-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, KWm+XCT8DhXNofHlCvcU8eEaCeuK2WFu4OK3PwJt8CvOhzkRr41XU5h37q55/9Gh uex92bUTbrW0yhMdXjbAOQ== 0000950137-04-001026.txt : 20040217 0000950137-04-001026.hdr.sgml : 20040216 20040217163743 ACCESSION NUMBER: 0000950137-04-001026 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20031231 FILED AS OF DATE: 20040217 FILER: COMPANY DATA: COMPANY CONFORMED NAME: KENSEY NASH CORP CENTRAL INDEX KEY: 0001002811 STANDARD INDUSTRIAL CLASSIFICATION: SURGICAL & MEDICAL INSTRUMENTS & APPARATUS [3841] IRS NUMBER: 363316412 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-27120 FILM NUMBER: 04609362 BUSINESS ADDRESS: STREET 1: MARSH CREEK CORPORATE CENTER STREET 2: 55 EAST UWCHLAN AVE STE 204 CITY: EXTON STATE: PA ZIP: 19341 BUSINESS PHONE: 6105947156 MAIL ADDRESS: STREET 1: 55 EAST UWCHLAN AVE STREET 2: STE 201 CITY: EXTON STATE: PA ZIP: 19341 10-Q 1 c82999e10vq.txt QUARTERLY REPORT 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
PAGE ---- PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS Consolidated Balance Sheets as of December 31, 2003 (Unaudited) and June 30, 2003......................... 3 Consolidated Statements of Operations for the three and six months ended December 31, 2003 and 2002 (Unaudited).......................................................... 4 Consolidated Statements of Stockholders' Equity for the six months ended December 31, 2003 (Unaudited) and for the year ended June 30, 2003............ 5 Consolidated Statements of Cash Flows for the six months ended December 31, 2003 and 2002 (Unaudited)............... 6 Condensed Notes to Consolidated Financial Statements (Unaudited)................ 7 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS................................... 12 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.............................. 24 ITEM 4. CONTROLS AND PROCEDURES................................................................. 25 PART II - OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..................................... 26 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K........................................................ 26 SIGNATURES................................................................................................. 27 EXHIBITS................................................................................................... 28
PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS KENSEY NASH CORPORATION CONSOLIDATED BALANCE SHEETS - --------------------------------------------------------------------------------
December 31, ASSETS 2003 June 30, CURRENT ASSETS: (UNAUDITED) 2003 ------------- ------------- Cash and cash equivalents $ 3,795,915 $ 15,040,857 Investments 48,287,337 33,370,540 Trade receivables, net of allowance for doubtful accounts of $27,200 and $131,582 at December 31, 2003 and June 30, 2003, respectively 2,748,778 3,760,286 Royalties receivable 5,545,882 4,571,006 Other receivables (including approximately $12,500 and $41,000 at December 31, 2003 and June 30, 2003, respectively, due from employees) 415,352 578,491 Inventory 4,183,530 3,481,322 Deferred tax asset, current portion 501,038 2,097,147 Prepaid expenses and other 2,080,432 2,564,179 ------------- ------------- Total current assets 67,558,264 65,463,828 ------------- ------------- PROPERTY, PLANT AND EQUIPMENT, AT COST: Leasehold improvements 9,034,455 6,737,363 Machinery, furniture and equipment 16,826,899 14,492,068 Construction in progress 1,048,677 2,927,955 ------------- ------------- Total property, plant and equipment 26,910,031 24,157,386 Accumulated depreciation (12,344,980) (10,757,669) ------------- ------------- Net property, plant and equipment 14,565,051 13,399,717 ------------- ------------- OTHER ASSETS: Deferred tax asset, non-current portion 1,017,513 1,017,513 Acquired patents, net of accumulated amortization of $1,554,231 and $1,422,718 at December 31, 2003 and June 30, 2003, respectively 2,542,136 2,673,648 Goodwill 3,284,303 3,284,303 ------------- ------------- Total other assets 6,843,952 6,975,464 ------------- ------------- TOTAL $ 88,967,267 $ 85,839,009 ============= ============= LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 1,930,172 $ 2,111,421 Accrued expenses 2,741,605 2,926,604 Current portion of debt 645,415 836,989 Deferred revenue 166,169 195,060 ------------- ------------- Total current liabilities 5,483,361 6,070,074 ------------- ------------- LONG TERM PORTION OF DEBT 219,147 ------------- ------------- Total liabilities 5,483,361 6,289,221 ------------- ------------- COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY: Preferred stock, $.001 par value, 100,000 shares authorized, no shares issued or outstanding at December 31, 2003 and June 30, 2003 -- -- Common stock, $.001 par value, 25,000,000 shares authorized, 11,325,354 and 11,366,975 shares issued and outstanding at December 31, 2003 and June 30, 2003, respectively 11,325 11,367 Capital in excess of par value 75,129,839 76,356,345 Retained earnings 8,477,064 3,200,450 Accumulated other comprehensive loss (134,322) (18,374) ------------- ------------- Total stockholders' equity 83,483,906 79,549,788 ------------- ------------- TOTAL $ 88,967,267 $ 85,839,009 ============= =============
