDA) for
510(k) approval, the approval to market the device in the U.S., in time for a
commercial launch of the product in the first quarter of fiscal 2005. In
addition, we completed a six patient pilot study, the TRACER study, on the
carotid artery application for the TriActiv in September 2003. This study was
completed at one clinical site in Costa Rica. The TriActiv carotid application
device was successfully used to provide protection from potential stroke-causing
emboli by actively removing debris during carotid stenting procedures. We plan
to begin enrollment in a CE Mark study for the TriActiv carotid application by
the end of fiscal 2004. While we currently have trials ongoing for the SVG and
carotid arteries and plan to initiate studies for additional applications of the
device, we cannot make any assurances as to the successful completion of these
trials and subsequent regulatory approval for the TriActiv in the U.S. or in
Europe.

Clinical efforts in pursuit of FDA approval and continuing development of the
TriActiv, as well as our continued development of proprietary biomaterials
products and technologies, require significant research and development
spending. We anticipate research and development expense will continue to
increase as we pursue commercialization of the TriActiv in the U.S., and explore
opportunities for other indications related to the TriActiv as well as our other
technologies, including the continued development of proprietary biomaterials
technologies. While we believe research and development expense will increase in
absolute dollars, we believe that it will decrease as a percentage of total
revenue so long as our revenue continues to grow at a faster pace than the
expenses. Research and development expense was 33% of total revenue for fiscal
2003 and 31% and 32%, of total revenue, respectively, for the three and six
months ended December 31, 2003.

Selling, General and Administrative. Selling, general and administrative
expenses include general and administrative costs, including activities of our
finance, human resource and business development departments, as well as costs
related to the sales and marketing of our products. The costs of our patent
litigation are also

14

included within selling, general and administrative expenses. The general and
administrative component of selling, general and administrative expenses has
increased over the same period in 2002. This increase is a result of the overall
growth of our business as well as expenses incurred related to compliance with
new SEC and corporate governance regulations. The sales and marketing component
of selling, general and administrative expenses has increased over the same
period in 2002. This increase relates to increased sales efforts for the
TriActiv in Europe, which was commercially launched in May 2002, and the 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 established a
European sales and marketing team, which currently consists of three clinical
specialists and four sales people, and will continue to add personnel to this
team as we believe is required to meet our clinical and sales goals. This team
is selling the product direct in the German market and supports our distributor
relationships in the rest of Europe. We have entered into distribution
agreements for sales of the TriActiv in the United Kingdom, Ireland,
Switzerland, Austria and Italy as of December 31, 2003 and are in the process of
identifying distributors for the rest of Europe and in Asia. We anticipate sales
and marketing expenses will continue to increase as we 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

Our "critical accounting policies" are those that require application of
management's most difficult, subjective, or complex judgments, often as a result
of the need to make estimates about matters that are inherently uncertain and
may change in future periods. It is not intended to be a comprehensive list of
all of our significant accounting policies. In many cases, the accounting
treatment of a particular transaction is specifically dictated by accounting
principles generally accepted in the United States of America, with no need for
management's judgment in their application. There are also areas in which the
selection of an available alternative policy would not produce a materially
different result. We have identified the following as our critical accounting
policies: revenue recognition, accounting for stock-based compensation,
allowance for doubtful accounts, inventory, and income taxes.

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. All of our shipments are Free on Board (F.O.B.) shipping point. Revenue
under research and development contracts is recognized as the related expenses
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 or services are
performed.

Stock-Based Compensation. We account for stock-based compensation costs under
SFAS No. 123, Accounting for Stock-Based Compensation (SFAS No. 123), as amended
by SFAS No. 148 which permits (i) recognition of the fair value of stock-based
awards as an expense, or (ii) continued application of the intrinsic value
method of Accounting Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees (APB 25). We account for its stock-based employee and
director compensation plans under the recognition and measurement principles of
APB 25. Under the intrinsic value method, compensation cost represents the
excess, if any, of the quoted market price of our 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. We account
for stock-based awards to non-employees using the fair value method in
accordance with SFAS No. 123, which requires using the Black-Scholes
option-pricing model to determine the fair value of the option at the original
grant date. Options granted to non-employees, as defined under SFAS 123, (as
amended by SFAS No.