See notes to consolidated financial statements. 3 KENSEY NASH CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) - --------------------------------------------------------------------------------
THREE MONTHS ENDED SIX MONTHS ENDED DECEMBER 31, DECEMBER 31, -------------------------------- -------------------------------- 2003 2002 2003 2002 REVENUES: Net sales $ 8,041,754 $ 6,403,114 $ 15,353,705 $ 11,515,631 Research and development 91,807 207,940 327,108 364,632 Royalty income 5,583,696 3,935,182 10,423,291 7,554,492 ------------- ------------- ------------- ------------- Total revenues 13,717,257 10,546,236 26,104,104 19,434,755 ------------- ------------- ------------- ------------- OPERATING COSTS AND EXPENSES: Cost of products sold 3,537,701 2,932,136 6,879,831 5,320,590 Research and development 4,247,574 3,463,961 8,325,555 6,554,716 Selling, general and administrative 2,072,275 1,634,708 4,032,365 3,205,181 ------------- ------------- ------------- ------------- Total operating costs and expenses 9,857,550 8,030,805 19,237,751 15,080,487 ------------- ------------- ------------- ------------- INCOME FROM OPERATIONS 3,859,707 2,515,431 6,866,353 4,354,268 ------------- ------------- ------------- ------------- OTHER INCOME: Interest income 290,815 266,968 581,015 687,852 Interest expense (20,430) (42,453) (40,600) (85,755) Other income 3,297 500 5,619 391 ------------- ------------- ------------- ------------- Total other income - net 273,682 225,015 546,034 602,488 ------------- ------------- ------------- ------------- INCOME BEFORE INCOME TAXES 4,133,389 2,740,446 7,412,387 4,956,756 Income tax expense (1,364,018) (947,092) (2,135,773) (1,713,371) ------------- ------------- ------------- ------------- NET INCOME $ 2,769,371 $ 1,793,354 $ 5,276,614 $ 3,243,385 ============= ============= ============= ============= BASIC EARNINGS PER SHARE $ 0.24 $ 0.17 $ 0.46 $ 0.30 ============= ============= ============= ============= DILUTED EARNINGS PER SHARE $ 0.23 $ 0.16 $ 0.43 $ 0.29 ============= ============= ============= ============= WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 11,390,124 10,762,939 11,411,189 10,756,554 ============= ============= ============= ============= DILUTED WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 12,154,675 11,403,487 12,237,931 11,338,233 ============= ============= ============= =============
See notes to consolidated financial statements. 4 KENSEY NASH CORPORATION CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY - --------------------------------------------------------------------------------
CAPITAL COMMON STOCK IN EXCESS RETAINED EARNINGS/ ----------------------------- OF PAR (ACCUMULATED SHARES AMOUNT VALUE DEFICIT) ------------ ----------- ------------- ------------------ BALANCE, JUNE 30, 2002 10,748,455 $ 10,748 $ 67,289,436 $ (5,585,885) Exercise of stock options 618,520 619 6,091,865 Tax benefit from exercise of stock options 2,599,494 Stock options granted to non-employee 375,550 Net income 8,786,335 Foreign currency translation adjustment Change in unrealized gain on investments (net of tax) Comprehensive income ------------ ----------- ------------- ------------- BALANCE, JUNE 30, 2003 11,366,975 11,367 76,356,345 3,200,450 ------------ ----------- ------------- ------------- Exercise of stock options 98,879 99 1,317,691 Stock repurchase (See Note 5) (140,500) (141) (2,998,133) Tax benefit from exercise of stock options 442,558 Stock options granted to non-employee 11,378 Net income 5,276,614 Foreign currency translation adjustment Change in unrealized loss on investments (net of tax) Comprehensive income ------------ ----------- ------------- ------------- BALANCE, DECEMBER 31, 2003 (Unaudited) 11,325,354 $ 11,325 $ 75,129,839 $ 8,477,064 ============ =========== ============= ============= ACCUMULATED OTHER COMPREHENSIVE COMPREHENSIVE (LOSS)/INCOME INCOME TOTAL --------------- ------------- ------------- BALANCE, JUNE 30, 2002 $ (147,258) $ 61,567,041 Exercise of stock options 6,092,484 Tax benefit from exercise of stock options 2,599,494 Stock options granted to non-employee 375,550 Net income $ 8,786,335 8,786,335 Foreign currency translation adjustment (3,257) (3,257) (3,257) Change in unrealized gain on investments (net of tax) 132,141 132,141 132,141 ------------- Comprehensive income $ 8,915,219 ============= BALANCE, JUNE 30, 2003 (18,374) 79,549,788 ------------- ------------- Exercise of stock options 1,317,790 Stock repurchase (See Note 5) (2,998,274) Tax benefit from exercise of stock options 442,558 Stock options granted to non-employee 11,378 Net income $ 5,276,614 5,276,614 Foreign currency translation adjustment 72,551 72,551 72,551 Change in unrealized loss on investments (net of tax) (188,499) (188,499) (188,499) ------------- Comprehensive income $ 5,160,666 ============= ------------- ------------- BALANCE, DECEMBER 31, 2003 (Unaudited) $ (134,322) $ 83,483,906 ============= =============