15

148) and Emerging Issues Task Force (EITF) 96-18 "Accounting for Equity
Instruments that are Issued to Other Than Employees for Acquiring or in
Conjunction with Selling, Goods or Services", are recorded as expense over the
service period. We did not grant any options to non-employees for the three
months ended December 31, 2003. See Note 4 for options granted to non-employees
in July 2003 and October 2002.

Allowance for Doubtful Accounts. Our allowance for doubtful accounts is
determined using a combination of factors to ensure that our trade receivables
balances are not overstated due to uncollectibility. We maintain a bad debt
reserve for all customers based on a variety of factors, including the length of
time receivables are past due, trends in overall weighted average risk rating of
the total portfolio, significant one-time events and historical experience with
each customer. Also, we record additional reserves for individual accounts when
we become aware of a customer's inability to meet its financial obligations to
us, such as in the case of bankruptcy filings or deterioration in the customer's
operating results or financial position. If circumstances related to specific
customers change, our estimates of the recoverability of receivables would be
adjusted.

Inventory. Our inventory is stated at the lower of cost or market. Adjustments
to inventory are made at the individual part level for estimated excess,
obsolescence or impaired balances, to reflect inventory at the lower of cost or
market. Factors influencing these adjustments include: changes in demand, rapid
technological changes, product life cycle and development plans, component cost
trends, product pricing, physical deterioration and quality issues. Revisions to
these adjustments would be required if any of these factors differ from our
estimates.

Income Taxes. Our estimated effective tax rate includes the impact of certain
research and development tax credits, accelerated depreciation credits and
assumptions related to stock option exercise activity. Material changes in or
differences from our estimates of these three factors could impact our estimate
of our effective tax rate.

RESULTS OF OPERATIONS

COMPARISON OF THREE MONTHS ENDED DECEMBER 31, 2003 AND 2002

The following table summarizes our operating results for the three months ended
December 31, 2003 compared to the three months ended December 31, 2002.

16

Total Revenues. Total revenues increased 30% to $13.7 million in the three
months ended December 31, 2003 from $10.5 million in the three months ended
December 31, 2002.

Net Sales. Net sales of products increased 26% to $8.0 million from
$6.4 million for the three months ended December 31, 2003 and 2002,
respectively as we continued to increase sales to existing customers
and expand sales to new customers. These increases were primarily
attributable to increased sales of our orthopaedic products.
Orthopaedic sales increased 121% to $4.6 million from $2.1 million for
the three months ended December 31, 2003 and 2002, respectively. These
sales were offset by a decrease in our cardiology biomaterial product
sales. Cardiology biomaterial sales decreased by 18% to $3.2 million
from $3.9 million for the three months ended December 31, 2003 and
2002. As discussed above, this decrease was expected and related to
sales of the polymer anchor component of the Angio-Seal product which
declined to $1.0 million from $1.6 million for the three months ended
December 31, 2003 and 2002, respectively. We believe several factors
will more than compensate for the decline in sales of this one
component, as demonstrated in our second quarter of fiscal 2004. These
factors are the growth in our orthopaedic sales, continued growth in
Angio-Seal device sales, which should result in increased collagen plug
component sales, and growth in sales to our other existing biomaterials
customers as well as the addition of new customers. Net sales for the
three months ended December 31, 2003 and December 31, 2002 consisted
almost entirely of biomaterials sales, as the TriActiv sales were less
than 1% of total sales in both periods.