See notes to consolidated financial statements. 5 KENSEY NASH CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) - --------------------------------------------------------------------------------
SIX MONTHS ENDED DECEMBER 31, ---------------------------------- 2003 2002 OPERATING ACTIVITIES: Net income $ 5,276,614 $ 3,243,385 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 1,961,337 1,429,463 Tax benefit from exercise of stock options 442,558 48,838 Changes in assets and liabilities which provided (used) cash: Accounts receivable 199,771 (539,125) Deferred tax asset 1,596,109 1,434,760 Prepaid expenses and other current assets 454,726 (247,303) Inventory (702,208) (789,340) Accounts payable and accrued expenses (366,248) 990,568 Deferred revenue (28,891) (50) -------------- -------------- Net cash provided by operating activities 8,833,768 5,571,196 -------------- -------------- INVESTING ACTIVITIES: Additions to property, plant and equipment (2,752,645) (1,300,913) Sale of investments 4,300,000 17,313,708 Purchase of investments (19,607,411) (176,061) -------------- -------------- Net cash (used in) provided by investing activities (18,060,056) 15,836,734 -------------- -------------- FINANCING ACTIVITIES: Repayments of long term debt (410,721) (480,359) Sale of restricted investments -- 386,292 Stock repurchase (2,998,274) -- Proceeds from exercise of stock options 1,317,790 202,850 -------------- -------------- Net cash (used in) provided by financing activities (2,091,205) 108,783 -------------- -------------- EFFECT OF EXCHANGE RATE ON CASH 72,551 4,507 (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (11,244,942) 21,521,220 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 15,040,857 3,632,395 -------------- -------------- CASH AND CASH EQUIVALENTS, END OF PERIOD $ 3,795,915 $ 25,153,615 ============== ============== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid for interest $ 40,600 $ 82,140 ============== ============== Cash paid for income taxes $ $ ============== ============== SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING ACTIVITY: Increase in prepaid expense related to non-employee stock options (See Note 4) $ 11,378 $ 375,550 ============== ==============
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 7 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: 8
THREE MONTHS ENDED SIX MONTHS ENDED DECEMBER 31, DECEMBER 31, --------------------------------- --------------------------------- 2003 2002 2003 2002 Net income, as reported $ 2,769,371 $ 1,793,354 $ 5,276,614 $ 3,243,385 Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects (350,209) (464,444) (701,325) (904,285) -------------- -------------- -------------- -------------- Pro forma net income $ 2,419,162 $ 1,328,910 $ 4,575,289 $ 2,339,100 ============== ============== ============== ============== Earnings per share: Basic - as reported $ 0.24 $ 0.17 $ 0.46 $ 0.30 ============== ============== ============== ============== Basic - pro forma $ 0.21 $ 0.12 $ 0.40 $ 0.22 ============== ============== ============== ============== Diluted - as reported $ 0.23 $ 0.16 $ 0.43 $ 0.29 ============== ============== ============== ============== Diluted - pro forma $ 0.20 $ 0.12 $ 0.37 $ 0.21 ============== ============== ============== ==============
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:
DECEMBER 31, JUNE 30, 2003 2003 ------------ ------------ Raw materials $ 2,857,880 $ 2,109,149 Work in process 527,196 765,388 Finished goods 798,454 606,785 ------------ ------------ Total $ 4,183,530 $ 3,481,322 ============ ============
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. 10 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. 11 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% 12 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, 13 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.
THREE MONTHS ENDED PERCENT ------------------------------------------------------ CHANGE % OF % OF PRIOR PERIOD DECEMBER 31, TOTAL DECEMBER 31, TOTAL VS. CURRENT ($ MILLIONS) 2003 REVENUES 2002 REVENUES PERIOD ------------ ---------- ------------ ---------- ------------ Total Revenues $ 13.7 100% $ 10.5 100% 30% Net Sales $ 8.0 59% $ 6.4 61% 26% Research & Development Revenue $ 0.1 1% $ 0.2 2% (56)% Royalty Income $ 5.6 40% $ 3.9 37% 42% Cost of Products Sold $ 3.5 26% $ 2.9 28% 21% Research & Development Expense $ 4.2 31% $ 3.5 33% 23% Selling, General & Administrative Expense $ 2.1 15% $ 1.6 15% 27% Interest Income $ 0.3 2% $ 0.3 3% 9%
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 $267,000 in the three months ended December 31, 2002. Although our cash and investment balances have increased by 36%, this increase was almost entirely offset by lower interest rates. COMPARISON OF SIX MONTHS ENDED DECEMBER 31, 2003 AND 2002 The following table summarizes our results for the six months ended December 31, 2003 compared to the six months ended December 31, 2002.