Research and Development Revenues. Research and development revenues
decreased 56% to $92,000 from $208,000 for the three months ended
December 31, 2003 and 2002, respectively. The revenues for the three
months ended December 31, 2003 consist of amounts generated under our
NIST vascular graft grant and our NIH grant. The revenues for the three
months ended December 31, 2002 consisted of amounts generated under our
NIST cartilage and vascular graft grants. The decrease from the prior
year primarily reflected the completion of the NIST cartilage grant in
October 2002, which resulted in an $88,000 decrease from the comparable
period in the prior year. Also contributing to the decrease was a
decrease in reimbursements under the synthetic vascular graft grant
which generated $90,000 in revenue for the three months ended December
31, 2003 compared to $120,000 for the three months ended December 31,
2002. This decrease was attributable to the timing of animal studies
which are a significant component of the total reimbursement under the
grant. Specifically, an animal study concluded prior to the second
quarter of fiscal 2004 and another animal study is expected to start in
the third fiscal quarter of 2004, in contrast to the second quarter of
fiscal 2003 where an animal study was being conducted throughout that
quarter. The NIH breast cancer drug delivery grant was received in
January 2003, this contributed $0 in revenue in the three months ended
December 31, 2002 and only $2,000 in revenue for the three months ended
December 31, 2003. This project concluded in October 2003.

Royalty Income. Royalty income increased 42% to $5.6 million from $3.9
million in the three months ended December 31, 2003 and 2002,
respectively. This increase reflected a greater number of units sold as
well as an increase in the average selling price for the Angio-Seal.
Royalty units increased 41% as approximately 329,000 Angio-Seal units
were sold to end-users during the three months ended December 31, 2003
compared to approximately 234,000 units sold during the three months
ended December 31, 2002. The average worldwide selling price has
increased to $187 from $185 in the three months ended December 31, 2003
and 2002, respectively. We believe that these increases are due to St.
Jude Medical's continued sales and marketing efforts, increased
adoption of vascular closure devices and the launch in January 2002 of
the STS platform, a new generation of the Angio-Seal product line
(commanding a premium price over the previous version of the device),
all resulting in market share gains and increased sales dollars for the
entire Angio-Seal product line in the U.S., Japan and the European
markets.

17

Cost of Products Sold. Cost of products sold increased 21% to $3.5 million in
the three months ended December 31, 2003 from $2.9 million in the three months
ended December 31, 2002. Despite the overall increase in cost of products sold,
gross margin increased 200 basis points, from 54% to 56%, in the three months
ended December 31, 2002 and 2003, respectively, reflecting the higher margins on
our biomaterials products, manufacturing efficiencies and greater production
volumes, resulting in a decrease in per unit costs.

Research and Development Expenses. Research and development expenses increased
23% to $4.2 million in the three months ended December 31, 2003 compared to $3.5
million in the three months ended December 31, 2002. This increase was
attributable to our continued development efforts on the TriActiv, including
clinical trial expenses. While research and development expenses continued to
increase in dollars, they decreased as a percentage of total revenue to 31% from
33% for the three month periods ended December 31, 2003 and December 31, 2002,
respectively. Research and development expenses related to the TriActiv
increased $529,000, or 23%, to $2.8 million in the three months ended December
31, 2003 from $2.3 million in the three months ended December 31, 2002. This
increase was attributable primarily to direct clinical trial expenses, which
increased $306,000 and product testing to support continued development on both
the current TriActiv device as well as future applications of the device,
including the TriActiv FX, of $149,000. In addition, there was an increase in
personnel expenses, including travel, of $27,000 and facility costs of $41,000,
both of which to support the growth in the development efforts of TriActiv. We
also continued our development efforts on our biomaterials products, including
our work under the second NIST grant and the conclusion of the NIH grant.
Biomaterials-related spending increased $254,000, or 22%, to $1.4 million in the
three months ended December 31, 2003 from $1.2 million in the three months ended
December 31, 2002 related primarily to increases in personnel costs totaling
$128,000, professional and consulting fees totaling $54,000 and facility costs
of $61,000 to support our continued development of potential new products and
processes for our current and prospective customers. We expect research and
development expenses to increase as we investigate and develop new products,
conduct clinical trials and seek regulatory approvals for our proprietary
products.