SIX MONTHS ENDED PERCENT ------------------------------------------------------ CHANGE % OF PRIOR PERIOD DECEMBER 31, TOTAL DECEMBER 31, % OF TOTAL VS. CURRENT ($ MILLIONS) 2003 REVENUES 2002 REVENUES PERIOD ------------ ---------- ------------ ---------- ------------ Total Revenues $ 26.1 100% $ 19.4 100% 34% Net Sales $ 15.4 59% $ 11.5 59% 33% Research & Development Revenue $ 0.3 1% $ 0.4 2% (10)% Royalty Income $ 10.4 40% $ 7.6 39% 38% Cost of Products Sold $ 6.9 26% $ 5.3 27% 29% Research & Development Expense $ 8.3 32% $ 6.6 32% 27% Selling, General & Administrative Expense $ 4.0 15% $ 3.2 16% 26% Interest Income $ 0.6 2% $ 0.7 4% (16)%
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 24 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. 25 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:
Number of Number of Number of Votes Votes Broker Votes For Withheld Against Abstentions Non-Votes ---------- ---------- ---------- ---------- ---------- Election of Class II Directors: Joseph W. Kaufman 9,336,928 1,088,069 -- -- -- Harold N. Chefitz 7,309,754 3,115,243 -- -- -- Steven J. Lee 7,365,744 3,059,253 -- -- -- Approval of Fourth Amended and Restated Employee Incentive Compensation Plan 3,976,193 -- 4,743,536 32,823 1,672,445 Ratification of the Appointment of Deloitte & Touche LLP 7,043,042 -- 3,374,776 7,179 --
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. 26 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) 27 EX-10.5 3 c82999exv10w5.txt EMPLOYMENT AGREEMENT EXHIBIT 10.5 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT ("Agreement"), is made and entered into as of the 1st day of October, 2003, by and between Kensey Nash Corporation, a Delaware corporation (the "Company"), and Wendy F. DiCicco ("Executive"). WHEREAS, the Company wishes to retain Executive as an executive employee, and Executive wishes to be employed by the Company in such capacity, all upon the terms and conditions hereinafter set forth. NOW, THEREFORE, in consideration of the mutual covenants of parties hereinafter set forth, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereby agree as follows: 1. EMPLOYMENT OF EXECUTIVE. The Company engages and employs Executive in an executive capacity and Executive accepts such employment and agrees to act as an employee of the Company in accordance with the terms of employment hereinafter specified. Executive shall hold the office of Chief Financial Officer and shall, subject to the direction and supervision of the Company's Board of Directors, (a) have the responsibilities and authority customarily associated with such office, and (b) perform such other duties and responsibilities as the Company's Board of Directors shall from time to time assign to her. Executive agrees diligently and faithfully to serve the Company and to devote her best efforts, her full business time and her highest talents and skills to the furtherance and success of the Company's business. 2. COMPENSATION. As full and complete compensation to Executive for all services to be rendered by Executive hereunder, the Company shall pay Executive as follows: (a) The Company shall, during the term of Executive's full-time employment, pay or cause to be paid to Executive a base salary at the rate of $165,000 per annum, or Executive's most recent per annum base salary, whichever is greater. Such base salary shall be paid in periodic installments at the discretion of the Company (but not less frequently than monthly) in accordance with the Company's normal mode of executive salary payment. (b) The Company may, during the term of Executive's employment, pay or cause to be paid to Executive an annual bonus of cash, stock or other property in such amounts as the Company's Board of Directors may determine in their sole discretion, but not to exceed 75% of Executive's base salary. 3. TERM OF EMPLOYMENT; SEVERANCE. (a) The term of Executive's employment hereunder (the "Employment Term") shall commence on the date hereof and shall expire two (2) years after such date. (b) Termination of Executive's employment pursuant to this Agreement or voluntary termination of employment shall not constitute a waiver of any of Executive's obligations hereunder which survive termination hereof, including without limitation those arising under paragraphs 5 through 9 inclusive hereof. (c) In the event Executive's employment is terminated by the Company without cause (as hereinafter determined), Executive shall continue to be entitled to receive those fringe benefits enumerated in paragraph 4 hereof until the expiration of the original Employment Term and the Company shall pay to Executive a severance 28 fee equal to the greater of (i) any amount of base salary remaining until the expiration of the original Employment Term and bonus for each remaining year of the original Employment Term, which bonus shall be based on an average of the bonuses received by Executive during the last two fiscal years prior to such termination without cause (the "Estimated Bonus"), to which Executive would otherwise be entitled but for such termination, or (ii) twelve (12) months of Executive's salary and Estimated Bonus; provided, however, that Executive shall not be entitled to receive any fringe benefits or such severance fee if Executive breaches any of her obligations arising under paragraphs 7 through 9 hereof. The continuance of Executive's fringe benefits and the payment by the Company of any severance fee to Executive pursuant to this Agreement shall be in complete satisfaction and settlement of, and as liquidated damages for, any and all of Executive's claims, damages or causes of action arising directly or indirectly from this Agreement. In addition, upon the termination of Executive's employment by the Company without cause, all options to purchase shares of common stock of the Company ("Options") that were granted to Executive and have vested prior to the date of such termination without cause shall remain exercisable for a period of one (1) year from the date of such termination without cause. (d) In the event Executive's employment is terminated with cause, the Company shall have no further obligations hereunder or otherwise with respect to Executive's employment from and after the date of such termination, except for the payment of Executive's base salary accrued through the date of such termination. For purposes of this Agreement, "cause" for termination shall be deemed to exist upon (i) a determination by the Company's Board of Directors that Executive has committed an act of fraud, embezzlement or other act of dishonesty which would reflect adversely on the integrity of the Company or if Executive is convicted of any criminal statute involving breach of fiduciary duty or moral turpitude; (ii) a reasonable determination by the Company's Board of