Selling, General and Administrative Expense. Selling, general and administrative
expense increased 27% to $2.1 million in the three months ended December 31,
2003 from $1.6 million in the three months ended December 31, 2002. This
increase was primarily the result of increased sales and marketing expenses,
which increased $320,000 to $999,000 in the three months ended December 31, 2003
from $678,000 in the three months ended December 31, 2002. This increase related
partially to the TriActiv European sales and marketing efforts, which increased
$272,000 primarily due to personnel cost increases totaling $122,000, travel and
convention expense increases totaling $44,000 and $88,000 related to a clinical
study in support of reimbursement of the product in Europe. The clinical study
expenses were $191,000 and $104,000 in the three months ended December 31, 2003
and 2002, respectively. The increase in sales and marketing expenses was also
related to pre-launch efforts in the U.S. Sales and marketing expenses in the
U.S. increased $49,000 in the year over year periods related to an increase in
salaries for additional personnel totaling $45,000. In addition, general and
administrative expenses increased $117,000 to $1,074,000 in the three months
ended December 31, 2003 from $956,000 in the three months ended December 31,
2002. This increase was partially attributable to a $49,000 increase in
personnel expense as well as professional service and public company expenses,
including audit, legal, D&O insurance, board of directors' costs, and SEC filing
fees, which increased $118,000 primarily as a result of new SEC and governmental
regulations in addition to our continued growth. These increases were offset by
an $83,000 decrease in the allowance for doubtful accounts. We were carrying a
receivables reserve for an amount due from a company that had filed for
bankruptcy. The reserve represented approximately 50% of the customer's balance
at the time they filed for bankruptcy. The outstanding balance has since been
paid and the reserve was no longer required.

Net Interest Income. Interest expense decreased 52% to $20,000 in the three
months ended December 31, 2003 from $42,000 in the three months ended December
31, 2002. This decrease was the result of a lower principal balance on the
Acquisition Obligation as we continued to make the required quarterly payments
and

18

as a result of the early repayment to certain debt holders. Interest income
increased by 9% to $291,000 in the three months ended December 31, 2003 from
$267,000 in the three months ended December 31, 2002. Although our cash and
investment balances have increased by 36%, this increase was almost entirely
offset by lower interest rates.

COMPARISON OF SIX MONTHS ENDED DECEMBER 31, 2003 AND 2002

The following table summarizes our results for the six months ended December 31,
2003 compared to the six months ended December 31, 2002.

Revenues. Revenues increased 34% to $26.1 million in the six months ended
December 31, 2003 from $19.4 million in the six months ended December 31, 2002.

Net Sales. Net sales of products increased 33%, to $15.4 million from
$11.5 million for the six months ended December 31, 2003 and 2002,
respectively. These increases were primarily attributable to increased
sales of our orthopaedic products. Orthopaedic sales increased 120% to
$8.4 million from $3.8 million for the six months ended December 31,
2003 and 2002, respectively. These sales were offset in part by a
decrease in our cardiology product sales. Cardiology sales decreased by
6% to $6.3 million from $6.7 million for the six months ended December
31, 2003 and 2002. As discussed above, this decrease was expected and
relates to sales of the anchor component of the Angio-Seal product,
which declined to $1.8 million from $2.8 million for the six months
ended December 31, 2003 and 2002, respectively. Net sales for the six
months ended December 31, 2003 and December 31, 2002 consisted almost
entirely of biomaterials sales, as TriActiv sales were less than 1% of
total sales in both periods.

Research and Development Revenues. Research and development revenues
decreased 10% to $327,000 from $365,000 for the six months ended
December 31, 2003 and 2002, respectively. The revenues for the six
months ended December 31, 2003 consisted of amounts generated under our
NIST vascular graft grant and our NIH grant. In the prior year,
revenues were generated under the NIST articular cartilage and vascular
graft development grants. The decrease from the prior year period
primarily reflected the completion of the NIST cartilage grant in
October 2002, which resulted in a $193,000 decrease from the comparable
period in the prior year. Offsetting this decrease was an increase of
59% in the synthetic vascular graft which generated $273,000 in revenue
for the six months ended December 31, 2003 compared to $172,000 for the
six months ended December 31, 2002. Also contributing to the revenue

19

was our NIH breast cancer drug delivery grant. This grant contributed
no revenue in the six months ended December 31, 2002 and $54,000 in
revenue for the six months ended December 31, 2003. This project
concluded in October 2003.

Royalty Income. Royalty income increased 38% to $10.4 million from $7.6
million in the six months ended December 31, 2003 and 2002,
respectively. Royalty units increased 38% as approximately 617,000
Angio-Seal units were sold to end-users during the six months ended
December 31, 2003 compared to approximately 448,000 units sold during
the six months ended December 31, 2002. We believe that these increases
were due to St. Jude Medical's continued sales and marketing efforts,
increased adoption of vascular closure devices and the launch in
January 2002 of the STS platform, a new generation of the Angio-Seal
product line (commanding a premium price over the previous version of
the device), all resulting in market share gains and increased sales
dollars for the entire Angio-Seal product line in the U.S., Japan and
the European markets.

Cost of Products Sold. Cost of products sold increased 29% to $6.9 million in
the six months ended December 31, 2002 from $5.3 million in the six months ended
December 31, 2002. While overall cost of products sold increased, gross margin
also increased to 55% from 54%. This increase reflected a favorable product mix
within our biomaterials products, in addition to, manufacturing efficiencies and
greater production volumes, resulting in a decrease in per unit costs.

Research and Development Expenses. Research and development expenses increased
27% to $8.3 million in the six months ended December 31, 2003 from $6.6 million
in the six months ended December 31, 2002. This increase was mainly attributable
to our continued development efforts on the TriActiv system, including clinical
trial expenses. Research and development expenses as a percentage of revenue
decreased from 34% to 32% for the six month period ended December 31, 2002 and
December 31, 2003, respectively. Research and development expense related to the
TriActiv increased $1.1 million, or 25%, to $5.3 million in the six months ended
December 31, 2003 from $4.3 million in the six months ended December 31, 2002.
This increase was attributable primarily to direct clinical trial expenses,
which increased $760,000, and product testing and facility costs to support
continued development on both the current TriActiv device as well as future
applications of the device, including the TriActiv FX, of $305,000. We also
continued our development efforts on our biomaterials products, including our
work under the NIST grant and the conclusion of the NIH grant.
Biomaterials-related spending increased $694,000, or 30%, to $3.0 million in the
six months ended December 31, 2003 from $2.3 million in the six months ended
December 31, 2002 related primarily to increases in personnel costs totaling
$210,000, operational supplies and facility costs totaling $354,000 and
professional and consulting fees totaling $110,000, all to support our continued
development of potential new products and processes for our current and
prospective customers.

Selling, General and Administrative. Selling, general and administrative expense
increased 26% to $4.0 million in the six months ended December 31, 2003 from
$3.2 million in the six months ended December 31, 2002. This increase was
primarily the result of sales and marketing expenses, which increased to
$602,000 in the six months ended December 31, 2003 from $1.3 million in the six
months ended December 31, 2002. This increase related partially to the TriActiv
European sales and marketing efforts which increased $479,000 primarily due to
personnel increases totaling $192,000, travel and convention expenses totaling
$59,000 and $209,000 related to a clinical study to support reimbursement of the
product in Europe, on which expenses were $339,000 and $130,000 in the six
months ended December 31, 2003 and 2002, respectively. The increase in sales and
marketing expenses was also related to U.S. pre-launch efforts on the TriActiv.
U.S. sales and marketing expenses increased $123,000 in the year over year
periods related to an increase in salaries for additional personnel totaling
$93,000 and $22,000 for convention expenses. In addition, general and
administrative expenses increased 12%, or $225,000, to $2.1 million in the six
months ended December 31, 2003 from $1.9 million in the six months ended
December 31, 2002. This increase was attributable a $62,000 increase

20

in personnel costs as well as professional services and public company expenses,
including legal fees, D&O insurance, board of directors costs and SEC filing
fees, which increased $200,000 as a result of new SEC and governmental
regulations in addition to our continued growth. In addition, we incurred a
$134,000 increase in audit and tax fees caused by an overall increase in audit
fees and a $50,500 professional service fee relating to the completion of a
research and development tax credit project that began in the fourth quarter of
our fiscal year ended June 30, 2003. This increase was more than offset by a
$216,000 decrease in the allowance for doubtful accounts. We were carrying a
receivables reserve for an amount due from a company that had filed for
bankruptcy. The reserve represented approximately 50% of the customer's balance
at the time it filed for bankruptcy. The outstanding balance has since been paid
and the specific reserve was no longer needed.