Directors that Executive has failed to discharge his duties in a reasonably satisfactory manner which failure is not cured by Executive within thirty (30) days after delivery of written notice to Executive specifying the nature of such failure; (iii) the death of Executive; (iv) a mental or physical disability of Executive which renders Executive, in the reasonable opinion of the Company's Board of Directors, unable to effectively perform her duties hereunder for a substantially continuous period of one hundred eighty (180) days; or (v) the voluntary termination of Executive's employment hereunder other than as a result of a breach of the Company's obligations hereunder. (e) In the event Executive's employment is terminated by the Company pursuant to a Change in Control (as that term is defined in that certain Termination and Change in Control Agreement dated of even date herewith between the Company and Executive (the "Change in Control Agreement")), the Company shall pay to Executive a severance fee equal to the greater of (i) the amount Executive would be entitled to receive under paragraph 3(c) of this Agreement for a termination without cause, or (ii) the amount Executive would be entitled to receive pursuant to a Change in Control under the Change in Control Agreement. (f) In the event Executive's employment is not renewed by the Company upon the expiration of the Employment Term for a term (the "Renewal Term") of at least one (1) year, Executive shall, upon (i) the expiration of the Renewal Term, if any, or (ii) the Employment Term in the event there is no Renewal Term, or (iii) upon Executive's voluntary termination within 60 days of the Company's failure to renew her employment on substantially the same terms as set forth herein for at least one (1) year, continue to receive those fringe benefits enumerated in paragraph 4 hereof for a period of twelve (12) months, and the Company shall pay to Executive a severance fee equal to three (3) months of Executive's salary and the Estimated Bonus; provided, however, that Executive shall not be entitled to receive any fringe benefits or such severance fee if Executive breaches any of her obligations arising under paragraphs 7 through 9 hereof. In addition, all Options that were granted to Executive and have vested prior to the expiration of the Renewal Term shall remain exercisable for a period of one (1) year from the expiration of the Renewal Term. (g) In the event any payments or benefits received by the Executive upon her termination of employment (which payments shall include, without limitation, the vesting of an option or other non-cash benefit 29 or property), whether pursuant to the terms of this Agreement or any other plan, arrangement, or agreement with the Company or any affiliated company (collectively, the "Total Payments") would be subject (in whole or in part) to the excise tax imposed by Section 4999 of the Internal Revenue Code of 1986, as amended (the "Code"), or any similar tax as may hereafter be imposed (the "Excise Tax"), the following provisions shall apply: (i) In the event that the Total Payments cause the Executive's "parachute payments" within the meaning of Section 280G(b)(2) of the Code to equal or to exceed three times the Executive's "base amount" within the meaning of Section 280G(b)(3) of the Code (the "Trebled Base Amount") by an amount which is not greater than 10% of the Trebled Base Amount, the Total Payments shall be reduced (or eliminated) such that no portion of the Total Payments is subject to the Excise Tax. Reductions shall be made first to those Total Payments arising under the terms of this Agreement. (ii) In the event that the Total Payments cause the parachute payments to exceed 110% of the Trebled Base Amount, the Company shall pay to the Executive at the time specified below, an additional amount determined as set forth below (the "Gross-up Payment"). The Gross-up Payment shall be made with respect to the amount which equals 100% of the Executive's "excess parachute payments" subject to the Excise Tax. The Gross-up Payment shall be an amount such that the net amount retained by Executive with respect to the Total Payments after reduction for any Excise Tax on the Total Payments and any federal, state and local income or employment tax and Excise Tax payable by the Executive on the Gross-up Payment hereunder (provided that such amount is actually paid when due) shall be equal to the amount of the Total Payments that the Executive would retain if the Total Payments did not constitute parachute payments. (iii) For purposes of determining whether any of the Total Payments will be subject to the Excise Tax and the amount of any Excise Tax: (a) The Total Payments shall be treated as "parachute payments" within the meaning of Section 280G(b)(2) of the Code, and all "excess parachute payments" within the meaning of Section 280G(b)(1) of the Code shall be treated as subject to the Excise Tax, unless, and except that to the extent that, in the written opinion of independent legal counsel, compensation consultants or auditors of nationally recognized standing ("Independent Advisors") selected by the Company and reasonably acceptable to Executive, the Total Payments (in whole or in part) do not constitute parachute payments, or such excess parachute payments (in whole or in part) represent reasonable compensation for services actually rendered within the meaning of Section 280G(b)(4) of the Code in excess of the base amount within the meaning of Section 280G(b)(3) of the Code or are otherwise not subject to the Excise Tax; (b) The amount of the Total Payments which shall be treated as subject to the Excise Tax shall be equal to the lesser of (i) the total amount of the Total Payments or (ii) the total amount of excess parachute payments within the meaning of Section 280G(b)(1) of the Code (after applying Section 3(g)(iii)(a) above); and (c) The value of any non-cash benefits or any deferred payment or benefit shall be determined by the Independent Advisors in accordance with the principles of Sections 280G(d)(3) and (4) of the Code. In the event that the Excise Tax is subsequently determined to be less than the amount taken into account hereunder at the time the Gross-up Payment is made, Executive shall repay to the Company at the time that the amount of such reduction in 30 Excise Tax is finally determined (but, if previously paid to the taxing authorities, not prior to the time the amount of such reduction is refunded to Executive or otherwise realized as a benefit by Executive) the portion of the Gross-up Payment that would not have been paid if such Excise Tax had been applied to initially calculating the Gross-up Payment, plus interest on the amount of such repayment at the rate provided in Section 1274(b)(2)(B) of the Code. In the event that the Excise Tax is determined to exceed the amount taken into account hereunder at the time the Gross-up Payment is made (including by reason of any payment the existence or amount of which cannot be determined at the time of the Gross-up Payment), the Company shall make an additional Gross-up Payment and shall indemnify and hold Executive harmless in respect of such excess (plus any interest and penalties payable with respect to such excess) at the time that the amount of such excess is finally determined. The Gross-up Payment provided for above shall be paid on the 30th day (or such earlier date as the Excise Tax becomes due and payable to the taxing authorities) after it has been determined that the Total Payments (or any other portion thereof) are subject to the Excise Tax; provided, however, that if the amount of such Gross-up Payment or portion thereof cannot be finally determined on or before such day, the Company shall pay to Executive on such day an estimate, as determined by the Independent Advisors, of the minimum amount of such payments and shall pay the remainder of such payments (together with interest at the rate provided in Section 1274(b)(2)(B) of the Code), as soon as the amount thereof can be determined. In the event that the amount of the estimated payments exceeds the amount subsequently determined to have been due, such excess shall constitute a loan by the Company to Executive, payable on the fifth day after demand by the Company (together with interest at the rate provided in Section 1274(b)(2)(B) of the Code). If more than one Gross-up Payment is made, the amount of each Gross-up Payment shall be computed so as not to duplicate any prior Gross-up Payment. Executive shall notify the Company in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Company of the Gross-up Payment. Such notification shall be given as soon as practicable but no later than ten (10) business days after Executive is informed in writing of such claim and shall apprise the Company of the nature of such claim and the date on which such claim is requested to be paid. Executive shall not pay such claim prior to the expiration of the 30-day period following the date on which it gives such notice to the Company (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Company notifies Executive in writing prior to the expiration of such period that it desires to contest such claim, Executive shall: (i) give the Company any information reasonably requested by the Company relating to such claim; (ii) take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Company; (iii) cooperate with the Company in good faith in order effectively to contest such claim; and (iv) permit the Company to participate in any proceedings relating to such claim; 31 provided, however, that the Company shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify and hold Executive harmless, on an after-tax basis, for any Excise Tax or income or employment tax (including interest and penalties with respect thereto) imposed as a result of such representation and payment of costs and expenses. Without limitation on the foregoing provisions of this Section 3(g), the Company shall control all proceedings taken in connection with such contest and, at its sole option, may pursue or forgo any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and proceedings, hearings and conferences with the taxing authority in respect of such claim and may, at its sole option, either direct Executive to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and Executive agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine; provided, however, that if the Company directs Executive to pay such claim and sue for a refund, the Company shall advance the amount of such payment to Executive, on an interest-free basis, and shall indemnify and hold Executive harmless, on an after-tax basis, from any Excise Tax or income or employment (including income or employment or interest or penalties with respect thereto) imposed with respect to such advance or with respect to any imputed income with respect to such advance; and further provided that any extension of the statute of limitations relating to payment of taxes for the taxable year of Executive with respect to which such contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Company's control of the contest shall be limited to issues with respect to which a Gross-up Payment would be payable hereunder and the Executive shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. If, after the receipt by Executive of an amount advanced by the Company pursuant to this Section 3(g), Executive becomes entitled to receive any refund with respect to such claim, Executive shall (subject to the Company's complying with the requirements of this Section 3(g)) promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). If, after the receipt by Executive of an amount advanced by the Company pursuant to this Section 3(g), a determination is made that Executive shall not be entitled to any refund with respect to such claim and the Company does not notify Executive in writing of its intent to contest such denial of refund prior to the expiration of thirty (30) days after such determination, then such advance shall be forgiven and shall not be required to be repaid and the amount of such advance shall offset, to the extent thereof, the amount of Gross-up Payment required to be paid. 4. FRINGE BENEFITS. (a) During the Employment Term, Executive shall be entitled to participate in all health insurance and retirement benefit programs normally available to other executives of the Company holding positions similar to that of Executive hereunder (subject to all applicable eligibility rules thereof), as from time to time in effect. Executive shall also receive the benefits listed on Exhibit A hereto. (b) Executive shall be entitled to paid vacation according to the normal vacation schedule for other executive employees. Executive shall make good faith efforts to schedule such vacations so as to least conflict with the conduct of the Company's business and shall give the Company adequate advance notice of her planned absences. Accumulated, unused vacation time for Executives of the Corporation is not vested and will not be paid to Executive either while employed or upon termination of employment. 32 (c) The Company shall reimburse Executive for all business-related expenses incurred by Executive at the Company's direction. Executive shall submit to the Company expense reports in compliance with established Company guidelines. 