Net Interest Income. Interest expense decreased 53% to $41,000 in the six months
ended December 31, 2003 from $86,000 in the six months ended December 31, 2002.
This decrease was the result of a lower principal balance on the Acquisition
Obligation, as we continued to make the required quarterly payments. Interest
income decreased to $581,000 in the six months ended December 31, 2003 from
$688,000 in the six months ended December 31, 2002. Although our cash and
investment balances increased, this increase was more than offset by lower
interest rates.

LIQUIDITY AND CAPITAL RESOURCES

Our cash, cash equivalents and investments were $52.1 million at December 31,
2003 up $3.7 million from our balance of $48.4 million as of our fiscal year
ended June 30, 2003.

Net cash provided by our operating activities was $8.8 million and $5.6 million
in the six months ended December 31, 2003 and 2002, respectively. In the six
months ended December 31, 2003, changes in asset and liability balances provided
$1.2 million of cash. This increase in cash was primarily due to the utilization
of our deferred tax asset, coupled with a reduction in prepaid and other assets
partially offset by an increase in inventory. The inventory increase was due to
production requirements for the second half of fiscal 2004 for biomaterials and
TriActiv. Currently, we able to use our deferred tax asset to offset our federal
tax liability. The decrease in our prepaid and other assets was directly
attributable to the pre-payment for our clinical trial contracts, which are
expensed when the service is performed. In addition we had net income of $5.3
million, a tax benefit from the exercise of stock options of $443,000 and
non-cash depreciation and amortization of $2.0 million. In the six months ended
December 31, 2002, changes in asset and liability balances provided $850,000 of
cash, in addition to net income of $3.2 million, a tax benefit from exercise of
stock options of $49,000 and non-cash depreciation and amortization of $1.4
million.

We have an $8.0 million capital spending plan for fiscal 2004, of which $2.8
million had been spent on leasehold improvements to fit-out additional leased
space and to reconfigure existing space, machinery, equipment and furniture and
fixtures through December 31, 2003. These expenditures were primarily related to
the expansion of our research and development capabilities ($412,000), expansion
and upgrade of our MIS technology ($168,000) and the continued expansion of our
manufacturing capabilities for our biomaterials and the TriActiv product lines
($2.1 million). We expect our capital expenditures will be at the $8.0 million
planned level by year-end.

We have a $645,000 current obligation to the former shareholders of THM, a
company we acquired in September 2000. The obligation was due in equal quarterly
installments of $281,250, which began on December 31, 2000 and ends on September
30, 2004. As of February 28, 2003 we had repaid certain former shareholders of
THM thereby reducing our remaining quarterly installments to $223,256 through
September 30, 2004. We believe we have adequate cash balances at December 31,
2003 to repay the remaining amounts under this obligation through its maturity
in September 2004.

21

The exercise of stock options provided cash of $1.3 million for the six months
ended December 31, 2003. We believe that option exercises will continue through
fiscal 2004 due to the strength in our share price compared to the average
exercise price of outstanding options.

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. In
addition to the potential cash requirements associated with our announced stock
repurchase plan (see below), we will add additional manufacturing facilities to
support the continued growth of our biomaterials business and expected
commercial launch of the TriActiv. We believe our current cash and investment
balances, in addition to cash generated from operations, will be sufficient to
meet our operating, financing and capital requirements through at least the next
12 months. 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 and costs associated with that commercialization; 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,
sales, and marketing 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 generate cash from operations 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 that 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 available to us, or will be available to us 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 below under the caption "Risks
Related to Our Business" below, as well as under the heading "Risk Factors" in
our Annual Report on Form 10-K for our fiscal year ended June 30, 2003.