5. INVENTIONS. Executive agrees, on behalf of herself, her heirs and personal representatives, that she will promptly communicate, disclose and transfer to the Company free of all encumbrances and restrictions (and will execute and deliver any papers and take any action at any time deemed necessary by the Company to further establish such transfer) all inventions and improvements relating to Company's business originated or developed by Executive solely or jointly with others during the term of her employment hereunder. Such inventions and improvements shall belong to the Company whether or not they are patentable and whether or not patent applications are filed thereon. Such transfer shall include all patent rights (if any) to such inventions or improvements in the United States and in all foreign countries. Executive further agrees, at the request of Company, to execute and deliver, at any time during the term of her employment hereunder or after termination thereof, all assignments and other lawful papers (which will be prepared at the Company's expense) relating to any aspect of the prosecution of such patent applications and rights in the United States and foreign countries. 6. EXPOSURE TO PROPRIETARY INFORMATION. (a) Executive acknowledges and agrees that during the course of her employment by Company, she will be in continuous contact with customers, suppliers and others doing business with the Company throughout the world. Executive further acknowledges that the performance of her duties hereunder will expose her to data and information concerning the business and affairs of the Company, including but not limited to information relative to the Company's proprietary rights and technology, patents, financial statements, sales programs, pricing programs, profitability analyses and profit margin information, customer buying patterns, needs and inventory levels, supplier identities and other related matters, and that all of such data and information (collectively "the Proprietary Information") is vital, sensitive, confidential and proprietary to Company. (b) In recognition of the special nature of her employment hereunder, including but not limited to her special access to the Proprietary Information, and in consideration of her employment, Executive agrees to the covenants and restrictions set forth in paragraphs 7 through 9 inclusive hereof. As used in this Agreement, the term "Company" shall include, where applicable, any parent, subsidiary, sub-subsidiary, or affiliate of Company. 7. USE OF PROPRIETARY INFORMATION. Executive acknowledges that the Proprietary Information constitutes a protectible business interest of Company, and covenants and agrees that during the term of her employment hereunder and after the termination of such employment, she shall not, directly or indirectly, whether individually, as a director, stockholder, owner, partner, employee or agent of any business, or in any other capacity, make known, disclose, furnish, make available or utilize any of the Proprietary Information, other than in the proper performance of her duties during the term of her employment hereunder. Executive's obligations under this paragraph with respect to particular Proprietary Information shall terminate only at such time (if any) as the Proprietary Information in question becomes generally known to the public other than through a breach of Executive's obligations hereunder. 8. RESTRICTION AGAINST COMPETITION AND EMPLOYING OR SOLICITING COMPANY EMPLOYEES, CUSTOMERS OR SUPPLIERS. Executive covenants and agrees that during the term hereof and for the one (1) year period immediately following the effective date of any termination of her employment hereunder (the "Termination Date"), he shall not, directly or indirectly, whether individually, as a director, stockholder, partner, owner, employee or agent of any business, or in any other capacity, (i) engage in a business substantially similar to that which is conducted by the Company in any market area in which such business is operated; (ii) solicit any party who is or was a customer or supplier of the Company on the Termination Date or at any time during the six month period immediately prior thereto for the sale or purchase of any type or quantity of 33 products sold by or used in the business of the Company on the Termination Date or at any time within such six month period; or (iii) solicit for employment any person who was or is an employee of the Company on the Termination Date or at any time during the twelve month period immediately prior thereto. 9. RETURN OF COMPANY MATERIALS UPON TERMINATION. Executive acknowledges that all price lists, sales manuals, catalogs, binders, customer lists and other customer information, supplier lists, financial information, and other records or documents containing Proprietary Information prepared by Executive or coming into her possession by virtue of her employment by the Company is and shall remain the property of the Company and that upon termination of her employment hereunder, Executive shall return immediately to the Company all such items in her possession, together with all copies thereof. 10. EQUITABLE REMEDIES. (a) Executive acknowledges and agrees that the covenants set forth in paragraphs 5 through 9 inclusive hereof are reasonable and necessary for the protection of the Company's business interests, that irreparable injury will result to the Company if Executive breaches any of the terms of said covenants, and that in the event of Executive's actual or threatened breach of any such covenants, the Company will have no adequate remedy at law. Executive accordingly agrees that in the event of any actual or threatened breach by her of any of said covenants, the Company shall be entitled to immediate injunctive and other equitable relief, without bond and without the necessity of showing actual monetary damages. Nothing contained herein shall be construed as prohibiting the Company from pursuing any other remedies available to it for such breach or threatened breach, including the recovery of any damages which it is able to prove. (b) Each of the covenants in paragraphs 5 through 9 inclusive hereof shall be construed as independent of any other covenants or other provisions of this Agreement. (c) In the event of any judicial determination that any of the covenants set forth in paragraphs 5 through 9 inclusive hereof is not fully enforceable, it is the intention and desire of the parties that the court treat said covenants as having been modified to the extent deemed necessary by the court to render them reasonable and enforceable, and that the court enforce them to such extent. 