RESEARCH AND DEVELOPMENT TAX CREDIT

During our first quarter fiscal 2004, we recorded a research and development tax
credit of approximately $310,000. This was in addition to the $1.5 million tax
credit we recorded in the fourth quarter of fiscal 2003 and represents the
additional portion of the credit. The tax credit relates to our qualified
research and development activities. In connection with the research and
development tax credit, we recorded an additional $50,500 of professional
service fees as a component of selling, general and administrative expenses
during the quarter ended September 30, 2003, as discussed above. As a result of
this final portion of the research and development tax credit related to prior
years as well as the estimated current portion of our research and development
tax credit, we estimate that our effective tax rate will be approximately 31.5%
for fiscal 2004.

STOCK REPURCHASE PROGRAM

On October 23, 2003, we announced that our board of directors had approved a
program to repurchase up to 400,000 of our issued and outstanding shares of
Common Stock over six months from the date of the board

22

approval. As of December 31, 2003, we repurchased and retired 140,500 shares of
Common Stock and used $3.0 million of its available cash for the purchases. We
intend to finance any remaining repurchases using our available cash.

We plan to continue to repurchase our shares for cash, from time to time in the
open market, through block trades or otherwise. The repurchase program does not
require us to purchase any specific dollar value or number of shares. Any
further purchases under the program will depend on market conditions and may be
commenced or suspended at any time or from time to time without prior notice.

DEBT

On September 1, 2000, we incurred an obligation in the amount of $4.5 million
(the Acquisition Obligation) in conjunction with the acquisition of THM, a
developer of porous, biodegradable, tissue-engineering devices for the repair
and replacement of musculoskeletal tissues. The Acquisition Obligation was 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 our's financial statements, with a
remaining balance of $645,415 as of December 31, 2003, of which the entire
amount was current at December 31, 2003. During the quarter ended March 31,
2003, we had repaid certain debt holders, thereby reducing our remaining
quarterly installments to $223,256 through September 2004.

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

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 us, our business or our management,
are intended to identify forward-looking statements, but they are not exclusive
means of identifying them.

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:

o general economic and business conditions, both nationally and
in our markets;

o our expectations and estimates concerning future financial
performance and financing plans;

o the impact of competition;

o anticipated trends in our business and the businesses of our
customers;

o existing and future regulations affecting our business;

o strategic alliances and acquisition opportunities; and

o other risk factors listed under "Risks Related to Our
Business" below.

Except as expressly required by the federal securities laws, 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

23

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, of which most have been
described in detail in our Annual Report on Form 10-K under "Risk Factors",
include but are not limited to:

o our ability to successfully commercialize the TriActiv in the
European Union;

o our ability to obtain regulatory approval for the TriActiv in
the United States;

o subsequent to U.S. regulatory approval, our ability to
successfully commercialize the TriActiv in the United States;

o our reliance on revenues, both royalty income and product
sales, from the Angio-Seal product line;

o the performance of St. Jude Medical as the manufacturer,
marketer and distributor of the Angio-Seal product;

o our dependence on the continued growth and success of our
biomaterials products and customers;

o our dependence on our biomaterials customers for marketing and
obtaining regulatory approval for their products;

o our ability to obtain any additional required funding for
future development and marketing of the TriActiv, as well as
our biomaterials products;

o the competitive markets for our products and our ability to
respond more quickly than our competitors to new or emerging
technologies and changes in customer requirements;

o the acceptance of our products by the medical community;

o our dependence on key customers, vendors and personnel;

o the use of hazardous materials, which could expose us to
future environmental liabilities;

o our ability to expand our management systems and controls to
support anticipated growth;

o potential dilution of ownership interests of our stockholders
by stock issuances in future acquisitions or strategic
alliances;

o risks related to our intellectual property, including patent
and proprietary rights and trademarks; and

o risks related to our industry, including potential for
litigation, ability to obtain reimbursement for our products
and our products' exposure to extensive government regulation;

o adherence and compliance with corporate governance laws,
regulations and other obligations affecting our business.

ITEM 3. 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,
municipal and corporate securities with maturities ranging from 2-14 years.
Also, the portfolio includes certain municipal variable rate demand obligations
that have maturities ranging from 7 to 30 years. These municipal variable-rate
demand obligations are putable weekly and callable on a monthly basis. We
mitigate default risk by investing in what we believe are safe and high credit
quality securities and by monitoring the credit rating of investment issuers.
Our portfolio includes only marketable securities with secondary or resale
markets. We have an audit committee approved investment strategy which currently
provides guidance on the duration and type of our investments. These
available-for-sale securities are subject to interest rate risk and decrease in
market value if interest rates increase. At December 31, 2003, our total
portfolio consisted of approximately $48.3 million of investments. While our

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investments may be sold at anytime because the portfolio includes
available-for-sale marketable securities with secondary or resale markets, 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 had $645,415
in outstanding debt at December 31, 2003, related to the acquisition of THM.
Such debt contains a fixed interest rate provision of 7.5% and is thus not
subject to risk related to fluctuation in interest rates.

ITEM 4. CONTROLS AND PROCEDURES

We carried out an evaluation, under the supervision and with the participation
of our management, including our Chief Executive Officer and Chief Financial
Officer, of the design and operation of our disclosure controls and procedures.
Based on this evaluation, our Chief Executive Officer and Chief Financial
Officer concluded that, as of December 31, 2003, our disclosure controls and
procedures were effective to provide reasonable assurance that the information
required to be disclosed by us in the reports filed or submitted under the
Securities Exchange Act of 1934 is recorded, processed, summarized and reported
within the time periods specified in the SEC's rules and forms.

We are in the process of evaluating our compliance with Section 404 of the
Sarbanes-Oxley Act of 2002 (Section 404). Under the current SEC rules, we will
be required to be in compliance with Section 404 as of June 30, 2004. Section
404 requires our management to assert that all necessary controls and procedures
are in place and documented to ensure accurate financial reporting. We are
currently enhancing our internal controls over financial reporting in order to
accomplish compliance by June 30, 2004.

Any control system, no matter how well designed and operated, can provide only
reasonable (not absolute) assurance that its objectives will be met.
Furthermore, no evaluation of controls can provide absolute assurance that all
control issues and instances of fraud, if any, have been detected or that we
will be in compliance with Section 404 as of June 30, 2004.

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PART II - OTHER INFORMATION

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

The Company's 2003 Annual Meeting of Stockholders was held on December 3, 2003.
At the Annual Meeting, the Company's stockholders (i) elected Joseph W.
Kaufmann, Harold N. Chefitz and Steven J. Lee as Class II Directors to the
Company's board of directors, (ii) voted against approval of the Fourth Amended
and Restated Kensey Nash Corporation Employee Incentive Compensation Plan and
(iii) ratified the appointment by the Company's board of directors of Deloitte &
Touche LLP as the independent auditors of the Company's financial statements for
the fiscal year ending June 30, 2004. The following summarizes the voting
results for such actions:

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.

A. Exhibits.

10.5 Employment Agreement dated October 1, 2003, by and
between Kensey Nash Corporation and Wendy F. DiCicco,
CPA

31.1 Certification of Chief Executive Officer pursuant to
Exchange Act Rule 13a-14(a).

31.2 Certification of Chief Financial Officer pursuant to
Exchange Act Rule 13a-14(a).

32.1 Certification of Chief Executive Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.

32.2 Certification of Chief Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.

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B. Reports on Form 8-K.

We filed a Form 8-K on October 15, 2003 to furnish our press
release announcing our financial position and results of
operations as of, and for the three month period ended
September 30, 2003 (pursuant to Item 12 of Form 8-K).

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

KENSEY NASH CORPORATION

Date: February 17, 2004 By: /s/ Wendy F. DiCicco, CPA
--------------------------------------------
Wendy F. DiCicco, CPA
Chief Financial Officer
(Principal Financial and Accounting Officer)

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