11. LIFE INSURANCE. The Company may at its discretion and at any time apply for and procure as owner and for its own benefit and at its own expense, insurance on the life of Executive in such amounts and in such form or forms as the Company may choose. Executive shall cooperate with the Company in procuring such insurance and shall, at the request of Company, submit to such medical examinations, supply such information and execute such documents as may be required by the insurance company or companies to whom the Company has applied for such insurance. Executive shall have no interest whatsoever in any such policy or policies, except that, upon the termination of Executive's employment hereunder, Executive shall have the privilege of purchasing any such insurance from the Company for an amount equal to the actual premiums thereon previously paid by Company. 12. NOTICES. Any notice required or permitted pursuant to the provisions of this Agreement shall be deemed to have been properly given if in writing and when sent by United States mail, certified or registered, postage prepaid, when sent by facsimile or when personally delivered, addressed as follows: 34 If to Company: Kensey Nash Corporation Marsh Creek Corporate Center 55 East Uwchlan Avenue, Suite 204 Exton, Pennsylvania 19341 Attention: Joseph Kaufmann With a copy to: Katten Muchin & Zavis 525 West Monroe Street Suite 1600 Chicago, Illinois 60661-3693 Attention: David R. Shevitz, Esq. If to Executive: Wendy F. DiCicco 205 Roberts Road Ardmore, PA 19003 Each party shall be entitled to specify a different address for the receipt of subsequent notices by giving written notice thereof to the other party in accordance with this paragraph. 13. WAIVER OF BREACHES. No waiver of any breach of any of the terms, provisions or conditions of this Agreement shall be construed or held to be a waiver of any other breach, or a waiver of, acquiescence in or consent to any further or succeeding breach thereof. 14. ASSIGNMENT. This Agreement shall not be assignable by either party without the written consent of the other; provided, however, that this Agreement shall be assignable to any corporation or entity which purchases the assets of or succeeds to the business of the Company (a "Successor Employer"), and the Company agrees to cause this Agreement to be assumed by any Successor Employer as a condition to such purchase or succession. Subject to the foregoing, this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective heirs, personal representatives, successors and assigns. 15. GOVERNING LAW. This Agreement shall be governed by and construed in accordance with laws and judicial decisions of the Commonwealth of Pennsylvania. 16. SEVERABILITY. If any term or provision of this Agreement shall be held to be invalid or unenforceable, the remaining terms and provisions hereof shall not be affected thereby. 17. MISCELLANEOUS. Paragraph headings herein are for convenience only and shall not affect the meaning or interpretation of the contents hereof. This Agreement contains the entire agreement between the parties hereto with respect to the subject matter hereof and supersedes all prior agreements and understandings between the parties and all prior obligations of the Company with respect to the employment of Executive by the Company or the payment to Executive of compensation of any kind whatsoever. No supplement or modification of this Agreement shall be binding unless in writing and signed by both parties hereto. This agreement may be executed in multiple counterparts, each of which shall be deemed enforceable without production of the others. 35 IN WITNESS WHEREOF, the parties have caused this Agreement to be executed as of the date first hereinabove set forth. /s/ Wendy F. DiCicco, CPA ----------------------------------------- Wendy F. DiCicco KENSEY NASH CORPORATION By: /s/ Joseph W. Kaufman -------------------------------------- Title: Chief Executive Officer ---------------------------------- 36 Exhibit A BENEFITS Health/prescription, dental, and vision insurance equal to that provided for all other full-time exempt Kensey Nash Corporation employees. Life insurance in the amount of $50,000 Short term disability insurance equal to that provided for all other full-time exempt Kensey Nash Corporation employees. Long term disability benefits at 40% of salary Supplemental long term disability insurance Three weeks annual vacation accrued at 10 hours per month. Accumulated, unused vacation time for Executives of the Corporation is not vested and will not be paid to Executive either while employed or upon termination of employment. Six days annual personal leave Eleven holidays each year 401K Plan Employee Incentive Compensation Plan 37 EX-31.1 4 c82999exv31w1.txt CERTIFICATION OF CEO-EXCHANGE ACT RULE EXHIBIT 31.1 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 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 report; 3. Based on my knowledge, the financial statements, and other financial information included in this 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 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-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: February 17, 2004 /s/ Joseph W. Kaufmann -------------------------------- Joseph W. Kaufmann Chief Executive Officer 38 EX-31.2 5 c82999exv31w2.txt CERTIFICATION OF CFO-EXCHANGE ACT RULE EXHIBIT 31.2 CERTIFICATION 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 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 report; 3. Based on my knowledge, the financial statements, and other financial information included in this 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 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-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: February 17, 2004 /s/ Wendy F. DiCicco, CPA -------------------------------- Wendy F. DiCicco, CPA Chief Financial Officer 39 EX-32.1 6 c82999exv32w1.txt CERTIFICATION OF CEO-SARBANES OXLEY ACT EXHIBIT 32.1 CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Kensey Nash Corporation (the "Company") on Form 10-Q for the quarter ended December 31, 2003, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Joseph W. Kaufmann, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. 1350, as adopted pursuant to 906 of the Sarbanes-Oxley Act of 2002, that: 1. The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. Date: February 17, 2004 /s/ Joseph W. Kaufmann ---------------------------- Joseph W. Kaufmann Chief Executive Officer 40 EX-32.2 7 c82999exv32w2.txt CERTIFICATION OF CFO-SARBANES OXLEY ACT EXHIBIT 32.2 CERTIFICATION OF THE CHIEF FINANCIAL OFFICER PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Kensey Nash Corporation (the "Company") on Form 10-Q for the quarter ended December 31, 2003, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Wendy F. DiCicco, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. 1350, as adopted pursuant to 906 of the Sarbanes-Oxley Act of 2002, that: 1. The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. Date: February 17, 2004 /s/ Wendy F. DiCicco, CPA ----------------------------- Wendy F. DiCicco, CPA Chief Financial Officer 41 -----END PRIVACY-ENHANCED MESSAGE-----